Court Rules Against AFSCME

The Delaware Supreme Court found that a bylaw proposed for inclusion in the proxy statement of CA, Inc. (CA) by activist shareholder, AFSCME, was a proper subject for action by shareholders.

However, justices ruled the proposed bylaw, if adopted as drafted, would violate Delaware law. The bylaw proposed by AFSCME would have required the board of CA to reimburse "reasonable expenses" if a stockholder was successful in electing at least one independent candidate to a board seat.

The court found that the bylaw, as written, went too far because it didn't allow CA's directors to exercise their judgment "to decide whether or not it would be appropriate, in a specific case, to award reimbursement at all."

In cases where dissidents run proxy contests motivated by personal or petty concerns, or to promote interests that would be harmful to the company, the board's hands would be tied, the court said. The ruling is a blow to some activists, who have argued that their ability to nominate independent directors is circumscribed by the high expense. But it could give holders a road map in seeking other changes to the director-election process consistent with the court's decision.

"We're pleased with the...decision," said a spokeswoman for CA, a Long Island, N.Y., software company.

Richard Ferlauto, director of pension investment policy for AFSCME, told The Wall Street Journal, "We're happy to see Delaware law clarified, but the decision makes Delaware less relevant to the discussions about shareholder election rights." He said "the focus for shareholders has to be on the Securities and Exchange Commission and the creation of an appropriate right of shareholder access at the federal level." The decision comes amid a larger debate on expanding shareholders' say in nominating corporate directors.