Shareholders vs Indiana States Law

Ball Corp, an Indiana-incorporated company, has faced shareholder proposals in four of the past five years (2005, 2006, 2008 and 2009) to declassify its board. In each year, despite board opposition, the proposal received majority support from shareholders voting for and against. Despite the message from shareholders, the board took no action to address their concerns.

It seems that a recent change to Indiana corporate law will prevent shareholders from having their way. Effective May 12, 2009, Indiana corporate law mandates that public companies stagger the terms of their board members into two or three groups; companies incorporated in that state had until July 31, 2009 to adopt a bylaw expressly electing not to be governed by this requirement. Since Ball Corp did not take action to amend its bylaws, it now would appear that shareholders are precluded from raising the subject again. The company was to once again face a shareholder proposal, submitted by CalPERS, to declassify the board. However, on Jan. 25, 2010, the SEC issued a “no-action” letter indicating that it would not take enforcement action if the company omits the shareholder proposal from its proxy materials agreeing with company that “implementation of the proposal would cause Ball to violate state law.”

Votes against incumbent directors have been high in recent years due to the lack of response on the declassification issue – with opposition reaching more than 30% in 2009. Shareholders will likely continue to hold directors accountable, given the board’s failure to amend bylaws to eliminate the classified board when it had the opportunity.

Indiana’s corporate law has propelled the $850 million American Federation of State, County and Municipal Employees (AFSCME) Employees Pension Plan to submit two proposals asking WellPoint and Lincoln National, to change their incorporation to Delaware. In 2009, Indiana statutory changes diminished “key basic rights of shareowners by weakening standards of care for directors and strengthening anti-takeover provisions through default classified boards.” the statement said.

Another default provision in Indiana law restricts investors’ rights even further by allowing only the board, not shareowners, to amend a company’s bylaws; shareowners can amend the bylaws only if the company’s charter specifically provides for that right. “In our view, Indiana’s corporate law is moving in the wrong direction, toward greater director entrenchment and away from giving shareholders power over corporate ground rules,” AFSCME said in the statement.


SEC No-Action Letter >>

AFSCME Statement >>

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