Chap 6 - Shareholder voting in public corps

Question 1

What are the 2 defining features of public corps?

Answer 1

1. There is a operation between the owners - shareholders, and controllers - managers and directors
2. Shareholders have 3 ways to exercise control: selling, voting, suing

Question 2

What is the most centralized type of corp?

Answer 2

Publicly available ones because managers and directors have nearly all the power to make management decisions. The most a shareholder can do to directly affect operations is to vote to replace a director

Question 3

Must US corporate is ___ law, but some ___ laws govern public corps

Answer 3

state law, federal laws - Securities Act of 1933 (33 Act) – primary market transactions* Securities Exchange Act of 1934 (34 Act) – secondary markettransactions* Proxy regulation set out in Schedule 14A* Sarbanes-Oxley Act (2002) (SOX)* Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)(Dodd-Frank Act)

Question 4

What did the 33-34 Securites Acts do?

Answer 4

Congress explicitly sought to require companies toprovide more information to the market on a regular basis so thatinvestors could make informed investment and voting decisions andexercise what power they had with full and accurate information.

Question 5

What did the SOX act do in the wake of which scandal?

Answer 5

The Enron Scandal. The SOX act led to direct federal regulation of public companies. it requires public corps to use public auditors for public record keeping and verification. SOX also requires companies to have an audit committee composed of independent directors, and mandates lawyers report violations

Question 6

What did the Dodd-Frank Wall Street Reform & Consumer Protection Act do?

Answer 6

Passed in the wake of the housing recession. It enables the SEC to allow for shareholder proxy to nominate directors, mandates the disclosure of CEO compensation compared to the median employee, mandates disclosure of company hedging, and encourages a separation of CEO from Chairman of the board - comply or explain why the two roles should be executed by the same perosn

Question 7

What is proxy voting?

Answer 7

The appointment of someone to vote on a shareholders’ behalf. Ex. shareholders of a mutual fund would have the manager of the fund vote for them on company matters of. very company that would be included in that fund

Question 8

What is a proxy solicitation?

Answer 8

broadly defined to include “not only to direct requests tofurnish, revoke or withhold proxies, but also to communications which mayindirectly accomplish such a result or constitute a step in a chain ofcommunications designed ultimately to accomplish such a result” - everything on the voting agenda must be described to the shareholder

Question 9

When would a shareholder have a cause of action against a proxy?

Answer 9

If the proxy statement misstated or omitted relevant facts - what facts a shareholder would consider to be important

Question 10

What laws would apply to a company based in Delaware on a proxy voting issue?

Answer 10

Both federal and Delaware state law

Question 11

What is a proxy contest? Who are the parties in a proxy contest?

Answer 11

Waged between the current board of directors and dissident shareholders who wish to elect a new slate of directors. Kind of a public version of closed corp vote pooling agreements. Opposing factions between shareholders and managers solicit proxies from other shareholders - whoever gets the most votes wins the proxy contest

Question 12

What kinds of companied must follow federal proxy regulation?

Answer 12

All companies that* have securities listed on a national securities exchange or* have more than $10 million in assets and 2,000 or more holders ofany class of equity securities (or 500 or more who are notaccredited investors

Question 13

What does it mean to solicit a proxy?

Answer 13

Very broad definition - Solicit” includes not only “direct requests to furnish, revoke orwithhold proxies, but also … communications which may indirectlyaccomplish such a result or constitute a step in a chain ofcommunications designed ultimately to accomplish such aresult.”

Question 14

What kinds of things re exempted from being considered a proxy solicition?

Answer 14

Solicitation of less than 10 voters, the furnishing of proxy voting advice between peoples in a business relationship, those who don’t seek to act as proxies, the personal expressions of how a particular shareholder intends to vote

Question 15

Who can sue when one commits a proxy violation?

Answer 15

The SEC, the Justice Department, sometimes the shareholders in a private cause of action, nd the company itself against an insurgent

Question 16

What are the requirements for a proxy card?

Answer 16

Must show each issue to be voted upon, an option to withhold authority

Question 17

If Jim ives his proxy card and then reconsiders before the vote and sends a second proxy card, which way did he vote?

Answer 17

The latest proxy governs. Proxies can also be revoked

Question 18

When is a materially misleading proxy not actionable?

Answer 18

When the controlling shareholder had enough votes to approve the objected transaction without seeking proxies - Virginia Bankshares, Inc. v. Sandberg - If the proxy votesaren’t needed to win, then the misleading proxy solicitationmaterials don’t matter

Question 19

What is a poison pill? What is another name for a poison pill?

Answer 19

Stockholder rights plan. It is a deterrent against hostile takeovers. It allows existing shareholders to buy new shares in the company at a reduced rate which would effectively dilute the takeover company’s ownership, making it very expensive for the takeover company to actually be successful. They would almost have to buy the company twice.

Question 20

How does a poison pill work?

Answer 20

By a provision in the corporate governance (probably bylaws). When a specified amount of stock is bought by an entity, the board of directors can issue new stock at a discount to every other shareholder. It also functions to devalue the existing stock because much of it is being handed out for free.

Question 21

How does one get around a poison pill?

Answer 21

Gain control of the board of directors before triggering the pill. Run a proxy contest and elect your preferred slate of directors.

Question 22

is there an implicit poison pill?

Answer 22

Yes. All the board needs to do is resolve to adopt a poison pill.

Question 23

What is the 2 step standard to determine if a poison pill is violating a board’s fiduciary duties? - Third Point LLC v. Ruprecht

Answer 23

Court applied the Unocal standard (Know this)* (1) did the board have reasonable grounds to believe that therewas a threat?* (2) was the board’s response proportionate to the threat posed?* A. Was it draconian (preclusive or coercive)* B. Did it fall within a range of reasonable responses to the threatposed (“reasonable, not perfect”)

Question 24

What is a shareholder proposal?

Answer 24

Allows shareholders to put a proposal before the board. And, to ut such issues put to shareholders as a praxy

Question 25

Who must bear the cost of satisfying technical requirements for the proxy solicitation and submitting it to the SEC?

Answer 25

The company

Question 26

Who usually trigger a shareholder proposal?

Answer 26

Individuals, hedge funds, chraities

Question 27

What qualifies a shareholder to submit a shareholder proposal?

Answer 27

1. Continuously held either 1% or $2,000
2. for at least 1 year

Question 28

What are the limits on proposals?

Answer 28

No more than 500 words, no more than one proposal per shareholder

Question 29

When must a proposal be sent?

Answer 29

sent 120 days to the corporation before the proxy materials were mailed for the previous year’s annual shareholder meetings

Question 30

Can a repeated proposal be excluded?

Answer 30

Yes, if it is under a certain percentage

Question 31

How can a company respond to a proposal?

Answer 31

They can adopt it, they can attempt to exclude on procedural or substantive grounds (see chart), or they can attempt to negotiate

Question 32

What does company have to do if they want to exclude a proposal?

Answer 32

Must file an intent to exclude to the SEC

Question 33

What was the holding of CA, Inc. v. AFSCME?

Answer 33

Proposals that would compel the board to violate fiduciary duties cannot be upheld