Proxy Access Defense #2

J.W. Verret —  18 July 2010

I’ve been working over the summer writing my August submission.  Law Review Editors take note, you will be receiving my submission of “Delaware’s Future: Reviewing Company Defenses to Shareholder Proxy Access” within the next few weeks.  My last post began a discussion about some of the defenses I have been designing for Boards to defend against shareholder access to the corporate proxy.

Proxy access was one of the major corporate governance reforms included in the Dodd-Frank Act, and we can expect that Boards of Directors will be anxious to implement defenses against insurgent shareholder campaigns as a result.  This paper considers what defenses would be strategically useful, and then analyzes whether they will survive review in Delaware, federal courts, the SEC and the stock exchanges.  It follows my previous academic work and testimony on proxy access.

In my first post on this topic I mentioned the possibility of using lower poison pill triggers to prevent shareholders from obtaining a sufficient ownership stake to meet the minimum holding requirements to actually nominate candidates onto the corporate proxy.  A second defense I want to mention could be even more powerful and is more likely to survive review in both Delaware and the federal courts.

The Delaware General Corporation Law gives the board and the shareholders the co-extensive authority to adopt bylaws setting the qualification requirements necessary to become a director.  There is very little case law interpreting this provision, other than the general rule from Schnell v. Chris-Craft that powers granted to the corporation may not be used in an inequitable manner.  Qualification requirements based on experience, education, and other background-like variables would likely survive scrutiny, particularly where they are adopted well in advance of a threatened proxy fight.

The key element in such a bylaw would be that the Board would serve as the ultimate interpreter of the provisions.  For example, a qualification provision could require directors to have 20 years of experience at a comparable company in the same line of business.  The Board, then, would determine whether that requirement has been met, and only after the proxy contest has actually happened.  Under the holding in Bebchuk v. CA, a shareholder challenge to such a facially neutral bylaw would likely not even be justiciable until a shareholder nominee actually won the contest.  And yet, the prospect that the Board will invalidate the director may discourage nominees in the first instance.

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