Hearing on
Current Governance Issues at Amtrak
TABLE OF CONTENTS(Click on Section)
The purpose of this hearing will be to allow the Subcommittee to explore governance at Amtrak, including the relationship between the board of directors and the chief executive officer.
1. Disputed Tenure of Current Board Members
The Amtrak Reform and Accountability Act of 1997 (ARAA), Public Law 105-134, substantially altered Amtrak’s corporate governance and structure. Among other changes, a new structure with new personnel were required for the Amtrak board of directors. Continuing from prior law were two fundamental features: that Amtrak is not a department, agency, or instrumentality of the U.S. government [49 U.S.C. 24301(a)(3)] and that, to the extent consistent with the federal statute, Amtrak is a District of Columbia corporation governed by the D.C. Business Corporation Act [49 U.S.C. 24301(e)].
The ARAA required a new “Reform Board” of directors to be appointed, as set forth in Section 24302 of Title 49. The new board was to “consist of voting members appointed by the President, by and with the advice and consent of the Senate, for a term of 5 years.” [49 U.S.C. 24302(a)(2)(i).] Of the seven seats, the President could install the Secretary of Transportation in one as a presidential option without further confirmation. [49 U.S.C. 24302(a)(2)(ii)]
President Clinton nominated 6 persons for regular Senate confirmation, and the then-Secretary of Transportation as the seventh member, for 5-year terms. (The Amtrak statute contains no “holdover” clause allowing presidentially appointed board members to serve beyond their tenure until a successor is confirmed.) The termination dates of the original Reform Board appointees ranged from June 25, 2003 (4 directors) to September 25, 2003 (2 directors) to August 4, 2004 (1 director).
The pivotal statutory feature was that only one round of presidential appointments was guaranteed by the ARAA. In Section 24302(h), Congress specified that 5 years after the appointment of the original Reform Board, one of two alternatives would apply. If in FY2003, Amtrak was receiving no federal funds, the Reform Board was to adopt bylaws for shareholder elected directors. On the other hand, if in FY2003, Amtrak was still receiving federal funds, a repetition of the presidential appointment paradigm was required.
During the 5-year tenure of the initial Reform Board, two directors resigned and were replaced by President Bush. Department of Transportation (DOT) Secretary Slater was replaced by Secretary Mineta, and Governor Tommy Thompson was replaced by David M. Laney. Since that time, and reportedly in the correspondence with the Senate on Mr. Laney, the Administration asserted that both the DOT Secretary and Mr. Laney were receiving full 5-year terms, even though nearly half of the original terms had already run.
This leads to the current disputed status of the board, which in turn affects whether the board has a quorum with legal authority to enter into legally valid transactions. In order to give effect to all provisions of the ARAA provisions specifying that in FY2003, including the possibility that the presidentially appointed directors were to be replaced by shareholder-elected directors, the conferring of new five-year terms on mid-term appointees is arguably a legal impossibility, because that would allow any President during the initial Reform Board’s tenure to nullify the FY2003 ARAA alternatives by simply “churning” the board with new appointments. If this analysis is correct, then Secretary Mineta and Mr. Laney have not been actual board members since June 25, 2003. The Secretary could be—but apparently has not been—reinstalled with another summary appointment, but Mr. Laney would have to be renominated and reconfirmed by the Senate.
DOT and Amtrak, in response to a request at the Subcommittee’s recent Amtrak reform hearing, filed legal memoranda in the hearing record on the various legal issues affecting the board’s status. Both argue that the principal rationale for board members Mineta and Laney receiving new five-year terms is that the ARAA, unlike prior law, does not specify that midterm appointees serve only the remainder of the already running term. (This of course begs the question of the structural feature of the statute concerning FY2003 noted above. Given that structure, repeating the pre-1997 language would have been superfluous.)
By the spring of 2004, only one of the seven original Reform Board appointees remained in office. Since four of seven directors had left by the fall of 2003, there was a substantial period of time during which Amtrak did not have a quorum by the Administration and Amtrak’s standard (four members per the Amtrak bylaws) or the articles of incorporation (five members). The quorum issue, not dealt with by current federal law, is discussed below.
In April and August 2004, respectively, President Bush announced the recess appointment of two new directors, Enrique Sosa and Floyd Hall. In addition to the inherent termination of even a valid recess appointment at the end of the “next session” of the Senate under Article II, Section 2, Clause 3 of the Constitution, there are also issues about the validity of any recess appointment to the Amtrak board. As noted earlier, by federal law, Amtrak is not part of the federal government. But the recess appointment power addresses on its face the filling of vacancies among “Officers of the United States.” Thus it is arguable that neither of the two recess appointees is a validly appointed Amtrak board member. It appears that in the entire prior history of Amtrak, only one recess appointment was made by President Reagan, and no quorum issue or other challenge to the validity of the appointment was raised.
The Administration has submitted pending nominations only for the permanent appointment of Messrs. Sosa and Hall, whose recess appointments (if valid) expire when the Senate adjourns at the end of its 2005 session. There has been no renomination of Mr. Laney and apparently no reappointment of Secretary Mineta.
2. Does Amtrak have a quorum for a functioning board of directors?
The number of validly serving directors is of crucial importance to the validity of various transactions. The federal statute sets no quorum standard for the Amtrak board, so the issue is therefore governed by the D.C. Business Corporation Act pursuant to 49 U.S.C. 24301(e). That Act [Sec. 29-101.36 (2003)] specifies that a “ majority of the number of directors fixed by the bylaws or in the absence of a bylaw fixing the number of directors, then of a number stated in the articles of incorporation, shall constitute a quorum for the transaction of business unless a higher number is required by the articles of incorporation or the bylaws [emphasis added].” Although convoluted, this seems to say that the higher number, whether in the bylaws or articles, controls.
Less opaque is the general rule in the D.C. Business Corporation Act—that “[w]henever a provision of the articles of incorporation is inconsistent with a bylaw, the provision of the articles of incorporation shall be controlling.” [Section 29-101.47(b)] This is logically consistent with the principle that the articles of incorporation, the company’s constitutional document (amendable only with consent of two-thirds of the voting shares) must prevail over mere bylaws, which can be amended by a quorum of the board of directors with no shareholder participation. Since the Amtrak conflict is between articles that specify a quorum of five directors and a bylaw that requires merely a majority of voting positions for a quorum, the former seems likely prevail.
In Amtrak’s case, the bylaws (necessarily adopted later) contradict the articles of incorporation on this point. The articles state categorically that five members are required for a quorum [Section 7.01], while the bylaws set the standard as a majority of the directors with voting powers--which would be four under the current seven-seat structure of the board [Section 4.08]. Under the D.C. statute, even a fully constituted board cannot amend the articles of incorporation without the consent of two-thirds of the shareholders entitled to vote. [Sec. 29-101.54] The DOT preferred stock no longer has any voting rights, pursuant to Section 415(c) of the ARAA. The common stock—which, Amtrak acknowledges, reacquired its voting rights upon enactment of the ARAA—is held by four private sector corporations—American Premier Underwriters Inc., Burlington Northern Santa Fe Railway, Canadian Pacific Railway, and Canadian National Railway. Given the current distribution of stock ownership, only a combination of the first two listed shareholders would suffice to create the required two-thirds majority for amendment of the articles of incorporation.
The legal memoranda submitted by DOT and Amtrak cite Section 29-101.36 of the D.C. statute and assert that a quorum is a majority of the directors “prescribed in the applicable governing document,” which in turn is claimed to be four of seven directors, without further explanation.
3. If a quorum is lacking, may an executive committee validly govern the corporation?
If the membership of the Amtrak board falls below the quorum standard (whether four or five) as it did for some months during 2003-2004 and (even by the DOT/Amtrak count) will again when the current recess appointments (if valid) expire, Amtrak and DOT contend in their legal memoranda that the board may “delegate all its powers” to an “executive committee” of two or more directors, citing Section 29-101.37 of the D.C. Business Corporation Act.
In April 2003, the Amtrak board (which had an undisputed quorum at that point) first authorized the creation of executive committees by amending the bylaws with a new Section 5.01, setting the minimum size of such a committee at three directors (two being the statutory minimum under Section 29-101.37 of the D.C. statute). The April 2003 version of this provision qualified the delegation of powers to any executive committee by stating that it must be “consistent with applicable law” and that the committee’s exercise of corporate powers was merely “in between meetings of the Board of Directors.”
Analytically, the claim that any executive committee can act indefinitely as an alter ego for a quorumless board is questionable. If correct, this would allow any corporate board to negate any and all quorum requirements for legally valid action merely by delegating all powers to a small executive committee. The D.C. statute specifies that any delegation of authority to an executive committee “shall not operate to relieve the board of directors, or any member thereof, of any responsibility imposed upon it or him by law.” [Section 29-1101.37]
Assuming the validity of such a total and indefinite delegation, the executive committee in question must be governed by the bylaw authorizing it. As noted, the minimum membership for an executive committee established in the Amtrak bylaws in April 2003 was 3 directors. As noted in the Amtrak and DOT memoranda, the putative Amtrak board further amended the bylaws in September 2003 to reduce this standard to two directors, the statutory minimum. [Section 5.01, Amtrak bylaws]. The putative amendment also deleted the phrase limiting the exercise of corporate powers by an executive committee to the time “in between meetings of the board.”
The validity of this action, however, obviously depends on the existence of a quorum at that time. If, as noted earlier, the Amtrak board actually ceased to have a required quorum in June 2003 when four of seven directors arguably lost their tenure, then there was no board quorum capable of validly amending the bylaws in September, and Amtrak’s governance rested entirely on the “executive committee” theory outlined above.
4. What kinds of Amtrak transactions are at risk of legal invalidity if there is no quorum?
In March 2003, the Amtrak board (with an undisputed quorum) adopted and published on the Amtrak website a “Statement of Policy Adopted by the Amtrak Board of the Directors.” In this document, the board publicly announced limits on the authority of various subordinate officers, and specified certain classes of transactions in which only the board could validly bind the company. A few examples follow.
a. Labor Contracts
Article VIII, p. 12 of the Policy Statement specifies that “The President & CEO and/or the Vice President-Labor Relations is authorized to execute collective bargaining agreements after the Board has approved the pattern collective bargaining agreement for a particular round of negotiations” [emphasis added]. In the fall of 2003—after the board had arguably been reduced to three or perhaps one member—Amtrak signed an initial or “pattern” agreement with the Transportation Communications Union. Two or more additional agreements have been signed since then.
b. Settlement of Legal Claims
Article VIII, p. 7 of the Policy Statement authorizes the President to settle claims against Amtrak or against railroads indemnified by Amtrak only up to $1 million. A Legal Affairs Committee may approve litigation settlements up to $3 million. However, “Full Board consideration of proposed settlements is required for settlements in excess of $3 million.” In February 2004, Amtrak settled litigation claims against Amtrak of around $200 million arising from defects in the Acela high-speed locomotives; the settlement involved reported cash payments of around $42 million. Even using the board membership count claimed by the Administration and Amtrak, the board had only three members as of that time, and may have had only one.
c. Development of Amtrak Property
Article II, p. 8 of the Policy Statement states that “all development projects—generally all transactions involving the use of the Corporation’s real property, including air rights, by a third party or a joint venture between Amtrak and third parties for the purpose of a significant commercial, industrial or residential development in which the Corporation participates and receives a share of the revenue generated—shall be presented to the Board for approval prior to execution.” According to recent press reports, Amtrak is currently considering bids in the hundreds of millions of dollars to sell air rights over the Chicago Union Station for construction of large office-residential towers.
d. Hiring or Firing of an Amtrak President/Chief Executive Officer
The relationship between the Amtrak board and the Chief Executive Officer (CEO), unlike many other issues, is explicitly addressed in the federal statutes as amended by the ARAA. First, the president of the company is an ex officio nonvoting board member. [49 U.S.C. 24302(a)(2)(D)] Second, “Amtrak has a President and other officers that are named and appointed by the board of directors of Amtrak” [49 U.S.C. 24303(a)]. Third, under the same provision, all such officers “serve at the pleasure of the board,” and each “must be a citizen of the United States.”
The fact that federal law explicitly addresses this relationship necessarily displaces any inconsistent provision of the District of Columbia Business Corporation Act, pursuant to Section 24301(e). If the Amtrak president and other officers must be “named and appointed by the board,” then any lack of a quorum for valid board action would seem to call in question the legal capacity of any lesser group of directors to hire or fire a CEO.
If Amtrak currently lacks a quorum of validly serving directors, then the company faces the dilemma that it must comply with its own Board approval procedures, but it lacks the legal wherewithal to amend or rescind those procedures. In the case of the quorum requirement—if in fact governed by the articles of incorporation, not the bylaws—any alteration to the quorum standard would require a two-thirds majority consent of the voting shareholders.