Lecture 3 - Shareholders: Rights and Voting

Question 1

What is Corporate Governance?

Answer 1

“Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. … Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring.” - OECD 2004

Question 2

Shareholders - basic rights

Answer 2

o Litigation
o Information
o Economic
o Control

Question 3

Litigation (Shareholders basic rights)

Answer 3

o Direct individual and class action lawsuits under
state law
o Derivative lawsuits under state law
o Direct individual and class action lawsuits under federal securities law

Question 4

Litigation - Limitations (Shareholders basic rights)

Answer 4

o Causes of action under state law are extremely limited.
o Contemporaneous ownership rule denies standing to anyone that was not a shareholder at the time of the action complained
o Federal securities laws:
• Apply only to public companies
• Scope of law is limited
• Trend toward limiting rights

Question 5

Information (Shareholders basic rights)

Answer 5

o State laws
• Books and records
• Shareholder lists
• Basic documents (the charter, bylaws, minutes of board meetings)

Question 6

Information - Limitations (Shareholders basic rights)

Answer 6

o State laws
• proper purpose
o Federal securities laws
• complexity of disclosure

Question 7

Economic (Shareholders basic rights)

Answer 7

o Distributions, in particular dividends
o Sale of shares
• Sale as “exit” – voices shareholder dissatisfaction

Question 8

Economic - Limitations (Shareholders basic rights)

Answer 8

• Directors have sole discretion over declaration of dividends (whether to pay them, amount, timing)
• Ability of shareholder to sell may be restricted
by law, by contract or by board of directors.

Question 9

Control (Shareholders basic rights)

Answer 9

o Election of directors
o Extraordinary matters – “fundamental changes” – mergers, dissolution of the corporation or amendments to the incorporation statutes.

Question 10

Control Sources (Shareholders basic rights)

Answer 10

o State law

o Federal Proxy law – procedural and information requirements for solicitation of proxies

Question 11

Shareholders – Formal Voting Procedures

Answer 11

Shareholders may vote:
o In annual or special meetings
♣ Quorum has to be met (the minimum number of shareholders to transact business)
♣ The ability to called special meetings is usually limited to the Board
♣ Special meetings have one specific subject to be discussed
o In person or by proxy
• By written consent, when permitted

Question 12

Shareholders – Access to the Ballot (Proposals)

Answer 12

Shareholder proposals must relate to appropriate matters

Question 13

Voting Procedures – Problems (Shareholder Voting - Challenges & Limitations)

Answer 13

o Formal procedures (e.g., meeting requirements- quorum)
o Expense, complexity of contacting other shareholders (proper purpose to obtain SH list, proxy solicitation)
o Limited scope of mandatory matters; mgmt sets the agenda

Question 14

Voting Procedures – Solutions (Shareholder Voting - Challenges & Limitations)

Answer 14

o Proxy voting; written consent in lieu of meeting when permitted
o Shareholder proposals must be included in company proxy statement, when appropriate
o Suggestions to increase matters subject to SH approval, let SH set the agenda (see e.g., Bebchuck)

Question 15

Exercise of Voting Rights – Problems (Shareholder Voting - Challenges & Limitations)

Answer 15

o Potentially divergent interests
  ♣ Retail investors vs. institutional investors
o Disincentives to SH participation 
  ♣ Rational apathy
  ♣ Free rider problem

Question 16

Institutional Investors

Answer 16

Intermediaries who largely invest other people’s money, such as mutual funds, pension funds and insurance companies

Question 17

One Share-One Vote – Problems (Shareholder Voting - Challenges & Limitations)

Answer 17

o Potentially divergent interests
o Cost of coordination when ownership is
dispersed
o Tyranny of the majority when there is a controlling shareholder

Question 18

Types of Shareholders

Answer 18

• Controlling: individual or group owning either
♣ an outright majority of the voting stock of the corporation or
♣ a substantial majority of the voting stock with the remaining shares being widely dispersed

Question 19

Protection of Minority Shareholders (Shareholders – Majority Rules)

Answer 19

o Limited fiduciary duties for controlling shareholders
o Cumulative voting for election of directors (mandatory in a few states)
o “Contractual” protections

Question 20

voting with feet

Answer 20

sell the stock if they are unhappy with the financial results

Question 21

Voting caps

Answer 21

♣ Limit the number of votes that a shareholder may cast, regardless of the number of shares the shareholder may actually possess.
♣ Voting caps therefore redistribute control and may affect the incentives for shareholder participation in shareholder meetings.

Question 22

Anti-take-over devices

Answer 22

♣ May be a serious impediment to the functioning of the market for corporate control. ♣ In some instances, take-over defences can simply be devices to shield the management or the board from shareholder monitoring.
♣ In implementing any anti- takeover devices and in dealing with take-over proposals, the fiduciary duty of the board to shareholders and the company must remain paramount.

Question 23

Directors often can find ways around the shareholder approval requirement

Answer 23

a possible merger could be restructured as an asset purchase

Question 24

Proxy contest

Answer 24

an unfriendly contest for the control over an organization. The event usually occurs when corporation’s stockholders develop opposition to some aspect of the corporate governance, often focusing on directorial and management positions. Corporate activists may attempt to persuade shareholders to use their proxy votes (i.e., votes by one individual or institution as the authorized representative of another) to install new management for any of a variety of reasons. Shareholders of a public corporation may appoint an agent to attend shareholder meetings and vote on their behalf. That agent is the shareholder’s proxy

Question 25

apprisal rights

Answer 25

the statutory right of a corporation’s minority shareholders to have a fair stock price be determined by a judicial proceeding or independent valuator, and the obligation for the acquiring corporation to repurchase shares at that price. An appraisal right is a protection policy for shareholders, preventing corporations involved in a merger from paying less than the company is worth to the shareholders.

Question 26

Two primary shareholder rights (Velasco)

Answer 26

◦ right to elect directors

◦ right to sell shares