Corporate Governance

Delaware's Top Five Worst Shareholder Decisions for 2008 (#5)

By J. Robert Brown

CA, Inc. v. AFSCME Emples. Pension Plan, 953 A.2d 227 (Del. 2008)

This was the case that came to the Supreme Court via the SEC.  It was a case without an adequate factual record and taken in violation of the Supreme Court's own rules.

The issue was the validity of a bylaw that would require the board to pay reasonable expenses incurred by shareholders in a proxy contest but only if one or more of the shareholder candidates actually won.  The law in Delaware (albeit law developed in the 1930s) made it clear that boards could invoke their fiduciary duties and refuse to reimburse solicitation expenses motivated by personal or petty concerns. 

In some ways, the case was unremarkable.  It essentially invalidated the bylaw by finding that there was no fiduciary out.  Without the fiduciary out, the board might be obligated to pay expenses even when the proxy contest was "motivated by personal or petty concerns, or [would] promote interests that do not further, or are adverse to, those of the corporation."

What brought the case into the top five worst decisions was the result-oriented reasoning in the case.  First, the bylaw only applied to proxy contests that resulted in the election of an insurgent director.  The director's election, argued plaintiff, rendered the motivation irrelevant.

• COUNSEL: “I personally cannot fathom a situation where a director nominated by shareholders is elected for other than policy reasons.”
• JUSTICE: “Couldn’t the bylaw itself be read to be an expression of policy that is in the best interests of the corporation to have additional people enabled to run for office and therefore it doesn’t matter whether the person who ultimately gets elected was doing it entirely for personal reasons or not.”
• COUNSEL: “That’s exactly the point.”

How did the Court address the argument?  By ignoring it.  There is no discussion of this issue in the opinion.

Second, at oral argument, plaintiff conceded that the bylaw could be repealed if it would result in a violation of fiduciary duties.  For example:

• JUSTICE:“If this bylaw was adopted by the shareholders the board could repeal it.”
• COUNSEL: “In theory yes. Then it would raise questions as to their fiduciary duties in making that decision to do so. But there wouldn’t be anything under the statute that would prohibit them from repealing the bylaw.”

In other words, there was already sufficient protection for the board from any possible violation of fiduciary duties.  The Court chose to ignore the exchange. 

Similarly, the bylaw provided only for the reimbursement of reasonable expenses.  Counsel conceded that reimbursements that resulted in a violation of fiduciary obligations would be unreasonable.

• JUSTICE: “So is it your position that a reimbursement that’s otherwise impermissible under Delaware law can still be a reasonable expense?"
• COUNSEL: “I don’t think it can be your honor.”

And, again, the Court's handling of the argument?  Two conclusory sentences. 

• As presently drafted, the Bylaw would afford CA's directors full discretion to determine what amount of reimbursement is appropriate, because the directors would be obligated to grant only the "reasonable" expenses of a successful short slate. Unfortunately, that does not go far enough, because the Bylaw contains no language or provision that would reserve to CA's directors their full power to exercise their fiduciary duty to decide whether or not it would be appropriate, in a specific case, to award reimbursement at all.

The reasoning was disingenuous.  The Court could just have easily read reasonable, as counsel conceded at oral argument, to possibly be "0" in the case of illegal payments. 

The race to the bottom dictated, and The Race to the Bottom predicted, the outcome.  But even for Delaware courts, it was a result oriented decision that got to the finish line largely by ignoring the arguments and evidence that dictated the opposite outcome.

Full post as published by The Race to the Bottom on December 29, 2008 (boomark / email).