The limits of shareholder representation?

May 25, 2015
<p>Impending ban on fee-shifting bylaws at Delaware corporations and DuPont's costly proxy fight against Trian show persistence of shareholder rights issues &nbsp;</p>

With the heaviest part of the 2015 proxy season starting to wind down, it’s worth taking a look at a couple of recent events that have implications for many governance professionals.

First, on May 12 the Delaware Senate approved amending the Delaware General Corporation Law to prohibit companies from adopting bylaws or charter provisions that would force the loser in a shareholder lawsuit to pick up the entire legal tab. Essentially, the bill the State Senate passed prohibits the possibility of applying the Delaware Supreme Court’s decision in ATP Tour Inc vs Deutscher Tennis Bund et al (2014) to stock corporations, though the decision continues to apply to private, non-stock companies.

It’s possible the Delaware Senate may also have wanted to give SEC chair Mary Jo White no cause to bring the weight of the SEC to bear on the question of fee-shifting provisions. White said earlier this year the commission would be closely monitoring this situation out of concern about reducing shareholders’ ability to file federal securities claims.    

It’s interesting that the same bill upholds companies’ right to adopt exclusive forum provisions that require shareholders to bring suit against Delaware corporations in a Delaware court. That’s something proxy advisory firms have opposed and suggested investors take into account when voting proxies.

As we reported in March, the Council of Institutional Investors has said it believes barring fee-shifting provisions would not only strengthen the accountability of Delaware companies to their shareholders but ‘also safeguard Delaware’s pre-eminence as the adjudicator of US business disputes.’ Perhaps confirming the right to exclusive forum provisions is the state’s way of hedging its bets to retain such pre-eminence.

Second, it’s been reported that DuPont spent $15 million to keep an alternate short slate of directors nominated by Trian Fund Management from being elected to the company’s board, including the hedge fund’s founding partner and CEO, Nelson Peltz. DuPont shareholders voted to re-elect all 12 of the DuPont-nominated directors, but it’s hard to see how the company can claim a victory given how much of shareholders’ money was spent to achieve it. I would expect savvy investors to be keeping close tabs on the company’s ongoing efforts to meet performance goals in light of its all-out campaign to refute Trian’s critical points regarding corporate costs and the results of recent years’ R&D spending in its agriculture business, among other things.

To be sure, DuPont’s situation points up the tough circumstances companies potentially can find themselves in if they truly believe directors nominated by an activist investor would be a disruptive force on the board, as DuPont has said. Whether justified or not, that feeling certainly restricts the range of options for settling with an activist to avoid a costly proxy fight, as more companies have been willing to do recently.

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