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Board Manages CA, Inc. ? No Way!

By Harvard Law School Program on Corporate Governance

Earlier this year, the SEC submitted to the DE Supreme Court two questions pertaining to a bylaw proposal ? requiring CA to reimburse the reasonable expenses of a successful ?short-slate? board candidate nominated by a stockholder (unaffiliated with management) ? that had been submitted by a shareholder for inclusion in the forthcoming CA proxy materials. In its recently issued AFSCME/CA opinion, the Court concluded ?yes? to the first question (i.e., whether the bylaw proposal would be a proper subject for shareholder action) … AND ? concluded ?yes? to the second question (i.e., whether if adopted, it would cause CA to violate any DE law to which it is subject).

The core rationale for the second ?yes? was that the bylaw would preempt the Board?s fiduciary duty to exercise its discretion (vis-à-vis any such request) by mandating the payment. The Court concluded that ?the Bylaw, as drafted, would violate the prohibition[s] ? against contractual arrangements that commit the board of directors to a course of action that would preclude them from fully discharging their fiduciary duties to the corporation and its shareholders?. [emphasis added, footnote omitted]

There has been considerable professional commentary about the Court?s decision. In some cases, writers have taken a short-cut by stating that the problem with the proposed bylaw was that it would interfere with the directors? role vis-à-vis ?management? of the enterprise (e.g., the decision ?reaffirms the bedrock principle that the directors of the corporation, not the shareholders, manage the business and affairs of the corporation?). That characterization of the board?s ?management? role calls for the recollection of a bit of corporate-law history.

In the early 1970s a prominent outside director ? noting that (then-current) DE law ?required? him and his fellow directors (serving on the board of a major publicly-owned DE corporation) to manage the business and affairs of that enterprise ? demanded that the board be provided a separate staff to assist the board in performing that task. In fact, a literal reading of the relevant DE statutory provision in effect at the time so provided ? as was similarly the case with the parallel provision in the Model Business Corporation Act! BUT that literal interpretation of the statute ? calling for active involvement by the board with the day-to-day business affairs of the corporation ? was clearly not what was intended for the board of a large corporation. AND it was clearly not intended for the board of a large publicly-held corporation!

In reaction, the ABA Committee on Corporate Laws (in its role providing ongoing editorial oversight for the Model Act) amended the Act in l974 to provide that ?[a]ll corporate powers shall be exercised by or under the direction of the board of directors ? and the business and affairs of the corporation shall be managed by or under the direction of [the board].? [emphasis supplied] Samuel Arsht (at the time a noted leader of the DE corporate bar and a member of the ABA Committee as well) spearheaded a comparable adjustment that was made in the DE statute.

The point here is a very simple one; that is, while the board of directors has authority to engage in the conduct of the corporation?s business and affairs at whatever level it chooses ? subject to the directors? fiduciary duty and, in the case of a DE corporation, subject to any limitation set forth in its certificate of incorporation (as provided by the DE statute) ? the CA board of directors does not have obligatory involvement with day-to-day management of the business and affairs of the enterprise. To suggest that it does have a duty to manage the business and affairs of CA, Inc. ? or even might ? is mischievous!

Full post as published by The Harvard Law School Corporate Governance Blog on July 28, 2008 (boomark / email).