Clearie Gottlieb memo
July, 2006

In its June 22 decision in Bebchuk v. CA, Inc., the Delaware Court of Chancery also addressed in dicta the ability of a board to amend stockholder-adopted by-laws. The question arose in the context of a challenge to a stockholder-proposed by-law that would restrict the CA board's ability to adopt and maintain a stockholder rights plan. While the court concluded that the issue was not ripe for disposition, it noted that the board's ability to repeal a by-law adopted by stockholders remains an open question when the subject matter of the by-law is a restriction on the board.

The fundamental question is the relative priority of two provisions of the DGCL: Section 109, which grants stockholders the right to amend the by-laws and Section 141(a), which authorizes the board to manage or supervise the management of the corporation's business affairs. In the case of poison pills, the issue is complicated by the specific statutory authorization in DGCL Section 157 for boards to issue rights, which has been found by the Delaware Supreme Court to permit rights plans. Although the authorities cited by the Bebchuk court support the proposition that the board may repeal stockholder-adopted by-laws, the court did not decide the question. In any event, the recent amendments to the DGCL clarify that at least majority-vote by-laws adopted by stockholders are not mutable by the board.

In view of these new amendments and the SEC staff position that no-action relief is not forthcoming in the case of stockholder proposals to amend by-laws, notwithstanding board implementation of a substantially similar policy guideline, we expect activist efforts to amend by-laws to provide for majority-vote standards will continue to escalate. In addition, so long as the legality of by-law restrictions on the board's power to adopt and maintain poison pills remains unresolved, we also expect to see a continuing stream of stockholder proposals to restrict this power by amending the by-laws. Corporations should be circumspect in deciding how to allocate their resources in anticipated challenges by activists and consider the actions they may take to preempt and best prepare for those battles.