Delaware recently amended its corporation statute. Among other changes, the legislature approved this addition to § 216: "A bylaw amendment adopted by stockholders which specifies the votes that shall be necessary for the election of directors shall not be further amended or repealed by the board of directors."

Hmm.

We have discussed shareholder-adopted bylaws before. In Delaware one of the most important open questions relating to such bylaws is whether the board can amend them unilaterally. The Model Business Corporation Act expressly covers this situation: "A corporation's board of directors may amend or repeal the corporation's bylaws, unless ... the shareholders in amending, repealing, or adopting a bylaw expressly provide that the board of directors may not amend, repeal, or reinstate that bylaw." (§ 10.20(b)) The Delaware statute does not address this question directly, and the Delaware courts have not yet decided the issue.

How does this new amendment to the Delaware code affect the debate? Obviously, it allows shareholders to protect a bylaw that specifies the votes necessary for the election of directors, but does it carry a negative implication that the board is allowed to amend other shareholder-adopted bylaws? Even if a bylaw expressly provides that the board of directors may not amend, repeal, or reinstate that bylaw?

To answer these questions, we need to look at § 109 of the Delaware corporation statute, which provides that "the power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote." That section also allows corporations to include a charter provision conferring on the board of directors the power to adopt, amend or repeal bylaws, then concludes: "The fact that such power has been so conferred upon the directors ... shall not divest the stockholders ... of the power, nor limit their power to adopt, amend, or repeal bylaws."

This statute is endlessly fascinating, and I recommend papers by Brett McDonnell and Larry Hamermesh if you have a taste for such arguments. The question of the moment, however, is whether the new language changes anything about the old debate, and that depends importantly on where you started.

• If you thought, prior to this amendment, that directors had the power to amend shareholder-adopted bylaws, it's hard to see how the amendment would change anything.

• If you thought, prior to this amendment, that directors did not have the power to amend shareholder-adopted bylaws, then I would suggest that this amendment changes things.

I come at this as one who finds the statute prior to the amendment almost wholly indeterminate. Given that starting point, my sense is that the new language carries a fairly strong negative implication that the board is allowed to amend other shareholder-adopted bylaws, even if those bylaws expressly provide that the board of directors may not amend, repeal, or reinstate that bylaw.

UPDATE: In the comments, Larry Hamermesh points to the synopsis of the bill, which states:

Section 5 Amends § 216 to provide that a bylaw adopted by a vote of stockholders that prescribes the required vote for the election of directors may not be altered or repealed by the board of directors. This amendment does not address any other situation in which the board of directors amends a bylaw adopted by stockholder vote.

Corporate Governance, Corporate Law, Delaware | Bookmark

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