Delaware to Decide Who Pays

Delaware Supreme Court Justice Myron Steele yesterday heard oral arguments on who--shareholders or companies--should bear the costs of a campaign to seat new directors. The judge is expected to allow additional comments and issue a ruling in the next couple of weeks, the AP reported.

Delaware recently modified its constitution to allow its highest court to opine on state-law questions before 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.

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). Giuffra, an attorney representing CA, argued that a bylaw proposed by AFSCME is invalid under Delaware law.

The proposed bylaw would require CA under certain circumstances to reimburse reasonable expenses incurred by dissident nominees in a short-slate proxy contest, as long as at least one of the directors is elected.

Giuffra argued that under Delaware law the proposed bylaw infringes on the responsibility of directors to make management decisions and uphold their fiduciary duties to shareholders.

Barry, on the other hand, argued that the proposed bylaw is valid because Delaware courts have recognized the rights of shareholders in electing directors and should be taken into consideration at CA's annual meeting in September.

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