The Voting System of Corporations

Question 1

Why do corporations have voting systems?

Answer 1

Well, there are collective actions problems. Without voting, small shareholder would have little incentive to participated in corporate governance.

Question 2

Modern collective action problem

Answer 2

There are no controlling shareholders but many institutions with large stakes, so they influence the corporate governance.

Question 3

What do shareholders vote on?

Answer 3

1) Election of directions (having a board is mandatory)
2) Fundamental changes to the company.
3) Shareholder resolutions

Question 4

What is a example of a “fundamental change in the corporation” i.e., something the shareholders must vote on.

Answer 4

1) Amendments to the charter

2) Transformational transactions: Mergers, substantial sales of assets, and dissolutions

Question 5

What is the default rule for number of votes per share?

Answer 5

There needs to be at least one class of stocks that have a one-for-one voting mechanism, i.e., one vote per stock per seat up for election. E.g., if you have 100 shares, you can cast 100 votes per seat. (Unless the charter specifies otherwise.)

Question 6

Are annual shareholder meetings mandatory?

Answer 6

You bet your ass they are.

Question 7

What is the minimum and maximum period of notice for the annual meeting?

Answer 7

10 days and 60 days respectively.

Question 8

What is the default quorum? (i.e., the minimum number of shares voting.)

Answer 8

Majority of the shares.

Question 9

What is the proxy system?

Answer 9

If a shareholder cannot attend the annual shareholder meeting, he can vote by finding a representative, a proxy, who goes to the meeting on his behalf and votes.

Question 10

What are the three meanings of proxy?

Answer 10

1) The card that the shareholders uses to cast her vote. (Proxy card)
2) A representative who casts a vote on behalf of the shareholder
3) The filing provided to all shareholders on items the company will vote upon (proxy statement)

Question 11

What are the three mandatory features of a corporation?

Answer 11

1) A board of directors
2) One class of voting stock
3) An annual election of directors

Question 12

What are the two types of boards?

Answer 12

1) Unitary board: a single class of directors that are annually elected (there is only one class)
2) Staggered board: Allows for up to three different classes (in Delaware) where voters will vote for only one of those classes each year. (So, if there are three classes, class A will be voted on every three years. But there will still be a vote for a class each year.)

Question 13

How can staggered boards be adopted?

Answer 13

Can be adopted

(1) by charter,
(2) an initial bylaw, or
(3) a bylaw adopted by a shareholder via voting.

Question 14

What is a contested election?

Answer 14

More nominees than open seats.

Question 15

What is an uncontested election?

Answer 15

An equal number of nominees and open seats.

Question 16

What are the two main styles of voting?

Answer 16

1) Straight

2) Cumulative

Question 17

What are the two types of straight voting?

Answer 17

1) Majority voting (common in uncontested elections)

2) Plurality voting

Question 18

What are the two types of majority voting schemes?

Answer 18

1) Majority of shares present at meeting and entitled to vote
2) Majority of shares voting

Question 19

How does the Majority of shares present at meeting an entitled to vote scheme work?

Answer 19

Director elected if: Votes for > (votes withheld + votes against). This is the default rule in Delaware.

Question 20

How does the majority of shares voting scheme work

Answer 20

Elected if vote for > votes against (votes withheld are irrelevant)

Question 21

How does plurality voting work in a contested election

Answer 21

If votes for director A > votes for director B then A is elected. (Plurality voting is the norm in a contested election)

Question 22

Hoes does plurality voting work in an uncontested election

Answer 22

Directed elected if votes for > 0. (Plurality voting is the norm, but uncommon in an uncontested election.)

Question 23

What is cumulative voting?

Answer 23

Each shareholder gets votes equal to number of shares owned multiplied by the number of seats to be filled. He can then case all the votes for a single candidate or distribute the votes among two or more candidates. (These are relevant in contested elections and this style of voting is opt-in via charter.)

Question 24

If a director is not elected in a contested election what happens?

Answer 24

Companies usually follow one of two approaches.

(1) The incumbent (currently holding position) direction must resign and the board can choose whether to accept his resignation; or
(2) The director may no longer serve on the board because she failed to obtain a majority.

Question 25

Why would we use cumulative voting?

What is an argument against it?

Answer 25

If there is a shareholder with 51% of the shares, then they will always be able to elect under straight voting. So, it improves the likelihood of minority representation on the board.

However, this could undermine collegiality of the board.

Question 26

A company has 300 shares outstanding. A owns 199 shares and B owns 101 shares. The company has a three person board elected on annual terms. In a straight voting scheme, would A be able to elect each seat?

Answer 26

Yes! He would be able to win each seat 199 to 101. Remember, each person gets to cast one vote for each seat.

Question 27

A company has 300 shares outstanding. A owns 199 shares and B owns 101 shares. The company has a three person board elected on annual terms. In a cumulative voting scheme, would B be able to win a seat?

Answer 27

Yes! B would be able to cast 303 (100*3) votes FOR ONE CANDIDATE (as opposed to straight voting where you are only able to cast one vote per candidate.)

A’s votes of 597 cannot be divided up three ways so that all three groups shares are greater than 303.

Question 28

Example: uncontested election—There are 120 shares outstanding and the shareholders vote-one-for-one below.

Ashok: 25 (for); 10 (Against); 65 (Abstain)

Janet: 51 (for); 49 (Against); 0 (Abstain)

Under plurality voting, who is elected?

Answer 28

Both! Under plurality voting, a director is nominated if the votes for > 0.

Question 29

Example: uncontested election—There are 120 shares outstanding and the shareholders vote-one-for-one below.

Ashok: 25 (for); 10 (Against); 65 (Abstain)

Janet: 51 (for); 49 (Against); 0 (Abstain)

In a majority voting scheme, who wins?

Answer 29

It depends! It depends on which majority voting scheme we use.

Under Majority of shares present at meeting an entitled to vote: Janet wins.

This is because her votes of 51 are > her votes of 49 (against plus abstain)

Under majority of share voting: Ashok wins because his 25 votes are > the votes against him (withheld votes are irrelevant.) AND Janet wins because he 51 votes > her 49 against.

Question 30

How do contested elections work, procedurally?

Answer 30

Well, remember in a contested election there are more candidates than open seats. These are rare..

Each voter receives a proxy card, one with the candidates of the incumbents, and one with the candidates of the dissidents. Each shareholder can only vote on one card, and each gets one vote for each candidate on that card.

Question 31

100 shareholders vote in a contested elected.

The incumbents are as follows:

Ashok = 40 for; 5 against; 0 abstain

Janet clark has 34 for; 11 against and; 0 abstain

Walter white has 34 for; 11 against; and 0 abstain

The dissident card is as follows:

Saul Goodman has 55 for; 0 against; and 0 abstain

Skyler White has 45 for; 10 against; and 0 abstain

Gus Fring has 44 for; 11 against; and 0 abstain

Under plurality voting, who would be elected to the board?

Answer 31

Under plurality voting, Saul has the most votes, so he is in. Skyler has more votes than Gus or any candidate on the incumbent card, so his in. And Gus has more votes than anyone on the incumbent card, so he is in as well. (Remember plurality in contested elections = elected if votes for candidate A > votes for candidate B.)

Question 32

100 shareholders vote in a contested elected.

The incumbents are as follows:

Ashok = 40 for; 5 against; 0 abstain

Janet clark has 34 for; 11 against and; 0 abstain

Walter white has 34 for; 11 against; and 0 abstain

The dissident card is as follows:

Saul Goodman has 55 for; 0 against; and 0 abstain

Skyler White has 45 for; 10 against; and 0 abstain

Gus Fring has 44 for; 11 against; and 0 abstain

Under majority voting, who would be elected to the board?

Answer 32

This is trickier than it seems.

First, we need to see which card (if any) got a majority of votes. Then, we need to see if any candidate on that card got more than the majority of the votes for them (in this case, a candidate would need 51).

Because each shareholder can only choose one card, there will either be one card with the majority of the people voting on it, or there will be a tie (no one will win, then, usually the incumbents stay on the board.)

Because Saul is the only one with a majority of votes (55 > 51) on the majority card, he is elected.

But, who fills up the other seats? Typically the incumbent board. So two of them will be appointed.

How to prevent this from happening? Adopt plurality voting in the bylaws. 85% of companies that use majority voting in uncontested elections will use plurality voting in contested elections.

Question 33

Example of cumulative voting.

Shareholder A: 70 shares;

Shareholder B: 30 shares;

Election of 5 directors.
How many votes does A get under cumulative voting?

How many votes does B get?

Answer 33

1) A will get 705 =350 votes
2) B will get 305 = 150 votes.

Note here, A should be strategic and not use too many votes on one or two candidates or B might end up getting more people on the board than him.

A’s Candidate 1: 150* 
A’s Candidate 2: 150*
A’s Candidate 3: 25 
A’s Candidate 4: 25 
B’s Candidate 1: 50*
B’s Candidate 2: 50*
B’s Candidate 3: 50*

• Representing the new five man board.

Question 34

How can a director be removed under DGCL?

Answer 34

A director can be removed with for without cause. §141(k)

UNLESS

1) The board is staggered (unless the charter provides otherwise); or
2) There is cumulative voting

In these situations, you need cause.

Question 35

What constitutes cause for removing a director?

Answer 35

Generally, poor business decisions, without more, will not constitute cause. There needs to be some negligent, or intentionally harmful act.

Question 36

Staggered boards and cumulative voting are good for defending against what?

Answer 36

They are good as a takeover defense. (A majority shareholder will have a harder time getting the shareholders out if she can only vote on one class per cycle. With cumulative voting, the minority shareholders also have more voting power. Additionally, if a company has cumulative voting or a staggered board, then you can only remove a director for cause.

Question 37

Can a majority shareholder amend the charter?

Answer 37

Only if the board approves it. DGCL § 242(b)(1)

Therefore, if a board classification, voting style, number of directors, etc., is in the charter, you cannot change it without board approval

Question 38

Can a majority shareholder amend the bylaws?

Even if the charter of the company says that only directors can amend?

Answer 38

Yes!

And, a charter cannot divest shareholders of the right to amend the bylaws. DGCL § 109(a)

Therefore, if something like board classification, voting type, number of directors, etc., are in the by-laws, you could change it.

Question 39

What is an ESB?

Answer 39

an effective staggered board. This is a board that cannot be dismantled by bylaw amendment.

Question 40

What is a special meeting under DGCL §211(d)?

Answer 40

A special meeting can be called by the board and by other authorized in the charter (usually shareholders). (This is the default rule in Delaware.)

Question 41

What is a special meeting under • RMBCA § 7.02 (SS 244)

Answer 41

Under this statute, a special meeting can be called by the board or by 10% of the shareholders.

Question 42

What is “written consent?”

Answer 42

Even if the board doesn’t meet for a shareholder meeting, the shareholders can vote, and then provide the board written consent to act.

Question 43

How does a board receive written consent under DGCL § 228?

Answer 43

The approval required for written consent is the same number of votes that would be needed to pass the resolution at an annual meeting or special meeting.

Question 44

How does a board receive written consent under• RMBCA § 7.04(a)?

Answer 44

The shareholders need to unanimously approve before sending written consent.

Question 45

What are the options for proxy card distribution?

Answer 45

Remember, proxy cards means the card that shareholder uses to cast her vote. Each shareholder can only use one card, and the last card submitted revokes an earlier one.

Option 1: Management (directors/incumbents) supply a proxy card with management nominees.

Option 2: Dissident shareholders can distribute a different card than the management.

Question 46

When is the board (incumbents) full reimbursement of proxy costs from a proxy contest?

Answer 46

Whether the board’s nominees win or lose, the board is entitled to recover proxy costs if

(1) the costs are reasonable and
(2) the proxy contest was made in defense of corporate policies or principles.

• Frossel rule articulated in Rosenfeld
• *In practice, management is always reimbursed.

Question 47

When are the dissident shareholders entitled to reimbursement of proxy costs from a proxy contest?

Answer 47

Only if they win the “proxy fight” and the shareholders ratify the decision to elect the new board.

Question 48

Are proxy contests expensive?

Answer 48

Yes. Very.

Question 49

What is class voting?

Answer 49

Sometimes, when there are different classes of shareholders (e.g., some with more votes and some with less votes) then in some cases they will vote separately to protect the classes.

Question 50

How does class voting work?

Answer 50

A majority (or higher if decided upon) of the votes in each class that is entitled to a separate vote must approve the transaction for its authorization.

Question 51

When is class voting required by DGCL 242(b)(2)

Answer 51

If a charter amendment changes:

1) the legal rights of the class (power, preferences, or rights) e.g., changing the preferred stock’s dividends payout from 10% to 5%.
2) the par value of number of shares of a class

Question 52

Does Delaware require class voting for mergers?

Answer 52

No.

Question 53

Under the RMBCA 10.04(a) when is class voting required

Answer 53

Generally, when an amendment to the charter changes the economic OR legal rights of the class

Question 54

Does the RMBCA require class voting for mergers?

Answer 54

Yes. Because it requires class voting for an amendment that changes the economic rights of the class.

Question 55

Say a company has two classes of stock: common stock and preferred shares. The company needs financing and has two proposals:

1) issuing senior preferred shares (the previous preferred shares are not touched, but the company is issuing a new class with higher preferences if the company is liquidated).
2) Issuing more preferred shares at a discount.

Do these actions require class voting under the DGCL?

Answer 55

1) issuing more preferred shares:

Not clear, it is only indirectly affecting the power and preferences and rights of the class because it is not actually affecting the class itself.

2) Yes, because it affects the number of shares in the class it affects the power, preferences, (maybe rights) of the class.

Question 56

Say a company has two classes of stock: common stock and preferred shares. The company needs financing and has two proposals:

1) issuing senior preferred shares (the previous preferred shares are not touched, but the company is issuing a new class with higher preferences if the company is liquidated).
2) Issuing more preferred shares at a discount.

Do these actions require class voting under the RMBCA?

Answer 56

1) Yes. under RMBCA 10.04(a)(5) if you issue a new class of shares that has seniority over the previous class then you need class voting.
2) No, but this has been debated. (Whatever, just accept it.)

Question 57

Under federal securities law, what information do shareholders have the right to view?

Answer 57

They have the right to view mandatory disclosure. (E.g., financial statements.)

Question 58

Under state law, what information do shareholders have the right to view?

Answer 58

1) Under DGCL 220/RMBA 16.02 they have the right to inspect books and records for a proper purpose.
2) Shareholders have the right to obtain the shareholder’s list for a proper purpose (the list of the shareholders)

Question 59

Which party bears the burden of showing a proper purpose for shareholder’s right to inspect the books under state law? Shareholders or the management?

Answer 59

Shareholders have the burden, so it is assumed at first that there isn’t a proper purpose. Why? to protect information.

Question 60

Which party bears the burden of showing a proper purpose for shareholder’s right to obtained the shareholders’ list under state law? Shareholders or the management?

Answer 60

The burden is on the management of the corporation. The presumption is that there is a proper purpose. The corporation must give a valid reason why it cannot.

Question 61

Why are shareholders given the right to vote?

Answer 61

They have incentives to maximize the long-term value of the company.

Question 62

What are the three main techniques use to separate voting from cash flows?

Answer 62

1) Circular voting
2) Vote buying
3) Controlling minority structure

Question 63

What is circular voting?

Answer 63

Under DGCl 106(c) a corporation cannot count votes from (or count these votes towards quorum) two kinds of shares:

1) shares the corporation itself owns
2) Shares held by a subsidiary in which the corporation owns a majority of the voting stock.
3) According to Speiser, the second condition is interpreted broadly. Meaning, even if a company has 9% of the converted voting stock of a subsidiary but would own 95% of the voting stock if they converted it, then the courts will not count voting from that subsidiary.

Question 64

What is vote buying?

Answer 64

Well, vote buying is simply a voting agreement supported by consideration personal to the shareholder.

It is not allowed by common law but not illegal per se.

Under Schrieber there is a test of fairness (does it undermine the interests of other shareholders. For example, by lowering the price in a merger?)

Question 65

What is hidden vote buying?

What is an example?

Are these void per se?

Answer 65

It is “hidden” because there is a layer to the buying. But at its core, it is still a voting agreement supported by consideration personal to the shareholder.

An example would be loaning money to a shareholder that is blocking a merger because he cannot exercise his warrants. Loaning the money so he could exercise his warrants would be considered vote buying.

No, these are not void per se. They are subject to the test of fairness (does it undermine the interests of the other shareholders?)

Question 66

What are the three main minority structures?

Answer 66

1) Stock pyramids
2) Cross ownership
3) Dual-class shares

Question 67

What is a stock pyramid?

Answer 67

A shareholder owns over half of the shares in company A. Company A owns a little over half the shares in company B. Then Company B owns little over half the shares in company C.

In effect, the shareholder can control company C even though he might only have about 12% actual ownership himself in company C.

Not common in the U.S.

Question 68

What is the standard situation in which class voting provides protection?

Answer 68

the standard situation is that we have a dominant class (usually, the common shareholders) and we give class voting rights to the non-dominant class so that the dominant class cannot just control every major decision.

Question 69

What is cross ownership?

Answer 69

Not common in the U.S., but a company with may sister companies makes the ownership less clear but they still all have control over one another.

An example would be:

(1) Company A owns 40% of company B.
(2) Company B owns 40% of company A.
(3) Company B owns 40% of company C
(4) Company C owns 40% of company B
(5) A shareholder, who is in on the groups, owns 11% in each company. That way, they always have enough shares to control the votes in each company.

Question 70

What are dual class shares?

Answer 70

First of all, it is the most important minority structure for this class.

The company’s charter assigns higher or lower voting rights for its different classes. (E.g., class A has 1 vote per share and class B has no votes per share.)

Question 71

Why are dual class shares useful?

Answer 71

Founders can raise capital without giving up control.

Question 72

What problems do dual class shares pose?

Answer 72

They insulate the company from the takeover market and allow for potential abuses of power.

Question 73

How does a company’s dual class share system effect the price of the shares?

Answer 73

People will pay less for classes of shares that have little or no voting rights.

Question 74

When do collective action problems arise?

Answer 74

When there is a widely held company, the individual shareholders don’t think their votes will make a difference, but even if they do make a difference, they don’t get a large share of the returns anyway.

Question 75

What are two solutions to the collective action problem?

Answer 75

1) Institutional shareholders (mutual funds, pensions, insurance companies, etc.)

But, these shareholders usually have (1) mandatory diversification requirements, so they don’t own that large of a stake (2) there may be agency problems because the managers of the company/mutual fund could know each other, and (3) doing research to one costs money.

2) Hedge funds.

Hedge funds are a lightly regulated pool of funds with little diversification requirements so they have a higher incentive to monitor. But, many try to generate short-term gains at the expense of long-term gains.

Question 76

What do the federal (SEC) proxy rules of 14a and the Schedule 14A requirement regulate?

Generally and specifically.

Answer 76

1) Generally: These rules regulate proxies and disclosures.
2) Specifically, they regulate:
a) Shareholder communications (solicitation)
b) Short sales
c) Shareholder proposals
d) Anti-fraud rules

Question 77

What is a solicitation?

Answer 77

According to rule 14a-1: a solicitation is “any communication reasonably calculated to result in procurement of a proxy.” (i.e., the management or other controlling shareholders reach out to the shareholders to try to be a proxy for them at a meeting.)

Question 78

When can you not solicit? (i.e., attempt to be a proxy for another shareholder?)

Answer 78

According to rule Rule 14a-3(a): You may not solicit to other shareholders UNLESS you provide a schedule 14A disclosure or the communication is EXEMPT.

Question 79

What are the two situations in which proxy solicitation is exempt?

Answer 79

1) Under Rule 14a-2(b)(1): a solicitation that does not seek directly or indirectly the power to act as a proxy for a security holder. (Shareholder’s communication Exemption)

Under Rule 14a-2(b)(2): It will be exempt if the solicitation is to ten or fewer shareholders.

Question 80

What is the exception to the proxy solicitation exemption?

Answer 80

Under Rule 14a-6(g): Even if the communication is exempt, is a shareholder owns more than 5 mill worth of stock, he must file the communication he sends out as a “Note if exempt solicitation” after it is sent.

Question 81

HLS, Inc. is a public corporation and Midland is a 1% institutional investor (shareholder) considering a proxy campaign (start a proxy fight) to put (nominate) 3 candidates on HLS’s board. But before Midland goes ahead, he wants to know where it stands with other big institutional investors (test the waters to see if he can get some traction). Its plan has two steps: (1) circulate a memo to 15 other institutions to check their sentiments; and (2) send out proxy solicitations to HLS shareholders. What is Midland required to do under Rule 14a?

(4 general steps)

Answer 81

1) The staring point: under 14a-3, he must:
a) submit a proxy statement (schedule 14A) and memo to the SEC
b) include the proxy statement with the memo to the other shareholders
c) implicitly reveal his intentions to other shareholders
2) Does the memo meet the definition of a solicitation: he wants to “test” the waters, so the communication is “reasonably calculated to result in procurement of a proxy.” So, yes.
3) Is it exempt? Well, he is sending it to 15 other institutions so the exemptions under 14-a2(b)(2) is not met. But, under 14a-2(b)(1) he is not “at any time during the solicitation seeking directly or indirectly the power to act as a proxy for a shareholder.” He is considering asking in the future, but he is not asking in this communication. (However, this is risky, as this could retroactively be viewed as a solicitation.) But for now, it is exempt.
4) The facts do not tell us this, but if he owns more than 5 million in shares, he must also send out a Notice of exempt solicitation” after sending it out under 14a-6(g).

Question 82

What is a short slate?

Answer 82

When a dissident shareholder is nomination directors to the board that do not constitute a majority of the board.

Question 83

What is the bona fide nominee rule and how does it relate to short slates?

Answer 83

A director must consent to be included in a proxy card. This relates to short slates because a shareholder must choose between one card (incumbent) or the other (dissident). The incumbent directors may not want to be associated with the insurgent directors nominated by the dissident.

Question 84

What is the round-up rule passed by the SEC (14a-4(d)(4)?

Answer 84

The solution to the bona fide nominee rule. A dissident’s card can be complimented (or rounded up) by adding some of the incumbent directors and therefore have. a full proxy card.

Question 85

What is a shareholder proposal?

Answer 85

Under certain conditions, a shareholder can submit to management proposals that management will then send to the other shareholders for consideration in the proxy materials.

Question 86

What conditions must a shareholder comply with in order to send a proposal?

Answer 86

Under 14a-8:

1) A shareholder must be a long-term shareholder.

Question 87

What are the three ways a shareholder can be considered a “long-term” shareholder?

Answer 87

1) Own 2k of the company’s shares for at least three years
2) Own 15k of the company’s shares for at least 2 years
3) Own 25k of the company’s shares for at least 1 year.

Question 88

When can managers exclude a shareholder proposal from the proxy materials

Answer 88

Under one (?) these conditions:

1) It is improper under state law
2) Relates to a matter of ordinary business
3) Relates to a matter that represents less than 5% of the company’s business
4) conflicts with the company’s proposal.

Question 89

Who bears the burden of exclusion of shareholder’s proposal?

Answer 89

The company must demonstrate the grounds for exclusion.

Question 90

What are two examples of a shareholder proposal?

Answer 90

1) Corporate social responsibility proposals

2) Corporate governance proposals

Question 91

How can a corporate social responsibility proposal related to “matters of ordinary business” and thus be excluded.

Answer 91

1) If the issue is fundamental to the management’s ability to run a company on a day-to-day basis. (E.g., hiring practices, how much to produce, which supplier to use, etc.
2) The proposal “micro-manages (e.g., how to do things, under time constraints, etc.)

But, this rule is hard to administer.

Question 92

What is a corporate governance proposal?

Answer 92

A proposal for how the company is managed, i.e., structure of the board and other issues relating to matters that are not ordinary business, from the perspective of the shareholders.

Question 93

What are examples of a corporate governance proposal?

Answer 93

requests to declassify the board, impose cumulative voting, impose a majority vote, say on pay of management, poison pill, adopt proxy access, special meets, supermajority voting, independent chair, etc.

Question 94

What are some examples of corporate governance proposals that are automatically considered a proper subject for shareholder proposals

Answer 94

1) Proxy expense reimbursement

2) Proxy access

Question 95

What is proxy expense reimbursement provision?

Answer 95

Bylaws may include a provision that allows for reimbursement of expenses incurred by a shareholder in getting a proxy, it is thus a proper subject for shareholder proposals under 14a-8.

Question 96

What is a proxy access provision?

What are the differences between state and federal law on this issue?

Answer 96

1) Under Delaware law, a proposal that asks for proxy access, i.e., access to the ballot to be included in the bylaws, it is a proper subject for proposals.
2) Under federal law (SEC) shareholders may propose via rule 14a-8 bylaw amendments the provide proxy access.

So, there really are no differences.

Question 97

Is proxy access or expense reimbursement mandated?

Answer 97

No, they must be adopted as a bylaw. They are a a proper subject though.

Question 98

What is the proxy anti-fraud rule?

Answer 98

The SEC’s general prohibition of false or misleading proxy statements. It gives shareholders the right to recover damages from the company for misrepresentation in the proxy statements.

Question 99

What are the three conditions of the proxy anti-fraud rule?

Answer 99

1) Materiality (a misrepresentation or omission must be material, meaning a shareholder would consider it important when voting).
2) There must be culpability (some circuits require only negligence , other requires scienter, i.e., intentionality or extreme recklessness
3) Causation and reliance (a plaintiff does not need to prove actual causation and reliance if the misrepresentation is material and the proxy solicitation “was an essential link in the accomplishment of the transaction.” It will be presumed.

Question 100

What is an example of a misrepresentation in a proxy solicitation/statement?

Answer 100

Essentially, anything the board recommends.

Question 101

If a transaction would have been approved anyway even if the shareholders relied on the misrepresentation, is there causation for a fraudulent proxy statement?

Answer 101

No. If it is not the essential link and would have been approved anyway, there is no causal connection.

Question 102

What duties do directors have as the fiduciary superintended of voting?

Answer 102

They have a duty to not unfairly manipulate the voting process.

Question 103

What is an example of unfair manipulation of the voting process by the directors?

Answer 103

In Schnell, the directors negotiated the dissidents to amend the bylaws to advance the annual meeting up by one month. In effect, this left too little time for the dissidents to organize.

In other words, they “used the corporate machinery for the purpose of perpetuating itself in office.”

Question 104

Is an abstain/withold vote the same as returning your proxy card?

Answer 104

No, it counts towards the quorum.

Question 105

Are short slates cheaper?

Answer 105

No

Question 106

Why would a short slate be favorable to dissidents? (three reasons)

Answer 106

1) Adding a limited amount of new directors is usually beneficial and not too disruptive
2) Proxy advisory firms may be willing to support a short slate versus a control slate
3) Dissidents want to achieve some influence but do not want to run the company.

Question 107

Which of the following is incorrect with regard to corporations?

A. If a shareholder with 51% of the shares submits a proposal to the board under Rule 14a-8, the corporation must adopt the proposal.

B. Assume that shareholder “A” has 100 shares and there are 10 seats up for election. Under straight (non-cumulative) voting, shareholder “A” can cast a maximum of 100 shares per seat.

C. Assume that shareholder “A” has 100 shares and there are 10 seats up for election. Under cumulative voting, shareholder “A” can cast a maximum of 1000 votes per seat.

Answer 107

A is incorrect. There are limited situations in which a board must accept a shareholder proposal.

Question 108

4. Which of the following is incorrect with regard to corporations?

A. Under Delaware law, shareholders always have the right to amend the bylaws.

B. Under Delaware law, any shareholder can include a proposal on the company’s proxy statement.

C. Under Delaware law, shareholders must vote on charter amendments.

D. Under Delaware law, shareholders can provide directors with the ability to modify the bylaws.

Answer 108

B is incorrect. A shareholder must meet certain requirements that related to the amount of shares they own and for how long they hold them.

Question 109

5. Which of the following is correct with regard to corporations?

A. Even if shareholders propose a director for inclusion on the company’s proxy statement, they must still send out a separate proxy card.

B. Because of the Froessel rule, management will always be reimbursed for expenses associated with
proxy contests, and dissident shareholders will always be reimbursed if they win.

C. Shareholders always have the right to inspect the books and records of the corporation.

D. A, B, and C are incorrect.

E. A, B, and C are correct

Answer 109

E is correct.

Question 110

6. Which of the following is correct with regard to corporations?

A. Under Delaware law, vote buying arrangements are prohibited.

B. Under SEC rules, dual-class shares are prohibited when they are adopted as part of an initial public offering.

C. Under Delaware law, corporations cannot vote their own shares of stock (that is, “circular voting” is prohibited). However, a subsidiary in which the corporation has 50% of the stock could vote in the corporation.

D. All of the above are incorrect.

Answer 110

D is correct.

A. Vote buying arrangements are prohibited under common law, not state law.

B. Dual-class shares are allowed at public offerings.

C. Remember, this rule is interpreted broadly. Just because a subsidiary doesn’t have the full 51% doesn’t mean that they don’t have convertible shares that will give them the power.