Ch 34 and 35 Management Duties and Shareholder Rights Flashcards
[Conflict]
Stakeholders
Corporations have two sets of managers: directors and officers
Managers, shareholders, and stakeholders have a conflict of interest because they each have different goals:
Hostile takeovers:
- Stakeholders: those who are affected by the activities of a corporation, such as employees, customers, creditors, suppliers, and the communities in which it operates.
- Managers want three things: to maximize their income, keep their jobs, and build an institution that will survive them.
- Shareholders want a high stock price—right now, not five years from now.
hostile takeovers:
An attempt by an outsider to acquire a company in the face of opposition from the target corporation’s board of directors
The Business Judgment Rule
The officers and directors of a corporation owe a fiduciary duty to, and must act in the best interest of, both the corporation and its shareholders.
The business judgment rule accomplishes three goals:
- It permits directors to do their job.
-Business is risky. No one can guarantee perfect decision making all the time. If directors were afraid that they would be liable for every decision that led to a loss, they would never make a decision, or at least not a risky one. - It keeps judges out of corporate management.
-Shareholders would generally prefer that their investments be overseen by experienced corporate managers, not judges. - It encourages directors to serve.
-No one in their right mind would serve as a director if they knew that every decision was open to attack in the courtroom.
We dont want risk averse managers. This stumps growth.
Under the business judgment rule, managers are not liable for decisions they make:
Even managers who violate the business judgment rule are protected from liability (and their decisions are upheld) under any of the following circumstances:
- The disinterested members of the board of directors form a special committee that approves the decision. Disinterested directors are those who do not themselves benefit from the transaction.
- The disinterested shareholders approve it. The decision is valid if approved by shareholders who do not benefit from it
- Neither board members nor shareholders approve the decision, but the court determines it was entirely fair to the corporation. In determining fairness, the courts will consider the impact of the decision on the corporation and whether the price was reasonable.
- Controlling shareholders have a fiduciary duty to shareholders without control (so-called “minority shareholders”). These controlling shareholders can avoid liability under the business judgment rule only if either:
-the disinterested members of the board and the disinterested shareholders approve the decision; or
-a court determines that the decision was entirely fair - Even if the corporation has an indemnification provision in its charter protecting managers from liability for wrongdoing, they will still be personally liable for any violations of the duty of loyalty, but not the duty of care.
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Applications of the Business Judgment Rule
(Legality, Self-Dealing, Liability of Controlling Shareholders)
Legality: An illegal activity automatically violates the business judgment rule, even if it actually helps the company and is entirely fair.
Self-Dealing:Self-dealing means that a manager makes a decision benefiting either himself or another company with which he has a relationship.
Liability of Controlling Shareholders: Anyone who owns enough stock to control a corp. has a fiduciary duty to minority shareholders and is subject to the busiess judgment rule.
Corporate Opportunity
- Managers are in violation of the corporate opportunity doctrine if they compete against the corporation without its consent. To avoid liability, a manager must first offer an opportunity to disinterested directors and shareholders, and only if they turn it down does the manager have the right to take advantage of the opportunity himself.
- The manager can still avoid liability by showing that the company would have been unable to benefit from the opportunity.
Rational Business Purpose
Informed Decision
Rational Bus Purpose Informed Decision: any decision that has no rational business purpose automatically violates the business judgment rule.
Informed Decision: The duty of care requires managers to make an informed decision—that is, with the care that an ordinarily prudent person would take in a similar situation.
Not every decision will work. Try the best decision with what you got.
More Conflict: Takeovers
Takeovers: The Basics
There are three ways to acquire control of a company:
For more than 50 years, hostile takeovers have been a feature of American corporate life. As a result, a body of both common law (applying the business judgment rule) and statutes has developed to govern these conflicts. Let’s begin with a review of takeovers.
- Buy the company’s assets. Such a sale must be approved by both the shareholders and the board of directors of the acquired company.
- Merge with the company. In a merger, one company absorbs another. The acquired company ceases to exist
- Buy stock from the shareholders. This method is called a tender offer because the acquirer asks shareholders to “tender,” or offer their stock for sale.
Three scenarios are common in hostile takeovers:
1. The target has assets that the bidder genuinely wants.
2. The bidder seeks to profit either by improving the target’s operations or by dismembering the company and selling off its parts.
3. The bidder expects that the target company will buy its own stock back at a premium price.
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Takeover Defenses
(Common Law Protection: The Business Judgment Rule,Takeover Statutes)
Common Law Protection (general guidelines):
-When establishing takeover defenses, shareholder welfare must be the board’s primary concern
-If it is clear that the company will ultimately be sold, the board must auction the company to the highest bidder; it cannot give preferential treatment to a lower bidder.
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Takeover Statutes
Takeover Statutes
* A Federal Statute: The Williams Act.
The Williams Act regulates tender offers. It applies only if the target company’s stock is publicly traded. Under the Williams Act:
-Any individual or group who together acquire more than 5 percent of a company’s stock must file, within 10 days, a public disclosure document (called a “Schedule 13D”) with the Securities and Exchange Commission (SEC);
-Under Schedule 13D, the filer must disclose any plans it has to acquire the target company;
-On the day a tender offer begins, a bidder who intends to acquire more than 5 percent of the target must file a disclosure statement with the SEC;
-Within 10 days of the commencement of a tender offer, the target company must state its position on the offer;
-A bidder must keep a tender offer open for at least 20 business days initially and for at least 10 business days after any substantial change in the terms of the offer;
-Any shareholder may withdraw acceptance of the tender offer at any time while the offer is still open;
-If the bidder raises the price offered, all selling shareholders must be paid the higher price, regardless of when they tendered; and
-If the stockholders tender more shares than the bidder wants to buy, it must purchase shares pro rata (in other words, it must buy the same proportion from everyone, not first come, first served).
State Statutes
Most states have now passed laws to deter hostile takeovers.
Some common protections under state statutes:
- Freezeouts. A merger between the bidder and the target company is delayed, unless the target board approves
- Supermajority voting. A merger is prohibited or the bidder cannot vote its shares unless either the target board or a supermajority of its shareholders (typically 80 percent) approve.
- Poison pill (aka shareholder rights plan). These plans interfere with an outsider’s ability to buy company stock.
- Classified board of directors. Typically, all directors must be elected each year, which means that the entire board can be voted out at the same time.
- Disgorgement. Targets have the right to any profits earned by a shark
- Anti-greenmail. These statutes discourage bidders because they prohibit a target from buying back the shark’s stock at a premium price.
- Stakeholders. As we have seen, some states have followed the lead of the Unocal case and passed statutes that permit management, when responding to a hostile takeover, to consider the welfare of company stakeholders, such as the community, customers, suppliers, and employees, or even the regional or national economy. Since takeovers are almost always harmful to these other constituencies, company management has a ready excuse for fighting the takeover.
- Blank check preferred stock. In theory, before Casablanca issued poison pill shares, the shareholders would have to approve the new class of stock
- Asset lockup (aka “scorched earth strategy”). The target sells off the assets that the shark most wants.
- Disqualification of directors. Some companies have amended their bylaws to provide that anyone who receives payment from an activist is disqualified from serving as a director.
Shareholder Rights CH 35
Shareholder Rights CH 35
Who Are the Shareholders?
The Relationship between Shareholders and Managers
As a shareholder, you have neither thr right nor the obligation to smange the day-to-day buisness of the enterprise
Right to information
Shareholders acting in good faith and with a proper purose have the right to inspect and copy the coproration’s minute bookm accounting recordsm and shareholder lsits
Proper purpose: One that aids a shareholder in managing and protecting her investment.
- An activist investor is a shareholder with a large block of stock whose goal is to influence management decisions and strategic direction.
- Proxy advisory firms are also playing a larger role. They are firms that advise shareholders on how to vote in corporate elections
Rights of Shareholders
Right to INFO
As a shareholder, you have neither the right nor the obligation to manage the day-to-day business of the enterprise
Under the Model Business Corporation Act (Model Act), shareholders acting in good faith and with a proper purpose have the right to inspect and copy the corporation’s financial statements, accounting records, minutes of board meetings, and shareholder lists.
- A proper purpose is one that aids the shareholder in managing and protecting her investment.
Corporate Changes
(Right to Approve Changes, Appraisal Rights)
Right to Approve Changes (A corporation must seek shareholder approval in the following circumstances) :
* Dissolution. A corporation cannot voluntarily dissolve without shareholder approval.
* Amendments to the charter. Directors propose amendments to the charter, but these amendments are not valid until approved by shareholders.
* Amendments to the bylaws. Both directors and shareholders have the right to amend the bylaws, but shareholders can override the directors’ changes.
* Mergers. As a general rule, one corporation cannot merge with another unless a majority of both sets of shareholders approve.
* Sale of assets. Shareholders do not have to approve routine sales of assets—say, each printer that HP sells
Appraisal Rights:
many state laws require the company to buy back at fair value the stock of any shareholders who object to this decision
-If a corporation decides to undertake a fundamental change, the company must buy back at fair value the stock of any shareholders who object.
Protection of Minority Shareholders
(Fiduciary Duty, Ordinary Buisness Transasctions, Protection from Being Expelled)
- Fiduciary: anyone who owns enough stock to control a corporation has a fiduciary duty to minority shareholders (those with less than a controlling interest).
- Ordinary Business Transactions: Minority shareholders have the right to overturn an ordinary business transaction between the corporation and a controlling shareholder unless the corporation can show that the transaction is fair to the minority shareholders.
-Forced Sinven to pay dividends so large that the subsidiary faced bankruptcy;
-Hired other, wholly owned, subsidiaries but not Sinven; and
-Refused to force its other subsidiaries to abide by their contracts with Sinven - Protection from Being Expelled. Many states prohibit a company from expelling shareholders unless the firm pays a fair price for the minority stock and the expulsion has a legitimate business purpose
Part 1
Right to Vote
(Shareholder Meetings, Proxies, Election of Directors, Executive Compensation, and Shareholder Proposals)
A corporation must have at least one class of stock with voting rights
- Shareholder Meetings. A corporation must hold some version of an annual shareholder meeting to conduct such matters as electing directors.
-Everyone who owns stock on the **record date **is entitled to vote at the shareholder meeting, whether it is an annual or a special meeting - a** quorum** is present, meaning that a certain percentage of the outstanding shares are represented, either in person or by proxy.
- Some states (including Delaware) permit corporations to hold virtual shareholder meetings.
- Proxies: The person whom a shareholder appoints to vote for her at a meeting of the corporation; also, the document a shareholder signs appointing this substitute voter
-proxy statement: Information a company provides to shareholders in preparation for the annual meeting
-annual report: A document containing detailed financial information that public companies provide to their shareholders
