ATP, Chevron and the Inevitable Consequences: Bylaws Restricting Shareholder Proposals (Part 1)

Delaware is a mangement friendly jurisdiction and the cases arising in the jurisdiction largely reflect this approach.  This is particularly true with respect to the recent spate of decisions governing bylaws.  

Chevron upheld forum selection bylaws.  ATP, in the context of a non-stock company, upheld a fee shifting bylaw. In both cases, the courts allowed management to adopt bylaws for the first time that restricted shareholder rights in the context of judicial recourse.  The language of the decision was excessively broad, unmooring bylaws from any statutory language of the DGCL or the common law.    

It was only a question of time before the broad language would be used in other ways in order to limit shareholder rights.  Moreover, given Delaware's influence, it was also likely that the authority would be inovoked corporations formed in other states. 

This can be seen with respect to the proposal submitted by management of Ashford Hospitality Prime, Inc., a Maryland corporation.  A proposal in the proxy statement, if adopted, would limit shareholder proposals to shareholders who own beneficially and of record at least 1% of the outstanding shares of the company.  The proposed bylaw would provide: 

• (1)   Nominations of individuals for election to the Board of Directors and the proposal of other business to be considered by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who: was a stockholder of record (a) has beneficially owned at least 1% of the outstanding shares of common stock of the Corporation (the "Required Shares") continuously for at least one year both at the time of giving of notice by the stockholder as provided for in this Section 11(a) andthrough and including at the time of the annual meeting (including any adjournment or postponement thereof), (b) who is a stockholder of record of the Corporation both at the time of giving of notice as provided for in this Section 11(a) and as of the time of the annual meeting (including any adjournment or postponement thereof), and (c) is entitled to vote at the meeting in the election of each individual so nominated or on any such other business and who has complied with this Section 11(a). 

The provision, therefore, imposes a significant threshold.   According to CII, the 1% threshold would require "about a $10 million position." In addition, however, the provision appears to impose procedural hurdles.  The language apparently disqualifies any street name owner from making proposals or nominating directors unless they hold the shares as record owners.  Street name owners would therefore have to withdraw shares from any nominee account (usually with a broker) and obtain a certificate.  Moreover, the provision does not, apparently, allow shareholders to aggregate their interests but instead allows only shareholders owning 1% or more of the shares to submit proposals.  The provision, therefore, effectively eliminates the right of small shareholders to make proposals.  

For a recent piece on Fee Shifting Bylaws and the approach taken by the Delaware courts to bylaws, see The Future Direction of Delaware Law (Including a Brief Exegesis on Fee Shifting Bylaws).