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CA v. AFSCME: The Decision is Out; CA Wins

The Delaware Supreme Court’s opinion is out and available from Jay Brown’s site.

Quick reactions:

• We are not cited. We are depressed. 
• Nonetheless, we are pleased to see a strong affirmation of the principle of director primacy: “it is well-established that stockholders of a corporation subject to the DGCL may not directly manage the business and affairs of the corporation, at least without specific authorization in either the statute or the certificate of incorporation.”
• The roundtrip between section 109 and section 141(a) seems to have been resolved in favor of the latter: “Because the board’s managerial authority under Section 141(a) is a cardinal precept of the DGCL, we do not construe Section 109 as an “except[ion]…otherwise specified in th[e] [DGCL]” to Section 141(a). Rather, the shareholders’ statutory power to adopt, amend or repeal bylaws under Section 109 cannot be “inconsistent with the law,” including Section 141(a).” OTOH, later in the opinion, we read: “What we do hold is case specific; that is, wherever may be the location of the bright line that separates the shareholders’ bylaw-making power under Section 109 from the directors’ exclusive managerial authority under Section 141(a), the proposed Bylaw at issue here does not invade the territory demarcated by Section 141(a).”
• The bottom line is that a bylaw intended to regulate the process by which directors are elected is a proper subject of shareholder action.
• The next question was “whether the proposed Bylaw, if adopted, would cause CA to violate any Delaware law to which it is subject.” Answer? Yes.
• As I feared, the court reaffirmed Quickturn’s pernicious doctrine that “binding contractual arrangements that the board of directors had voluntarily imposed upon themselves” must contain a fiduciary out. Once again, the Delaware courts have gutted the board’s ability to make precommitments. I remain unconvinced, for the reasons explained in this earlier post.

Richard Layton & Fingers already has a friends of the firm email out:

… the SEC certified two questions of law to the Supreme Court: (i) whether the Proposal is a proper subject for action by stockholders as a matter of Delaware law and (ii) whether the Proposal, if adopted, would cause CA to violate any Delaware law to which it is subject.

The Supreme Court answered the first question—whether the Proposal was a proper subject for action by stockholders—in the affirmative. The General Corporation Law of the State of Delaware (the “DGCL") empowers both directors (so long as the Certificate of Incorporation so provides, as CA’s does) and stockholders of a Delaware corporation with the ability to adopt, amend or repeal the corporation’s bylaws. Because the DGCL also vests the board of directors with the authority to manage the business and affairs of the corporation, however, a conflict can arise. As the Supreme Court held, “the shareholders’ statutory power to adopt, amend or repeal bylaws is not coextensive with the board’s concurrent power.” While it refused to “articulate with doctrinal exactitude a bright line” that would divide those bylaws that stockholders may permissibly adopt from those that would go too far in infringing upon the directors’ right to manage the corporation, the Supreme Court held that the Proposal concerned the process for electing directors—"a subject in which shareholders of Delaware corporations have a legitimate and protected interest.” Accordingly, the Supreme Court held that the Proposal was a proper subject for stockholder action.

The Supreme Court, however, went on to answer the second question—whether the Proposal, if adopted, would cause CA to violate any Delaware law—in the affirmative. The Court found that the Proposal could require the board to reimburse dissident stockholders in circumstances where a proper application of fiduciary principles would preclude them from doing so (such as when a proxy contest was undertaken for “personal or petty concerns, or to promote interests that do not further, or are adverse to, those of the corporation"). Accordingly, the Supreme Court held that the proposed bylaw, as written, would violate Delaware law if enacted by stockholders.