Sarah Teslik is scared.
Ms. Teslik, executive director of the powerful Council of Institutional Investors, Washington, is afraid the Delaware courts are about to wipe out 15 years of accomplishments by the corporate governance movement.
At stake is the binding bylaw shareholder resolution -- a proposal by one shareholder that, if approved by a majority of a company's shareholders, must be obeyed -- one of the most potent tools in the arsenal of shareholder activists.
Recent rulings
Recent decisions by the Delaware Chancery Court have corporate governance activists worrying that it may ultimately declare such resolutions illegal. Companies at which such resolutions are proposed are expected to challenge them through the courts later this year.
Because more than half of the companies in the United States are incorporated in Delaware, that would be a major blow to corporate governance activists.
15 years of work gone?
"If binding bylaw proposals are wiped out, it could mean that the last 15 years of (corporate governance) work is gone," Ms. Teslik said. "The risk is the proxy process becoming meaningless.
"Companies have learned that they can ignore (non-binding) proposals that get 51% of the vote."
Not all activist investors agree.
"I would not view what happens in Delaware (as terrible), regardless of how it comes out," said Peter Clapman, general counsel of the Teachers Insurance Annuity Association-College Retirement Equities Fund, New York.
"I don't see it destroying shareholder ability to take actions. I still think the precatory (non-binding) proposal works for us," Mr. Clapman said.
He added: "Most of the companies we deal with take action even before going to a vote."
Not catastrophic
Richard Koppes, former general counsel of the California Public Employees' Retirement System, Sacramento, and now of counsel at Jones Day Reavis & Pogue, Sacramento, acknowledges a court decision against binding resolutions would be a setback, but not a catastrophic event.
"I don't think 15 years of work will be thrown away," he said.
Still, Ms. Teslik isn't the only one who's worried.
"Binding bylaw proposals are the only corporate governance tool that makes a difference," said Kurt Schacht, general counsel of the State of Wisconsin Investment Board, Madison, which has filed binding resolutions with several companies this year.
"The bottom line on all this is that shareholders could get backed into a corner, where the only thing left would be to get our own directors on the board," he said.
The Delaware Chancery Court last year invalidated San Jose, Calif.-based Quickturn Design System's "no hand" poison pill -- which said that a new board of directors could not redeem a poison pill for six months. The court said the pill illegally restricted the board of directors' power. Judge Jack Jacobs, vice chancellor of the court, in the case said that under Delaware law, the board of a Delaware-incorporated company has the full power to manage the affairs of the company, subject only to limitations set out in the certificate of incorporation. The Delaware Supreme Court upheld that ruling, in an opinion written by Judge Randy Holland.
Legal arguments
Shareholder activists are concerned the same logic could cause the court to say binding resolutions unfairly usurp power from the board.
A recent article on binding resolutions was published in the December Tulane Law Review and written by Lawrence A. Hamermesh, associate professor of law at Widener University School of Law, Wilmington, and an authority on Delaware corporation law. The article said while state laws give shareholders the right to adopt bylaws, they don't allow them to limit the managerial power of the board, particularly in relation to poison pills and other anti-takeover measures.
The article states: "In at least some respects, attempts by stockholders to adopt bylaws limiting or influencing director authority inevitably offend the notion of management by the board of directors."
Although no case has yet come before the Delaware courts, it is likely one will come up later this year because the Wisconsin board has several binding bylaw resolutions filed with a number of companies.
Should the decision go against them, corporate activists say they're ready to take on the state of Delaware, where so many companies incorporate because of its corporate-friendly laws.
"Shareholder patience with Delaware is wearing thin," said Nell Minow, a principal of LENS Inc., Washington.
"There's a coalition of institutions ready to vote to have corporations move out of Delaware," said Guy Wyser-Pratte, a New York-based arbitrageur and shareholder activist. "I've said to the Delaware courts: 'Make my day.' "
