New section 113 of the DGCL would expressly permit the bylaws of a corporation to provide for reimbursement of a shareholder’s reasonable proxy solicitation expenses in connection with an election of directors. Together, the new amendments would provide both a vehicle—the company’s proxy statement—and the financial means for qualifying shareholders to participate directly in the election of directors.
New section 113, which was adopted in response to the 2008 Delaware Supreme Court decision in CA, Inc. v. AFSCME Employee Pension Plan, also identifies a non-exclusive list of conditions and procedures that may be imposed upon a shareholder’s right to reimbursement of expenses, including the following:
• conditions based upon the number of shareholder-nominated directors as to which reimbursement is requested;
• limitations based upon the amount spent by the corporation in soliciting proxies or the proportion of votes cast in favor of the shareholder nominees; and
• conditions based upon whether a particular shareholder previously requested reimbursement for similar expenses.
The recent DGCL amendments will likely encourage shareholders of Delaware corporations to request bylaw amendments that would provide proxy access for director nominations and reimbursement of proxy solicitation expenses related to those nominations. Moreover, these significant amendments pave the way for the recent vote by the SEC to amend the federal proxy rules to facilitate shareholder nominations of directors, even if they result in a contested election of directors.
Proposed SEC Rules
On May 20, 2009, the SEC voted to propose amendments to the federal proxy rules that would permit shareholders to nominate directors as part of a corporation’s annual proxy solicitation process. The commission, citing the current economic crisis as being one of the most serious in 100 years and one that has called into issue whether boards are exercising appropriate oversight over management, has decided to propose new rule amendments that would remove existing impediments under the federal proxy rules upon shareholders who wish to nominate directors. Under the new rules, shareholders could also modify a company’s nomination procedures or disclosure about elections, subject to applicable state law requirements.
Under proposed Rule 14a-11, certain qualifying shareholders could include their nominees for director in the company’s proxy materials unless they are prevented from doing so under applicable state law or a company’s certificate of incorporation or bylaws. The new rule would apply to all Exchange Act reporting companies, including investment companies. Shareholders would be required to meet certain threshold requirements as to level and duration of ownership of a company’s voting securities in order to qualify, and certify that they are not holding their stock for the purpose of changing control of the company. No more than one shareholder nominee, or a number representing up to 25 percent of the company’s directors, whichever is greater, could be nominated by qualified shareholders, and certain disclosure and indemnification requirements would be imposed on the proponent shareholders.
Rule 14a-8(i)(8) of the federal proxy rules would be amended to allow certain qualifying shareholder proposals that would amend, or request an amendment to, a company’s governing documents related to the company’s director nomination procedures or other director nomination disclosure provisions to be included in the company’s proxy solicitation materials.
This is a dramatic departure from the present rule, which permits companies to exclude shareholder proposals that “relate to an election” of directors. The current eligibility provisions of the rule would continue to apply—that is, that a shareholder proponent has continuously held at least $2,000 or one percent (whichever is less) of the company’s voting securities for at least one year prior to submitting the proposal.
Thus, the SEC proxy rule amendments will include a “direct access” rule as well as a mechanism to allow shareholders to submit direct access bylaw proposals. The new DGCL amendments should go a long way to facilitate activist shareholder proposals to amend governing documents of Delaware companies so that they provide “direct access” to the director nomination process, as well as providing for reimbursement of shareholder proponents. The SEC proposed proxy rule amendments could conceivably be in place before commencement of the 2010 proxy season; proxy access will therefore likely be an important issue for companies in preparing their proxy materials.
Joris M. Hogan is a partner at Torys who specializes in cross-border mergers and acquisitions as well as securities law in the firm’s New York office.
