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Delaware Supreme Court Clarifies when a Bylaw may Provide for Reimbursement of Proxy Expenses

CA, Inc. v. AFSCME Employees Pension Plan, C.A. 329,2008 (Del. 2008) (en banc)

In response to questions certified to it by the SEC, the Delaware Supreme Court has decided if a bylaw may mandate reimbursement of proxy solicitation expenses. No is the short answer.

As pension plans and other institutional investors seeks representation on corporate boards, they are looking for ways to make that process less expensive. Under the current Delaware law, even a successful proxy contestant will not be reimbursed for expenses unless it elects the majority of the board. Given how difficult that is to do as an outsider, few want to go through the expense of the effort. Here the bylaw proposed mandatory reimbursement for any successful election campaign, even if only one slot was filled.

The Court makes a distinction between bylaws that affect "process and procedures" of the board from bylaws that affect "substantive business decisions." Only process and procedure bylaws are valid, and a bylaw may not dictate the decision a board must make in the exercise of its fiduciary duty. As the Court acknowledges, that distinction is a tight one to make as some process bylaws affect the decision to be made.

The Court leaves open the possibility that a provision in a certificate of incorporation may mandate proxy solicitation reimbursement. However, as such a change in the certificate must be proposed by the board itself, that route seems a long road to travel.