Noting that it did not want "to encourage corporations to seek advisory opinions about important issues of Delaware corporat[e] law," the Delaware Chancery Court recently rejected an attempt by a board of directors to obtain a pre-adoption adjudication of the validity of a shareholder-proposed option repricing by-law amendment.
In September 1998, the State of Wisconsin Investment Board ("SWIB"), a shareholder of General Datacomm Industries, Inc. ("GDC"), sought to include in GDC's proxy materials a proposed by-law that would prohibit GDC's board from repricing to a lower strike price any issued and outstanding stock option. GDC then sought to exclude the proposal from its proxy materials, requesting no-action relief from the staff of the Securities and Exchange Commission ("SEC"). GDC argued that the proposal was invalid under Delaware law, as it sought to impose limitations on the board's authority that were not otherwise contained in GDC's articles of incorporation. The Staff declined the requested relief, noting that there was no "compelling precedent" to support the company's position that the proposal was not a proper subject of shareholder action under Delaware law.
GDC brought suit for declaratory and injunctive relief to prevent SWIB from introducing the by-law at GDC's annual meeting. Relying on the Delaware Supreme Court's decision in Quickturn Design Systems, Inc. v. Shapiro, GDC alleged that the proposed by-law improperly sought to restrict the director's statutory power and authority under the company's articles of incorporation to make decisions on matters of management policy. Eight days before the scheduled board meeting, GDC sought expedited review of its action for two reasons. First, GDC claimed that it should not be forced to adopt a facially invalid by-law. Second, GDC maintained that, as long as the dispute remained unresolved, it impaired GDC's directors "in the management of GDC's incentive compensation program for recruitment and retention of key employees."
The Chancery Court rejected GDC's motion for expedited relief on the ground that the validity of the repricing by-law was not yet ripe for adjudication. The Court noted that "where 'the Court is asked to adjudicate the validity of a proposed measure that has not been -- and may never be -- adopted, compelling reasons to justify judicial intervention must be shown.'" The Court held that no compelling reasons existed to justify judicial intervention, since the parties had the opportunity to inform the shareholders of their views prior to the vote on the by-law -- including GDC's position that the proposed by-law was invalid. Moreover, the Court noted that "a post-meeting adjudication would not unduly disrupt the Corporation's affairs."
The Court further stated that it would promptly consider any request to expedite a post-adoption adjudication of the by-law, and observed that resolution of the issue may entail consideration of whether the by-law is invalid under Quickturn, and whether a board may repeal a shareholder-approved by-law amendment. As to the latter, the Chancery Court noted that careful scrutiny of several sections of Delaware General Corporation Law, including Sections 102, 109, 141, 153 and 157, likely would be required.
GDC's shareholders subsequently adopted the proposed bylaw, which is believed to be the first shareholder-initiated by-law amendment on options repricing. At press time, no additional review of the validity of the by-law amendment had been sought.