Shareholders Flashcards
Shareholder Standing:
π must have equity interest in corporation, more than a share of stock.
(1) Nature of the Holding: SH of record or beneficial owner?
(2) Timing: P must have been SH - (a) at time of the wrongdoing; (b) at time suit was filed; and (c) throughout litigation
(3) Countervailing Interests: No interests adverse to the corporations success; No short selling.
Tooley v. Donaldson: Deciding Between a Direct and Derivative Suit
Test:
(1) Who suffered the alleged harm, the corporation or the suing SHs individually?
(2) Who would recieve the benefit of any recovery or other remedy, the corporation or the SHs individually?
Incumbent Director Candidate:
Already on board and election expenses paid whether they win or lose.
Insurgent Director Candidate:
Outside candidate and corporation does not reimburse insurgent’s election expenses unless they are elected and SH approves.
Entrenches incumbent management and discourages SH activism.
Contested Election Situations:
(1) Hostile Takeover;
(2) Activist Investor
Contested Vote: Corporation pays for incumbent if they win or lose.
Expenses must be reasonable and proper.
Pre-Suit Demand Requirement
(A) Must be Made to Board; OR
(B) Allege with particularity why demand should be excused.
- Demand Futility Test
- Only applicable to derivative suits, NOT direct suit.
United Food and Commercial Workers Union v. Zuckerberg: NEW Rule for Demand Futility
Test:
(1) Did the director receive a material personal benefit from the alleged misconduct that is the subject of the litigation demand?
(2) Does the director face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand?
(3) Does the director lack independence from someone who receive a material personal benefit from the alleged misconduct that is the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand?
Note:
- Ask for EACH director on demand board.
- Focus on whether directors would have been able to make a good decision.
Shareholder Voting Rights:
Elect directors; Approve fundamental transactions; and Initiate Action.
Special Litigation Committees
Committee of independent directors formed by board to investigate and make recommendations about whether to pursue litigation in a derivative action.
Einhorn v. Culea: Indepence Test
Test: Whether a member of a committee has a relationship with an individual ∆ or the corporation that would reasonably be expected to affect the member’s judgment with respect to the litigation at issue.
Factors to Determine Independence of Director:
(1) Status as a ∆ and potential liability
(2) Participation in alleged wrongdoing or financial benefits from challenged transaction.
(3) Dealings with an individual ∆
(4) Personal, family, or social relations with individual ∆’s
(5) Economic relationships with the corporation
(6) Number of members; AND
(7) Roles of corporate counsel and independent counsel.
Note: Considered as totality of the circumstances
What is Structural Bias?
When current directors sued are the ones who chose the new, non-defendant directors.
In re Oracle Corp: Independent Directors?
Question of independence turns on whether a director is, for any substantial reason, incapable of making a decision with only the best interest of the corporation in mind.
Test focuses on impartiality and objectivity.
Auer v. Dressel: Shareholder Power to Initiate Action
(H):
Resolution: Shareholders cannot make board change executive officers. Infringes board powers to run corporation.
Amend Bylaws: Shareholders have right to amend bylaws.
Removal Power: Shareholders have inherent power to removed board members; Must give notice, reason why, and opportunity to rebut accusation.
Campbell v. Loew’s (DE Ch. 1957): Battle for Control between Two Majority SH’s
(H): SHs have inherent right between annual meetings to fill newly created vacancies; SHs have inherent power to remove directors for cause.
Process of Removal:
(1) There must be notice of the charges;
(2) For cause (good reason)
- Harassment was “for cause” for removal (deliberate instruction)
(3) Opportunity to be heard (able to present defense)
CA Inc. v. AFSCME
Corporations pay for re-election but NOT for election expenses of new directors.
Shareholders can make rules about procedures that the company does.
How do shareholders vote?
Only at Meetings: Annual or Special
Annual: Required to elect directors; Public Companies must vote on “Say on Pay”; Have to have every year, shareholder can bring attention after 15 months; Have to have notice of meeting at least 10 days in advance, no more than 60 days.
Special Meeting: Notice has to have time, place, and purpose; Called by either board or person authorized in articles/bylaws.
No Meeting: Written Consent (DE Statute: Only need majority outstanding votes to take action by written consent).
How/When is Vote Valid?
Quorum: Most require MAJORITY of shares entitled to vote (Number of shares, not number of SHs).
In Person or Proxy: May give proxy holder discretion to vote as they please or direct vote.
Voting Requirements: Simple Majority ( Everyone who shoed up, more people voted yes than no); or Absolute Majority (More than half of TOTAL number of shares, no matter who present).
How do you determine WHICH SH’s vote?
Record Date: Day that corporation picks for date of entitlement to vote.
Record Date can be manipulated.
Shareholder Voting (How Many Votes?)
Default Rule: One Share, One Vote.
Permissible: Different Classes of Stock (Supervoting Stock and Non-Voting Stock)
Electing Directors: Voting
Straight Voting: Vote all shares for each individual director spots.
Cumulative Voting: Vote all shares for one director.
Voting Trusts
Arrangement shareholders make (usually in close corporations) about how things are going to happen.
Taking legal title and transferring to voting trust.
Trust Agreement: Document controlling how shares are voted.
Trustee: Votes on behalf of trust (beneficiary).
Voting Pool Arrangements:
Agreement of some sort that you are all going to vote the same way.
Plurality Voting v. Majority Voting
Majority Voting: Each elected director must obtain a majority.
Plurality: Top vote getters for open directorship win those seats (DEFAULT Rule)
Note: Can stagger voting; Avoid shareholder taking control of board at one single voting.
Blasius Industries (DE 1988): Interference with Shareholder Voting
(R) Directors breach their fiduciary duty when they take an action to interfere with shareholder voting, even if it is in a good faith pursuit of corporation’s best interest.
- Even if acting with subjective good faith, the board could not act for principle shareholders; interfering with effectiveness of vote.
- Unintended breach of duty of loyalty
Poison Pill:
Thing company does when someone gets too many shares and the board decided to offer all other shareholders, except big one, more shares at a cheap price.
