Monday, July 21, 2008

Director Centered? Not Really, Part 2

There's another side to the AFSCME case.

Although the incumbent directors won that particular lawsuit and avoiding the meta-proxy contest that offended their sensibilities, they also inspired the Delaware Supreme Court to provide a road map for shareholder proponents in the future.

The court's opinion makes clear what is required for such resolutions to pass muster and get into the proxy materials. They must demand the reimbursement only of "reasonable" expenses -- which the AFSCME resolution did; and they must leave discretion in the board to withhold even reasonable reimbursement on "fiduciary" grounds.

One might initially react that any resolution that meets the second of those tests will be toothless. But that is, I think, to misunderstand the significance of the word "fiduciary." A fiduciary isn't "someone who has discretion to run the business as he damn well pleases." A fiduciary is somewho under enforceable obligations.

The courts suggestion, then, is that if AFSCME re-words its resolution to allow for fiduciary denials, resubmits it, and wins on that basis, and if after some future proxy contest a board of CA refuses to pay reasonable expenses despite the passage of this resolution, THAT decision will be subject to judicial review.

The decision is available here.

On page 23 there, in footnote 35, you'll find a plain statement of fact: "A decision by directors to deny reimbursement on fiduciary grounds would be judicially reviewable."

And don't say it's "only a footnote." The famous language of the Carolene Products case, about "discrete and insular minorities," is only a footnote too. It has had weighty consequences.

The Anglo-Saxon common law principles of contract and property, as they've developed in the corporate law of pertinent jurisdictions, aren't especially director centered. Directors, like other fiduciaries, are to be kept watch over. They are the employees of the real owners of a company, the equity investors.

That's a simple truth, but appears to need regular re-affirmation.

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