Binding Shareholder Proposals

Transcription

1 Binding Shareholder Proposals The Proposals That Bind: Dealing with Binding Shareholder Proposals in a Proxy Access World ABA Spring Meeting 2012 (Las Vegas, NV) Steven M. Haas Hunton & Williams LLP

2 Key Issues Who has the power to amend bylaws? Incorporators/initial directors Stockholders Directors What is the scope of permissible bylaws? Delaware General Corporation Law ( DGCL ) Common law Intersection between stockholders right to amend bylaws and board s duty to manage the corporation Can stockholders prevent directors from repealing a stockholderadopted bylaw? 2

3 Who Has the Power to Amend Corporate Bylaws? 3

4 Original Bylaws The original bylaws may be adopted, amended or repealed by the incorporators [or] by the initial directors. 109(a). In addition, the board may adopt, amend and repeal the bylaws prior to receiving any payment for any of its stock. 109(a). 4

5 Power Shifts to the Stockholders Once payment has been received for shares, the DGCL shifts the authority to amend the bylaws: After a corporation has received any payment for any of its stock, the power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote. 109(a). Legislative commentary: This Amendment makes it clear that stockholders always have the power to make, alter or repeal bylaws, even though the directors may also be delegated such power. 5

6 Charter Can Vest Power in the Directors Although stockholders have the power to amend the bylaws, the certificate of incorporation can provide such power to the directors: any corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors. 109(a). Almost every certificate of incorporation grants this power, without qualification. But this does not divest stockholders of their power: 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. 109(a). 6

7 What is the Permissible Scope of Bylaws? 7

8 Scope of Permissible Bylaws General statutory authorization: The bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs and its rights or powers or the rights or powers of its stockholders, directors, officers or employees. 109(b). 8

9 Bylaws Contemplated by the DGCL The DGCL contemplates specific types of bylaws, including: Place of annual meeting ( 211) Director qualifications ( 141(a)) Titles, duties, and terms of officers ( 142) Ability to call special meeting ( 211(d)) Quorum and voting requirements ( 216) Notice of adjourned meetings ( 222(c)) 9

10 Bylaws Contemplated by the DGCL The DGCL also contemplates restrictions in the bylaws, including with respect to: Ability of directors to act by written consent ( 141(f)) Place of board meetings ( 141(g)) Board s authority to set director compensation ( 141(h)) Remote participation in meetings by directors ( 141(i)) 10

11 Common Law Limitations on the Scope of Bylaws Delaware courts have generally said bylaws establish rules and procedures Delaware courts have also imposed a reasonableness requirement on bylaws See Brumley v. Jessup & Moore Paper Co., 77 A. 16 (Del. 1910) (invalidating improper restriction in right to inspect books and records) In particular, this has been applied in the context of advance notice bylaws 11

12 To What Extent Can Shareholders Adopt Bylaws that Govern or Bind the Board of Directors? 12

13 Specific References to Stockholder- Adopted Bylaws in the DGCL Section 141(d): Board can be staggered pursuant to a stockholderadopted bylaw Section 216: Majority/plurality standard in director elections: 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. Section 203(b)(3): Stockholders can opt-out of Section 203 with a bylaw amendment: A bylaw amendment adopted pursuant to this paragraph shall not be further amended by the board of directors. 13

14 Stockholder-Adopted Bylaws DGCL only contemplates very limited instances of stockholder-adopted bylaws. Otherwise, the DGCL does not explicitly address the question of the extent to which stockholder-adopted bylaws regulate or define board action. But see Hollinger Int l, Inc. v. Black, 844 A.2d 1022 (Del. Ch. 2004): Sections 109 and 141 [of the DGCL], taken in totality, and read in light of Frantz, make clear that bylaws may pervasively and strictly regulate the process by which boards act, subject to the constraints of equity. Id. at 1080 n.136 (emphasis added). 14

15 Stockholder-Adopted Bylaws Examples of stockholder-adopted bylaws Separation of Chairman and CEO roles Majority voting standards in director elections Proxy access (and, perhaps coming soon, proxy expense reimbursement) Binding vs. precatory considerations ISS and institutional shareholder support Potential exclusion under Rule 14a-8 because invalid under state law Ability to formulate bylaw under Rule 14a-8 word limit 15

16 Board s Authority to Manage the Corporation In examining the scope of a bylaw, look at the board s general statutory authority to manage the corporation. Under the DGCL, [t]he business and affairs of every corporation shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. 141(a). If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation. Id. 16

17 How do we reconcile Section 109(a) with Section 141(a)? Arguments in favor of stockholder empowerment: Section 141(a) says board manages the corporation except as may be otherwise provided in this chapter or in the certificate of incorporation Section 109(a), which gives stockholders the power to amend bylaws, is provided in this chapter 17

18 How do we reconcile Section 109(a) with Section 141(a)? But this issue was addressed by the Del. Supreme Court in CA, Inc. v. AFSCME, mem. op. (Del. 2008): [W]e do not construe Section 109 as an exception to Section 141(a). [T]he shareholders statutory power to adopt, amend or repeal bylaws under Section 109 cannot be inconsistent with the law, including Section 141(a) (emphasis added). [B]oth the board and the shareholders, independently and concurrently, possess the power to adopt, amend and repeal the bylaws. 18

19 How do we reconcile Section 109(a) with Section 141(a)? Board s authority, of course, is not without limitations, even in the absence of a limitation in the certificate of incorporation: Board s statutory mandate is accompanied by concomitant fiduciary duties. See Quickturn Design Sys., Inc. v. Shapiro, 721 A.2d 1281, (Del. 1998). Non-controlling stockholders, in contrast, do not owe any fiduciary duties, including in connection with proposal to amend the bylaws. 19

20 Can Stockholders Adopt a Bylaw that Prohibits the Board from Amending or Repealing It? 20

21 Restricting the Power to Repeal/Amend Under CA, such a bylaw arguably runs afoul of Section 141(a). In addition, such a bylaw would seemingly be in conflict with the standard provision in certificates of incorporation giving the board power to amend bylaws. Where a by-law provision is in conflict with a provision of the charter, the by-law provision is a nullity. Centaur Partners, IV v. Nat l Intergroup, Inc., 582 A.2d 923, 929 (Del. 1990). [A] corporation s bylaws may never contradict its certificate of incorporation. Oberly v. Kirby, 458 n.6 (Del. 1991) 21

22 Restricting the Power to Repeal/Amend But there is no definitive decision, and the case law is not clear. In American Int l Rent a Car, Inc. v. Cross, 1984 WL 8204, *3 (Del. Ch. May 9, 1984), the court suggested, in dicta, that shareholders could adopt a bylaw that expressly provided it could not be amended or repealed by the board. If a majority of American International's stockholders in fact disapproved of a Board's amendment of the bylaw, several recourses were, and continue to be, available to them. They could vote the incumbent directors out of office. Alternatively, they could cause a special meeting of the stockholders to be held for the purpose of amending the bylaws and, as part of the amendment, they could remove from the Board the power to further amend the provision in question. 22

23 Restricting the Power to Repeal/Amend In General DataComm Indus. v. State of Wis. Inv. Board, 731 A.2d 818 (Del. Ch. 1999) (Strine, V.C.), the court recognized the novelty of the issue of repealing stockholder-adopted bylaws: The question of whether a stockholder-approved bylaw may be repealed by a board of directors has not clearly been answered by a Delaware Court. However the affirmative answer may be the correct one. Id. at 822 n.1. 23

24 Restricting the Power to Repeal/Amend But see the Delaware Supreme Court s dicta in Centaur Partners, IV v. National Intergroup, Inc., 582 A.2d 923 (Del. 1990): Case involved a stockholder-adopted bylaw that fixed the number of directors and expressly provided that it could not be amended/repealed by the board. Supreme Court noted that the Certificate of Incorporation said the number of directors would be fixed as provided in the By-Laws and said that [t]o the extent that the directors have general authority to adopt or amend corporate by-laws, these two provisions are in obvious conflict. Id. at

25 Restricting the Power to Repeal/Amend Keep in mind, however, that a board s decision to amend or repeal a stockholder-adopted bylaw would be subject to the directors fiduciary duties Actions permitted under the DGCL cannot be done inequitably 25

26 What Alternative Bylaw Strategies Might be Pursued by Stockholders or Boards? 26

27 Alternative Strategies for Stockholders In light of CA, stockholders might impose procedural obstacles in the bylaws For example, the bylaw might provide that it can only be amended or repealed by a unanimous vote of the board of directors This has been upheld in Delaware, at least where a majority stockholder adopted the bylaw This could be potent in light of proxy access 27

28 Alternative Strategies for Stockholders Frantz Manuf. Co. v. EAC Indus., 501 A.2d 401 (Del. 1985) Upheld stockholder-adopted bylaws proposed by a hostile acquiror that required, among other things, unanimous director approval to take board action and unanimous ratification of board committee actions Hostile acquiror had one representative on board The bylaw amendments were a permissible part of [the stockholder s] attempt to avoid its disenfranchisement as a majority shareholder. Id. at 407. Bylaw amendments were not inequitable under the circumstances. Id. at

29 Alternative Strategies for Boards Supermajority voting requirements for stockholders to amend bylaws Advance notice and disclosure provisions Director qualifications (proxy access) Stockholder engagement 29

30 Bibliography Lawrence A. Hameresh, Corporate Democracy and Stockholder- Adopted By-Laws: Taking Back the Street?, 73 Tul. L. Rev. 409 (1998) Jay W. Eisenhofer & Michael J. Barry, Mandatory Bylaws are Permitted Under Delaware Law: An Argument in Favor of Shareholders Rights, Bank and Corporate Governance Law Reporter (May 2004) Frederick H. Alexander & James D. Honaker, Power to the Franchise or the Fiduciaries: An Analysis of the Limits on Stockholder Activist Bylaws, 33 Del. J. Corp. L. 749 (2008) 30

31 About Steven M. Haas is a partner focusing on corporate governance and mergers and acquisitions at Hunton & Williams LLP. He is a member of the Delaware and Virginia bars. He is the author of two chapters on stockholder rights and director duties in the treatise Corporate Governance: Law and Practice (LexisNexis) and is an adjunct professor of law at the University of Richmond School of Law. Prior to joining Hunton & Williams LLP, he was a senior associate at Abrams & Laster LLP in Wilmington, Delaware. Contact: shaas@hunton.com 31