Problems of Control Flashcards
What are Proxies and Proxy Fights?
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Proxies & Proxy Fights: Through the use of proxies shareholders may authorize someone else to vote their shares at a shareholder meeting so that things can get accomplished.
- Each year, shareholders must elect the board, at which time the proxies are often dispatched. A proxy voting relationship gives rise to an agent-principal relationship.
- Occasionally an insurgent group may seek to oust an incumbent board and seeks proxies to vote consistent with the ouster at the shareholder meeting. Soliciting proxies may cost substantial money
Proxy Fights - Reimbursement of Costs
- The incumbent board may use corporate funds to keep itself in power so long as there is a bona fide policy dispute (there must be a dispute over business policy, as opposed to the board’s mere self-interest in maintaining their director position).
- The incumbent board may be reimbursed whether they win or lose, because they have a right to defend against attacks.
- The insurgent group may recover reasonable and proper expenses from the corporation, only if they win (because such a win essentially validates the merit of their efforts).
What is a Shareholder Proposal?
Shareholder Proposals = is a shareholder’s recommendation or requirement that the company and/or its board of directors take action, which the shareholder intends to present at a meeting of the company’s shareholders.
Shareholder Proposal ** - Presumption**
Presumption is that the corporation must include the proposal in its proxy statement unless there is a proper exclusion. The burden falls to the company to demonstrate it is entitled to exclude a proposal.
Shareholder Proposal - Eligibility
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Eligibility: To be eligible to submit a proposal a shareholder must have continuously held at least $2,000 in market value or 1% of the company’s securities for a least one year by the date of submission and through the date of the meeting.
- The proposal may not exceed 500 words, and
- must be received at least 120 days before the date the proxy statement is released.
Under which 13 circumstances may a corporation exclude a shareholder proposal?
- Improper under state law
- Violation of law
- Violation of proxy rules
- Personal grievance/special interest
- Relevance: Proposal relates to operations that account for less than 5% of company’s net assets and not significantly related to the company’s business (economic, ethically, or socially)
- Absence of Power or Authority
- Management Functions: relates to company’s ordinary business operations
- Director Elections: proposal relates to election
- Conflicts: proposal conflicts with one of the company’s own proposals
- Substantially Implemented: company has already substantially implemented the proposal
- Duplication: the proposal substantially duplicates another proposal that will be included in the proxy materials
- Resubmission: the proposal deals with substantially the same subject matter as another that has within the previous 5 calendar years (so long as the proposal received less than 3% of the vote if proposed once in the last 5 years, less than 6% if proposed twice in the last 5 years, or less than 10% if proposed three or more times, or
- **Specific amounts of dividends. **
What is a Close Corporation?
Corporations in which shareholders are also managers of the business (integration of ownership and control), tend to have a smaller number of shareholders, and there is typically no ready market for the shares.
What is Cumulative Voting?
Cumulative Voting: to ensure minority shareholders are guaranteed some representation, each shareholder is allowed to vote by the number of shares he holds times the number of directors to be elected. They can divide them equally or use them all at once.
What are Vote Pooling Agreements?
Vote Pooling Agreements: in a close corporation, shareholders can agree to pool their votes and request that a third party intercede when there is a disagreement about how to vote said shares. These voting agreements will be enforced so long as the agreement is not fraudulent or harmful to the public.
What is a Voting Trust?
- Voting Trust: the shares are transferred into trust and the only person allowed to vote them is the trustee, who is instructed to vote in a certain way.
- The trust must be in writing and it becomes a public document because could lead to a supermajority.
- Trustee has a fiduciary duty and shareholder can sue the trustee for breach of fiduciary duty.
- They are self-enforcing and good for giving stock to children.
What is Class Voting?
Class Voting: dividing up shares of the corporation into classes-some have voting rights, others do not. This divides power.
What are Voting Agreements?
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Voting Agreements: shareholders can agree to pool their votes and request that a third party intercede when there is a disagreement about how to vote said shares.
- Elected directors are supposed to choose officers who will act in the best interst of all shareholders, so an agreement to bind each other at the director level traditionally constituted a violation because it sterilized the board.
- However, in close corporations, shareholders can bind each other at the director level if such an agreement is unanimous, or there is no objecting minority shareholder interest (Clark v. Dodge and Galler v. Galler).
- Furthermore, a shareholder agreement in close corporations that controls board voting and management decisions should still be enforced so long as the agreement is not fraudulent or harmful to the public (Galler v. Galler).
Describe the Fiduciary Duties of Shareholders in Close Corporations…
Shareholders in close corporations owe one another more significant fiduciary duties because the close corporation shareholders are more like partners and owe each other a fiduciary duty of the utmost good faith and loyalty.
What is the Freeze Out Test?
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Freeze out test: When there is a majority shareholder oppressing a minority shareholder and they are trying to freeze-out the minority, then it is the majority’s burden to demonstrate that business decisions were made for a legitimate business purpose. The court affords the majority deference to determine a legitimate business purpose for what it did. Then the minority has the burden to show there was a less harmful alternative.
- Majority Oppressing a Minority: duty of loyalty claim which is inherent fairness test
- Majority Oppressing a Minority and looks like a Freeze-out
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Freeze-Out in Close Corporation:
- Majority’s burden to demonstrate that business decisions were made for a legitimate business purpose. The court affords the majority deference to determine a legitimate business purpose for what it did
- Court also place a burden on minority shareholders to demonstrate there was a less harmful alternative
Involuntary Dissolution in **MBA Jx - **
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MBA JX court may dissolve a corporation in a proceeding by a shareholder if the shareholder proves that
- (1) corporate assets are being misapplied or wasted,
- (2) that the directors are deadlocked and the corporation has subsequently suffered or will suffer irreparable injury,
- (3) have failed to elected directors at two consecutive annual meetings OR
- (4) that the directors in control have acted in a manner that is illegal, oppressive or fraudulent.
