Post Date: May 22, 2006
In a case filed in the Delaware Chancery Court, Professor Lucian Bebchuk is challenging CA Corporation’s assertion in an SEC submission that Bebchuk’s poison pill-limiting bylaw proposal is illegal under Delaware law.
CA Corporation notified the SEC and Bebchuk that it plans to exclude Bebchuk’s proposed bylaw from its 2006 proxy statement, based on its assertion that the bylaw is impermissible under the law of Delaware, where CA is incorporated. Bebchuk filed for a declaratory judgment that his proposed bylaw is valid under Delaware law and for an order compelling the software provider to withdraw its SEC submission containing the illegality assertion.
The suit is expected to resolve long-standing questions concerning the general scope of shareholder power to adopt bylaws and, in particular, bylaws limiting board adoption of poison pills. Professor Bebchuk is represented by the securities and corporate governance law firm Grant & Eisenhofer.
“Although this important issue has for years been intensively discussed among corporate governance commentators and law reviews, the issue does not appear to have previously been litigated,” said attorney Jay Eisenhofer of Grant & Eisenhofer. “We hope that this test case will contribute to improving corporate governance by making shareholders’ rights clear.”
In recent months, Bebchuk has submitted proposed bylaw amendments for a shareholder vote in a number of major companies, which prompted companies such as American International Group and Time Warner to agree to amend their bylaws.
As part of his bylaw initiative, Bebchuk developed a provision – a “poison pill antidote” – designed to limit the potential costs to shareholders from an indefinite use of a poison pill takeover defense. The provision would prevent a board from maintaining a pill not approved by shareholders without periodic determination that doing so would be desirable. It would also require a supermajority or unanimous vote of directors to authorize extensions of the life of a pill. Martin Lipton, who developed the poison pill in the early 1980s, issued a forceful critique of Bebchuk’s poison pill antidote.
In response to Professor Bebchuk’s pill bylaw proposals, Bristol-Myers Squibb agreed to amend its bylaws to incorporate such an arrangement, and Halliburton placed the proposal on the ballot for its annual meeting. In contrast, CA sought to exclude Bebchuk’s proposal, and Bebchuk’s suit seeks to prevent CA from doing so.
More information about Professor Bebchuk’s suit, his CA proposal and his bylaw initiative can be found on the policy work page of his website.