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American Bar Association

ABA Section of Business Law

Business Law Today

Keeping Current: Corporations
By Scott Towers and Catherine L. Beck
Changes to Delaware General Corporation Law may impact 2010 proxy season
Recent amendments to the Delaware General Corporation Law (DGCL) are likely to elicit proposals from activist stockholders in the 2010 proxy season. On April 10, 2009, Delaware's Governor Jack Markell signed into law a bill containing significant amendments to the DGCL that will take effect on August 1, 2009. The amendments may bestow on stockholders greater access to companies' proxy statements, and rights to expense reimbursement for proxy solicitations, with respect to director elections.

New section 112 of the DGCL permits, but does not require, a Delaware corporation to adopt bylaw provisions that require director nominations by stockholders to be included in the corporation's proxy statement. New section 113 permits, but does not require, a Delaware corporation to adopt bylaw provisions that require the corporation to reimburse proxy-solicitation expenses incurred by a stockholder in connection with an election of directors.

Stockholder activism regarding such bylaw amendments likely will not be limited to corporations domiciled in Delaware because the laws of many other states (including Pennsylvania) are silent on the topic and, arguably, permit corporations to adopt such amendments.

Another of the recent amendments to the DGCL restricts the ability of a Delaware corporation to eliminate rights to indemnification and advancement of expenses.

Access to Proxy Materials
New section 112 provides that a corporation's bylaws may grant access to its proxy materials to stockholders in connection with the election of directors. The bylaws may provide that if a corporation solicits proxies in such elections, it must include in its proxy materials, in addition to the board's nominees, nominees submitted by a stockholder.

Section 112 identifies a nonexclusive list of conditions and procedures that the bylaws may impose on access to the corporation's proxy materials, including

  • A provision requiring a minimum amount of ownership, or duration of ownership, of shares by the nominating stockholder;
  • A provision requiring the nominating stockholder to submit specified information concerning the stockholder and the stockholder's nominees;
  • A provision conditioning eligibility upon the number or proportion of directors nominated by stockholders or whether the stockholder previously sought to require such inclusion;
  • A provision precluding nominations by any person who has acquired or proposed to acquire a specified percentage of the corporation's stock within a specified period before the election of directors;
  • A provision requiring that the nominating stockholder indemnify the corporation in respect of any loss arising as a result of any false or misleading statement or information submitted by the nominating stockholder in connection with a nomination; or
  • Any other lawful condition.
Reimbursement of Proxy Expenses
Section 113 of the DGCL expressly permits the bylaws of a corporation to provide for the reimbursement of reasonable proxy solicitation expenses incurred by a stockholder in soliciting proxies in connection with an election of directors.

Similar to section 112, section 113 sets forth a nonexclusive list of procedures and conditions that may be imposed upon the right to the reimbursement of expenses, including

  • Conditioning reimbursement upon the number or proportion of persons nominated by the stockholder seeking reimbursement or whether such stockholder previously sought reimbursement for similar expenses;
  • Limitations on the amount of reimbursement based upon the proportion of votes cast in favor of the stockholder's nominees, or based upon the amount spent by the corporation in soliciting proxies in connection with the election;
  • Limitations concerning elections of directors by cumulative voting; or
  • Any other lawful condition.
New section 113 was adopted in response to the 2008 Delaware Supreme Court decision in CA, Inc. v. AFSCME Employees Pension Plan. In AFSCME, the court held that a stockholder's bylaw amendment proposal to require reimbursement of stockholder proxy expenses by a corporation may be a valid proposal, so long as the bylaw "establishes or regulates a process for substantive director decision-making" and reserves for directors the power to exercise their fiduciary duty to decide whether it would be appropriate to reimburse expenses in a specific situation. Although section 113 does not contain such a "fiduciary out" requirement, a bylaw provision requiring reimbursement of proxy expenses should contain such an exception in light of the AFSCME decision. If such an exception is not included, a court may nevertheless read one into such a bylaw provision in light of the AFSCME decision.

Indemnification/Advancement Rights
An amendment to section 145(f) of the DGCL prohibits an amendment to a corporation's certificate of incorporation or bylaws that would eliminate or impair rights to indemnification or to advancement of expenses after the occurrence of the act or omission giving rise to the indemnification or advancement claim, unless the relevant provision explicitly authorizes such elimination or impairment after such an act or omission has occurred.

This amendment responds to and rejects the Delaware Chancery Court's holding in Schoon v. Troy Corp., which denied advancement of a former director's litigation expenses where the corporation amended its bylaws to eliminate its obligation to advance expenses after the director left office, even though the action giving rise to the advancement claim occurred at a time when the bylaws would have required advancement.

In response to the Schoon holding, many corporations amended their bylaws, or entered into separate indemnification agreements, to protect their directors and former directors from such retroactive bylaw amendments regarding the advancement of expenses. For directors serving Delaware corporations that did not so amend their bylaws or enter into separate agreements, the amendment to section 145(f) provides assurance that existing indemnification and advancement protections cannot be retroactively amended. Corporations domiciled in states other than Delaware that wish to provide their directors with the highest permissible degree of protection against personal liability should review their charters, bylaws, and applicable state law to determine if action needs to be taken in order to provide their directors with the protections afforded by section 145(f) of the DGCL.

Impact and Potential Changes
The recent DGCL amendments likely will lead activist stockholders to make proposals requesting bylaw amendments relating to proxy access for director nominees and reimbursement of proxy solicitation expenses related to director elections. Rule 14a-8(i)(8) under the Securities Exchange Act of 1934 (Exchange Act) allows companies to exclude such proposals, as well as stockholder-nominated director candidates, from its proxy materials because they relate to the election of directors. However, proposed amendments to the SEC rules likely would require the inclusion of such proxy access proposals and director nominations in companies' proxy materials.

On May 20, 2009, the SEC voted to propose rule amendments to facilitate the rights of stockholders to nominate directors. Proposed amendments to Rule 14a-8(i)(8) under the Exchange Act require companies, under certain circumstances, to include proposals in their proxy materials that would, if approved, amend their companies' governing documents to address director nomination procedures or other director nomination disclosure provisions. In addition, proposed new Rule 14a-11 would permit stockholders meeting certain ownership thresholds to have their director nominees included in their companies' proxy materials (unless otherwise prohibited by applicable state law or their companies' charters or bylaws). The full text of the SEC's proposed rule amendments was published in the Federal Register on June 18, 2009 and public comments are due by August 17, 2009.

Public companies should closely monitor the SEC's proposed rule amendments. It is possible that the rule amendments will be made before the 2010 proxy season and will have a significant impact on how companies manage access to their proxy materials, and respond to stockholder proposals regarding proxy access and director nominations, in the 2010 proxy season.

Towers is a partner and Beck is an associate at Ballard Spahr Andrews & Ingersoll, LLP in Philadelphia. Their respective e-mails are towerss@ballardspahr.com and beckc@ballardspahr.com.

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