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— Safe Harbor —
This year, however, the committee, which is formally known as the Council of the Corporation Law Section of the Delaware State Bar Association, offered up its most aggressive set of amendments in years. Most importantly, the committee tried to address the problem of empty voting, a phenomenon that's generated significant attention in recent years.
The term refers to shareholders casting votes for shares they no longer
own or do not constitute their only economic interest in a company. The
former problem arises when a shareholder sells his stock after the
record date for a vote but before the vote itself; the latter when a
shareholder alters his economic stake by using derivatives or shorting
part of his shareholding. It's a prominent example of the ways in which
shareholders may use derivatives to twist the machinery of corporate
voting to their own advantage.
The Delaware amendments try to minimize the impact of empty voting by allowing companies to set different record dates for notifying shareholders of a meeting and for voting. Thus a company could tell its shareholders on March 1 that it will hold a shareholder vote on, say, a merger on May 1 but could allow shareholders as of, say, April 15, or even April 29, to vote. Reducing the time between the record date for voting purposes and the vote itself would also reduce the number of votes held by parties that have sold their stock and thus have no incentive to vote. As Wilmington law firm Potter Anderson & Corroon LLP notes in a memo to clients, the revised section would leave certain issues unresolved. It doesn't specify how close the voting record date may be to the meeting date, an issue that involves the byzantine relationships among transfer agents, stock exchanges and proxy-voting services. Delaware's action may push at least some of those entities to address the ways in which they contribute to the problem. The proposed amendments to the statute would also expressly allow companies to give shareholders the right to nominate directors on the company's proxy and to provide for reimbursement of the expenses of shareholders who run a short slate of directors. The amendments would "make express what we always thought people could do," says J. Travis Laster, a partner at Abrams & Laster LLP in Wilmington. Their real purpose, he and others say, is to suggest to institutional investors that Delaware accepts that shareholders should have relatively easy access to a company's proxy. Though the Delaware courts seemed to respond to pressure from institutional investors to take a more searching look at the behavior of boards and directors after Congress passed the Sarbanes-Oxley Act in 2002, the state's bar made only modest changes to its corporate statute. The same desire to appear responsive to shareholders may also have animated a change that would allow the Court of Chancery to remove a director "who has been convicted of a felony or found by a court to have committed a breach of the duty of loyalty if the Court of Chancery determines that the director did not act in good faith in performing the acts underlying the conviction or judgment and that the removal of the director is necessary to avoid irreparable harm to the corporation," according to the Potter memo. Finally, the committee offers an amendment that would overrule Vice Chancellor Stephen Lamb's 2008 ruling in Schoon v. Troy Corp. There, the judge held that a board may amend its bylaws to eliminate director indemnification and advancement of litigation expenses to a director for claims arising from actions taken before the amendment as long as the suit is brought after the board amends its bylaws. Delaware lawyers disliked the ruling, and many companies responded to the decision by changing their bylaws to negate it. The committee followed suit with its own proposed amendment to the statute. David Marcus is senior writer at Corporate Control Alert. |
Delaware's corporate law statute may be the most carefully maintained statute in the country. A committee of about 20 lawyers weighs changes for months before actually proposing any. Then, in May or June, the state's Legislature generally passes any proposed changes with little debate. 
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