Delaware Court Rules for CA in Suit
By KARA SCANNELL and JUDITH BURNS
July 18, 2008; Page C6
The Delaware Supreme Court
said a shareholder bylaw that would require companies to reimburse
challengers who succeed in getting elected to the board was invalid.
In the closely watched
case, the pension fund of the American Federation of State, County and
Municipal Employees sought to impose a bylaw that would require CA
Inc. to pay the "reasonable expenses" to shareholders who successfully
elected at least one independent candidate to a board seat.
The court found that the
bylaw, as written, went too far because it didn't allow CA's directors
to exercise their judgment "to decide whether or not it would be
appropriate, in a specific case, to award reimbursement at all." In
cases where dissidents run proxy contests motivated by personal or petty
concerns, or to promote interests that would be harmful to the company,
the board's hands would be tied, the court said.
The ruling is a blow to
some activists, who have argued that their ability to nominate
independent directors is circumscribed by the high expense. But it could
give holders a road map in seeking other changes to the
director-election process consistent with the court's decision.
"We're pleased with
the...decision," said a spokeswoman for CA, a Long Island, N.Y.,
software company.
Richard Ferlauto, director
of pension investment policy for AFSCME, said, "We're happy to see
Delaware law clarified, but the decision makes Delaware less relevant to
the discussions about shareholder election rights." He said "the focus
for shareholders has to be on the Securities and Exchange Commission and
the creation of an appropriate right of shareholder access at the
federal level."
The decision comes amid a
larger debate on expanding shareholders' say in nominating corporate
directors.
The decision isn't a
complete loss for shareholder activists, says John Olson, a
corporate-governance lawyer at Gibson, Dunn & Crutcher. "The court is
soundly affirming that shareholders have the right to propose bylaws
relating to the process of electing directors. I think people will try
to be creative in ways of using state law to get access to the corporate
proxy."
The question came to the
Delaware court after the labor union sought to offer a binding bylaw for
a vote at CA's annual meeting, set for September. CA and its lawyers
argued the resolution would violate Delaware law.
When CA asked the SEC
staff to weigh in, the SEC, in turn, asked for help from the Delaware
Supreme Court, the first time it has done so since Delaware amended its
constitution last year to allow such assistance. The court agreed to
decide the matter, citing the importance of the questions at stake.
Robert Giuffra Jr., a
partner with the New York law firm of Sullivan & Cromwell LLP, which
represents CA, argued that if the bylaw were adopted, CA's directors
would become nothing more than rubber-stamping "robots."
Michael Barry, a partner
with the Wilmington, Del., law firm of Grant & Eisenhofer, which
represents AFSCME, countered that shareholders' voting rights are
paramount and that Delaware allows bylaws to direct spending on specific
items.
After the court's decision
late Thursday, the SEC said CA could exclude the shareholder proposal.
CA said it would.
Write to Kara
Scannell at
kara.scannell@wsj.com1 and Judith Burns at
judith.burns@dowjones.com2
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