Corporate Governance

The Dodd-Frank Wall Street Reform Act and the Preemption of Delaware Law (Say on Pay, Part 1)

By J Robert Brown Jr.

Delaware law defines a number of mandatory matters that must be submitted to shareholders.  These include the sale of the business (mergers, dissolution, sale of all or substantially all of the assets), amendments to the charter, and the election of directors. 

We can now add another, gratis of Dodd-Frank:  Executive compensation or so called "say on pay" (Section 14A of the Exchange Act, 15 USC 78n-A).  The provision, as we will discuss below, is broad.  Unlike other requirements in the DFA, this one applies not just to listed companies but to all companies subject to the proxy rules (companies registered under Section 12(g) with 500 shareholders of record and $10 million in assets).  It represents the first time on a comprehensive basis that shareholders have been given the specific authority to vote on particular matters.

Yet it is more than affirmative authority.  Under Delaware law, at least one Vice Chancellor has noted that say on pay could conflict with Delaware law.  See Leo E. Strine, Jr., Breaking the Corporate Governance Logjam in Washington: Some Constructive Thoughts on a Responsible Path Forward, 63 Bus. Law. 1079 (2008)("Although the issue has not been resolved in Delaware, distinguished scholars have suggested that a bylaw requiring stockholder approval of executive compensation contracts would be at greater risk of invalidation than a bylaw governing the conduct of director elections. n82 Setting the compensation for top executives has long been considered a core managerial function of a board of directors.").  The conflict issue is now gone.  Federal law preempts any state law provisions to the contrary. 

We will discuss the provision in the next post, including the possibility that it preempts Delaware law in a much broader way than anticipated. 

The Dodd-Frank Wall Street Reform Act and a short Summary of the legislation are posted online.  We have included the "say on pay" provision below.

Full post as published by The Race to the Bottom on July 13, 2010 (boomark / email).