July 18, 2008
CA, Inc. v. AFSCME Employees Pension Plan
On July 17, 2008, the Supreme Court of the State of Delaware (the “Court”) issued its opinion in CA, Inc. v. AFSCME
Employees Pension Plan.
In May 2007, the State of Delaware amended its Constitution to allow the Court to hear and determine questions of law
certified to it by the United States Securities and Exchange Commission (the “SEC”) in the same manner the Court
already hears and determines questions from United States federal courts and the highest appellate courts of other states.
The Court may hear and determine questions “where it appears to [it] that there are important and urgent reasons for an
immediate determination of such questions by it.” This is the first advisory opinion of the Court sought by the SEC.
In its decision, the Court considered two questions certified to it by the SEC, namely whether a proposed bylaw submitted
to CA, Inc. (“CA”) by AFSCME Employees Pension Plan (“AFSCME”) for inclusion in CA’s proxy statement for its 2008
annual meeting (i) is a proper subject for action by stockholders as a matter of Delaware law; and (ii) if adopted, would
cause CA to violate Delaware law. The proposed bylaw would require the CA board to reimburse the reasonable proxy
expenses of any stockholder that sought to elect a short slate (i.e. less than a majority) of directors if stockholders elected
at least one nominee from the short slate. With regard to the first question, the Court found that the proposed bylaw was
one that regulated the process of decision making rather than mandating the decision, and thus a proper subject for
stockholder action. However, with regard to the second question, the Court ruled that, if adopted, the proposed bylaw
would cause CA to violate Delaware law, as the mandatory nature of the bylaw left no room for the directors to exercise
their fiduciary duties to decide whether or not it would be appropriate to provide reimbursement.
CA’s annual meeting of stockholders is scheduled for September 9, 2008. On March 13, 2008, AFSCME submitted the
proposed bylaw for inclusion in CA’s proxy materials. On April 18, 2008, CA notified the SEC of its intention to exclude
the proposed bylaw from its proxy materials pursuant to Rule 14a-8 under the Exchange Act of 1934. CA also requested a
no-action letter stating that the SEC would not recommend enforcement action if CA excluded the proposal, as permitted
pursuant to Rule 14a-8, on the grounds that the proposed bylaw is not a proper subject for stockholder action or that, if
implemented, the proposed bylaw would violate Delaware law. AFSCME opposed CA’s request. Because each side
offered a legal opinion supporting its view of Delaware law, the SEC certified the two questions of state law to the Court.
In its analysis, the Court began by noting that Section 109(a) of the DGCL provides that the stockholders of a Delaware
corporation shall have the power to adopt, repeal or amend the corporation’s bylaws, provided that the corporation’s
certificate of incorporation may confer this power on the directors as well. Section 109(a) further provides that if such
power is so conferred on the directors, the power of the stockholders will not be limited. As CA’s certificate of
incorporation confers the power to adopt, repeal or amend its bylaws on the directors, the Court stated that this power
must be allocated between these two decision making bodies. The Court analyzed Section 109(a) along with Section
141(a) of the DGCL, which provides that the business and affairs of the corporation shall be managed under the direction
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of a board of directors except as may be otherwise provided in the DGCL or in the certificate of incorporation, and stated
that “the shareholders’ statutory power to adopt, repeal or amend bylaws is not coextensive with the board’s concurrent
power and is limited by the board’s management prerogatives under Section 141(a)”. In deciding the question of the
scope of the power of the stockholders to adopt bylaws, the Court noted that the “proper function of bylaws is not to
mandate how the board should decide specific substantive business decisions, but rather to define the process and
procedures by which those decisions are made”. The Court held that the proposed bylaw had the intent and effect of
regulating the process for electing the directors of CA, and therefore was a proper subject of shareholder action.
In determining the second question, the Court noted that it was required to analyze the validity of the proposed bylaw in
the abstract (i.e., it “must necessarily consider any possible circumstance under which a board of directors might be
required to act”). In finding that the proposed bylaw would violate Delaware law, the Court relied upon two prominent
corporate takeover cases, Paramount Communications, Inc. v. QVC Network, Inc. and Quickturn Design Sys., Inc. v.
Shapiro, which establish a prohibition against contractual arrangements that commit a board of directors to a course of
action that would preclude the directors from fully discharging their fiduciary duties. The Court held that, as the
proposed bylaw would mandate reimbursement of election expenses that a board of directors properly carrying out its
fiduciary duties could otherwise decide not to reimburse (for example in the case where a proxy contest was motivated by
personal or petty concerns), the proposed bylaw, as written, could cause CA to violate Delaware law and is thus invalid.
This memorandum is intended only as a general discussion of these issues. It should not be regarded as legal advice. We would be pleased to
provide additional details or advice about specific situations if desired.
599 LEXINGTON AVENUE | NEW YORK | NY | 10022-6069 | WWW.SHEARMAN.COM
©2009 Shearman & Sterling LLP. As used herein, “Shearman & Sterling” refers to Shearman & Sterling LLP, a limited liability partnership organized under the laws of the State of Delaware.