Director Centered? Not Really

Advocates of a director-centered understanding of corporate law are going to make -- or are already making -- a huge to-do about a decision of the Delaware Supreme Court Thursday.

You might as well hear about it here first, from an equity-centered fellow like me.

The case is AFSCME v. CA, and it arose (unusually) not from in-state litigation but because the Securities and Exchange Commission referred the key questions between the union pension fund and the issuing corporation to that court, as the highest authority on Delaware law.

AFSCME has sought to wage a proxy context with CA, which used to be known as Computer Associates but which has adopted the initials as the name, a common habit these days (and one I find annoying, but never mind) sought to engage in a meta-proxy-fight, pressing a shareholder's resolution that would have obliged the board of directors to reimburse stockholders for the reasonable expenses of a short-slate proxy solicitation.

In the case of a successful full-slate proxy solicitation, the issue doesn't really arise. By definition, success means the dissidents have taken over the board. But a short-slate solicitation means that dissidents are asking shareholders to put some new blood on the board, short of a majority. If they do so, then should the majority be able to deprive them of compensation for the reasonable expenses of that campaign? That was the issue.

The Delaware court said "yes, they can."

A memo issued by the law firm Wachtell Lipton on the very day of the decision heralded this as an "unequivocal and welcome holding [that] should discourage further efforts by stockholder activists to erode the fundamental prerogatives of the board of directors."

Whoa cowboys. Not so fast. The entrenched incumbent boards of the world have won a victory here but it is a less sweeping and unequivocal one than such language suggests.

I'll say some more about the other side of this coin tomorrow.