USA: Delaware - Supreme Court opinion in CA Inc v AFSCME

The Delaware Supreme Court has given its opinion in CA Inc. v AFSCME Employees Pension Plan (No. 329, 2008). The opinion has been keenly anticipated because of the issues it raises about the management of companies and the role of the directors and shareholders.  AFSCME, a stockholder in CA Inc. ("the company"), submitted a bylaw for inclusion in the company's proxy materials for its 2008 annual stockholder meeting. The bylaw, if accepted, would require the board of directors to reimburse a stockholder (or group of stockholders) the reasonable expenses incurred in nominating one or more candidates in a contested election of the board of directors. 

The company's board decided to exclude the proposed bylaw from the proxy materials. The SEC was informed and a request was made for a "no action" letter (one indicating that enforcement action would not be taken against the company for its exclusion of the proposed bylaw). The company argued that the proposed bylaw was not a proper subject for a stockholder action and if implemented would breach Delaware General Corporation Law (DGCL). The AFSCME obtained legal advice taking the opposition position. The SEC decided to ask the Delaware Supreme Court for its opinion - the first time it has done so under new clarification rules in the Delaware Constitution (Article IV, §11(8), about which see here) - and posed two questions.

The first question was whether the AFSCME proposal was a proper subject for action by shareholders under Delaware law. The court held that it was and observed:

The shareholders of a Delaware corporation have the right “to participate in selecting the contestants” for election to the board. The shareholders are entitled to facilitate the exercise of that right by proposing a bylaw that would encourage candidates other than board-sponsored nominees to stand for election. The Bylaw would accomplish that by committing the corporation to reimburse the election expenses of shareholders whose candidates are successfully elected. That the implementation of that proposal would require the expenditure of corporate funds will not, in and of itself, make such a bylaw an improper subject matter for shareholder action".

The second question for the court was whether the AFSCME Proposal, if adopted, would cause the company to violate any Delaware law to which it was subject. The court held that it would. In reaching this decision, the court considered the proposed bylaw in the abstract and stated that it had to consider:

... any possible circumstance under which a board of directors might be required to act. Under at least one such hypothetical, the board of directors would breach their fiduciary duties if they complied with the Bylaw. Accordingly, we conclude that the Bylaw, as drafted, would violate the prohibition, which our decisions have derived from Section 141(a), against contractual arrangements that commit the board of directors to a course of action that would preclude them from fully discharging their fiduciary duties to the corporation and its shareholders".

Unsurprisingly commentators have been quick to describe the decision as a further example of the director-centric nature of Delaware law but the court's opinion is rather more nuanced than this description suggests.  For further discussion see:

Harvard Corporate Governance blog | Wall Street Journal article | Professor Bainbridge's blog | Risk & Governance Blog | Delaware Corporate and Commercial Litigation Blog (with links to other blog posts) | 

Canada: mergers, acquisitions and the role of directors

At the end of June, Canada's Competition Policy Review Panel published a report titled "Compete to Win". The report makes many recommendations and of particular interest are those concerning company directors. In a section titled "Strengthening the Role of Directors in Mergers and Acquisitions" (pp. 76-77) the Panel concluded:

the new global context in which mergers and acquisitions (M&As) occur requires that Canada update its regulatory framework to place the directors of Canadian companies on the same footing as their counterparts at Delaware companies".

The Panel recommended:

• Securities commissions should repeal National Policy 62-202 (Defensive Tactics).
• Securities commissions should cease to regulate conduct by boards in relation to shareholders rights plans (“poison pills”).
• Substantive oversight of directors’ duties in mergers and acquisitions matters should be provided by the courts.
• The Ontario Securities Commission should provide leadership to the Canadian Securities Administrators in making the above changes, and initiate action if collective action is not taken before the end of 2008.

For further information see:
Review website | Terms of reference | Report | Review research reports | Earlier consultation paper | Ontario Securities Commission | Canadian Securities Administrators | 

Canada: directors' duties during a takeover

The Quebec Court of Appeal has delivered an important and controversial opinion concerning the duties of directors during a takeover. In BCE inc. (Arrangement relatif à), 2008 QCCA 935 (available in PDF here) the court unanimously rejected the position adopted by the board of a target company (in reliance on the famous Revlon case from Delaware: 506 A. 2d 173, Del. Sup. Ct. 1986) that its overriding duty was to maximise shareholder value and obtain the highest value for the shareholders.  The court held:

It is clear from the principles enunciated by the Supreme Court in Peoples [Department Stores Inc. (Trustee of) v. Wisethat 2004 SCC 68] that at no time do the directors have an overriding duty to act only in the best interests of the shareholders and to ignore the adverse effect on the interests of the debentureholders" (para. [99], emphasis in the original).

In Canada, the directors of a corporation have a more extensive duty. This more extensive duty embodied in the statutory duty of care encompasses, depending on the circumstances of the case, giving consideration to the interests of all stakeholders, which, in this case includes the debentureholders. They must have regard, inter alia, to the reasonable expectations of the debentureholders, and those may be more extensive than merely respecting their contractual legal rights" (para. [107]).

BCE, the target company, has begun appeal proceedings: the Canadian Supreme Court will hear the motion to appeal on June 17. For further background information see here.

NB: For further discussion of Revlon, see: Kraakman, R. and Black, B., "Delaware's Takeover Law: The Uncertain Search for Hidden Value", (2002) 95 Northwestern University Law Review, 521-566, available on SSRN here.

Delaware: Corporate officers and fiduciary duties

In two recent Delaware decisions it has been accepted that corporate officers owe the same duties as directors: Midland Grange No. 27 Patrons of Husbandry v. Walls (28 Feb. 2008) and Miller v. McDonald (9 April 2008). For further discussion, see this post on the Harvard Law School Corporate Governance Blog and an article by Lyman Johnson posted here on SSRN.

Europe: European Commission: Alternative capital maintenance regime

Several years ago the European Commission began to consider the feasibility of establishing an alternative to the current capital maintenance regime established by the Second Company Law Directive (77/91/EEC). In October 2006, KPMG was commissioned to undertake a study exploring the main features of the current regime (including the costs imposed) as well as that in Australia, Canada, New Zealand, California and Delaware. KPMG also considered four academic proposals for alternative regimes to the current capital maintenance rules. The KPMG study has now been published and is available here. Background information is available here.

US: Delaware: Can a company company director bring a derivative action?

In Schoon v Smith (No 554, 2006, 12 February 2008) it was argued that equity and public policy support the argument that a company director should be able to bring a derivative action in respect of wrongdoing by the company’s other directors. The Delaware Supreme Court rejected this argument; the court’s opinion contains some very interesting discussion of the equitable principles governing the derivative action in Delaware.