Corporations - Shareholders: Voting Flashcards
Shareholder Voting - Who Votes? - Record Shareholder and Record Date
The “record shareholder” as of the “record date” is eligible to vote at a shareholder meeting.
Record shareholder = the person shown as the owner in the corp records.
Record date = voter eligibility cut off date fixed by board of directors but may not be more than 70 days before meeting. By default, it’s the day the notice of the meeting is mailed to the shareholders. Unless the articles provide otherwise, each outstanding share is entitled to 1 vote.
EXCEPTIONS:
1) Treasury Stock = if the corp reacquires stock before the record date, so the corp is the owner of it as of the record date, no one votes on that stock because it was not outstanding as of the record date.
2) Death of Shareholder = even if shareholder dies, their estate’s executor can vote on the shares
3) Voting By Proxy = a shareholder may vote their shares in person or by proxy executed in writing. A proxy is 1) a writing (fax and email are fine), 2) signed by the record shareholder, 3) directed to the secretary of the corp, 4) authorizing another to vote the shares
–» Revocation of Proxy: A proxy is generally revocable by the shareholder and may be revoked by the shareholder attending the meeting to vote themselves, in writing to corp secretary, or by appointing another proxy.
–» Irrevocable Proxy: a proxy is irrevocable only if it states it is and is coupled with an interest or given as security. This means the proxy holder has some interest in the shares other than voting. It could include an option to buy the shares or a pledge of the shares. Any interest beyond the simple interest in voting the shares.
–» Statutory Proxy Control: 1: must have full and fair disclosure of all material facts with regard to any management-submitted proposal upon which the shareholders are to vote; 2: material misstatements, omissions, and fraud in connection with the solicitation of proxies are prohibited; and 3: management must include certain shareholder proposals on issues other than election of directors, and allow proponents to explain their position.
Shareholder Voting Trusts and Voting Agreements
This is the solution for “block voting” where you have a group of smaller shareholders who want to increase their influence by voting as a block. They can do so through a voting trust or voting agreement.
Voting Trust = a written agreement of shareholders under which all of the shares owned by the parties are transferred to a trustee who votes the shares and distributes the dividends in accordance with the provisions of the voting trust agreement.
Requirements for Voting Trust =
1) a written trust agreement controlling how the shares will be voted
2) a copy of the agreement (including names and addresses of the beneficial owners of the trust) given to the corp
3) legal title to the shares is transferred to the voting trustee AND
4) original shareholders receive trust certificates and retain all shareholder rights except for voting
Voting Agreement = voting or “pooling” agreements provide for how they will vote their shares.
Voting Agreement Requirements = agreement must be in writing and signed. Need not be filed with the corp and is not subject to any time limit. States are split on whether voting agreements are specifically enforceable. States that grant specific performance means there’s no need for a voting agreement.
Where Do Shareholders Vote?
Convening Meetings = 2 kinds of meetings:
1) Annual Meetings = corps must hold these or a shareholder can petition the court to order one to be held. Mostly used to elect directors.
2) Special Meetings = may be called by 1: the board of directors, 2: the president, 3: the holders of at least 10% of the outstanding shares, or 4: anyone else authorized to do so in the articles or bylaws
Notice = shareholders must be notified of meetings not fewer than 10 or more than 60 days before the meeting. Notice must be in writing to every shareholder entitled to vote. Notice may be waived in writing or by attendance.
–» Contents of Notice: must state the date, time, and place. For special meetings, must also state purpose. Can’t do anything else at that meeting other than what it says is its purpose.
–» Consequences of Failure to Give Proper Notice: whatever action was taken at the meeting is voidable unless those were not sent notice waive the notice defect. They can waive either expressly (in writing and signed) or impliedly (the shareholders attend the meeting without objecting at the outset).
How Do Shareholders Vote?
Shareholders generally get to vote on these things:
1) to elect directors
2) to remove directors
3) on fundamental corporate changes
Quorum: every time shareholders vote, must have quorum. Quorum focuses on number of shares represented. A quorum is a majority of outstanding shares entitled to vote unless the articles or bylaws require a greater number. A shareholder quorum will NOT be lost if people leave the meeting (which is unlike a directors’ meeting, where the quorum is lost if too many directors leave).
Voting In General: If a quorum is present, generally shareholders will be deemed to have approved a matter if the votes cast in favor of the matter exceed the votes cast against the matter, by default. This is true even if most present abstain and only a tiny number of votes in favor exceed a tiny number opposed.
Cumulative Voting Optional
Cumulative voting comes up only in close corporations. It gives smaller shareholders a better chance of electing someone to the board.
Available ONLY when shareholders elect directors.
Contrast with straight voting, where there is a separate election for each seat on the board being elected. Each outstanding share gets one vote for each seat. The candidate who gets more votes than another is elected.
But in Cumulative Voting, we don’t vote for each seat individually, but rather have one at-large election where the top finishers are elected. To determine voting power with cumulative voting, multiply the shareholder’s number of voting shares times the number of directors to be elected. The total number may be divided among the candidates in any manner that the shareholder desires, including casting all for the same candidate.
Cumulative Voting does NOT exist by default. It must be provided for in the articles.
Class Voting on Article Amendments
Whenever an amendment to the articles of incorporation will affect only a particular class of stock, that class has a right to vote on the action even if the class otherwise does not have voting rights.
Shareholder Resolutions
Shareholders are permitted to submit resolutions or proposals for action at shareholder meetings. Shareholders may express views on corporate matters through nonbinding resolutions. Shareholder resolutions that seek to bind the corp or board should involve a proper subject for shareholder action like seeking an amendment to the bylaws.
Stock Transfer Restrictions
Shareholders can freely transfer stock in general. But sometimes people want to restrict transferability especially in a close corp to keep outsiders out.
Restrictions are fine if reasonable. Valid if not an undue restraint on alienation. A right of first refusal is valid because it does not restrict the ability to transfer, but only requires the shareholder to offer the stock first to the corp.
To enforce against transferee/3rd party purchaser, the 1) restriction must be conspicuously noted on the stock certificate or 2) the transferee must have had actual knowledge of the restriction at time of purchase.
Shareholders’ Inspection Rights
Shareholders have the right to inspect and copy the books and records of the corp. Generally, all shareholders have standing to access those records.
Procedure: depends on material sought. For non-controversial things, shareholders have unqualified right of access. For more controversial things, their access is qualified.
Unqualified Rights to Certain Records: (shareholders can access regardless of purpose)
1) corp’s articles and bylaws
2) board resolutions regarding classification of shares
3) minutes of shareholders’ meetings from the past 3 years
4) communications sent by the corp to shareholders over the past 3 years
5) a list of the names and business addresses of the corp’s current directors and officers
6) a copy of the corp’s most recent annual report.
The shareholder must make a written demand at least 5 business days in advance
Qualified Right: for controversial things like excerpts of the minutes of the board meetings, the corp’s books, papers, and accounting records, or shareholder records, must state a proper purpose
–> Proper Purpose = one reasonably related to the person’s interest as a shareholder
Must give 5 business days’ advance written notice
Failure to Allow Proper Inspection: if the corp fails to allow proper inspection, shareholder can seek court order. If the shareholder wins, could recover costs and atty fees incurred
DIRECTORS don’t have to go through this procedure. They have UNFETTERED access to this material.
Distributions
Types of Distributions = dividends, repurchases of shares (like a redemption but voluntary), redemptions of shares (forced redemptions to the corp at price set in articles), distribution of assets upon liquidation, etc
Rights to Distributions = at least 1 class of stock must have a right to receive corp’s net assets upon dissolution. other than that, distributions are generally discretionary
-> Compelling Distributions: shareholders have no right to compel distributions UNLESS they can make a very strong showing of abuse of discretion, like if the corp consistently makes profits and board refuses to declare dividend while paying themselves bonuses. Suits to compel distribution are DIRECT, not derivative.
-> Which shareholders get dividends? Record shareholders of the stock as of the record date. Preferred stock paid before common. See pg 57
Which funds can be used to make a distribution?
Traditional View - 3 funds:
1) earned surplus = generated by business activity and consists of all earnings minus all losses minus distributions previously paid
2) stated capital = generated by issuing stock so when the corp issues stock it can allocate the proceeds between stated capital and capital surplus. Stated capital can NEVER be used for distributions.
3) capital surplus = generated by issuing stock. Computed by payments in excess of par plus amounts allocated in a no-par issuance. CAN be used for distributions if you inform shareholders.
Modern View - Insolvency
Corp can’t make a distribution if it’s insolvent or if the distribution would render it insolvent (being unable to pay debts or having fewer assets than debts)
Liability for Unlawful Distributions
Director Liability = directors are jointly and severally liable for improper distributions. A director who votes for or assents to a distribution that violates the rules is personally liable to the corp for the amount of distribution that exceeds what could have been properly distributed.
–> Defense: GOOD FAITH RELIANCE 1) based on financial statements prepared according to reasonable accounting practices or 2) by relying on info from officers, employees, legal counsel, accountants, etc. A director who is held liable for an unlawful distribution is entitled to contribution 1) from every other director who could be held liable (the ones who voted for it) and 2) each shareholder for the amount she accepted while knowing the distribution was improper.
Shareholder Liability = shareholders are personally liable ONLY if they knew the distribution was improper when they received it
