Post Date: July 5, 2006
The Delaware Chancery Court issued a decision in the litigation initiated by Professor Lucian Bebchuk against CA Inc. The decision forced CA to withdraw its plan to exclude Bebchuk's poison pill proposal from the corporate ballot and opens the door to shareholder voting on such proposals in other companies.
In the past, Delaware law firms have routinely issued opinions stating that bylaws limiting poison pill use are invalid under Delaware law (which governs most public companies including CA). Relying on such opinions, the SEC has allowed companies to exclude such proposals from the ballot. Bebchuk's test case will bring such exclusion to an end.
As part of his bylaw initiative, Bebchuk submitted a stockholder proposal to CA for adopting a bylaw provision that would prevent boards from indefinitely maintaining a pill not approved by shareholders without periodic determination that doing so would be desirable. When CA announced its intention to exclude Bebchuk's proposal as invalid under Delaware law, Bebchuk asked the Delaware Chancery court for a declaratory judgment that the proposed bylaw is valid.
Although the court concluded that the case it not yet "ripe" enough for a declaratory judgment, its discussion of the validity issue rejects the arguments made by CA, and in the letter opinion of its Delaware law firm, that the proposed bylaw is clearly invalid. Reviewing these arguments the court concluded that "[a]t a minimum, the issue of the legality of the proposed bylaw is an important, undecided one."
The decision made it impossible for CA to continue maintaining that the proposal is invalid and to obtain an SEC no-action letter approving its exclusion, and CA announced that it will place Bebchuk's proposal on the ballot. Beyond CA, companies will no longer be able to obtain no-action SEC letters approving the exclusion of pill bylaw proposals, and will have to place such proposals on the ballot.
"I am pleased that the Chancery Court's decision in my case compelled CA to place my proposed bylaw on the corporate ballot," Bebchuk said. "I am glad that CA's shareholders will get the opportunity to vote on the proposal and that shareholders in other companies will be able to place such proposals on the ballot."
Additional info about the case and its consequences can be found on Bebchuk's policy webpage.