April 30, 2009
The financial crisis and change in Administration have created a "perfect storm" in which significant changes in corporate governance are unfolding at both the state and federal level. As discussed below, Delaware has enacted changes in its General Corporation Law concerning stockholders’ ability to nominate director candidates in a company proxy statement and to provide for reimbursement of proxy contest expenses, among other things, and the Securities and Exchange Commission ("SEC") is considering its own proxy access rule, as well as enhanced disclosure requirements relating to directors’ experience, board leadership, risk oversight and compensation. In addition, we anticipate that corporate governance legislation will be introduced in Congress shortly.
I. Amendments to the Delaware General Corporation Law
As an update to our March 5, 2009 client alert discussing proposed significant amendments to the Delaware General Corporation Law, on April 10, 2009 Delaware’s governor signed such amendments into law. The amendments dealing with proxies and stockholder meetings, among other items, are virtually identical to the amendments initially submitted to the Delaware State Bar Association for approval, and discussed in our earlier release. The amendments take effect on August 1, 2009. A brief summary of the amendments follows.
A. Proxy Access Bylaws
Among the amendments is a new Section 112 that permits (but does 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.
B. Proxy Expense Reimbursement Bylaws
A new Section 113 also has been enacted that permits (but does 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, a corporation’s bylaws may condition eligibility for reimbursement 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. Section 113 codifies 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 stockholder action, and provides non-exclusive guidance as to what conditions may be included in such a bylaw.
The additions of Section 112 and 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.
C. Separate Record Dates for Notice of and Voting at Stockholder Meetings
Section 213(a) has been amended to permit (but not require) a board of directors to fix one record date for stockholders entitled to notice of a meeting (which, consistent with existing Delaware law, must be no more than 60 nor less than 10 days before the date of the meeting) and a separate record date for determining the stockholders entitled to vote at the meeting. The 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 Section 213(a), as amended, a board can now set a record date for voting that is much closer to the date of the meeting as compared to the record date for notice of the meeting. In fact, the 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 a board of directors does not fix a separate record date for stockholders entitled to vote at a meeting at the time it fixes a record date for notice of the 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 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 amendment to Section 213(a).
D. Enhanced Protection of Indemnification and Expense Advancement Rights
Section 145(f), relating to the ability of a corporation to grant indemnification rights, also has been amended to 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 the 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 the act or omission expressly permits elimination or impairment after the act or omission has occurred. This amendment is intended to address the Delaware Chancery Court’s holding in Schoon v. Troy Corp., 948 A.2d 1157 (Del. Ch. 2008) that rights to indemnification and advancement of expenses vest 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 have been 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 had not commenced.
E. Judicial Removal of Directors under Extraordinary Circumstances
A new subsection (c) to Section 225 has been added, providing 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 the director has committed a breach of the duty of loyalty in connection with the 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.
II. Proposed Corporate Governance Changes by the SEC
In a speech to the Council of Institutional Investors ("CII") on April 6, 2009, SEC Chairman Mary Schapiro outlined an ambitious corporate governance agenda for the SEC over the coming months.
A. Proxy Access
Consistent with her commitment at her confirmation hearings, Chairman Schapiro indicated that the SEC will consider in May a proposal to "ensure that a company’s owners have a meaningful opportunity to nominate directors." She said that "proxy access is about making boards more accountable for the risks undertaken by the companies they manage." SEC Commissioner Aguilar also has noted his support for "swift and bold action to give shareholders access to their company’s proxy statement," and SEC Commissioner Walter has stated that she believes strongly that shareholders should have "a real say in determining who will oversee management of the companies that they own."
In fashioning a proposed rule on proxy access, Chairman Schapiro said that the SEC will take into account its proposals from 2003 and 2007, as well as the recent amendments to the Delaware General Corporation Law discussed above. She made clear, however, that the SEC will be reviewing these issues with "fresh eyes" and will "ensure that any procedural requirements for access are rational, and not a means to thwart effective investor participation." As noted below, the legislation expected to be introduced in Congress is likely to seek to confirm the SEC’s authority to permit shareholders to nominate directors in company proxy materials.
B. Enhanced Disclosure Concerning Directors, Risk and Executive Compensation
While acknowledging that disclosure generally is working well, Chairman Schapiro indicated that the SEC may not be asking for the right disclosure from public companies in certain areas. She outlined the following enhancements to SEC disclosure requirements that she anticipates the Commission will consider in June.
1. Director Disclosure
The current SEC rules require disclosure of a director’s business experience over the past five years. Chairman Schapiro said that the SEC will consider whether to require enhanced disclosure concerning a director nominee’s experience, qualifications and skills.
2. Board Leadership Disclosure
SEC rules currently do not require disclosure about a board’s leadership structure, although the New York Stock Exchange listing standards require listed companies to disclose who presides over executive sessions of the non-management directors, and many companies voluntarily provide disclosure about their board leadership practices. Chairman Schapiro said that the Commission will be considering "whether boards should disclose their reasons for choosing their particular leadership structure – whether the structure includes an independent chair, a non-independent chair, or a combined CEO/chair."
3. Executive Compensation and Risk Disclosure
Chairman Schapiro also questioned "whether our compensation disclosures accomplish the objective of providing shareholders with the most relevant information." She discussed recent studies that indicate the need to align compensation with prudent risk taking and said that the Commission is "considering whether greater disclosure is needed about how a company—and the company’s board in particular—manages risk, both generally and in the context of setting compensation." With respect to compensation, she also said that the Commission is considering whether to require more disclosure concerning: (1) a company’s overall compensation approach, rather than focusing solely on the highest paid officers; and (2) compensation consultant conflicts of interest.
4. Environmental Disclosure
In response to a question from the audience concerning requests by several institutional investor and environmental groups for greater disclosure concerning environmental matters, particularly climate change, Chairman Schapiro indicated that the SEC would be addressing this issue later this summer.
III. Possible Federal Corporate Governance Legislation
In a letter circulated to his fellow senators, and as reported by the Wall Street Journal on April 25, U.S. Senator Charles Schumer (D-N.Y.) indicated that he intends to introduce new corporate governance legislation entitled the "Shareholder Bill of Rights Act of 2009." According to press reports, the legislation is expected to (1) require public companies to hold an annual advisory (non-binding) shareholder vote on executive compensation (so called "say on pay"), (2) require shareholder approval of any "golden parachutes," (3) confirm the SEC’s authority to permit shareholders to nominate directors in company proxy materials, (4) require all directors to stand for election each year (declassified boards of directors) and use a majority voting standard, (5) require listed companies to separate the duties of the CEO and the board chairman, and (6) require boards of listed companies to create a separate risk committee to provide appropriate oversight of risk management.
IV. What Public Companies Should Do Now
The amendments to the Delaware General Corporation Law do not require any immediate action. Nevertheless, companies should start to consider whether any changes in their bylaws or practices are appropriate in light of the Delaware amendments. Important factors will be the outcome of the SEC’s proxy access and disclosure rulemaking and the expected introduction of federal legislation. We will keep you informed about the SEC rulemaking and Congressional action as it develops.
 See Synopsis, House Bill No. 19 (Apr. 10, 2009), available at
 Mary L. Schapiro, Chairman, U.S. Sec. & Exch. Comm’n, Address to the Council of Institutional Investors (Apr. 6, 2009), available at
 Nomination Hearing Before the S. Comm. on Banking, Housing & Urban Affairs, 111th Cong. (Jan. 15, 2009) (statement of the Hon. Mary L. Schapiro, Chairman-Designate, U.S. Securities and Exchange Commission).
 Luis A. Aguilar, Commissioner, U.S. Sec. & Exch. Comm’n, Increasing Accountability and Transparency to Investors, Remarks at the SEC Speaks in 2009 (Feb. 6, 2009), available at
 Elisse B. Walter, Commissioner, U.S. Sec. & Exch. Comm’n, Restoring Investor Trust through Corporate Governance, Remarks before the Practicing Law Institute (Feb. 18, 2009), available at
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])
Elizabeth Ising – Washington, D.C. (202-955-8287, [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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