CA, Inc. v. AFSCME Employees Pension Plan
No reporter information provided (2008)
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Rule of Law:
A shareholder-enacted corporate bylaw may regulate the process for director elections, but it is invalid under Delaware law if it mandates director action that would, under certain circumstances, prevent the directors from fully discharging their fiduciary duties to the corporation.
Facts:
- AFSCME Employees Pension Plan ('AFSCME'), a stockholder in CA, Inc. ('CA'), submitted a proposed bylaw for inclusion in the company's proxy materials for its 2008 annual meeting.
- The proposed bylaw would amend CA's bylaws to require the company to reimburse a stockholder for reasonable expenses incurred in a contested election of directors.
- Reimbursement under the proposed bylaw was conditioned on several factors, including that the election of fewer than 50% of the directors was contested and that one or more of the stockholder's nominees were elected.
- CA's Certificate of Incorporation vests the management of the business and conduct of its affairs in the Board of Directors, tracking the language of 8 Del. C. § 141(a).
- Prior to the proposal, the decision of whether to reimburse director election expenses was within the discretion of CA's board.
Procedural Posture:
- AFSCME submitted its proposed bylaw to CA for inclusion in the company's 2008 proxy materials.
- CA notified the SEC's Division of Corporation Finance of its intent to exclude the bylaw and requested a 'no-action letter,' arguing the bylaw was improper under Delaware law.
- AFSCME submitted a response to the SEC, arguing the bylaw was legally permissible.
- Confronted with conflicting legal opinions, the SEC certified two questions of Delaware law to the Delaware Supreme Court.
- The Delaware Supreme Court accepted the certification for review.
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Issue:
Would a shareholder-proposed bylaw that mandates the reimbursement of reasonable proxy expenses for a stockholder who successfully nominates a minority of the board violate Delaware law?
Opinions:
Majority - Jacobs, Justice.
Yes, a shareholder-proposed bylaw that mandates reimbursement would violate Delaware law. While the bylaw is a proper subject for shareholder action because it is process-oriented, it is nonetheless invalid because it would impermissibly restrict the board's full exercise of its fiduciary duties. The court analyzed the issue in two parts. First, it determined the bylaw was a proper subject for shareholder action under 8 Del. C. § 109 because it regulates the process of director elections, a legitimate area of shareholder concern, rather than dictating a substantive business decision. Second, the court found the bylaw, as drafted, would violate Delaware law because it divests the board of its duty to exercise its independent fiduciary judgment. Precedent like Paramount v. QVC establishes that directors cannot contract away their fiduciary duties. This bylaw would create a mandatory obligation, forcing the board to reimburse expenses even in situations where their fiduciary duties might compel them to refuse, such as when a proxy contest was motivated by interests adverse to the corporation. Because the bylaw contains no 'fiduciary out' clause preserving the board’s discretion to act in the corporation's best interest, it is invalid.
Analysis:
This decision clarifies the contentious boundary between shareholder power to create bylaws under DGCL § 109 and the board's statutory authority to manage the corporation under § 141(a). It affirms that shareholders may enact process-oriented bylaws, even those requiring the expenditure of corporate funds, but establishes a critical limitation: no bylaw can strip a board of its fundamental fiduciary duties. The ruling effectively requires that shareholder bylaws imposing mandatory action on the board must contain a 'fiduciary out' clause, preserving the directors' ability to exercise their judgment. This reinforces the primacy of fiduciary duties in Delaware corporate law and provides a framework for evaluating future shareholder proposals that seek to regulate board conduct.
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