Academic

Given its continued focus in oral argument on the hypothetical concerning the payment of expenses for a candidate motivated solely by personal reasons, I cannot say that the Delaware Supreme Court?s decision was surprising.  However, now that the Court has ruled, how should shareholders wishing to obtain reimbursement for proxy expenses proceed?  The Delaware Supreme Court suggested that shareholder advocates look for alternative means to achieve their goal such as amending the certificate of incorporation or finding recourse with the legislature.  But what about trying another bylaw proposal?  Indeed, while the Court found that the AFSCME proposal would violate Delaware law, it also stated that a bylaw proposal covering reimbursement of expenses is a proper subject for shareholder action.  And thus, it suggested that a shareholder bylaw proposal may still be a viable and legitimate option. 

In my previous post, I suggested that perhaps AFSCME should consider redrafting their proposal so that it provided for mandating the payment of expenses so long as the payment was consistent with the exercise of directors? fiduciary duty.  This seems to do away with any concern that the implementation of the bylaw would violate Delaware law in the form of compelling directors to act in a manner that violates their obligation to further the interests of the corporation and its shareholders.  However, in my previous post, I immediately discounted such a redrafting for two reasons, which may now deserve some greater probing. 

The first reason I discounted such a redrafting was because it seemed inconsistent with AFSCME?s position regarding the importance of the mandatory nature of the bylaw.  Indeed, AFSCME argued that because the bylaw mandated the payment of expenses, and hence did not enable directors to exercise any discretion, it also did not involve the exercise of directors? fiduciary duty.  The Court clearly found this argument unconvincing, calling it ?more semantical than substantive.?  As a result, it seems that the only way a bylaw provision covering expenses would be deemed consistent with Delaware law is it if afforded directors? the ability to exercise their business judgment with respect to the payment of expenses. And in fact, in a footnote of the opinion, the Court stated that in order for the bylaw provision to be consistent with Delaware law, ?it would also need to contain a provision that reserves the directors? full power to discharge their fiduciary duties.?

The second reason I discounted such a redrafting was because of the possibility that it would enable directors to challenge the payment of expenses for every successful candidate, thereby defeating shareholders? purpose in adopting the bylaw.  In listening to the oral arguments, it seemed that counsel for AFSCME tried to suggest that the circumstances pursuant to which a successful candidate would be motivated by personal reasons or reasons inconsistent with the corporation?s interest were far fetched at best.  Of course, the notion of shareholders running for the board and engaging in activism for purely personal reasons is the bogeyman that casts a shadow on the legitimacy of almost all shareholder activism.  And there have been studies suggesting that some shareholders do in fact put forth shareholder proposals for personal reasons, lending credence to the possibility of a personally motivated candidacy.  However, it seems that differentiating between campaigns that are purely personal and those that are not may prove difficult.  For example, isn?t it possible that a shareholder can have mixed motives, and thus be motivated by personal and ?corporate? reasons?  Indeed, while it may be true that a shareholder who runs for a board seat may be motivated by the personal desire to protect her investment or for some other personal goal, that may not negate the possibility that the shareholder?s candidacy could in fact benefit other shareholders and the corporation.  And to the extent that a candidate (motivated by personal reasons) is successful, can?t that somehow suggest that shareholders believe her service will benefit the corporation?  In this regard, it may prove difficult to determine when a candidacy is solely personal, thereby making the expenditure of funds in relation to it a violation of directors? duty. Ultimately, of course, the problem may not be whether one can determine if shareholders are actually motivated solely by personal reasons or otherwise run a campaign that does not benefit the corporation.  Instead, the problem may be the potential for protracted litigation over such questions.  Such litigation makes reimbursement uncertain, which could defeat the bylaw?s purpose of facilitating more nominees because it undermines the extent to which such nominees can rely on reimbursement to defray their expenses.

This analysis suggest that while redrafting the bylaw provision in a manner that provides some kind of carve out for directors? fiduciary duty likely would ensure the bylaw?s validity, it also may make the bylaw less meaningful from shareholders? perspective.  As a result, perhaps shareholders? best alternatives really are either a charter amendment or help from the legislature.