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Widener Law’s Professor Hamermesh Gives Keynote Address at the 9th Annual Directors’ Institute on Corporate Governance

Widener University School of Law Professor Lawrence A. Hamermesh recently gave the keynote address at the ninth-annual Directors’ Institute on Corporate Governance in New York City. The Sept. 7 event was presented by the Practising Law Institute.

Hamermesh, Widener’s Ruby R. Vale professor of corporate and business law, directs the school’s Institute of Delaware Corporate and Business Law. His remarks focused on reevaluating the utility of having stockholder meetings every year, and whether less-frequent voting might enhance the quality and impact of stockholder input into corporate governance.

Hamermesh’s appearance was part of a daylong seminar where corporate directors, government officials, corporate attorneys and academics shared perspectives on the regulatory environment surrounding directors in corporate America.

The Practising Law Institute offers programs and publications that serve attorneys and legal professionals in a variety of practice areas.

Hamermesh recently returned to Widener’s Delaware campus after an 18-month leave of absence, where he served as senior special counsel with the Office of Chief Counsel of the Division of Corporation Finance at the Securities and Exchange Commission in Washington, D.C.

Professor Lawrence A. Hamermesh

Professor Lawrence A. Hamermesh

Evidence Relating to the Effect of Prescribing Majority Voting in the Election of Directors as the Default Voting Standard

Prof. Lawrence A. Hamermesh
Ruby R. Vale Professor of Corporate and Business Law
Widener University School of Law, Wilmington, Delaware

[Professor Hamermesh is a member of the Delaware State Bar Association’s Council of the Corporation Law Section (the “Delaware Council”). Nevertheless, nothing stated here represents the views of that group.]

On August 11, 2011, the Council of Institutional Investors (“CII”) requested that the Delaware Council promote the revision of the Delaware General Corporation Law (“DGCL”) to alter the default rule governing the required vote in the election of directors. Specifically, CII asks that the default rule – currently that a plurality vote is sufficient to elect directors – be amended to require some form of majority vote, at least in the absence of a contested election. (CII’s letter was published on its web site more or less concurrently with its submission to the Delaware Council, and is available here).

In its letter, CII asserts that “many corporations incorporated in Delaware adopt the plurality voting standard by default.” This is an empirically testable assertion: to “adopt the plurality voting standard by default,” a company’s bylaws would have to be silent on the question of the required vote to elect directors. If the bylaws prescribed a voting standard (either the plurality standard or some form of majority vote standard), the default rule under Section 216 of the DGCL would be displaced and would not control. The bylaws, and not the statutory default provision, would prescribe the voting standard.

It therefore seemed appropriate to evaluate whether and to what extent Delaware public company bylaws actually do or do not prescribe a voting standard for electing directors. Because of CII’s focus on smaller public companies that have not adopted majority voting bylaws, I (with the assistance of George Codding, Widener Law ‘2012) examined a sample of 150 Delaware companies in the Russell 2000 small cap index. 142 of the 150 companies in that sample (95%) have bylaws prescribing a voting standard.

This result comes with one caveat. 21 of the 150 sampled companies (14%) have a bylaw provision to the effect that a majority in interest of the combined voting power of the issued and outstanding shares of stock entitled to vote represented at the meeting shall decide any question or matter brought before such meeting. Because of their typical comprehensiveness (governing votes on “all matters” or “all actions” subject to stockholder vote), I would be inclined to interpret such a provision as defining a general voting standard applicable in all voting situations, including the election of directors, absent some specific provision requiring a different standard for the election of directors. There are arguments to the contrary, however, which, if successful, would leave the statutory default standard to govern director elections, and would result in an amendment to that standard having a somewhat greater formal impact.

On balance, the information generated from our review indicates that, contrary to CII’s assertion, very few Delaware public companies – and certainly not “many” – “adopt the plurality voting standard by default.” Thus, in the large majority of Delaware companies, a change in the default rule governing the required vote to elect directors would have no formal effect at all. Barring a statutory amendment mandating some form of majority vote standard (rather than merely prescribing that standard as a default), any change in the voting standard in most of the sampled companies would have to arise through amendments to the governing bylaw provisions. Such amendments can be accomplished by unilateral stockholder vote under the DGCL, and adoption of a bylaw prescribing a majority vote standard precludes subsequent amendment by the directors (DGCL Section 216).

Professor Conaway on the CML Opinion

From Professor Ann Conaway
Widener University School of Law

In a case of first impression, the Delaware Supreme Court in CML V LLC v. Bax, (Del. Sept. 2, 2011,) has held that creditors do not have derivative standing to bring a fiduciary duty claim against present or former managers of an insolvent Delaware LLC under statutory provisions of the Delaware Limited Liability Company Act (DLLCA). The statutory preclusions on which the Supreme Court relied are found at 6 Del. Code §§ 18-1001-1002. In its opinion, the Delaware Supreme Court set forth the language of § 18-1002, stating that: “the plain language [of the statutory provisions] is unambiguous and limits derivative standing to “member[s] or assignee[s]” and that exclusive limitation is constitutional.” (Emphasis in the original). Indeed, § 18-1002 defines a “Proper plaintiff” as: “ In a derivative action, a plaintiff must be a member or an assignee of a limited liability company interest at the time of bringing the action….” (Emphasis added)
CML had entered a loan transaction with JetDirect at a time when the company’s finances were uncertain and the company’s financial situation somewhat unclear. However, CML was always free to contract for any terms it desired if greater financial security was sought. Shortly after the loan agreement by CML, JetDirect became insolvent and failed to pay CML. CML brought suit in the Court of Chancery for derivative and direct claims, including breach of the duty of care. The Court of Chancery dismissed the derivative claims and the case was appealed to the Delaware Supreme Court.
On appeal, the Vice Chancellor’s interpretation of DLLCA §§ 18-1001-1002 was disputed. In addition, counsel for CML argued that the Vice Chancellor’s interpretation rendered the statutory provisions of DLLCA unconstitutional on the grounds that they stripped the Court of Chancery of its traditional power to do “equity.” The Supreme Court quickly disposed of the constitutionality argument on the basis that the equitable derivative suit for stockholders from English common law was grounded in corporate – not LLC law. The Supreme Court continued that the Delaware General Assembly was free to legislate exceptions from the common law and did so with the enactment of the DLLCA in 1992.
The Supreme Court’s opinion in CML v. Bax is a beacon of hope for the law of Delaware unincorporated entities for its uncontroverted stance in line drawing between Delaware corporations and LLCs. In this opinion, the Supreme Court refuses, through the doctrine of equity, to infuse corporate principles into Delaware’s unambiguous, contractually based alternative entity statutes. With this opinion comes greater clarity and lower agency costs in the law of Delaware LLCs. Hopefully, the opinion will serve as a harbinger for the abandonment of corporate principles to define the rights of members, managers and other parties to a Delaware operating agreement. Five stars to the Delaware Supreme Court!

Too Busy to Think, Spread Too Thin to Matter: Why Stockholder Voting Should be Less Frequent, More Targeted, and More Thoughtful

I spoke two days ago at the 9th Annual PLI Directors’ Institute on Corporate Governance. Lots of great presentations and provocative suggestions at this event, from such luminaries as Bill Ackman, Ira Millstein, Hillary Sale, Pat McGurn, Richard Parsons, Alan Beller and lots of others. In my comments which you can find in this PDF, I asserted that stockholder meetings are too frequent and involve too many votes on too many items. Stockholder input into corporate governance is cheapened as a result, and would be more valued and valuable if voting were more selectively scheduled and targeted. Managers and investors share a common interest in having their governance dialogue include discussion of how to better focus stockholder voting and eliminate elections and resolutions that have little or no economic significance. State laws compelling the annual holding of stockholder meetings should become more flexible, but are unlikely to do so unless both management and stockholder representatives support that evolution.

Amendments Made to the Delaware General Corporation Law

The amendments to the Delaware General Corporation Law that were signed by the Governor this past spring became effective on August 1, 2009.  They can be viewed here.  As described more fully in the synopsis to the legislation, these are very significant amendments, dealing with issues like proxy access bylaws (new Section 112), proxy contest expense reimbursement bylaws (Section 113), bifurcation of record dates for notice and voting at stockholder meetings (amended Section 213 and related sections), and alteration of rights to indemnification and advancement of defense costs (amended Section 145(f)).