Binding Shareholder Proposals
The Proposals That Bind: Dealing with Binding Shareholder Proposals in a Proxy Access World
ABA Spring Meeting 2012 (Las Vegas, NV)
Steven M. Haas
Hunton & Williams LLP
Key Issues
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Who has the power to amend bylaws?
– Incorporators/initial directors
– Stockholders
– Directors
What is the scope of permissible bylaws?
– Delaware General Corporation Law (“DGCL”)
– Common law
– Intersection between stockholders’ right to amend bylaws and
board’s duty to manage the corporation
Can stockholders prevent directors from repealing a stockholderadopted bylaw?
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Who Has the Power to Amend
Corporate Bylaws?
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Original Bylaws
• The “original” bylaws may be “adopted,
amended or repealed by the incorporators [or]
by the initial directors….” § 109(a).
– In addition, the board may adopt, amend and
repeal the bylaws prior to receiving any payment
for any of its stock. § 109(a).
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Power Shifts to the Stockholders
• Once payment has been received for shares, the DGCL
shifts the authority to amend the bylaws:
– “After a corporation has received any payment for any
of its stock, the power to adopt, amend or repeal
bylaws shall be in the stockholders entitled to vote….”
§ 109(a).
– Legislative commentary:
• “This Amendment… makes it clear that stockholders always
have the power to make, alter or repeal bylaws, even though
the directors may also be delegated such power.”
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Charter Can Vest Power in the Directors
•
Although stockholders have the power to amend the bylaws, the
certificate of incorporation can provide such power to the directors:
– “any corporation may, in its certificate of incorporation, confer the
power to adopt, amend or repeal bylaws upon the directors….” §
109(a).
• Almost every certificate of incorporation grants this power, without
qualification.
•
But this does not divest stockholders of their power:
– “The fact that such power has been so conferred upon the
directors… shall not divest the stockholders… of the power, nor
limit their power to adopt, amend or repeal bylaws.” § 109(a).
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What is the Permissible
Scope of Bylaws?
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Scope of Permissible Bylaws
• General statutory authorization:
– “The bylaws may contain any provision, not
inconsistent with law or with the certificate of
incorporation, relating to the business of the
corporation, the conduct of its affairs and its
rights or powers or the rights or powers of its
stockholders, directors, officers or
employees.” § 109(b).
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Bylaws Contemplated by the DGCL
• The DGCL contemplates specific types of bylaws,
including:
– Place of annual meeting (§ 211)
– Director qualifications (§ 141(a))
– Titles, duties, and terms of officers (§ 142)
– Ability to call special meeting (§ 211(d))
– Quorum and voting requirements (§ 216)
– Notice of adjourned meetings (§ 222(c))
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Bylaws Contemplated by the DGCL
• The DGCL also contemplates restrictions in the bylaws,
including with respect to:
– Ability of directors to act by written consent (§ 141(f))
– Place of board meetings (§ 141(g))
– Board’s authority to set director compensation (§
141(h))
– Remote participation in meetings by directors (§
141(i))
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Common Law Limitations on the Scope
of Bylaws
• Delaware courts have generally said bylaws establish
rules and procedures
• Delaware courts have also imposed a “reasonableness”
requirement on bylaws
– See Brumley v. Jessup & Moore Paper Co., 77 A. 16 (Del. 1910)
(invalidating improper restriction in right to inspect books and
records)
– In particular, this has been applied in the context of advance
notice bylaws
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To What Extent Can Shareholders Adopt
Bylaws that Govern or Bind
the Board of Directors?
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Specific References to StockholderAdopted Bylaws in the DGCL
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Section 141(d): Board can be staggered pursuant to a stockholderadopted bylaw
Section 216: Majority/plurality standard in director elections:
– “A bylaw amendment adopted by stockholders which specifies
the votes that shall be necessary for the election of directors
shall not be further amended or repealed by the board of
directors.”
Section 203(b)(3): Stockholders can opt-out of Section 203 with a
bylaw amendment:
– “A bylaw amendment adopted pursuant to this paragraph shall
not be further amended by the board of directors.”
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Stockholder-Adopted Bylaws
• DGCL only contemplates very limited instances of
stockholder-adopted bylaws.
• Otherwise, the DGCL does not explicitly address the
question of the extent to which stockholder-adopted
bylaws regulate or define board action.
– But see Hollinger Int’l, Inc. v. Black, 844 A.2d 1022
(Del. Ch. 2004):
• “Sections 109 and 141 [of the DGCL], taken in totality, and
read in light of Frantz, make clear that bylaws may
pervasively and strictly regulate the process by which
boards act, subject to the constraints of equity.” Id. at 1080
n.136 (emphasis added).
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Stockholder-Adopted Bylaws
• Examples of stockholder-adopted bylaws
– Separation of Chairman and CEO roles
– Majority voting standards in director elections
– Proxy access (and, perhaps coming soon, proxy
expense reimbursement)
• Binding vs. precatory considerations
– ISS and institutional shareholder support
– Potential exclusion under Rule 14a-8 because invalid
under state law
– Ability to formulate bylaw under Rule 14a-8 word limit
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Board’s Authority to Manage the
Corporation
• In examining the scope of a bylaw, look at the board’s general
statutory authority to manage the corporation.
• Under the DGCL, “[t]he business and affairs of every
corporation… shall be managed by or under the direction of a
board of directors, except as may be otherwise provided in
this chapter or in its certificate of incorporation.” § 141(a).
– “If any such provision is made in the certificate of incorporation, the
powers and duties conferred or imposed upon the board of directors by
this chapter shall be exercised or performed to such extent and by such
person or persons as shall be provided in the certificate of
incorporation.” Id.
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How do we reconcile Section 109(a)
with Section 141(a)?
• Arguments in favor of stockholder
empowerment:
– Section 141(a) says board manages the
corporation “except as may be otherwise
provided in this chapter or in the certificate of
incorporation”
– Section 109(a), which gives stockholders the
power to amend bylaws, is “provided in this
chapter”
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How do we reconcile Section 109(a)
with Section 141(a)?
• But this issue was addressed by the Del. Supreme Court
in CA, Inc. v. AFSCME, mem. op. (Del. 2008):
– “[W]e do not construe Section 109 as an ‘exception’ … to
Section 141(a).”
– “[T]he shareholders’ statutory power to adopt, amend or
repeal bylaws under Section 109 cannot be ‘inconsistent
with the law,’ including Section 141(a)” (emphasis added).
– “[B]oth the board and the shareholders…, independently
and concurrently, possess the power to adopt, amend and
repeal the bylaws.”
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How do we reconcile Section 109(a)
with Section 141(a)?
• Board’s authority, of course, is not without limitations,
even in the absence of a limitation in the certificate of
incorporation:
– Board’s statutory mandate is accompanied by
“concomitant” fiduciary duties.
• See Quickturn Design Sys., Inc. v. Shapiro, 721 A.2d 1281,
1292-93 (Del. 1998).
• Non-controlling stockholders, in contrast, do not owe any
fiduciary duties, including in connection with proposal to
amend the bylaws.
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Can Stockholders Adopt a Bylaw that
Prohibits the Board from Amending or
Repealing It?
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Restricting the Power to Repeal/Amend
• Under CA, such a bylaw arguably runs afoul of Section
141(a).
• In addition, such a bylaw would seemingly be in conflict
with the standard provision in certificates of incorporation
giving the board power to amend bylaws.
– “Where a by-law provision is in conflict with a
provision of the charter, the by-law provision is a
nullity.” Centaur Partners, IV v. Nat’l Intergroup, Inc.,
582 A.2d 923, 929 (Del. 1990).
– “[A] corporation’s bylaws may never contradict its
certificate of incorporation.” Oberly v. Kirby, 458 n.6
(Del. 1991)
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Restricting the Power to Repeal/Amend
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But there is no definitive decision, and the case law is not clear….
In American Int’l Rent a Car, Inc. v. Cross, 1984 WL 8204, *3 (Del.
Ch. May 9, 1984), the court suggested, in dicta, that shareholders
could adopt a bylaw that expressly provided it could not be amended
or repealed by the board.
– “If a majority of American International's stockholders in fact
disapproved of a Board's amendment of the bylaw, several
recourses were, and continue to be, available to them. They
could vote the incumbent directors out of office. Alternatively,
they could cause a special meeting of the stockholders to
be held for the purpose of amending the bylaws and, as part
of the amendment, they could remove from the Board the
power to further amend the provision in question.”
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Restricting the Power to Repeal/Amend
• In General DataComm Indus. v. State of Wis. Inv. Board,
731 A.2d 818 (Del. Ch. 1999) (Strine, V.C.), the court
recognized the novelty of the issue of repealing
stockholder-adopted bylaws:
– “The question of whether a stockholder-approved bylaw
may be repealed by a board of directors… has not clearly
been answered by a Delaware Court. However… the
affirmative answer may be the correct one.” Id. at 822 n.1.
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Restricting the Power to Repeal/Amend
• But see the Delaware Supreme Court’s dicta in Centaur
Partners, IV v. National Intergroup, Inc., 582 A.2d 923
(Del. 1990):
– Case involved a stockholder-adopted bylaw that fixed the
number of directors and expressly provided that it could
not be amended/repealed by the board.
– Supreme Court noted that the Certificate of Incorporation
said the number of directors would be fixed as provided in
the By-Laws and said that “[t]o the extent that the
directors have general authority to adopt or amend
corporate by-laws, these two provisions are in
obvious conflict.” Id. at 929.
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Restricting the Power to Repeal/Amend
• Keep in mind, however, that a board’s decision
to amend or repeal a stockholder-adopted bylaw
would be subject to the directors’ fiduciary duties
– Actions permitted under the DGCL cannot be
done inequitably
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What Alternative Bylaw Strategies Might
be Pursued by Stockholders or Boards?
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Alternative Strategies for Stockholders
• In light of CA, stockholders might impose
procedural obstacles in the bylaws
• For example, the bylaw might provide that it can
only be amended or repealed by a unanimous
vote of the board of directors
– This has been upheld in Delaware, at least
where a majority stockholder adopted the
bylaw
– This could be potent in light of proxy access
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Alternative Strategies for Stockholders
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Frantz Manuf. Co. v. EAC Indus., 501 A.2d 401 (Del. 1985)
– Upheld stockholder-adopted bylaws proposed by a hostile
acquiror that required, among other things, unanimous director
approval to take board action and unanimous ratification of
board committee actions
• Hostile acquiror had one representative on board
– The “bylaw amendments were a permissible part of [the
stockholder’s] attempt to avoid its disenfranchisement as a
majority shareholder….” Id. at 407.
– Bylaw amendments were “not inequitable under the
circumstances.” Id. at 409.
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Alternative Strategies for Boards
• Supermajority voting requirements for
stockholders to amend bylaws
• Advance notice and disclosure provisions
• Director qualifications (proxy access)
• Stockholder engagement
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Bibliography
•
Lawrence A. Hameresh, Corporate Democracy and StockholderAdopted By-Laws: Taking Back the Street?, 73 Tul. L. Rev. 409
(1998)
•
Jay W. Eisenhofer & Michael J. Barry, Mandatory Bylaws are
Permitted Under Delaware Law: An Argument in Favor of
Shareholders’ Rights, Bank and Corporate Governance Law
Reporter (May 2004)
•
Frederick H. Alexander & James D. Honaker, Power to the
Franchise or the Fiduciaries: An Analysis of the Limits on
Stockholder Activist Bylaws, 33 Del. J. Corp. L. 749 (2008)
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About
Steven M. Haas is a partner focusing on corporate
governance and mergers and acquisitions at Hunton
& Williams LLP. He is a member of the Delaware
and Virginia bars. He is the author of two chapters
on stockholder rights and director duties in the
treatise Corporate Governance: Law and Practice
(LexisNexis) and is an adjunct professor of law at the
University of Richmond School of Law. Prior to
joining Hunton & Williams LLP, he was a senior
associate at Abrams & Laster LLP in Wilmington,
Delaware.
Contact: [email protected]
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