March 5, 2009
Significant proposed amendments to the Delaware General Corporation Law dealing with proxies and stockholder meetings, among other items, have been submitted to the Delaware State Bar Association for approval. Upon approval by the bar association, the proposed amendments will be submitted to the Delaware legislature for consideration. If enacted, the proposed amendments would take effect on August 1, 2009. A brief summary of the proposed amendments follows.
Proxy Access Bylaws
Among the proposed amendments is a new Section 112 which would permit (but not require) a corporation to include a provision in its bylaws providing stockholder access to its proxy materials with respect to the election of directors by including in the corporation’s proxy materials one or more individuals nominated by a stockholder, in addition to individuals nominated by the board of directors. The bylaws may condition the obligation to include stockholder nominees on the satisfaction of eligibility requirements and/or compliance with procedures set forth in the bylaws. Among other things, these procedures or conditions may include a minimum record or beneficial ownership, or duration of ownership, submission of background information, restrictions on numbers of directors nominated, restrictions on acquisitions of shares of the corporation, a requirement that the stockholder indemnify the corporation in respect of losses arising from information submitted by the stockholder or any other conditions permitted by law.
Proxy Expense Reimbursement Bylaws
A new Section 113 also has been proposed which would permit (but not require) a corporation’s bylaws to provide for the reimbursement by the corporation of expenses incurred by a stockholder in connection with the solicitation of proxies for the election of directors subject to the procedures and conditions set forth in the bylaws. For example, bylaws may condition eligibility upon the number of persons nominated by the stockholder seeking reimbursement or whether the stockholder has previously requested reimbursement, the proportion of votes cast for the nominee proposed by the stockholder seeking reimbursement, limitations related to the election of directors by cumulative voting or other conditions permitted by law. If adopted, Section 113 would codify one of the holdings of the Delaware Supreme Court in CA, Inc. v. AFSCME Employees Pension Plan, 953 A.2d 227 (Del. 2008) that bylaws permitting reimbursement of expenses of contestants in a successful proxy contest are a proper subject for shareholder action, and would provide non-exclusive guidance as to what conditions may be included in such a by-law.
The addition of either Section 112 or Section 113 to the Delaware General Corporation Law may encourage activist stockholders to seek the adoption of these types of bylaw provisions and facilitate their efforts to engage in proxy contests.
Separate Record Dates for Notice of and Voting at Stockholder Meetings
The proposed amendment to Section 213(a) would permit (but not require) a board of directors to fix one record date for stockholders entitled to notice of a meeting (which must be no more than 60 nor less than 10 days before the date of such meeting) and a separate record date for determining the stockholders entitled to vote at such meeting. The proposed revision is intended to provide a board of directors with greater flexibility to align stockholders’ voting and economic interests and minimize the issues that arise when a stockholder holds a voting interest for stock it no longer owns at the time of the meeting.
Under the proposal, a board could set a record date for voting that is much closer to the date of the meeting than the record date for notice of the meeting. In fact, the proposed amendment does not provide a restriction on how close a voting record date may be to the actual meeting date, which could create numerous logistical challenges in its practical application if enacted. The proposal also provides that if the board of directors does not fix a separate record date for stockholders entitled to vote at a meeting, then the default record date for voting will be the same as the record date set for purposes of determining the stockholders entitled to notice of the meeting.
The proposed amendments also include revisions to Sections 211 (Meetings of stockholders), 219 (List of stockholders entitled to vote, etc.), 222 (Notice of meetings and adjourned meetings), 228 (Consent of stockholders or members in lieu of meeting), 262 (Appraisal rights) and 275 (Dissolution generally; procedure) to conform those provisions with the proposed amendment to Section 213(a).
Enhanced Protection of Indemnification and Expense Advancement Rights
The proposed amendments to Section 145(f) relating to the ability of a corporation to grant indemnification rights provide that a right to indemnification or to advancement of expenses arising under a certificate of incorporation or bylaws cannot be eliminated or impaired by an amendment to such provision after the occurrence of the act or omission that gives rise to the proceeding for which indemnification or advance of expenses is sought unless the provision in effect at the time of such act or omission provides for such retroactive elimination or impairment. This proposed amendment is intended to reverse the holding in Schoon v. Troy Corp., 948 A.2d 1157 (Del. Ch. 2008), in which the Delaware Chancery Court found that rights to indemnification and advancement of expenses are triggered upon the commencement of the action for which the director seeks indemnification or advancement. As a result of the Chancery Court’s decision, indemnification or advancement rights could be eliminated or impaired in some circumstances after the occurrence of the act or omission that was the subject of the underlying proceeding as long as the proceeding itself has not commenced.
Judicial Removal of Directors under Extraordinary Circumstances
The proposed amendments include a new subsection (c) to Section 225 which provides that a corporation (or its stockholders through a derivative action) may petition the Court of Chancery to remove a director from office to the extent he or she has been convicted of a felony in connection with his or her duties to the corporation or if there has been a prior court judgment that such director has committed a breach of the duty of loyalty in connection with such director’s duties to the corporation. If the Court of Chancery determines that the director did not act in good faith in performing the acts that resulted in the prior conviction or judgment and that judicial removal is necessary to avoid irreparable harm to the corporation, then the Court of Chancery may take action to remove such director from office.
Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or any of the following:
John F. Olson – Washington, D.C. (202-955-8522, [email protected])
Dennis J. Friedman – New York (212-351-3900, [email protected])
Jonathan K. Layne – Los Angeles (310-552-8641, [email protected])
Amy L. Goodman – Washington, D.C. (202-955-8653, [email protected])
Gillian McPhee – Washington, D.C. (202-955-8230, [email protected])
Scott J. Calfas – Los Angeles (213-229-7362, [email protected])
Candice S. Choh – Los Angeles (213-229-7793, [email protected])
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