CA, Inc. (CA), a Delaware corporation of which the American Federation of State, County and Municipal Employees (AFSCME) is a stockholder, requested from the Division of Corporation Finance (the Division) of the Securities and Exchange Commission a no-action letter stating that the Division would not recommend any enforcement action if CA excluded from its proxy materials AFSCME’s proposed bylaw to reimburse stockholders or groups of stockholders for reasonable expenses incurred in connection with nominating candidates in a contested election of directors. To help it respond to CA’s request for a no-action letter, the SEC certified these two questions to the Supreme Court of Delaware: (i) whether under Delaware law AFSCME’s proposal was a proper subject for action by shareholders, and (ii) would AFSCME’s proposal, if adopted, cause CA to violate any Delaware law.

In answering the first question affirmatively, the Supreme Court of Delaware explained that pursuant to section 109(b) of the Delaware General Corporation Law (GCL) shareholders have the power to adopt, amend or repeal bylaws. On the other hand, the court noted that section 141(a) of the GCL provides that the business and affairs of every corporation shall be managed by the board of directors, and therefore the shareholders’ power to adopt bylaws is not unlimited. The court reconciled these two provisions by holding that shareholders have the power to adopt a bylaw if it is one that establishes or regulates a process instead of one that mandates a decision. Applying this standard, the court held that AFSCME’s proposed bylaw was one that regulated a process because its purpose was to promote the integrity of the director elections by promising reimbursement of the nominating stockholders’ proxy expenses if one or more of its candidates are elected.

In answering the SEC’s second question affirmatively, the court held that AFSCME’s proposed bylaw, if adopted, would violate Delaware law, because it could interfere with the board of directors’ ability to exercise its fiduciary duty. The court noted that under GCL section 141(a), contractual arrangements that commit the board of directors to a course of action that would preclude them from fully discharging their fiduciary duties are prohibited. The court explained that in situations where the proxy contest is motivated by personal or petty concerns, the board’s fiduciary duty could compel it to deny reimbursement. It provided as an example a circumstance in which a shareholder group affiliated with a competitor caused the election of a minority slate to obtain proprietary information. The court held that because AFSCME’s proposed bylaw contained no language that would allow the directors to decide whether in some circumstances reimbursement was not appropriate, the bylaw, if adopted, would violate Delaware law. (CA, Inc. v. AFSCME Employees Pension Plan, 2008 WL 2778141 (Del. Supr. July 17, 2008))