The Delaware State Bar Association recently proposed legislation that, if enacted, would amend the Delaware General Corporation Law (the DGCL) effective August 1, 2009. The proposed amendments focus on key areas relating to stockholder voting and the election of directors. These proposed amendments, on their face, make it easier for stockholders to have greater participation in the election of directors and also address the challenging issue of “empty voting” by stockholders. The DGCL amendments also raise practical concerns for management, directors and stockholders alike.
Proxy Access and Reimbursement of Stockholder Proxy Solicitation Expenses
The proposed amendments would add a new section to the DGCL, clarifying that a corporation may adopt bylaws that require the corporation, when soliciting proxies related to an election of directors, to include in its proxy materials one or more nominees submitted by stockholders in addition to individuals nominated by the board of directors. The new section would permit a corporation to impose conditions on the stockholder’s right of access to the proxy. These conditions may include: (i) a minimum level of stock ownership, measured both by amount and duration of ownership, and including ownership of options or other derivative rights; (ii) limiting the right of access according to whether a majority of board seats is to be contested, or whether nominations are related to an acquisition of a significant percentage of the corporation’s stock; (iii) submission by the nominating stockholder of information concerning it and its nominees; (iv) determining eligibility for inclusion in the corporation’s proxy solicitation materials based upon the number or proportion of directors nominated by stockholders or whether the stockholder previously sought to require such inclusion; and (v) requiring the nominating stockholder to indemnify the corporation with respect to any loss arising as a result of any false or misleading information or statement submitted by the nominating stockholder in connection with a nomination.
Another proposed amendment would permit a corporation to adopt bylaw provisions mandating reimbursement of reasonable expenses incurred by stockholders in soliciting proxies in connection with an election of directors. This new section outlines a non-exclusive list of conditions to reimbursement that may be specified in the bylaw, including: (i) conditioning eligibility for reimbursement upon the number or proportion of persons nominated by the stockholder seeking reimbursement or whether the stockholder previously sought reimbursement for similar expenses; (ii) limiting the amount of reimbursement based upon the proportion of votes cast in favor of one or more of the persons nominated by the stockholder seeking reimbursement, or upon the amount spent by the corporation in soliciting proxies in connection with the election; and (iii) imposing limits concerning elections of directors by cumulative voting. While the proposed DGCL amendment does not require the bylaw to contain an express “fiduciary out” for directors in the case where reimbursing expenses under such a bylaw would be contrary to the directors’ fiduciary duty to its stockholders, it is likely that Delaware courts would find an implied “fiduciary out” in a reimbursement bylaw.
In theory, the framework for corporations to adopt bylaws addressing proxy access and reimbursement of proxy solicitation expenses would provide a vehicle for those stockholders who meet appropriate standards set by the corporation to have meaningful input into the mix of directors sitting on the board. It appears likely, however, that new federal legislation or regulation regarding proxy access for stockholders will be enacted, leading to the possibility of conflicting state and federal laws. That could set up a dynamic where corporations have an incentive to enact bylaws permitting the most restrictions on proxy access (e.g., higher share–ownership thresholds and tighter requirements for stockholder reimbursement), while activist stockholders pressure corporations to adopt bylaw provisions addressing these issues in a more stockholder-friendly way. Especially for corporations that have responded to stockholder pressure to eliminate their classified boards, redeem their poison pills or otherwise dismantle antitakeover defenses, bylaws mandating proxy access and reimbursement of stockholders’ proxy solicitation expenses, even subject to restrictions, may lead to increased vulnerability to the demands of activist stockholders.
“Notice” and “Record” Dates for Meetings of Stockholders
Under the proposed amendment to Section 213(a), the board of directors can select both a “notice” record date for determining the stockholders entitled to notice of a meeting and a later record date for determining the stockholders entitled to vote at the meeting. The later record date could be any date on or before the meeting date, but would be required to be specified in the initial notice of the meeting. This change is intended to address “empty voting,” which occurs in a number of different situations. For example, a stockholder may own shares on the record date but may sell the shares prior to the meeting date. Alternatively, a stockholder may acquire voting rights, but not the economic interest, of shares eligible to vote at a meeting. In either case, the stockholder holds the right to vote, but without an economic stake in the corporation. Moving the record date for voting close to the meeting should result in more record stockholders continuing to be stockholders on the meeting date. The period between the record dates will also permit stockholders who have lent their shares to other persons (for example, so the shares can be used to cover a short position) to recall the shares so that they can be voted.
The practical implications of setting separate dates on which rights to notice and rights to vote attach may be quite cumbersome. It may be logistically difficult and expensive for corporations to obtain up-to-date stockholder lists and to solicit proxies effectively from new stockholders. From the stockholders’ view, those who become eligible to vote closer to the later record date may not have adequate time to digest the information given to them and cast informed votes. These concerns suggest that corporations may wait to adopt a system of two record dates until the share transfer and proxy solicitation systems have been adopted to the use of two record dates.
Indemnification and Advancement Rights - Section 145(f)
In addition to the issues relating to elections for directors and other proxy matters, the Delaware State Bar Association also proposed amendments to DGCL Section 145(f) to clarify that a director or officer’s right to indemnification or advancement of expenses under a provision in a corporation’s certificate of incorporation or bylaws may not be eliminated or impaired by a subsequent amendment of the provision, unless the provision contains, at the time of occurrence of the event with respect to which the right to indemnification or advancement arises, an explicit authorization that the right may be eliminated or limited. This proposed change results from (and is in direct contradiction to) the recent Schoon v. Troy Corp. case in which the court held that a board of directors could 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 had actually been made against the indemnitees before the amendment was adopted.