CA, Inc. v. AFSCME Employees Pension Plan

My firm has recently issued a memorandum on the Delaware Supreme Court’s decision in CA, Inc. v. AFSCME Employees Pension Plan. The Supreme Court’s decision addressed a proposed stockholder bylaw that would have required the Board of Directors of CA, Inc. to reimburse the reasonable expenses incurred by stockholders in conducting successful “short-slate” proxy contests. The Court held that, while the proposed bylaw related to director elections and, thus, was a proper subject for stockholder action under Delaware law, the proposed bylaw “mandates reimbursement of election expenses in circumstances that a proper application of fiduciary principles could preclude” and, thus, if adopted, could cause CA to violate Delaware law.

The Delaware Supreme Court’s decision has numerous implications. It reaffirms the bedrock principle of Delaware corporate law that the directors of a corporation, not the shareholders, manage the business and affairs of the corporation. The decision confirms that shareholder bylaws may not prevent the directors from fulfilling their fiduciary duties. To attempt to address the concerns articulated by the Court with the proposed bylaw, stockholders may attempt to modify their proposed bylaws in ways that leave boards with discretion to discharge their fiduciary duties. In addition, the decision makes clear that bylaws may not “mandate how the board should decide specific substantive business decisions,” but may “define the process and procedures by which those decisions are made.” Where the line will be drawn between those bylaws that mandate substantive decisions and bylaws that are procedural likely will be decided by the Delaware courts on a case-by-case basis in the future. Finally, under the Court’s reasoning, a binding shareholder bylaw proposal to prohibit a board of directors from adopting or implementing a “poison pill” likely would be deemed improper under Delaware law.

Our memorandum is available here.