The Council of the Corporation Law Section of the Delaware State Bar Association earlier today forwarded to Corporation Law Section members the proposed 2009 amendments to the Delaware General Corporation Law (“DGCL”). Consistent with Delaware’s preference for enabling legislation and maintaining maximum flexibility, the amendments eschew mandates for corporate action. Specifically, the proposed amendments create new Sections 112 and 113 that expressly permit Delaware corporations to adopt bylaws implementing proxy access and requiring reimbursement of stockholder proxy expenses in certain circumstances. Also included among the proposed amendments are changes to Section 213, to permit Delaware corporations to provide separate record dates for determining stockholders entitled to notice of and to vote at stockholder meetings, a new provision permitting judicial removal of directors in extreme, emergency circumstances, and a revision to Section 145(f) expressly providing that pre-existing indemnification and advancement rights provided in a corporation’s governing documents cannot be impaired by later amendments to those documents. The amendments are summarized in more detail below.
Access to Proxy Solicitation Materials (New Section 112)
The proposed amendments create a new section of the DGCL, Section 112, expressly authorizing a Delaware corporation to adopt a bylaw that grants stockholders the right to include within the corporation’s proxy solicitation materials stockholders’ nominees for the election of directors, subject to any lawful conditions the bylaws may impose. The subject of “proxy access” had been a significant one, and it promised to continue to be so in the current environment. The addition of proposed Section 112 removes any uncertainty regarding the ability of Delaware corporations to effect proxy access through adoption of a bylaw. In so doing, the proposed amendment clarifies that corporations may impose reasonable restrictions on the stockholders’ right to access company proxy materials and identifies a non-exclusive list of restrictions that are deemed to be reasonable.
One condition specified in Section 112 would permit the bylaws to establish minimum ownership requirements for stockholders to become eligible to include nominees in company proxy materials, measured both by amount and duration of ownership. The bylaws may establish this minimum ownership threshold by defining beneficial ownership to include ownership of options or other rights relating to stock, including derivative rights. Because Section 112 is intended to apply to stockholder nominations of short slates of directors and not as a vehicle for effecting changes of control through the corporation’s own proxy materials, the new section also expressly permits the bylaws to condition eligibility for inclusion in the corporation’s proxy materials to nominations for a limited number of seats that may be contested and to preclude entirely inclusion of nominations by persons who own or propose to acquire (such as through a tender offer) more than a specified percentage of the corporation’s stock. The bylaws also may require the nominating stockholder to submit specified information such as information concerning the ownership of the corporation’s stock by the stockholder and the stockholder’s nominees. The bylaws also may condition eligibility to require inclusion of nominees in the corporation’s proxy materials on the nominating stockholder’s execution of an undertaking to indemnify the corporation for any loss resulting from any false or misleading information submitted by the stockholder and included in such proxy materials, or on “any other lawful condition.”
The adoption of Section 112 thus would provide a more certain path for corporations and stockholders desiring to implement proxy access to balance the often disruptive nature of proxy contests with the desire to provide significant stockholders an avenue for effecting changes to the composition of the board of directors.
Proxy Reimbursement Bylaws (New Section 113)
The other new election-related statute is proposed Section 113, which effectively codifies the Delaware Supreme Court’s decision in CA, Inc. v. AFSCME Employees Pension Plan, 953 A.2d 227 (Del. 2008). That case validated the concept of “short slate reimbursement” bylaw provisions. New Section 113 would provide a statutory framework for the development of bylaw provisions which mandate reimbursement of reasonable expenses incurred by stockholders who achieve a defined level of success in a proxy contest.
Specifically, Section 113(a) permits Delaware corporations to adopt a bylaw providing for the reimbursement by the corporation of expenses incurred by a stockholder in soliciting proxies in connection with an election of directors, subject to such procedures or conditions as the bylaw may prescribe. Proposed Section 113 identifies a non-exclusive list of such conditions, including: (i) conditioning eligibility for reimbursement on the number or proportion of persons nominated by the stockholder, (ii) conditioning eligibility on whether the stockholder previously sought reimbursement for similar expenses, (iii) limiting the amount of reimbursement (which may be based upon the proportion of votes cast in favor of such nominee or the amount expended by the corporation in soliciting proxies), (iv) limiting elections of directors by cumulative voting, or (v) any other lawful condition. The restrictions thus permit corporations to limit the reimbursement to “short slate” contests, to define what level of “success” must be achieved in order to qualify for reimbursement, and otherwise to tailor their bylaws to their specific situation. In a footnote in the CA decision, the Delaware Supreme Court suggested that to be consistent with Delaware law, a proxy reimbursement bylaw would “need to contain a provision that reserves the directors’ full power to discharge their fiduciary duties.” Proposed Section 113 does not, however, include an express requirement that any such bylaw contain a fiduciary out. It remains to be seen whether, notwithstanding the express statutory authority for a proxy reimbursement bylaw provided by Section 113, Delaware courts will read a fiduciary out requirement into such a bylaw.
“Empty Voting” Amendments (Section 213(a))
Another issue proposed to be addressed in the 2009 amendments has its origins in the concern over the effects of “empty voting.” Empty voting most commonly occurs when a stockholder: (1) acquires voting rights to a significant block of publicly traded stock without acquiring a comparable economic interest in the company; or (2) simultaneously takes a short position that offsets the stockholder’s economic interest in the company. By divorcing voting power from economic interest, empty voting potentially disrupts the presumed tendency of stockholders to vote in a manner that maximizes their ownership interests in the company.
The proposed amendments to Section 213(a) of the DGCL, which outlines the process by which corporations may determine stockholders of record for purposes of stockholder meetings, provide a partial answer to this issue by permitting a board of directors to fix a record date for voting separate from the record date for notice of the stockholder meeting. In this way, a board may fix a record date that is closer to the meeting date, and presumably more reflective of the stockholder base, than a record date that is as many as 60 days prior to the meeting date. The need to provide for notice well ahead of a meeting frequently occurs in the case of votes to approve mergers and other similar matters requiring a longer solicitation period. This has sometimes led to difficulty in obtaining required majority votes in cases in which a large number of shares changes hands following a record date because the holders of sold shares often fail to vote, and purchases in the public markets do not automatically carry with them associated authority to direct the voting of shares acquired after the record date. Revised proposed Section 213 (a) provides no limit on how close the voting record date may be to the meeting date. For public companies, this will need to be determined in consultation with non-Delaware actors such as transfer agents, stock exchanges and proxy voting services.
Finally, Section 213(a) adds language applying the separation of notice and voting record dates to adjourned meetings. Other fundamental provisions of Section 213(a), including the requirement that the record date for notice and for voting be not more than 60 nor less than 10 days before an upcoming meeting, remain unchanged.
To the extent the changes in Section 213 are adopted, those changes necessitate conforming changes to a number of other sections to include the concept of different record dates for determining entitlement to notice and to exercise voting rights. These include Sections 211, 219, 222, 228, 262 and 275.
Judicial Removal of Directors (Section 225)
Section 225, which affords directors, stockholders and corporations the right to a judicial determination of entitlement to office or the outcome of a stockholder vote, is proposed to be amended to add a new subsection (c) authorizing the Court of Chancery to remove a director in certain narrow circumstances upon the application of a corporation or derivatively by a stockholder on behalf of a corporation. The new subsection (c) authorizes the Court of Chancery to remove a director who has been convicted of a felony or found by a court to have committed a breach of the duty of loyalty if the Court of Chancery determines that the director did not act in good faith in performing the acts underlying the conviction or judgment and that the removal of the director is necessary to avoid irreparable harm to the corporation. New Section 225(c) is purposely drafted very narrowly, and expressly requires that an action thereunder be brought “subsequent” to the one in which the underlying judgment is made. This amendment is similar to, though more circumscribed than, the judicial removal of directors provision in the Model Business Corporation Act, which has been enacted by several states.
Indemnification and Advancement Rights (Section 145(f))
The proposed amendment to Section 145(f) of the General Corporation Law adopts a default rule that is contrary to that articulated by the Court of Chancery in Schoon v. Troy, 948 A.2d 1157, 1165-66 (Del. Ch. 2008). That case held that a board of directors can amend a corporation’s bylaws to eliminate indemnification or advancement rights for claims relating to actions taken before the amendment, as long as no claim has actually been made against the indemnitees before the amendment is adopted. This aspect of the Court’s opinion led many corporations to revise their governing documents or to enter into indemnification agreements with indemnitees to expressly negate the result of Schoon. The proposed amendment to Section 145(f) adopts a statutory rule that eliminates these concerns.
Specifically, pursuant to revised Section 145(f), a corporation cannot eliminate or impair an indemnitee’s right to indemnification or advancement of expenses granted under a provision in the corporation’s certificate of incorporation or bylaws through an amendment to such provision adopted after the occurrence of the act or omission to which the indemnification or advancement of expenses relates. Such an amendment eliminating indemnification or advancement rights may be permitted, however, if the provision in the certificate of incorporation or bylaw in effect at the time of the act or omission includes language expressly authorizing such elimination or limitation.