Stockholders of a corporation subject to the Delaware General Corporation Law (DGCL) may not directly manage the business and affairs of the corporation, at least without specific authorization in either the statute or the certificate of incorporation. Therefore, the shareholders' statutory power to adopt, amend or repeal bylaws is not coextensive with the board's concurrent power and is limited by the board's management prerogatives under Del. Code Ann. tit. 8, § 141(a). To decide whether a bylaw proposed by a shareholder is a proper subject for shareholder action under Delaware law, courts must first determine: (1) the scope or reach of the shareholders' power to adopt, alter or repeal the bylaws of a Delaware corporation, and then (2) whether the bylaw falls within that permissible scope.
Appellant-petitioner CA, Inc. (“CA”) was a Delaware corporation whose board of directors consisted of 12 persons, all of who sat for reelection each year. On September 9, 2008, CA’s annual meeting of stockholders was held. In connection with the meeting, CA intended to file its definitive proxy materials. Appellee-respondent AFSCME Employees Pension Plan ("AFSCME"), a CA stockholder, submitted a proposed stockholder bylaw for inclusion in CA’s proxy materials for its 2008 annual meeting of stockholders. The Bylaw, if adopted, would amend CA’s current bylaws and directed the board of directors to reimbursement proxy expenses. CA's current bylaws and Certificate of Incorporation had no provision that specifically addressed the reimbursement of proxy expenses. On April 18, 2008, CA notified the SEC's Division of Corporation Finance ("Division") of its intention to exclude the proposed Bylaw from its 2008 proxy materials. CA requested from the Division a "no-action letter" stating that the Division would not recommend any enforcement action to the SEC if CA excluded the AFSCME proposal. CA's request for a no-action letter was accompanied by an opinion from its Delaware counsel, Richards Layton & Finger, P.A. ("RL&F"). The RL&F opinion concluded that the proposed Bylaw was not a proper subject for stockholder action, and that if implemented, the Bylaw would violate the Delaware General Corporation Law. On May 21, 2008, AFSCME responded to CA's no-action request with a letter taking the opposite legal position. The AFSCME letter was accompanied by an opinion from AFSCME's Delaware counsel, Grant & Eisenhofer, P.A. ("G&E"). The G&E opinion concluded that the proposed Bylaw was a proper subject for shareholder action and that if adopted, would be permitted under Delaware law. The Division was thus confronted with two conflicting legal opinions on Delaware law. To obtain guidance, the United States Securities and Exchange Commission ("SEC") sought the certification of two questions of Delaware law to the Supreme Court of Delaware.
Did the certified question seek a determination of whether the bylaw was a proper subject for stockholder action? If it did, would it violate any law if adopted?
The Supreme Court of Delaware answered the certified questions in the affirmative. The Court concluded that the bylaw fell within the scope of Del. Code Ann. tit. 8, § 109 and was a proper matter for stockholder action, but that the bylaw, as drafted, violated the prohibition derived from § 141(a) against contractual arrangements that committed a board to a course of action that would preclude them from fully discharging their fiduciary duties to the corporation and its shareholders. Both the board and the shareholders, independently and concurrently, had the power to adopt, amend and repeal the bylaws; and that shareholders' statutory power to adopt, amend or repeal bylaws was not coextensive with the board's concurrent power and was limited by the board's management prerogatives under § 141(a)