March 16, 2009
What's the Deal with Proposed Section 112?
Posted by Andrew Lund

The ball has begun rolling toward amending the DGCL.  Of some note, proposed Section 112 would explicitly permit adoption of bylaws providing shareholder access to the corporation’s proxy for purposes of director elections.  The language in the proposal goes further and permits the bylaws to place restrictions on the access.  The language then goes even further and provides a non-exclusive list of restrictions that would be ok (minimum share ownership for nominators, indemnification by nominators, etc.).

The indispensable Jay Brown has a post up noting his concern that the proposed amendment would harm shareholder access, under the assumption that a shareholder access rule will be adopted by the SEC in short order.  His point is that boards might adopt bylaws under the Delaware rule that are more restrictive of that access than any forthcoming SEC rule would be.  In its summary of the proposal, RiskMetrics considers this a possible repercussion and gains comfort from Michael Barry's view that any federal rule could preempt more board-imposed limitations.  

It strikes me, however, that boards could adopt restrictive bylaws even without the explicit permission granted by the proposed Section 112.  They don’t do so currently, but that’s only because 14a-8(i)(8) makes any restrictions unnecessary.  Take away or amend 14a-8(i)(8) and there’s little to stop boards from imposing restrictions in the bylaws.  I understand that the explicit list of limitations would preclude a shareholder claiming that the board improperly restricted its “right” to proxy access, but is it clear that the Delaware courts would be all that friendly to such a claim even without the proposed statute?  In any event, wouldn’t the board-adopted bylaws would be “procedural” and thus subject to amendment by shareholders should they so choose (as they’d have to do anyway under any SEC-adopted access rule)?  That seems to be the real protection for access here - not the possibility of the federal rule preempting limitations in board-approved bylaws.

So what’s the point of the Delaware proposal?  Perhaps it’s just a case of Delaware getting in front of federal action, thereby demonstrating that it’s responsive to the corporate governance movement and perhaps "preempting" federal action in other areas.

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