Compliance and Governance Blog

As this year’s proxy season approaches, recent changes to the Delaware General Corporation Law (DGCL) have caused Boards of Directors to consider preemptively amending their company’s bylaws to permit stockholder proxy access for the purpose of nominating Directors.
This consideration comes as Directors contemplate whether waiting for activist stockholders to propose their own amendment would be worse than proposing an amendment itself and in doing so, preemptively setting the rules of the game.
The new DGCL Section 112 permits amendments that impose conditions and limitations on stockholders who demand access to their entity’s proxy statements to present their own nominees. Section 112 describes several permissible conditions such as minimum stock ownership, submission of stockholder and nominee information, and limits on the number of stockholder nominees. Yet, it is by no means conclusive, and in the spirit of Delaware law, specifically allows for “any other lawful condition.”
Proactive boards have the advantage of shaping these conditions and limitations in their favor if they choose to amend, allowing the creative minds of corporate bylaw drafters to offer provisions that will provide Boards with a mechanism to preclude changes in control, yet appear stockholder friendly.
Drafters may consider conditions that limit stockholder nominees to short-slate elections or those elections where less than a majority of Directors are proposed. However, failure to act by boards may result in a stockholder proposed amendment that would be much less favorable to the Board.
Accompanying Section 112 is the new DGCL Section 113 which allows similar conditions and limitations for stockholder proxy expense reimbursement. The same arguments prevail in board consideration of expeditious bylaw amendments allowing for stockholder expense reimbursement.
All of this means that it’s necessary for Boards to understand their stockholder constituents in determining whether to amend or not to amend. Those boards that have a more vocal and active stockholder constituency may consider moving proactively to amend in lieu of waiting for their stockholders to push more lax requirements for stockholder proxy access and expense reimbursement.
Some Boards have already begun to act. HealthSouth Corporation became one of the first large U.S. public companies to adopt amendments implementing Sections 112 and 113 of the DGCL. Others are left to ask the question, “Amend or not amend?”
Reyner Meikle
Associate General Counsel
Corporation Service Company