SEC Wonders: Who’s to Pay for Proxy Fights?

In first-ever move, federal regulator asks Delaware Supreme Court to weigh in on a question.

For the first time ever, the Securities and Exchange Commission has asked the Delaware Supreme Court to weigh in on an aspect of the director nominating process: whether companies or shareholders should foot the cost of a proxy fight.

The regulator asked the state court to rule on which parties should pay in the case of a shareholder mounting a campaign to seat a minority slate of directors, according to the Dow Jones News Service. The issue is especially significant given the recent number of proxy contests resulting in dissident director candidates being nominated to boards.

Delaware recently modified its constitution to allow its highest court to rule on state law questions for the SEC, the wire service noted. But so far, the regulator has not taken advantage of this opportunity. About half of all U.S. public companies are incorporated in Delaware.

The issue has become the target of shareholder resolutions in the past two years. In the particular case in question, CA Inc. — formerly Computer Associates — has opposed a binding resolution submitted by the American Federation of State, County, and Municipal Employees (AFSCME) that would require the company to pay the expenses of a successful election of a short slate of directors, according to the Dow Jones report.

CA asked the SEC for permission to keep the measure off its proxy, claiming it violates Delaware law. That would leave decisions on spending to the company and its directors, not shareholders, according to the report. AFSCME, though, insists the resolution does not violate state law and should be put to a vote at this year’s annual meeting.

“We are unable to concur in your view that CA may exclude the proposal,” Thomas Kim, SEC corporation finance division chief counsel, wrote in a letter Friday to CA, according to Dow Jones.

The upshot: The SEC is asking the Delaware Supreme Court to consider whether this kind of proposal can be put before shareholders, and if it is adopted, whether it would violate Delaware law. The news service noted that the Delaware court is not required to accept the SEC’s request.

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