Court to Weigh Who Pays for Proxy Fights

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, according to a Dow Jones news report.

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).

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.

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.

"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. "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.