Delaware has enacted important amendments to the Delaware General Corporation Law. The amendments, which will go into effect on August 1, 2009, include a number of changes responsive to significant recent case law developments in the Delaware courts. Highlights of the 2009 amendments include:
Proxy Access and Expense Reimbursement Bylaws
In 2008, the Delaware Supreme Court held that shareholder-adopted bylaws governing procedures and process related to director elections were generally valid under the DGCL. CA, Inc. v. AFSCME Employees Pension Plan, 953 A.2d 227 (Del. 2008). Specifically, that case held valid a stockholder bylaw proposal requiring the corporation to reimburse expenses incurred by a stockholder in solicitation of proxies in support of a short-slate of dissident director nominees (so long as at least one dissident was elected) if the bylaw explicitly included flexibility not to reimburse if contrary to the board’s fiduciary duties.
In response to CA v. AFSCME, the 2009 DGCL amendments add a new §113 providing explicit statutory authority for a bylaw requiring a Delaware corporation to reimburse proxy solicitation expenses incurred by a stockholder nominating the stockholder’s own director(s). New §113 also identifies a nonexclusive list of conditions that the bylaws may impose on such a right to reimbursement, including:
- conditioning eligibility on the number or proportion of persons nominated or whether the stockholder previously sought reimbursement for similar expenses;
- limitations on the amount of reimbursement based on the proportion of votes cast in favor of the nominee(s) of the stockholder seeking reimbursement, or upon the amount spent by the corporation in soliciting proxies in connection with the election; and
- limitations concerning elections of directors by cumulative voting.
The nonexclusive list of conditions in §113 does not include the explicit “fiduciary out” required by the Delaware Supreme Court in CA v. AFSCME.
The 2009 DGCL amendments also add a new §112 providing explicit statutory authority for a bylaw requiring a Delaware corporation to include stockholder-proposed nominees for director in the corporation’s proxy materials under certain prescribed circumstances. Access to the corporation’s proxy materials for nomination of dissident directors has become one of the most important recurring demands among activist stockholders, and new §112 eliminates any doubt remaining after CA v. AFSCME regarding the validity under the DGCL of bylaws requiring such access. New §112 also includes a nonexclusive list of permissible procedures that may be put in place in the bylaws to limit stockholder access, including:
- a minimum level of record or beneficial stock ownership by the nominating stockholder. In establishing such a minimum, the bylaws may define beneficial ownership to take account of options or other derivative rights;
- requiring specified information about the nominating stockholder and the nominee(s);
- conditioning eligibility on the number or proportion of directors nominated (e.g., limiting access to short-slates) or whether the stockholder previously sought to require such inclusion;
- limiting the right of access if nominations are related to an acquisition of a significant percentage of the corporation’s stock; and
- requiring that the nominating stockholder indemnify the corporation for any loss arising from false or misleading information or statements submitted by the nominator.
Although the 2009 DGCL amendments resolve the state-law validity of bylaws requiring stockholder access for Delaware corporations, stockholder proposals to adopt such bylaws may still be excluded from management’s proxy materials under SEC Rule 14a-8(i)(8). Newly appointed SEC Chairwoman Mary Schapiro has indicated that the Commission will revisit the question of stockholder access under federal proxy rules in the next few months. Most observers expect that the federal proxy rules will be amended to facilitate stockholder access proposals yet this year.
Indemnification and Advancement
The 2009 changes amend DGCL §145(f) to state that a right to indemnification or advancement of expenses under a provision of the certificate of incorporation or the bylaws cannot be eliminated or impaired by an amendment of the provision after the occurrence of the act or omission to which indemnification or advancement of expenses relates, unless the provision contains, at the time of the act or omission, an explicit authorization of such impairment.
This amendment legislatively reverses the rule articulated in last year’s controversial decision in Schoon v. Troy Corp., 948 A.2d 1157 (Del. Ch. 2008), where the Delaware Court of Chancery ruled that the board of directors could make modifications to indemnification and advancement rights even after the related act or omission had occurred (so long as a lawsuit had not yet been filed).
Record Dates and “Empty Voting”
The 2009 amendments alter DGCL §213(a) (with corresponding amendments to related sections) to permit the board of directors to separate the record date for determining the stockholders entitled to notice of a meeting of stockholders from the record date for determining the stockholders entitled to vote at the meeting. Under amended §213(a), the board may choose a date later than the notice record date (which must be not more than 60 nor less than 10 days before the date of the meeting) for determining those stockholders entitled to vote.
The amendment gives the board flexibility to adopt dual-record-date strategies aimed at minimizing so-called “empty voting”, that is, voting by persons who no longer own the stock and no longer have the same economic stake in the corporation.
Chancery Court Removal of Directors
The 2009 changes amend DGCL §225 to grant the Delaware Court of Chancery explicit power to remove directors under certain circumstances. Under new §225(c), a Delaware corporation (or a stockholder acting derivatively) may bring an action to remove a director if the director has been convicted of a felony in connection with his or her duties or there has been a judgment on the merits by a court of competent jurisdiction that the director has committed a breach of the duty of loyalty. The Chancery Court may remove the director if it determines he or she did not act in good faith in the acts resulting in the conviction or judgment and removal is necessary to avoid irreparable harm to the corporation.