On April 10, Delaware’s governor signed into law two significant amendments to Delaware’s General Corporation Law (“DGCL”) that are expected to aid shareholder activists seeking to affect the composition of corporate boards. The two amendments, set to become effective August 1, 2009, will now allow corporate bylaws to give stockholders a greater role in nominating candidates for election to the board of directors.

Newly-created Section 112 provides that a corporation’s bylaws may require it to include in its own proxy materials one or more stockholder-nominated individuals, in addition to those candidates nominated by the board, provided that specified procedures and conditions are met. Section 112 also includes a nonexclusive list of procedures and conditions, including minimum stock ownership thresholds, specific information requirements, and other eligibility considerations that must be met prior to inclusion in the company’s proxy materials.

Encouraging stockholder nominees in a different way, new Section 113 will allow a corporation’s bylaws to require the corporation to reimburse a stockholder for expenses incurred in soliciting proxies in connection with director elections, provided also that specified procedures and conditions are met, such as limiting reimbursement based upon the number of persons nominated, the proportion of votes cast, or other considerations. This new section essentially codifies the Delaware Supreme Court’s holding in CA, Inc. v. AFSCME Employees Pension Plan, which held that a bylaw requiring reimbursement of reasonable fees in connection with director elections was a proper subject for stockholder action under Delaware law, but invalidated the bylaw nonetheless because it did not include a “fiduciary out.”¹  Since Section 113 does not include any express “fiduciary out,” it remains to be seen whether Delaware courts will read one in.

Under prior Delaware law, boards of directors had no obligation to include stockholder nominees in their corporations’ own proxy statements. If a stockholder wanted to nominate its own candidates, he or she would have had to incur the significant costs associated with preparing and disseminating his or her own proxy materials. Sections 112 and 113 now provide activist shareholders with less costly routes to nominate their own candidates, whether by including the nominees on the corporation’s own proxy materials or forcing the company to reimburse them for their costs.

Since the amendments merely enable companies to include these provisions in their bylaws instead of mandating them, boards of directors should expect shareholder proposals in the near future seeking to effect these bylaw provisions. While Rule 14a-8, amended in January of 2008 on this point, may allow public companies to exclude such proposals from their own proxy materials, motivated activist stockholders will still be able to use their own proxy solicitations to cause these bylaw amendments to occur. As such, companies should begin reviewing their bylaws to determine their current amendment rules and procedures, and start considering what conditions and procedures are necessary with respect to these newly-available bylaw provisions to ensure the continued orderly management of the company.

¹ 953 A.2d 227 (Del. 2008).

For more information, please contact:

Joseph C. Lucas
248.267.3299
lucas@millercanfield.com

David D. Joswick
248.267.3252
Joswick@millercanfield.com