TheCorporateCounsel.net

Earlier this week, I blogged about the Delaware Corporation Law Council’s white paper and draft legislation addressing precatory stockholder proposals.  UCLA Prof. Stephen Bainbridge has weighed in with his comments on the Council’s proposal, and he’s not a fan. In this excerpt, he argues that the Council’s draft legislation would create a right that Delaware has never recognized:

Recall the distinction the SEC drew in its proposing release between the universal proxy rule and Rule 14a-8. The former merely replicates a state-law right to vote for directors that clearly exists. The latter’s underlying state-law right to propose precatory matters is, at best, uncertain. The Council agrees. Indeed, it goes further, suggesting that CA, Inc. v. AFSCME  casts doubt on whether a stockholder-adopted bylaw could require proxy placement for business proposals, “because a corporation cannot deviate from Section 141(a) except in the charter.” (5 n.6) So consider what the Discussion Draft actually does.

In CA, Delaware’s highest court told us that a bylaw forcing the board to spend corporate funds in ways against which the board’s fiduciary duties might counsel impermissibly intrudes on the board’s § 141(a) authority. The Council’s answer is to have the General Assembly impose by statute what the stockholders arguably could not impose by bylaw. Section 141(a), of course, provides that the business and affairs of the corporation shall be managed by or under the direction of the board “except as may be otherwise provided in this chapter.”

A statute is the one instrument that can override board authority without running into AFSCME. That the Council reached for it should give us pause. When the SEC withdraws, Delaware’s default under current law is that the board controls the company’s proxy statement. Draft § 214 does not codify that default. It reverses it.

Prof. Bainbridge calls out several other issues with the proposed legislation, including its departure from Delaware’s generally contractarian approach to corporate law, its abandonment of Rule 14a-8’s ordinary business exclusion, and its elevation of precatory proposals as a method for holding boards accountable.

– John Jenkins