Corporate Governance

Shareholder Access and the Advocacy Role of Delaware in the Corporate Governance Debate: Protecting Against Inequitable Conduct by Management (Part 4)

By J Robert Brown Jr.

We are examining the Amicus Brief submitted by the State of Delaware in Business Roundtable v. SEC, the case challenging the SEC's rule providing certain shareholders with access for their nominees to the proxy statement.

In contending that Delaware adequately protects the shareholder franchise, the Brief filed by the State also notes that "once a proxy contest is initiated," the "Delaware courts have guarded the stockholder franchise from inequitable conduct by corporate management."  ?

The strength of the statement presumably depends upon the definition of "inequitable."  Whatever the resolution, it is clear that the Delaware courts have interpreted the law in a manner that tilts the playing field against shareholders in favor of management, particularly in proxy contests.  Examples?

Airgas illustrated that while ambiguities in the articles are to be interpreted in a manner that favors the  franchise, courts avoid the inconvenient truth by stretching the analysis to eliminate ambiguities.  In Airgas, the Court relied on the intent of everyone except the parties that actually drafted the provision at issue to resolve an obvious ambiguity in a staggered board provision. 

In Yucaipa/Selectica, the courts allowed boards to put in place poison pills with 5% thresholds that applied to agreements for a common slate of directors or the sharing of proxy expenses.  Moreover, the prohibition in Yucaipa effectively applied to insurgent shareholders but not to management.  Shareholders in Delaware don't lose their right to vote but they do lose their right to act collectively with respect to board elections. 

In Cryo-Cell, the court essentially allowed management to defeat a proxy contest by using board seats to buy votes.  Moreover, when the court found that management had abused the proxy process, the remedy was not to seat the insurgent directors but to rerun the election and subject the insurgent to another set of proxy expenses.  In fact, the insurgent in that case did not participate in the revote. 

In Inter-Tel, the court sanctioned behavior that was designed to disenfranchise.  Although applying the so called Blasius standard, the Chancery Court found that the board had demonstrated a "compelling justification" for the behavior.  In other words, even though the board had acted with the primary purpose of disenfranchising shareholders, the behavior was permitted.  The case also suggested that the Blasius standard be abandoned and that a board merely have to show that its behavior in disenfranchising was "reasonable."

For a history of the SEC's efforts to provide for shareholder access (a process that dates back to 1942), see The SEC, Corporate Governance, and Shareholder Access to the Board Room.  Assorted briefs and motions in this case can be found at the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on February 02, 2011 (boomark / email).