Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits Flashcards
What is a “principal-agent relationship”?
An arrangement in which one party (the agent) has authority to act for or on behalf of another party (the principal). Such an arrangement imposes a duty on the agent to act in the principal’s best interest.
What are “Agency Costs”?
Direct or indirect costs borne by the principal in a principal-agent relationship owing primarily to information asymmetries.
Agency costs include the cost of monitoring and assessing the agent as well as missed opportunities.
What is a “Controlling Shareholder”?
An individual or entity that owns a majority of the voting rights in a corporation.
What is a “Minority Shareholder”?
An individual or entity that owns less than a majority of voting rights in a corporation.
What is a “share class”?
Types of equity securities that have different voting rights - for example, an issuer may issue Class A shares that carry one vote per share and a Class B share that carry ten votes per share.
What is a “Dual-class structure”?
A capital structure that includes at least two classes of equity shares with unequal voting rights.
What is an “Annual General Meeting” (AGM)?
A yearly meeting of the corporate board of directors and shareholders, typically held in person and digitally, during which votes on directors, compensation plans, shareholder resolutions, and other important measures are held.
What are “extraordinary general meetings” (EGMs)?
Meetings besides an AGM of the corporate board and shareholders, typically held to deliberate and vote on urgent matters.
What is “proxy voting”?
A form of casting a ballot in an election in which a voter authorizes a representative to vote on their behalf according to to instructions.
What is “shareholder activism”?
A range of actions by a corporation’s shareholders that are intended to result in some change in the corporation, typically a change in the board of directors, management, or strategy.
What is a “shareholder derivative lawsuit”?
A legal action by a shareholder on behalf of a company, not the shareholder personally, against a third party. Often, the third party is a director or manager who the shareholder believes has harmed the company.
What is a “proxy contest”?
When a shareholder or group of shareholders campaigns for certain matters they have submitted to a shareholder vote, often a slate of directors who oppose the incumbent board and management. The incumbent board and management simultaneously campaign for their side.
What is a “tender offer”?
A solicitation by a current or prospective shareholder to other shareholders to acquire a substantial percentage, including 100%, of shares at a specified price.
The action is usually undertaken by a potential acquirer whose bid was rejected by the issuer’s board of directors, prompting the potential acquirer to appeal directly to shareholders.
What is a “hostile takeover”?
When a potential acquirer seeks to acquire a company (the target) against the wishes of the target’s board of directors.
Typically a tender offer is used to carry out the hostile takeover, against which a board might use a poison pill in its defense.
What is a “poison pill”?
Officially known as a shareholder rights plan, a poison pill is a hostile-takeover defense adopted by boards according to rules specified by the corporate charter.
There are several types of poison pills. Generally, they allow shareholders, excluding the hostile shareholder, to buy newly-issued shares at a discounted price. This would then dilute the bidder’s ownership percentage, rendering it impossible for the bidder to attain control.
