Shareholder Rights Flashcards
Management
Shareholders may vote to elect directors to serve on the board of directors and may unanimously agree to rules of management that depart from the governing statute (e.g., eliminating the board of directors, restricting the powers of the board of directors, or requiring dissolution of the corporation upon the occurrence of a specified event)
What are the two types of shareholder meetings?
Annual and special
Annual meeting
A corporation is ordinarily required by law to hold a shareholder meeting once a year at the place identified in the corporation’s bylaws or the corporation’s main office
Special meeting
If shareholders do not wish to wait until the annual meeting to take an action, they may call a special meeting at the place identified in the corporation’s bylaws or the main office
Requirements for actions at meetings
- Call
- Notice
- Quorum
- Voting
Call (meeting requirement)
A corporation must properly call its shareholder meetings (i.e., annual meetings are called by directors, and special meetings are called by directors, any person authorized under the articles or bylaws, or shareholders holding at least 10% of all the votes entitled to be cast
on the issue)
Notice
A corporation typically must notify its shareholders of the date, time, and place of each annual and special meeting within 10 to 60 days before the meeting date
If it is a special meeting, there must be a description of the meeting’s purpose
Exceptions to notice requirement (meetings)
Even if notice is improper, a shareholder waives the right to object by:
- Signing a formal waiver of the objection
- Attending the meeting and failing to object at the outset to the holding of the meeting
- Failing to object to a particular, non-noticed subject matter of the meeting when that subject matter first arises in the meeting
Quorum
The minimum number of shares that must be present at the shareholder meeting for any actions taken to be valid (e.g., shares representing a majority of the votes entitled to be cast)
Voting requirements
Votes must be cast only by shareholders who are eligible to vote on the issue, which is determined with reference to a set record date.
The record date may not be set more than 70 days before the meeting. Generally, one share has one vote
Voting methods
- Regular voting
- Straight voting
- Cumulative voting
- Proxy voting
- Class voting
- Voting trusts
- Shareholder voting agreements
Regular voting
When a quorum is present, a regular action is approved when the number
of votes cast in favor of the action exceeds the number of votes opposing the action
Straight voting
When electing directors, each seat on the board of directors is treated as
a separate election, so that a slim majority of votes may win the vote on each board seat (favorable to majority shareholders)
Cumulative voting
When electing directors, a shareholder first multiplies the number of
shares the shareholder owns by the number of board seats being contested. The shareholder then may allocate those total votes among the candidates as the shareholder sees fit. The director candidates who receive the most votes are elected to the board (favorable to minority shareholders)
Proxy voting
Shareholders can appoint someone to vote their shares for them; sometimes
the shareholder instructs the proxy how to vote, but other times the proxy has discretion
Revocability of proxy voting
An appointment of a proxy is generally revocable unless (1) the appointment
form states the proxy is irrevocable, and (2) the appointment is coupled with an interest (e.g., shares are used as security for a loan, shares are involved in a voting agreement, the proxy has purchased/agreed to purchase shares, or the proxy’s contract with the company requires her to be named as a proxy)
Class voting
Each class of shares votes as a separate voting group. Shares in a class may take action if (1) a quorum of those shares exists, and (2) the votes cast within the voting group
favor the action
Voting trusts
Shareholders may transfer their shares to a trustee who will vote the shares. For a voting trust to be valid, the trustee must (1) prepare a list of the names and addresses of all voting trust beneficial owners, (2) prepare a list of the number and class of shares each transferred to the trust, and (3) deliver copies of the list and agreement to the corporation at its
principal office
Shareholder voting agreements
Shareholders may enter agreements among themselves to vote for certain individuals to serve as directors of the corporation
Unanimous written consent
Shareholders may act without a meeting if all the shareholders who
would be entitled to vote consent in writing to the action
Inspection rights
Shareholders have the right to inspect the corporation’s records (e.g., bylaws,
financial statements, accounting books, meeting minutes). Statutes may limit inspection/copying to usual
business hours and upon written demand, and require that the demand be in good faith and for a proper
purpose
Proper purpose (inspection rights)
The purpose must be reasonably related to a person’s interest as a
shareholder, such as a desire to determine whether improper transactions have occurred. The
shareholder has the burden of showing credible evidence of improper conduct
Right of expression
In a publicly traded corporation, shareholders may make proposals to be considered at an annual or special shareholder meeting. Shareholders are entitled to initiate proposals when they (1) meet the SEC’s eligibility requirements regarding the value and duration of their stock ownership and (2) follow SEC procedures
Shareholder agreements
May alter the usual rules relating to corporate governance and radically
change the structure of a corporation (e.g., eliminate the board of directors or restrict the board’s powers, allow for proxy voting, allow shareholders to manage the corporation, require dissolution on a specified event).
To be effective, a shareholder agreement must (1) be unanimous and (2) be conspicuously noted
on the front or back of each outstanding stock certificate.
Option agreements
Give the corporation (or another person) the right to purchase or sell a
shareholder’s shares upon the occurrence of a specified triggering event
Direct lawsuit
When a shareholder has suffered an injury separate and apart from any injury done to the corporation, that shareholder may bring a direct suit against the corporation
Class-action lawsuit
When many shareholders of the same corporation have suffered similar direct injuries, then the shareholders may join together to bring a class-action lawsuit
Derivative lawsuit
When the injury to the shareholder arises from an injury to the corporation, the shareholder must bring a derivative suit on behalf of the corporation
Four requirements for a derivative lawsuit
- Contemporaneous ownership
- Continuous ownership
- Fair and adequate representative
- Demand
Contemporaneous ownership
The shareholder must have owned shares in the corporation on the date when the wrongful conduct occurred
Continuous ownership
The shareholder must own shares throughout the litigation
Fair and adequate representative
The shareholder bringing the lawsuit must fairly and adequately represent the interests of all shareholders in the corporation
Demand requirements
(1) The shareholder must demand that the board of directors
initiate suit on behalf of the corporation, and the board’s refusal must be improper, or
(2) a demand on the board must be excused based on futility
Improper refusal
The board must, (1) in good faith, (2) conduct a reasonable inquiry about whether it would be in the corporation’s best interests to bring suit, and (3) this decision must be made by disinterested directors. If the board fails to do this, the refusal is improper
Timing (demand requirements)
The shareholder may file a derivative lawsuit 90 days after serving the demand unless the board rejected the demand before the 90-day period expired or irreparable injury to the corporation would result during the 90-day period
Futility
The shareholder must allege facts that, if taken as true, raise a reasonable doubt that
(1) a majority of the directors are disinterested and independent, or
(2) the challenged transaction was the product of a valid business judgment
Dismissal requirements (derivative lawsuit)
The board may not seek dismissal of the shareholder’s derivative action, unless it has determined in good faith, after conducting a reasonable inquiry upon which its conclusions are based, that continuance would be contrary to the corporation’s best interests
Can a derivative proceeding be discontinued or settled without the court’s approval?
No. Once initiated, a derivative proceeding may not be discontinued or settled without the court’s approval
Expenses and attorney fees (derivative suit)
When a derivative suit results in a substantial benefit to the corporation, the court may order the corporation to reimburse the plaintiff for litigation
expenses, including attorney’s fees. But if the plaintiff brought the suit without reasonable cause or for an improper purpose, it may order the plaintiff to pay any defendant’s expenses incurred in defending the suit
