Feds Preempting Delaware Corporate Law
posted by Lawrence Cunningham
Congress appears hungrier to eat into state corporation law than any time since 2002 1933. More than 2002’s Sarbanes-Oxley Act, the so-called Shareholder Bill of Rights Act of 2009 would invade deeper into areas traditionally known as corporation law, and the province of the states, than since federal securities regulation was created in the 1930s.
A few provisions, while bold and getting most attention, are disclosure and proxy voting matters not far afield from traditional federal securities regulation; but several, getting far less attention, are not only bold but preempt deep inside traditional state corporation law territory. Starting with the deepest and least discussed:
1. All directors would have to stand for election annually, changing the prevailing corporation law option to have boards with multiple classes of directors serving staggered terms.
2. Boards would be required to have independent risk committees, specifying governance rules state corporation law never does (and even Sarbanes-Oxley’s provisions on board audit committees did not overtly require them but created compelling incentives to have them).
3. In uncontested director elections, the voting rule would be a majority of votes cast, changing traditional corporation law’s plurality rule.
4. The board chair would have to be an independent director, not otherwise employed by the corporation, a requirement unknown to traditional state corporation law.
5. A provision more nearly within traditional federal securities regulation would require executive disclosure of any special perqs received in connection with business combinations.
6. Getting heavy attention is a longstanding proposal, kicked around by the SEC for several years, to enable shareholders to use the corporation’s annual proxy statement to nominate directors for election. The SEC seems poised to act on the issue and Delaware recently amended its corporate code to enable this and for corporations to self-regulate how it works. This legislation would partly preempt both the SEC and Delaware on this matter.
7. Getting greatest attention is a longstanding proposal, mooted by governance gurus for years, to enable shareholders to render non-binding votes on top executive compensation, the so-called say-on-pay provision.
Numbers 6 and 7 are getting most attention and may warrant attention. But they address subjects (as number 5 does) within or close to traditional federal securities regulation. The others invade more deeply into state corporation law than any extant federal securities regulation provisions.
The current environment in Washington is not being kind to Delaware, long the leading producer of state corporation law in the US. It will be interesting to study forthcoming Delaware corporate law judicial opinions to detect for any response from the judiciary of the Vice President’s home state to this incremental preemption.
May 20, 2009 at 5:28 pm
Posted in: Corporate Law
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Responses (1)
A.J. Sutter - May 21, 2009 at 8:38 am
Thanks for pointing this out. What do you think the consequences might be? E.g., might the removal of staggered boards help to ignite another era of resource-wasting hostile M&A activity?
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