Monday, April 20, 2009

Dog Bites Man in Delaware Corporate Law Update

Governor Markell of Delaware signed House Bill 19 into law last week, updating a number of provisions of the Delaware General Corporate Law (DGCL), which determines the corporate governance for the majority of U.S. corporations. The long-awaited revisions appear to make some far-ranging changes in the law governing proxy contests, with provisions that both management and investors should like. However, a close read shows that the new law does not change as much as one might think.

The bill allows corporate bylaws to provide for the company to include board nominees of dissident shareholders on the corporation's proxy materials. It also allows the bylaws to provide for the corporation to reimburse dissidents for their proxy contest costs. Seems like this update would please activist investors, who would save considerable time and money on proxy contests, and receive the same financial support that incumbent directors receive in their board campaigns. At the same time the law allows corporations to impose various conditions on proxy access, such as minimum size and term of share ownership, disclosures about the shareholder, and limits on the percentage of shares the dissident can own.

Still, the amendments don't change all that much, at least relative to current Delaware law. First, the amendment contains mostly "may" and "can" verbs, rather than "shall" and "must" - in other words, proxy access remains completely optional. The current DGCL is silent on proxy access, so the new provisions do clear up any doubt that may have existed around whether a corporation can do this, though. On the other hand, nothing in the current DGCL precludes a corporation from doing this, either. So, any corporation that wanted to provide proxy access, either in their bylaws or otherwise, could have done it all along, without the help of House Bill 19. As a trend the changes are positive for activist investors, as it signals the overall will of the Delaware legislature to support proxy access. It also eliminates the possibility of a corporation litigating a bylaw amendment that provides for proxy access. Activist investors will likely be a little disappointed, and corporations relieved, that lawmakers did not see fit to make any of the law mandatory.

Posted by Michael Levin. Michael is with Hedge Fund Solutions and is a regular contributor to this blog. Contact Michael at