Originally uploaded to SSRN.

Abstract

Much like hostile tender offers in the 1980s and 1990s, shareholder bylaws purporting to limit board authority in key areas of corporate governance are, once again, forcing Delaware's courts to grapple with the fundamental nature of the corporate form.

In this (short) essay written for a roundtable discussion at the 2009 Annual Meeting of the Southeastern Association of Law Schools, I discuss CA, Inc. v. AFSCME Employees Pension Plan - the 2008 opinion in which the Delaware Supreme Court began to define the nature and scope of the shareholders' bylaw authority. In CA, Inc. the court held that a proposed bylaw requiring reimbursement of shareholders' proxy expenses under specified circumstances was a proper subject for shareholder action under the Delaware General Corporation Law, but that such a mandatory bylaw would nevertheless violate Delaware common law by forcing the board to breach its fiduciary duties if the board concluded that reimbursement would not promote the company's interests.

Commentators have criticized the court's fiduciary duty-based analysis as excessively vague and indeterminate. I argue here that the court's reliance on fiduciary duties in this context reflects not a failed attempt at clarity so much as a decided effort to maintain ambiguity. Just like in hostile takeover cases, which forced the court to address the scope of the shareholders' unilateral power to sell the company, one cannot meaningfully analyze the scope of the shareholders' unilateral power to write the rules of corporate governance without defining the nature and purpose of the corporation itself. However, given the lack of statutory guidance on the core questions of corporate power and purpose, Delaware judges have consistently - and understandably - remained reluctant to grapple with these issues in a clear and decisive way. Absent legislative intervention, we can expect a bylaw jurisprudence exhibiting a theoretical obscurity and hands-off posture reminiscent of Delaware's takeover jurisprudence - a trend already evidenced by the holding in CA, Inc.