Delaware Chancery Court
G&E represented a renowned corporate governance expert in this action seeking to establish that shareholder-adopted bylaws that limit a board’s ability to adopt or implement a “poison pill” rights plan are legal under Delaware law.
The shareholders’ right to adopt and amend corporate bylaws is enshrined in Delaware law. Yet for many years, corporate boards have sought to limit this right by arguing that the directors’ statutory obligation to manage the day-to-day affairs of a corporation somehow restricts the shareholders’ rights to amend bylaws in areas that directors considered to be within their business judgment. A board’s ability to adopt a “poison pill” rights plan is one such area. In early 2006, G&E’s client introduced a shareholder proposal to be considered by the shareholders of CA, Inc. that would have placed restrictions on the CA Board of Directors’ ability to adopt and implement a shareholders’ rights plan. CA, in turn, stated that it intended to exclude the proposal from the company’s proxy materials on the grounds that the bylaw was illegal under Delaware law.
In this litigation, before the Delaware Chancery Court, the plaintiff sought a declaratory judgment that his proposed bylaw was legal under Delaware law. Although the Court held that the plaintiff’s specific request for a declaratory judgment was not ripe, its decision made clear that bylaws enacted by shareholders that may restrict a board’s ability to adopt and implement a “poison pill” plan are not necessarily illegal under Delaware law.
The Court’s decision in this case is noteworthy because it specifically rejected the company’s argument that the bylaw was plainly illegal, and thus rejected the very argument upon which corporate boards have relied for years to exclude important shareholder proposals from corporate proxy statements.