Shareholder Rights Flashcards
How do shareholders exercise their power?
Sell
Vote
Sue
What does selling stock accomplish?
Depresses price of stock, project Board weakness, opens company to a hostile takeover
What is the issue with selling stock in a closely held corporation?
No ready market for sale, as stock is concentrated in a small market of shareholders
Voting
Each share is entitled to one vote, unless otherwise stated in charter. Shareholders may vote via proxy
Straight v. Cumulative voting
Straight voting is one vote per share per vacant seat. Cumulative voting is one vote per share for all seats-total number of votes based upon number of shares and divided as shareholder chooses
Why do minority shareholders prefer cumulative voting?
Weakens majority by decreasing their number of votes while allowing multiple minority shareholders to pool together and essentially guarantee at least one seat
What is a shareholder agreement?
How are they enforced?
Contractual obligation between shareholders to vote together
May be enforced by specific performance
What does the DGCL require of shareholder agreements?
In writing and signed by parties
Transfer restrictions
Default is that shares are freely transferable. Can be restricted, but must comply with statutory requirements and be reasonable
Restriction on transfer must be noted conspicuously on certificate representing security. If not, only enforceable if person receiving had actual knowledge of restriction
Supermajority
Minority shareholders have veto power on decisions. Allowed if in charter or bylaws
What is the difference in supermajorities in DGCL V MBCA?
DGCL: adopted by simple majority. If in CHARTER, only can be repealed by supermajority
MBCA: adopted by same vote as supermajority and repealed by supermajority
Trusts
Splitting of legal and equitable ownership. Shares are placed in a trust and trustee exercises power over it. Governed by trust agreement
Preemptive Rights
Anti-dilution provision which allows increase in stock to maintain relative voting power. Opt in, not by default, and usually only in closely held corporations
What is a deadlock?
Shareholders become unable to make decisions
If a corporation is in a deadlock, the court may
Use broad discretion to craft remedies, up to and including arranging the sale of the corporation.
What is the problem with selling shares when a company is in deadlock?
As there is no market, the fair value of the stock is not reflected
Irreparable injury: deadlock
Injury cannot be cured with time or payment of money
Allows appointment of custodian
Receiver v. Custodian
Custodian is for a solvent company, receiver for insolvent. Custodian typically resolves problem, receiver dissolves
Oppression of Minority Shareholders: Mass view
Heightened fiduciary duty. Fact specific inquiry in whether controlling group can demonstrate a legitimate purpose for action. If established, minority must show could have been achieved through less harmful means
Oppression of minority shareholders: Deleware
No special fiduciary duty
Proxy solicitation
If board is considering extraordinary action, will likely attempt to solicit proxies from shareholders with voting rights. Shareholder gives proxy instructions on how to vote shares
Proxy disclosure
Document detailing all pertinent information needed to make an informed decision when voting at annual meeting
A proxy statement cannot
Contain false or misleading information, nor omit a material fact
Note-material if it is information a reasonable shareholder would consider important in deciding how to vote
Defensive actions and standard
Actions taken to make a company less attractive to takeovers. Judged under Unocal standard
