July 17, 2008
Delaware Supreme Court Decides on SEC's Certified Questions
Posted by Lisa Fairfax

In a decision by Justice Jacobs, the Delaware Supreme Court decided today that AFSCME's proposed by-law mandating the reimbursement of proxy expenses for short slate winners would violate Delaware law. 

The Delaware Supreme Court answered the SEC's two certified questions as follows:

1. Is the AFSCME proposal a proper subject for action by shareholders as a matter of Delaware law?  YES.  The Court noted that shareholders' power to adopt, amend or repeal bylaws was not co-extensive with the board's power and hence was limited by the board's managerial power.  However, the Court stated that the bylaw was a proper subject for shareholder action because it regulated the process for electing directors, and facilitated the exercise of shareholders right to participate in selecting board nominees by encouraging nominees other than those supported by the board.

2. Would the AFSCME proposal, if adopted, cause CA to violate any Delaware law to which it is subject?  YES.  The Court noted that in considering the legality of the bylaw, it had to consider any possible scenario pursuant to which it would be applied, and in at least one circumstance, its application would constitute a violation of Delaware law.  That is, in circumstances pursuant to which the bylaw would compel directors to pay the expenses for candidates who ran for personal reasons or whose campaign did not further the interests of the corporation or its shareholders.  As a result of this possibility, the Court stated that the bylaw would "violate the prohibition, which our decisions have derived from Section 141(a), against contractual arrangements that commit the board of directors to a course of action that would preclude them from fully discharging their fiduciary duties to the corporation and its shareholders."

The Court concluded by noting that those who support the AFSCME bylaw such find alternative mechanisms for its implementation such as amending the certificate of incorporation or seeking recourse from the Delaware General Assembly.

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