Richards Layton & Finger
 

CA, Inc. v. AFSCME Employees Pension Plan

July 17, 2008

In CA, Inc. v. AFSCME Employees Pension Plan, C.A. No. 329, 2008 (Del. July 17, 2008) the Supreme Court of the State of Delaware (the "Supreme Court") answered two questions that had been certified to it by the United States Securities and Exchange Commission (the "SEC"). This was the first time that the SEC certified a question of law to the Supreme Court since Delaware's constitution was amended to allow for this procedure in 2007.

The two questions arose from a proposal that AFSCME Employees Pension Plan ("AFSCME") submitted on March 13, 2008 for inclusion in the 2008 proxy materials of CA, Inc. ("CA"), a Delaware corporation, for its annual meeting of stockholders (the "Proxy"). CA's annual meeting is scheduled to be held on September 9, 2008. The proposal sought stockholder approval of an amendment to CA's bylaws. The proposed bylaw would require the CA board of directors to reimburse the reasonable expenses (not to exceed the amount expended by CA in connection with such election) incurred by a stockholder or group of stockholders running a short slate of director nominees for election if at least one nominee on the short slate is elected to the board of directors (the "Proposal").

On April 18, 2008 CA requested a no-action letter from the Division of Corporation Finance of the SEC confirming that the Division would not recommend enforcement action if the Company omitted the Proposal from the Proxy. Among other grounds for this request, CA submitted an opinion of this firm that the Proposal, if adopted, would cause CA to violate Delaware law. AFSCME opposed the request, and sent its own letter to the SEC on May 21, 2008, taking the opposite legal position.

Faced with two conflicting opinions on Delaware law from Delaware law firms, the SEC certified two questions of law to the Supreme Court: (i) whether the Proposal is a proper subject for action by stockholders as a matter of Delaware law and (ii) whether the Proposal, if adopted, would cause CA to violate any Delaware law to which it is subject.

The Supreme Court answered the first question—whether the Proposal was a proper subject for action by stockholders—in the affirmative. The General Corporation Law of the State of Delaware (the "DGCL") empowers both directors (so long as the Certificate of Incorporation so provides, as CA's does) and stockholders of a Delaware corporation with the ability to adopt, amend or repeal the corporation's bylaws. Because the DGCL also vests the board of directors with the authority to manage the business and affairs of the corporation, however, a conflict can arise. As the Supreme Court held, "the shareholders' statutory power to adopt, amend or repeal bylaws is not coextensive with the board's concurrent power." While it refused to "articulate with doctrinal exactitude a bright line" that would divide those bylaws that stockholders may permissibly adopt from those that would go too far in infringing upon the directors' right to manage the corporation, the Supreme Court held that the Proposal concerned the process for electing directors—"a subject in which shareholders of Delaware corporations have a legitimate and protected interest." Accordingly, the Supreme Court held that the Proposal was a proper subject for stockholder action.

The Supreme Court, however, went on to answer the second question—whether the Proposal, if adopted, would cause CA to violate any Delaware law—in the affirmative. The Court found that the Proposal could require the board to reimburse dissident stockholders in circumstances where a proper application of fiduciary principles would preclude them from doing so (such as when a proxy contest was undertaken for "personal or petty concerns, or to promote interests that do not further, or are adverse to, those of the corporation"). Accordingly, the Supreme Court held that the proposed bylaw, as written, would violate Delaware law if enacted by stockholders.