Corporations Flashcards
(5 cards)
Amend Bylaws
Shareholders may amend the corporation’s bylaws where the proposed bylaw provision relates to procedural matters typically included in the bylaws, such as the nomination of directors.
Shareholders can amend (or repeal) board-approved bylaws. Further, shareholders can limit the board’s power to later amend and repeal a shareholder-approved bylaw.
Under the MBCA, shareholders have the power to amend the bylaws. See Point One. The board shares this power with the shareholders, unless (1) the corporation’s articles “reserve that power exclusively to the shareholders” or (2) “the shareholders in amending, repealing, or adopting a bylaw expressly provide that the board of directors may not amend, repeal, or reinstate that bylaw.” See MBCA § 10.20(b).
Shareholder-approved bylaw provisions can amend or repeal existing bylaw provisions, whether originally approved by the board or by shareholders. See ALAN R. PALMITER, CORPORATIONS: EXAMPLES AND EXPLANATIONS § 7.1.3 (7th ed. 2012). Thus, the Mega board’s bylaw amendment—which set more demanding thresholds for shareholder nomination of directors than the investor’s proposed bylaw provision—would be superseded (repealed) if Mega’s shareholders were to approve the investor’s proposal. Further, a shareholder-approved bylaw generally can limit the power of the board to later amend or repeal it. See MBCA § 10.20(b)(2). Thus, if Mega’s shareholders approved the bylaw provision proposed by the investor, Mega’s board could not repeal the provision because it includes a “no board repeal” clause.
The investor need not make a demand on the board if the investor states a direct claim, such as an allegation that the board interfered with the investor’s right to amend the bylaws. But the investor must make a demand on the board if the investor states a derivative claim (on behalf of the corporation), such as an allegation that the directors sought to entrench themselves by interfering with the proposed proxy access.
The MBCA generally requires that shareholders make a demand on the board of directors before initiation of a derivative suit. MBCA § 7.42 (shareholder may not bring derivative proceeding until written demand has been made on corporation and 90 days have expired). A derivative suit is essentially two suits in one, where the plaintiff-shareholder seeks to bring on behalf of the corporation a claim that vindicates corporate rights, usually based on violation of fiduciary duties. PALMITER, supra, § 18.1.1 (6th ed. 2009). The demand permits the board to investigate the situation identified by the shareholder and take suitable action. No demand on the board is required, however, if the shareholder brings a direct suit to vindicate the shareholder’s own rights, not those of the corporation.
Derivative suit
Is the suit brought by the investor derivative or direct? The MBCA defines a “derivative proceeding” as one brought “in the right of a domestic corporation.” MBCA § 7.40(1). Thus, the answer to how the investor’s suit should be characterized turns on what rights the investor seeks to vindicate. If the investor frames its claim as one of fiduciary breach by directors—for example, for failing to become adequately informed about voting procedures or for seeking to entrench themselves in office by manipulating the voting structure to avoid a shareholder insurgency—then the suit is “derivative” and the investor must make a demand on the board. See MBCA Ch. 7, Subch. D Introductory Comment (“the derivative suit has historically been the principal method of challenging allegedly illegal action by management”).
Direct Suit
If, however, the investor frames its claim as one to vindicate shareholder rights, the suit is direct and no demand is required. For many courts, the direct-derivative question turns on who is injured and who is to receive the relief sought by the plaintiff-shareholders. See Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (characterizing a merger-delay claim as direct because delay of merger only harmed shareholders, not corporation). Thus, if the investor claims that management’s refusal to include its proposed bylaw amendment in the corporation’s proxy materials violates its shareholder rights to initiate corporate governance reforms, the suit will be direct. Courts have not questioned the ability of shareholders to bring direct suits challenging board action to exclude their proposed bylaw amendments from the corporation’s proxy materials. See JANA Master Fund, Ltd. v. CNET Networks, Inc., 954 A.2d 335 (Del. Ch. 2008) (upholding shareholder’s direct challenge to board’s interpretation of advance-notice bylaw); Chesapeake Corp. v. Shore, 771 A.2d 293 (Del. Ch. 2000) (upholding shareholder’s direct challenge to actions by board that effectively prevented it from proposing bylaw amendments in contest for control).
