Why pray when you can order?

• Author: Brown, Meredith M.
• Position: Board of directors and mandatory bylaw amendment proposals

A warning to boards: Watch out for mandatory bylaw amendment proposals.

Shareholder activists and arbitrageurs may have a powerful new weapon in their arsenals, if courts uphold the validity of shareholder proposals to amend corporate bylaws to require particular kinds of corporate action, such as the dismantling of a poison pill plan.

In the past, most shareholder proposals have been precatory, not mandatory -- that is, they ask or pray the directors to consider a step; they don't order it.

That is because the SEC rule relating to shareholder proposals permits a company to exclude a proposal from its proxy statement if the proposal is, under the laws of the company's state of incorporation, not a proper subject for action by shareholders. The corporation statutes in most states, including Delaware, contemplate that a corporation's business will be managed by or under the direction of the board of directors. Companies have been able in many instances to take the position that a shareholder proposal mandating a particular corporate action is inconsistent with this kind of statutory provision, and so not a proper subject for shareholder action -- and therefore can be excluded from the proxy statement. The theory is that directors, not shareholders, are meant to run the company's business.

To overcome this problem, shareholders in the past have watered the proposals down by making them precatory rather than mandatory -- and so a proper subject for shareholder action. This has not been satisfactory for some shareholder activists, however, since even if a precatory proposal is approved by the shareholders, it is not binding on the board. The directors may conclude in the exercise Of their business judgment, after considering the pros and cons of the proposal, not to act as requested by the shareholders -- for example, not to redeem a poison pill.

The new wrinkle in the shareholder proposal arena is based on a different corporation law provision: the one, found in Delaware and most if not all corporation statutes, that empowers shareholders to amend the company's bylaws.

Shareholders recently have invoked their statutory ability to amend bylaws in support of bylaw amendments relating to such matters as a requirement that shareholder approval be obtained for continuation of a rights plan.

Companies have resisted, arguing that corporation statutes permit bylaws only to contain provisions "not inconsistent with law," and that a bylaw amendment that...