Caseflicks

Supreme Court of Delaware • 2008

CA, Inc. v. AFSCME Employees Pension Plan

953 A.2d 227

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Takeaway

In short, this case confirms that stockholders may use bylaws to shape the director-election process, but they may not use them to eliminate directors’ continuing ability to fulfill fiduciary duties in particular circumstances.

Background

CA, Inc., a Delaware corporation, had a twelve-member board elected annually. AFSCME, a CA stockholder, submitted a proposed bylaw for inclusion in CA’s 2008 annual-meeting proxy materials. The bylaw would require CA to reimburse a stockholder or stockholder group for reasonable expenses incurred in nominating candidates in a contested director election if, among other conditions, the contest involved less than half the board and at least one nominee was elected. Reimbursement could not exceed CA’s own election expenses.

CA sought SEC permission to omit the proposal under SEC Rule 14a-8, supported by a Delaware-law opinion that the proposal was not a proper subject for stockholder action and would violate the Delaware General Corporation Law. AFSCME submitted a contrary opinion. Because the SEC’s decision turned on unsettled Delaware law, it certified two questions directly to the Delaware Supreme Court: whether the bylaw was a proper subject for stockholder action and whether its adoption would cause CA to violate Delaware law. There was no lower-court decision.

Issues

Issue #1

Whether AFSCME’s proposed reimbursement bylaw was a proper subject for unilateral stockholder action under Delaware law.

Holding

Yes. The proposed bylaw was a proper subject for stockholder action because it regulated the process of director elections rather than improperly directing a substantive business decision.

Reasoning

Section 109(a) of the DGCL preserves stockholders’ power to adopt, amend, and repeal bylaws even when, as with CA, the certificate of incorporation also gives that power to directors. That stockholder power is not fully coextensive with directors’ authority, however, because Section 141(a) vests management of the corporation’s business and affairs in the board.

The Court rejected CA’s position that any bylaw constraining board discretion must appear in the certificate of incorporation under Section 102(b)(1). Bylaws necessarily impose rules that bind directors, and accepting CA’s broad position would largely erase the stockholders’ expressly protected statutory bylaw power.

Delaware law recognizes that bylaws may regulate the procedures through which directors act, even if those procedures substantially constrain the board. The central distinction is between a bylaw that establishes a process for decisionmaking and one that dictates a particular substantive business judgment.

Despite its mandatory wording, the reimbursement bylaw concerned the director-election process. It sought to facilitate stockholder nominations by reducing the cost disadvantage faced by dissident candidates and thereby supported stockholders’ protected interest in selecting the contestants for board office.

The fact that the bylaw would require corporate expenditures did not make it inherently substantive. A process-oriented bylaw can incidentally require spending, and the bylaw’s purpose and context—not merely its phrasing as a reimbursement command—showed that it governed the electoral process.

Issue #2

Whether the proposed bylaw, if adopted as written, would cause CA to violate Delaware law.

Holding

Yes. As drafted, the bylaw was invalid because it could compel reimbursement when directors’ fiduciary duties required them to deny it.

Reasoning

Section 109(b) permits bylaws only when they are not inconsistent with law. Because the SEC requested an abstract ruling on the proposal’s validity, the Court had to consider whether any possible application of the bylaw would conflict with Delaware law, rather than presume validity based on a concrete factual record.

Under Paramount v. QVC and Quickturn, directors may not bind themselves—or be bound through a corporate governance arrangement—to act in a way that prevents them from fully discharging their fiduciary duties. That principle applies to a stockholder-adopted bylaw as well as to a contract voluntarily executed by directors.

Delaware law permits reimbursement of proxy expenses when a contest involves corporate policy rather than personal, managerial, or adverse interests. But a contest could be pursued for petty, personal, or corporation-harming reasons; for example, a competitor-affiliated stockholder might seek to elect directors who would disclose valuable proprietary information. In such circumstances, fiduciary duties could require the board to refuse reimbursement altogether.

The proposed bylaw gave the board discretion only to determine the amount of reasonable expenses. It did not preserve the board’s authority to decide whether reimbursement itself would be appropriate in light of its fiduciary obligations. Its unconditional reimbursement mandate therefore could require an unlawful result.

The Court did not decide whether mandatory reimbursement would be sound governance policy. It held only that stockholders could not impose this version through a bylaw; they could instead seek a charter amendment or legislative change, or propose a bylaw that expressly preserved directors’ full fiduciary authority.