Stockholder Sues CA for Blocking His Proposal on Poison Pill Provisions

New York Law Journal
Cheryl Meyer
May 23, 2006

A prominent corporate governance expert has brought a lawsuit against Islandia-based CA, Inc., the struggling enterprise software company that has been trying to put years of corporate governance and financial mismanagement issues behind it.

Harvard law professor Lucian Bebchuk is challenging CA in the Delaware Court of Chancery after the company attempted to dismiss a bylaw amendment he proposed to amend its anti-takeover provisions. Mr. Bebchuk, who owns 140 shares of CA stock, wants this proposal to come up for a shareholder vote at the company's annual meeting in August. But CA went to the Securities and Exchange Commission to block the proposal, claiming it was illegal.

"We have only recently received Mr. Bebchuk's lawsuit and have no comment on it," CA said in a statement after the May 11 filing of the suit. "As stated in our letter to the SEC dated April 21, 2006, we believe that the proposed by-law amendment would violate Delaware law."

As of late last week, the company, which was established in 1976, had not responded to the May 11 suit.

Mr. Bebchuk's proposal would require a unanimous vote of the company's board of directors to adopt or extend any poison pill. Currently, CA needs only a majority of its 12-member board to pass a shareholder rights plan. Mr. Bebchuk also proposed to change the company bylaws to state that a poison pill should be reviewed every year. It also would require any extensions of more than one year to garner shareholder approval.

"I believe that poison pills adopted by the board of directors without ratification by stockholders can deny stockholders the ability to make their own decisions whether or not to accept a premium acquisition offer for their stock," Mr. Bebchuk said in his complaint.

Michael J. Barry, a partner at Grant & Eisenhofer in Wilmington, Del., who is representing Mr. Bebchuk, said the professor's proposal is an appropriate way to put some power back in the hands of shareholders.

"For years, corporate lawyers who dominate the corporate board have expressed what we considered false consensus that directors somehow have the unfettered right to manage the affairs of the corporation as they see fit," he said. "When in truth, the directors' managerial discretion can be restricted by the company's bylaws."

Gary Lutin, an investment banker at Lutin & Co. and manager of an investor-sponsored, online public stockholder forum, said shareholders have the right to amend the bylaws.

"The thing that I think needs to be emphasized is it's the shareholders' rights to make this decision and management has no business trying to prevent them from exercising that right," he said.

According Dow Jones Newswire, Mr. Bebchuk has submitted has submitted proposals for binding bylaw changes to the boards of several corporations.

Martin Lipton, a partner at Wachtell, Lipton, Rosen & Katz in Manhattan, has criticized the professor for "turning very real companies . . . into his private 'case studies.'"

Mr. Lipton wrote in a memorandum called "Deconstructing Corporate America" that Mr. Bebchuk's poison pill proposals would "effectively substitute the judgment of a single director for the judgment of the full board and potentially render the directors unable to fulfill their fiduciary studies."

Meanwhile, CA Inc. said on May 15 that Chief Financial Officer Robert Davis will leave the company, making him the third senior executive in less than a month to leave.

Mr. Davis, a key member of the company's mergers-and-acquisitions team, will exit CA by "mutual agreement," the company said. Replacing him as CFO is Robert Cirabisi, senior vice president and corporate controller.

The announcement follows word that Chief Technology Officer Mark Barrenechea would leave to join private equity firm Garnett & Helfrich Capital. In April, CA said former chief operations officer Jeff Clarke would depart to become president and CEO of the Travel Distribution Services division of Cendant Corp.

CA brought Messrs. Davis, Barrenechea and Clarke in over the past two years, along with CEO and President John Swainson, to revive the company after several years of accounting scandals and management turmoil.

Recently the Amalgamated Bank's LongView Collective Investment Fund filed a resolution against CA, seeking to oust two directors, former Senator Alfonse D'Amato and Hyperion Partners founder Lewis Ranieri, who were on the company's board when federal regulators started probing the company's accounting practices several years ago. CA has asked the Securities and Exchange Commission for permission to block the directors' removal.

In late April, former company CEO Sanjay Kumar and Stephen Richards, CA's top salesman, pleaded guilty to eight counts of securities fraud and obstruction of justice in Federal District Court in Brooklyn.

­ Cheryl Meyer is a reporter at The Deal, an ALM affiliate of the Law Journal.