SW Legal studies in Business

Shareholders May Not Strip Corporate Directors of Fiduciary Duties

Delaware high court held that a proposed change to a company’s bylaws about mandatory election expense coverage would remove from directors their fiduciary obligation to determine if the expenditure of corporate money on certain elections was valid or if it was not in the best interest of the company.

Topic Business Organization
Key Words

Stockholder Proposal; Bylaw; Election Expenses; Fiduciary Duty

C A S E   S U M M A R Y

CA is a Delaware corporation with a board that sits for reelection each year. Prior to the annual shareholder meeting, AFSCME (a union), a CA stockholder, submitted a proposed bylaw to include in the company’s proxy materials for the annual meeting. The proposal would change the bylaws to require CA to reimburse shareholders and board candidates for all election expenses incurred by candidates nominated to the board from the outside, so long as at least one outsider was elected to the board. Since the issue is not currently addressed by CA bylaws, under Delaware law, any decision about covering election expenses would fall under the fiduciary duty of the board to decide if such expenses should be covered. CA is required to submit proxy materials related to the board meeting to the SEC. CA informed the SEC that it intended to exclude ASFCME’s proposal from the proxy materials distributed to shareholders. The company requested a ruling by the SEC about the appropriateness of its decision and provided supporting legal arguments. ASFCME submitted a contrary analysis to the SEC. The SEC then asked the Delaware supreme court if, under Delaware law, the AFSCME proposal was a proper subject for action by shareholders and, if the proposed bylaw was adopted by the shareholders, if it would violate Delaware law.


Questions answered. The bylaw proposed by ASFCME is not an improper subject matter for shareholder action. However, the bylaw would mandate reimbursement of election expenses in circumstances that the board’s proper application of fiduciary principles could preclude, so the proposed bylaw is invalid. It would provide no power for directors to exercise their fiduciary duty to decide if expenditures would be appropriate. When a proxy contest is motivated by personal or petty concerns, or to promote interests that do not further those of the corporation, the board’s fiduciary duty could compel that reimbursement of proxy expenses be denied.

Citation CA, Inc. v, AFSCME Employees Pension Plan, ---A.2d--- (2008 WL 2778141, Sup. Ct., Del., 2008)

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