By Cydney Posner

An article from the WSJ reports that HealthSouth Corp. is moving to become the first large U.S. business to adopt bylaws authorizing reimbursement of activist shareholders for reasonable expenses incurred in connection with unseating management-backed directors. The article suggests that this move may motivate other companies to take similar actions and could even quell demand for the SEC's proxy access proposal. (Not to mention increasing the number of election contests and related fees....)

The move is intended to address a difficult governance issue that allows companies to finance the election of their own candidates from company funds, but requires challengers to finance proxy contests on their own. These contests can cost hundreds of thousands of dollars.

HealthSouth's new corporate bylaw requires reimbursement of "reasonable" expenses for a successful dissident board candidate and will also partly cover expenses for those gaining at least 40% of the votes cast. The new reimbursement bylaw rule is based on recent changes to Delaware law. (See this News Brief.) The article reminds us that a $2.6 billion accounting scandal was uncovered at HealthSouth in 2003, five former CFOs pleaded guilty to various crimes, and former CEO Richard Scrushy was ordered to pay $2.88 billion in a suit brought by shareholders. As a result, HealthSouth overhauled its management and board, installing Charles Elson, who runs the Weinberg Center for Corporate Governance at the University of Delaware's business school, as chairman of the nominating and corporate governance committee. Mr. Elson promoted the HealthSouth bylaw change.

RiskMetrics suggests that HealthSouth's action may encourage other companies, especially those under pressure from activist investors, to follow suit. AFSCME has submitted proposals at a number of companies this year to change bylaws to provide for reimbursement and plans to propose at least six similar bylaws in 2010 as a substitute for proxy access.

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