Recently enacted changes to the Delaware General Corporation Law (DGCL) will become effective on August 1, 2009. Among the more notable changes are those relating to proxy access for shareholders as well as director indemnification and advancement of expenses.
Access to Company Proxy Solicitation Materials
Shareholder access to company proxy materials has become a hot topic, especially in today’s troubled economic climate. Amid investor anger over how financial services firms were managed in the United States during the recent financial crisis, there has been a growing chorus of voices calling for regulatory changes that would facilitate greater shareholder oversight. Proponents of shareholder access to the company proxy believe that the practical realities of the current U.S. system – particularly the need for shareholders seeking to promote the election of an alternate slate of director candidates to incur the often substantial cost of preparing and distributing a separate proxy statement and proxy card – discourage director accountability.
In what has been characterized as an effort to forestall implementation of a national proxy access standard in the United States, on April 10, 2009, the State of Delaware amended the DGCL to permit Delaware companies to adopt bylaws that require company proxy materials regarding the election of directors to include candidates nominated by shareholders as well as candidates nominated by the incumbent board. Rather than promulgate a single standard, the new Delaware rule allows individual companies to determine the extent to which shareholders will be granted access to the company proxy. This approach seeks to balance the concerns of activist investors, who seek unrestricted proxy access, with corporate traditionalists who believe that such access will impair board and company stability and hinder (rather than enhance) a long-term perspective on maximizing shareholder value.
In particular, the new Section 112 of the DGCL identifies a non-exclusive list of conditions that the bylaws may impose on such a right of access to the company’s proxy materials, including:
- minimum share ownership requirements (e.g., the amount and duration of ownership);
- submission of specified information about the shareholder and its nominees;
- limitations based on the number or proportion of directors nominated by the shareholder;
- prohibitions on nominations if the shareholder has acquired (or has proposed to acquire) shares in excess of a prescribed amount within a period of time before the election of directors;
- a requirement that the shareholder indemnify the company for false or misleading statements provided by such shareholder; and
- any other lawful condition.
The long-term impact of the new Delaware changes is difficult to assess in light of very recent, overlapping federal legislative and regulatory proposals in the United States which could pre-empt state law.
SEC Proposed National Proxy Standard
On May 20, 2009, the SEC voted to propose a national proxy access standard that would require all public companies (other than debt-only registrants) subject to the proxy rules under the Securities Exchange Act of 1934 (which does not include foreign private issuers) to grant proxy access to shareholders that own as little as 1% of a company’s shares for at least one year (the actual applicable thresholds will range from 1% for the largest public companies to 5% for the smallest public companies). The proposal includes a number of other criteria that would need to be met before inclusion of shareholder nominees in the company proxy would be required, including requirements that the shareholders sign a statement declaring their intent to own the shares through the annual meeting at which the directors will be elected and to certify that they are not holding the shares for the purpose of changing control of the company or to gain more than minority representation on the board of directors. Shareholders would be able to include nominees in the company proxy materials representing up to 25% of the company’s board of directors. Nominating shareholders would be liable for any false or misleading statements provided by them for inclusion in the company proxy.
The SEC's proposals were published on June 10, 2009 in a rulemaking release and will be the subject of public comment for 60 days. They are expected to be finalized in advance of the 2010 proxy season.
Indemnification of Former Directors
The DGCL has also been amended so that a right to indemnification or advancement of expenses under a provision of a certificate of incorporation or bylaw cannot be eliminated 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 an explicit authorization of such elimination or limitation at the time of the act or omission. This change was enacted in response to a March 2008 decision of the Delaware Chancery Court in Schoon v. Troy Corp.
In that case, the court upheld the validity of an amendment to a corporation’s bylaws that eliminated the rights of former directors to the advancement of expenses, even though the former director served under the pre-amendment version of the bylaws and left the board before the amendment was made. Former officers and directors of Delaware companies will now be protected against post-service changes in company policy. Conversely, Delaware companies that wish to have the flexibility to eliminate the indemnity and advancement rights of former directors will have to expressly provide for this possibility in their bylaws.