September 09, 2008

Who Should Pay for a Successful Shareholder Proxy Campaign? The Delaware Supreme Court Issues a Split Decision

On July 17, 2008, the Delaware Supreme Court issued a split decision on the hotly-contested issue of whether a Delaware corporation can be required to reimburse dissident shareholders who wage a successful proxy campaign against current management and directors. In CA Inc. v. AFSCME Employees Pension Plan, a dissident shareholder had proposed that the corporation adopt a new bylaw that would require the corporation to automatically pay for successful shareholder proxy campaigns. The directors had opposed the bylaw and argued that it would usurp the directors' power to decide how to spend the corporation's money. The Court concluded that in the particular circumstances of the case, the proposed bylaw would impermissibly restrict the managerial and fiduciary duties of the board. The Court held that under Delaware law, a board can expend corporate funds to reimburse proxy expenses where the controversy is concerned with a question of policy, rather than with questions of personnel or management. However, the proposed bylaw did not leave the board any discretion about whether it would be appropriate, in a particular case, to award reimbursement. Although the Court suggested other means by which the dissident shareholder might be able to accomplish its goal under Delaware law, those means are largely unrealistic. So, the bottom line is that dissident shareholders likely won't be able to obtain reimbursement, even for successful proxy campaigns, without the board's approval.

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