953 A.2d 227 (Del. 2008)
CA, Inc. is a Delaware corporation whose board of directors consists of twelve persons, all of whom sit for reelection each year.1 Its annual meeting of stockholders is scheduled to be held on September 9, 2008, with definitive proxy materials intended to be filed on or about July 24, 2008.2
On March 13, 2008, AFSCME Employees Pension Plan, a stockholder associated with the American Federation of State, County and Municipal Employees, submitted a proposed stockholder bylaw for inclusion in CA's 2008 proxy materials.3 The proposed bylaw would amend the bylaws to require the board to cause the corporation to reimburse a stockholder or group of stockholders for reasonable expenses incurred in nominating candidates in a contested election of directors, subject to specified conditions including that fewer than 50% of directors are contested, at least one nominated candidate is elected, no cumulative voting, and expenses after adoption, with reimbursement not exceeding the corporation's expenditures.4
CA's current bylaws and Certificate of Incorporation contain no provision specifically addressing reimbursement of proxy expenses.5 Article SEVENTH, Section (1) of CA's Certificate of Incorporation provides that the management of the business and the conduct of the affairs of the corporation shall be vested in the Board of Directors.6
On April 18, 2008, CA notified the SEC's Division of Corporation Finance of its intention to exclude the proposed bylaw from its 2008 proxy materials and requested a no-action letter, accompanied by an opinion from Richards Layton & Finger concluding that the bylaw is not a proper subject for stockholder action and would violate the Delaware General Corporation Law if implemented.7
On May 21, 2008, AFSCME responded with a letter taking the opposite position, accompanied by an opinion from Grant & Eisenhofer concluding that the bylaw is a proper subject for shareholder action and would be permitted under Delaware law.8
On June 27, 2008, the SEC certified two questions of Delaware law to the Supreme Court of Delaware.9 The Court accepted certification on July 1, 2008, and the matter was argued on July 9, 2008.10
Whether the AFSCME Proposal is a proper subject for action by shareholders as a matter of Delaware law?11
Under 8 Del. C. § 109(a) and (b), stockholders possess concurrent power with the board to adopt, amend, or repeal bylaws containing any provision relating to the business of the corporation, the conduct of its affairs, and the rights or powers of stockholders and directors, provided the bylaw is not inconsistent with law or the certificate of incorporation.12 Under 8 Del. C. § 141(a), however, the board manages the business and affairs of the corporation, so stockholder-adopted bylaws may regulate the process and procedures by which directors make decisions but may not mandate specific substantive business outcomes.13
Yes. The proposed Bylaw regulates the process for electing directors.14 It commits the corporation to reimburse reasonable expenses of successful short-slate nominees in contested elections where fewer than 50% of directors are contested and at least one nominee is elected.15 This falls within the shareholders' power under Section 109(a) to adopt bylaws.16
It addresses the process of director elections in which stockholders have a legitimate interest.17 It does not mandate a specific business decision outside the electoral context.18 The established facts show that CA's Certificate of Incorporation confers bylaw power on the board.19 The certificate expressly preserves the stockholders' concurrent power.20
The Bylaw does not improperly intrude on board management prerogatives under Section 141(a).21 This is because it is process-oriented in nature.22 It facilitates the exercise of the stockholders' right to participate in selecting contestants for board elections.23
The AFSCME Proposal is a proper subject for shareholder action as a matter of Delaware law.24
Whether the AFSCME Proposal, if adopted, would cause CA to violate any Delaware law to which it is subject?25
A bylaw is invalid under Delaware law if it would require the board to act in a manner that precludes the directors from fully discharging their fiduciary duties, because Section 141(a) prohibits contractual or bylaw arrangements that commit the board to a course of action limiting their fiduciary discretion, as established in Paramount Communications, Inc. v. QVC Network, Inc. and Quickturn Design Systems, Inc. v. Shapiro.26
Yes. Although the Bylaw is process-related for purposes of the first question, as drafted it mandates reimbursement of reasonable expenses in defined circumstances. It does so without reserving to the board discretion to deny reimbursement where fiduciary duties would require it.27 Such circumstances include when a proxy contest is motivated by personal or petty concerns or to promote interests adverse to the corporation.28
The established facts show that the Bylaw would bind the board in the area of election expense reimbursement.29 It prevents full exercise of managerial power under Section 141(a) in circumstances where fiduciary principles could preclude reimbursement altogether.30 The absence of any language preserving the directors' full power to exercise fiduciary judgment renders the Bylaw inconsistent with law.31
The AFSCME Proposal, if adopted, would cause CA to violate Delaware law to which it is subject.32