In the midst of increasing pressure from stockholders seeking to exercise more effectively their rights in elections of directors, Delaware recently adopted legislation amending the Delaware General Corporation Law, or the DGCL. As discussed in our March 2009 Securities Update, the amendments, effective August 1, 2009, focus on key areas relating to stockholder voting and the election of directors. However, new proposed federal rules and amendments to the Securities Exchange Act of 1934 overlap with, and could potentially preempt, one of the DGCL amendments.
Summary of Amendments to the DGCL
On their face, the DGCL amendments 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. On the other hand, the DGCL amendments raise practical concerns for management, directors and stockholders alike. While the adopted amendments are summarized below, our March 2009 Securities Update details the substance of each amendment and their practical implications.
- Section 112 - Proxy Access – clarifies that a corporation may adopt bylaws that require the corporation, when soliciting proxies with respect 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. A corporation may impose a variety of conditions on the stockholder’s right of access to the proxy, such as requiring a minimum level of stock ownership.
- Section 113 – Reimbursement of Stockholder Proxy Solicitation Expenses – permits 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 nonexclusive list of conditions to reimbursement that may be specified in the bylaw.
- Section 213(a) – “Notice” and “Record” Dates for Meetings of Stockholders – permits the board of directors to 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. This change is intended to address “empty voting,” which occurs in a number of different situations.
- Section 145(f) - Indemnification and Advancement Rights - clarifies 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.
SEC Proposal for Shareholder Proxy Access
As discussed earlier in this Securities Update, the Securities and Exchange Commission recently voted to propose a comprehensive series of rule amendments to facilitate the fundamental right of shareholders to nominate and elect directors to the boards of companies they own. The proposed rules would require companies to include in the company’s proxy materials nominees for director, representing up to 25 percent of the entire board, that are proposed by stockholders owning as little as 1 percent of a large accelerated filer’s shares for one year, subject to certain limitations and conditions. The SEC’s proposing release seeks comment on the interaction of the proposed rules with state law, and it is possible that the final version of the new rules will trump state law, including DGCL § 112, by establishing an exclusive federal regulatory scheme applicable to all public companies. We expect the comment period to be lively, with both strong support for and opposition to the SEC’s proposed rules. On the one hand, corporate governance activists are expected to support federally mandated proxy access; the business community, on the other hand, will continue to voice its opposition to rules that preempt state law and company-tailored charter and bylaw provisions.
Shareholder Bill of Rights Act of 2009
On May 19, Sens. Charles Schumer of New York and Maria Cantwell of Washington introduced a “Shareholder Bill of Rights Act of 2009,” which includes a mandate that the SEC establish rules relating to proxy access by shareholders who own at least 1 percent of the voting securities of a company for two or more years. The broad-based bill also would give the SEC full authority under the Exchange Act to determine the use of company proxy statements for the nomination and election of directors by shareholders, effectively ending the question as to whether as a legal matter the SEC has the authority under the proxy provisions of the Exchange Act to require proxy access. Although it is not expressly provided for in the bill, this proposed legislation would likely preempt conflicting state laws on proxy access. The Shareholder Bill of Rights has yet to gain much momentum, and must pass both the Senate and the House of Representatives before it may be sent to the President for consideration.
The current thinking is that proxy access is no longer a question of “if” but rather “in what form.” Due to its sweeping nature, there is little chance that the Shareholder Bill of Rights Act of 2009 will be enacted in its current form. The SEC, however, appears to be focused on adopting final rules on proxy access prior to the 2010 proxy season. In the meantime, public companies governed by Delaware law are reminded that the DGCL amendments will be in full effect as of August 1. Until the dust settles from the SEC comment process and the rules take their final shape, it remains to be seen how the new federal legislation will impact any actions taken pursuant to the DGCL amendments.