Einde inhoudsopgave
The One-Tier Board (IVOR nr. 85) 2012/3.6.4
3.6.4 Basis of duties
Mr. W.J.L. Calkoen, datum 16-02-2012
- Datum
16-02-2012
- Auteur
Mr. W.J.L. Calkoen
- JCDI
JCDI:ADS600689:1
- Vakgebied(en)
Ondernemingsrecht (V)
Voetnoten
Voetnoten
Eisenhofer and Barry (2010), pp. 2-53.
Delaware GCL § 141(a); MBCA § 8.01(b).
Eisenhofer and Barry (2010), pp. 2-57. The list of consent powers for shareholders in the US is more limited than the comparable article 2:107(c) DCC in the Netherlands and than the UK listing rules. In Delaware a board would not need shareholder consent to sell off a subsidiary worth 50% of the group's equity, whereas in the Netherlands consent would be needed to sell off a subsidiary worth one-third of the balance sheet total. The criterion in Delaware CGL § 271 is divestment by a company of 'substantially all its assets'.
Delaware GCL § 141(e) and § 172. This is interesting in connection with the case law on supervision, see 3.7.3 below.
Delaware GCL § 4.
Delaware GCL. This procedure is often used to start litigation, see allo Veasey (2005), p. 1498.
Delaware GCL § 242(b); MBCA § 10.03.
Delaware GCL § 109(a); MBCA § 10.20(a).
Bebchuk v. CA Inc., 902 A.2d 737, 742 (Del. Ch. 2006).
CA Inc. v. AFSCME Employees Pension Plan, 953 A.2d 227 (Del. 2008).
Schnell v. Chris-Craft, 285 A.2d 437 (Del. 1971) and Leo E. Strine Jr., `If Corporate Action Is Lawful, Presumably There Are Circumstances in Which It Is Equitable to Take That Action. The Important Corollary to the Rule of Schnell v Chris-Craft', 60 The Business Lawyer 877 (2005), p. 29 ('Strine (2005)') in an article in which Leo Strine compared elements of law and equity.
Blasius Industries Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988) and Strine (2005), p. 38.
Moran v. Household International, 500 A.2d 1346 (Del. 1985) and Yucaipa Am. Alliance Fund 11, L.P. v. Riggio, C.A. No. 5465 — VCS (Del. Ch. 11 August 2010).
Prof. Jill Fisch, 'The Peculiar Role of Delaware Courts in Competition for Corporate Charters', 68 University of Cincinnati Law Review 1061, 1074-5 (2000). Although the Delaware statute provides general guidelines about corporate formalities such as the scheduling of annual meetings and the required components of a corporate charter, the statute does not deal with the fiduciary principles that provide the foundation of corporate law and allow, under appropriate circumstances, judicial scmtiny of corporation decision making ...
Veasey (2005).
Veasey (2005), pp. 1414-1415.
Although boards usually feel obliged to abide by codes and best practice mies, their duties are essentially based on state statutes, common law, court decisions and US federal laws and regulations as well as the mies of any stock exchange.
The board owes fiduciary duties to the company and thereby indirectly to the shareholders as a class as well as to all other stakeholders. When a person buys shares in a company, his relationship with the company, its board and most other interested parties is regulated by contractual relationships. Under the contract theory, shareholders of a corporation buy into a "hierarchy" of laws and other provisions that define the respective rights and responsibilities of the corporation, its shareholders, and its directors. This "hierarchy" rests on the following sources: (1) federal and state constitutions, (2) federal and state statutes, (3) common law, i.e. case law of the courts, (4) the corporation's certificate of incorporation (also known as the articles of incorporation) and (5) the corporation's bye-laws.1
Many provisions of state statutes facilitate the position of the boards by giving corporations the possibility of making their own particular arrangements for organizing the board and their liability exposure. Section 3.7.4 below describes the scope for insulating the directors from liability by means of indemnification and insurance by the company. Virtually all state corporate statutes recognize the rule that corporate powers are exercised by the board and that the business and affairs of the corporation are controlled by the board.2 In contrast, the rights and powers of shareholders are generally restricted. While shareholders have the right to elect directors, which is an important right, other rights are restricted. For example, shareholders have the right to "propose certain action to be undertaken" (only propose, not instruct) and to "approve or disapprove" of certain extraordinary transactions which "fundamentally affect the character or nature" of the corporation (e.g. mergers, dissolutions and amendments to the articles of incorporation or bye-laws).3
Some specific stipulations in the Delaware GCL are of interest to directors. These are the right of corporate directors to rely in good faith on the corporation's records and information presented to them,4 the right of the company to void transactions due to a conflict of interest5 and the right of shareholders to demand inspection of corporate books and records in certain circumstances.6
The articles of incorporation can be changed only by resolution of the board supported by the majority of shareholders.7 The articles of incorporation are usually short and may contain some limitations on the board's powers and provisions concerning the qualifications of directors and exclusion of the liability of directors.
Bye-laws form the operational document of the corporation. They are normally longer than the articles of incorporation and are typically described as a "contract" between the corporation and its shareholders. The majority of shareholders can change the bye-laws at their own initiative.8 It is of interest that the board may object to changes in the bye-laws, if the stipulation would impose restrictions on the ability of the company's board of directors to manage the corporation. Below are two examples of litigation on this subject.
Professor Bebchuk, as a shareholder of CA Inc., wanted a change in the bye-laws to limit the ability of the board to implement a "poison pill" which in this case was a shareholder rights plan. CA Inc. refused, arguing that such a limitation would be illegal because it restricts the board's exercise of its power to manage the affairs of the company. The court held that Professor Bebchuk's claim was not yet "ripe for decision", but also mentioned that there was tension between the provisions in Delaware GCL Section 109 giving the right of stockholders to change the bye-laws and Section 141(a) of the Delaware GCL, which requires the board to direct the business of the corporation.9
AFSCME Employees Pension Plan wanted a change in the bye-laws, once again of CA
Inc., by including a clause requiring the corporation to reimburse reasonable proxy expenses incurred by a director candidate, if nominated. CA Inc. refused. The court ruled that, in principle, such a clause would be legal, but this clause was not legal, because it was completely without any nuance, i.e. it did not contain an exception for the costs made for purely personal interests or for cases of petty concerns.10
These cases are of interest because they show that the principle that the board should be free to manage the company is upheld to a large extent by common law. They also illustrate the determination of shareholder activists, including academies such as Professor Bebchuk.
As mentioned above, in principle management should be free to manage the business of the corporation as it wishes. However, there is one area where the board should give shareholders room and that is the right of shareholders to vote directors in and out in the general meetings of shareholders. This is made clear in the following cases:
In Schnell v. Chris-Craft11 the board of Chris-Craft faced a proxy fight over issues of managerial underperformance. The board took action, within its legal powers, by holding the general meeting in December, at short notice, in some little town in upstate New York instead of in January in Manhattan, as usual. The aim was to dampen the turnut and leave the dissidente little time to solicit proxies. The Chancery Court of Delaware ruled on the basis of legal technicalities that the board's action was permissible. The Supreme Court went the other way and ruled, in equity, that because the aim was to frustrate the right of shareholders to vote the action was not permitted.
In the Blasius case12 Chancellor Allen ruled against the Atlas board, which had wanted to quickly appoint two directors to prevent Blasius, which was regarded as a dangerous oppressor, from being in a position to appoint a majority of directors. The Chancellor made clear that boards should be very careful when acting in an election context.
In hostile takeover cases the courts often permit defence mechanisms, if proportional, since they reason that the oppressor can always start a proxy fight.13
Common law is, of course, the main basis for the duties of directors in the US. Delaware's common law process, which places case law at the forefront of corporate law, has become the functional equivalent of judicial legislation. Delaware law on fiduciary duty is judge made. It offers corporations a variety of benefits, including flexibility, responsiveness, insulation from undue political influence and transparency.14 The US concept of common law is that of a "clear" law, because the background principles, which are applicable to all cases, provide predictability. No viable corporate governance regime can be founded on a "one size fits all" notion. Fiduciary law is based on equitable principles.15
Below is a quote of former Chief Justice Norman Veasey of the Delaware Supreme Court on the duties of independent directors.16
"As I see it, there are seven normal expectations that a stockholder should have of a board of directors. Although others may apply in some situations, the stockholders expect at least that (i) the stockholders will have a right to cast a meaningful vote for the members of the board of directors and have a right to vote on fundamental structural changes, such as mergers; (ii) the board of directors will actually direct and monitor the management of the company, including strategic business plans and fundamental structural changes; (iii) the board will see to the biring of competent and honest business managers; (iv) the board will understand the business of the farm and develop and monitor a business plan and the operations of the company; (v) when making a business decision, the board will develop a reasonable understanding of the transaction and act in good faith, on an informed basis, and with a rational business purpose; (vi) the board will carry out its basic fiduciary duties with honesty, care, good faith, and loyalty; and (vii) the board will take good faith steps to make sure the company complies with the law."
Stockholders also have expectations of the courts that are overseeing the stockholders' expectations of the board. Stockholders look to courts to enforce fiduciary duties in highly textured fact situations by applying the general principles that underlie the relationship between the investors and the board of directors. As I see it, the courts have at least seven key obligations. They are (i) be clear, (ii) be prompt; (iii) be balanced;• (iv) have a coherent rationale; (v) render decisions that are stable in the overall continuum; (vi) be intellectually honest;• and (vii) properly limit the function of the court.
As we have seen, independent directors are obliged to fulfil their duties to (i) let shareholders vote on board appointments and mergers, (ii) direct and monitor, including active directing and monitoring of strategy, (iii) arrange for succession, (iv) understand the business and develop and monitor strategy (dual function), (v) when deciding, understand the details and act in good faith, on an informed basis, with a rational business purpose, (vi) carry out fiduciary duties with honesty, care, good faith and loyalty and (vii) make sure the company complies with the law (which, of course, includes all federal laws such as the Securities Law and the Anti-Trust and the Foreign Corrupt Practices Act).