Court to Hear Arguments on Who Pays

The Delaware Supreme Court was asked by the Securities and Exchange Commission to weigh in on who -- companies or shareholders -- should bear the costs of a campaign to seat a minority slate of directors.

Delaware recently modified its constitution to allow its highest court to opine on state law questions for the SEC, but the federal agency hasn't taken advantage of the offer until now.

The precedent is important since about half of all U.S. public companies are incorporated in Delaware.

"This is a potential game changer" in how the SEC deals with certain types of shareholder proposals, attorney John Olson, a partner at Gibson, Dunn & Crutcher in Washington told Delawareonline yesterdfay. "The fact that the court took this on and was willing to decide it quickly indicates we could see this happen again."

At issue is a case that pits CA Inc., a Long Island computer software company, against the American Federation of State, County and Municipal Employees (AFSCME).

CA, formerly known as Computer Associates, is seeking to block a binding shareholder resolution that would require the company to pay the expenses of a successful election of a short slate of directors.

In advance of oral arguments, the Harvard Law School Corporate Governance blog has posted briefs from both sides of the argument 

CA asked the SEC staff for assurances that it could block a shareholder vote on the matter, asserting that the proposal violates Delaware law, which leaves decisions on spending to the company and its directors, not shareholders.

AFSCME said that the resolution doesn't violate state law and should be put to a vote at this year's annual meeting of CA shareholders.

Chief Justice Myron Steele issued an order instructing CA and the Washington-based AFSCME to submit briefs on the legal issues by today and present oral arguments later this week. CA plans to mail proxy statements this month for its annual meeting, scheduled for Sept. 9.

"We are unable to concur in your view that CA may exclude the proposal," SEC corporation finance division chief counsel Thomas Kim wrote in a letter Friday to CA, posted on the SEC's website.

Kim told Dow Jones that the Delaware court will consider whether the proposal is one that can be put before shareholders, and in that event, if adoption of it would violate Delaware law.

Delaware's Supreme Court doesn't have to accept the SEC's request, but given the importance of the matter, it is likely to do so, said Richard Ferlauto, AFSCME's director of pension investment policy, last week.

"One of the barriers to access to the proxy is who's going to pay for solicitation," Ferlauto was quoted as saying. When a short slate of dissident candidates is elected, it is AFSCME's view, he said, that costs should be reimbursed since "we believe it's our money" being spent.