Publications

Legislation has been proposed to amend the Delaware General Corporation Law (the DGCL) regarding stockholder access to proxies. The proposals would expressly permit Delaware corporations to adopt bylaws giving stockholders access to a company’s proxy statement to nominate directors and permitting the reimbursement of stockholder proxy expenses in certain situations.

Proxy access remains an area of potential SEC rulemaking and stockholder concern. The proposed amendments would put in place a voluntary corporate framework establishing the circumstances in which, and the limitations on, stockholders accessing a company’s proxy. In addition, the proposed amendments would allow Delaware corporations to provide different record dates for stockholders who are entitled to notice of an annual meeting and those entitled to vote at the meeting, and would permit the judicial removal of directors convicted of a felony through a direct or derivative claim.

The proposed amendments would also limit amendments to a certificate of incorporation or bylaws that would eliminate or impair rights to indemnification or advancement of expenses after the occurrence of the act or omission that is the subject of the action for which indemnification or advancement is sought.

If approved, these amendments will become effective on August 1, 2009.

Access to Proxy Solicitation Materials

The proposed amendments provide for a new Section 112 to the DGCL authorizing Delaware corporations to adopt bylaws granting stockholders “proxy access” for the purpose of nominating directors. The new section identifies a non-exclusive list of conditions that the bylaws may impose on the right to access the company’s proxy materials.

Specific examples of permissible conditions include limiting access to stockholders with a minimum level of record or beneficial ownership, limiting the number of seats that may be challenged, and requiring a minimum duration of ownership of company stock in order to avoid election contests initiated by stockholders with minimal economic interest in the company. The proposals would also allow a company to limit access in tender offers or other situations where the nominations are related to an acquisition of a certain percentage of the company’s stock.

The proposed amendments would make clear that a company has the authority to provide stockholders access to its proxy materials through a bylaw provision, offering certainty to companies and stockholders that choose to provide access to the company’s proxy. The amendments also attempt to strike a reasonable balance as to when a company may determine that it is not appropriate to provide access to its proxy.

Proxy Expense Reimbursement

The proposed amendments also provide for a new Section 113 to the DGCL that would permit a company to adopt bylaws providing for the reimbursement of expenses incurred by a stockholder in soliciting proxies in an election of directors.

This new section provides that reimbursement of proxy solicitation expenses can be subject to conditions prescribed in the bylaws. Section 113 would provide a non-exclusive list of conditions that includes, among other conditions, conditioning eligibility for reimbursement on the number or proportion of persons nominated by a stockholder seeking reimbursement, limiting the amount of reimbursement based on the proportion of votes casts in favor of the nominees submitted by the stockholder seeking reimbursement, or imposing “any other lawful condition” to reimbursement.

New Section 113 would effectively codify the Delaware Supreme Court’s recent holding in CA, Inc. v. AFSCME Employees Pension Plan, 953 A.2d 227 (Del. 2008), which approved a short-slate bylaw reimbursement provision. However, although that case suggested that a proxy reimbursement bylaw should reserve the directors’ full power to discharge their fiduciary duties, the proposed amendment does not expressly require a “fiduciary out.” Some companies may utilize the flexibility in the proposed amendment to condition reimbursement to circumstances that are consistent with the directors’ performance of their fiduciaries duties. It remains to be seen whether the Delaware courts will follow the suggestion in the AFSCME decision and read a fiduciary out standard into the proposed new Section 113.

Record Date Amendments

The proposed legislation includes amendments to Section 213(a) of the DGCL that would permit a company to set different record dates for determining when a stockholder is entitled to vote and which stockholders are entitled to notice of the meeting. The record date for the notice to stockholders must be at least at least ten days but not more than 60 days prior to the meeting date. The record date for determining which stockholders are entitled to vote at the meeting may be any date on or before the date of the meeting.

This proposed amendment would allow companies to address the so-called “empty voting” problem resulting when stockholders have voting rights in a company but do not have a comparable economic ownership, such as when a stockholder acquires only voting rights in a company or offsets its economic interest through a short position. By setting the record date for those entitled to vote at the meeting closer to the actual meeting date, a corporation may reduce the number of persons voting at the meeting who do not have an economic interest in the company. In addition, the amendment may prove useful to companies that disseminate proxy materials electronically, because such companies are positioned to provide proxy materials promptly to a stockholder who acquires shares after the record date for notice but prior to the record date voting at the meeting.

Judicial Removal of Convicted Directors

The proposed amendments also add new subsection (c) to Section 225 of the DGCL that would permit the removal of directors convicted of a felony in connection with their duties as a director. The removal action may be brought by the company or derivatively by its stockholders in the Court of Chancery.

The court may remove the director if it finds that the director did not act in good faith in performing the acts that result in the felony conviction. The removal action must follow the adjudication of the felony conviction. Additionally, the court must determine that the removal is necessary to avoid irreparable harm to the company. The proposed amendment is intentionally narrower than the judicial removal provision in the Model Business Corporation Act, which has been adopted in several states.

Indemnification and Advancement Rights

A proposed amendment to Section 145(f) of the DGCL would also prohibit amending a provision of a company’s certificate of incorporation or bylaws that would eliminate or impair rights to indemnification or advancement of expenses after the occurrence of the act or omission that is the subject of the action for which indemnification or advancement is sought, unless the provision explicitly authorizes such elimination or impairment after such action or omission has occurred.

This proposed amendment responds to the recent controversial holding of the Court of Chancery in Schoon v. Troy Corp., 948 A.2d 1157 (Del. Ch. 2008), which denied advancement of a former director’s litigation expenses because of a bylaw amendment adopted after the director left office, even though the alleged wrongdoing occurred at a time when the bylaws would require advancement. The proposed amendments would allow directors to make decisions in reliance on their then-existing indemnification and advancement protections, without fear that those protections will be eliminated after the fact.

Conclusion

Newly appointed SEC Chairman Mary Schapiro has reportedly directed SEC staff to draft proxy access rules. The proposed DGCL amendments would establish a voluntary legal framework to equip companies for such rules, or for institutional shareholder pressure to adopt proxy access models. Keeping a watchful eye on the status of these proposed DGCL amendments and on SEC action in this area will assist companies in preparing effective strategies for managing their proxies.