CA, Inc. v. AFSCME Employees' Pension Plan

Supreme Court of Delaware · 2008 · Corporations

CorporationsBylawsShareholder votingBoard authorityFiduciary dutiesDGCL 109(a)DGCL 109(b)DGCL 141(a)

Facts

CA is a Delaware corporation whose certificate of incorporation vests management of the business and affairs of the corporation in the board, and its current governing documents do not specifically address reimbursement of proxy expenses. AFSCME, a CA stockholder, submitted a proposed bylaw requiring the board to cause the corporation to reimburse a nominating stockholder's reasonable expenses in a contested director election if fewer than 50% of the board seats were contested and one or more of the nominator's candidates were elected, subject to a cap. CA sought to exclude the proposal from its proxy materials, contending that the bylaw was not a proper subject for shareholder action and would violate Delaware law. It was undisputed that, absent the bylaw, the decision whether to reimburse election expenses was presently within the board's discretion, subject to fiduciary duties and Delaware law.

Issue

Whether AFSCME's proposed reimbursement bylaw was a proper subject for shareholder action under Delaware law, and whether adoption of that bylaw would cause CA to violate Delaware law. More specifically, the court had to decide whether the bylaw permissibly regulated election-related process under DGCL § 109(b) or instead impermissibly intruded on board authority under § 141(a), and whether the bylaw unlawfully eliminated directors' ability to comply with fiduciary duties.

Rule

Under Delaware law, shareholders' bylaw power under DGCL § 109 is not coextensive with board authority and is limited by the board's managerial prerogatives under DGCL § 141(a). A proper shareholder bylaw may regulate process and procedure, including the process for electing directors, but may not mandate board action in a way that would preclude directors from fully discharging fiduciary duties; a bylaw requiring reimbursement of election expenses must preserve directors' full power to decide whether reimbursement is appropriate in a particular case.

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Pine Harbor Robotics, a Delaware corporation based in Seattle, has a shareholder proposal for the annual meeting. The proposal would add a bylaw stating that any shareholder who timely nominates a director candidate and gets at least one nominee elected in a contested election is entitled to reimbursement of reasonable solicitation expenses, capped at the amount the corporation spent on its own proxy materials.

Under Delaware law as articulated by the majority opinion, is this proposal a proper subject for shareholder action?

Explanation. The majority held that a shareholder-adopted bylaw may be a proper subject for shareholder action if it regulates process or procedure, including the process for electing directors. A reimbursement bylaw aimed at facilitating shareholder nominations and participation in selecting election contestants is process-related, and it does not become substantive merely because compliance requires corporate expenditures. The first question is therefore answered separately from whether the bylaw, if adopted as drafted, would also be consistent with law.