Voting

13 grounds for excluding proposals from solicitation materials-Summary (8)

(Burden is on the corporation) 1. Violates a law 2. Violation of proxy rules (false or misleading) 3. Personal grievance 4. relates to a matter < 5% of business or otherwise insignificant 5. Absence of power/authority as SH or within mgmt function 6. Relates to election of directors 7. Resubmission- may exclude if proposed within 3 years and received <3%; <6% on last submission if proposed twice already; or <10% if proposed three or more times within the last 5 years 8. In direct conflict with a company's own proposal

Rosenfeld test for incumbent directors recovering proxy costs (3)

1) Act in Good Faith (best interest of the corporation) 2) Bona fide Proxy Contest (not a purely personal power contest, individual gain) in defense of their corporate policies 3) Reasonable and Proper Expenses of Soliciting Proxies (fair and reasonable amount)

The mechanics of a class vote (4 steps)

1. Board proposal 2. Majority of all shareholders entitled to vote must approve it (No plurality voting) 3. Majority of all shareholder of the class entitled to a class vote must approve it (see if class vote is required) 4. File certificate w/ SoS

Why do shareholders have voting rights to begin with? (3)

1. Care about company success 2. Unable to contract the same way a creditor can 3. Ownership in the company

Requirements for a class vote in DE (3)

1. Change in par value 2. Change in number of authorized shares in the class 3. Change the class's powers, preferences, or special rights (BUT only legal rights) The creation of a new superior class is an economic right, NOT a legal right. No vote. Could negotiate around this in the charter to require a vote

Why prohibit the separation of voting rights and stock ownership? (3)

1. Control might end up consolidated in someone who wishes to run the corporation into the ground (competitor w/o financial interest) 2. Prices could fluctuate based on voting rights

What are the two categories of shareholder proposals?

1. Corporate governance proposals 2. Corporate Social Responsibility (CSR)

The four major areas governed by federal proxy rules

1. Disclosure requirements to inform SH and protect from misleading info 2. Substantive regulation of the proxy solicitation process 3. "town meeting" provision (14a-8) that permits SH to gain access to the corp's proxy materials, which lowers costs 4. General anti-fraud provision (14a-9) that allows courts to imply a private SH remedy for false or misleading proxy materials

What are the three situations where the shareholder votes?

1. Electing the board 2. Fundamental transactions - Charter amendment - Merger - Sale of substantially all assets - Dissolution 3. Shareholder resolutions

Why could it be more beneficial to have longer periods of director service like in Europe?

1. Empowers long term planning 2. Shareholders will be more vested in the election when it comes

What does a shareholder list disclose? (3)

1. Identity 2. Ownership interest 3. Address of registered owner

Arguments for allowing the split of voting and equity rights (2)

1. Investors should be able to make their own decisions (freedom of K) 2. "Market in votes" parallels the market for shares of stock

What is the policy rationale for making it more difficult on the SH to access books and records? (2)

1. May jeopardize sensitive information 2. Expensive to produce books and records - additional costs

What is the 3-part collective action problem facing shareholder voting?

1. Number of Shareholders: if many shareholders, they may assume their vote will be worthless 2. Financial interest: if small investment, the costs of monitoring or becoming informed will outweigh the "benefits" of protecting the interest 3. Rational Apathy: Shareholders see it as a "formality."

Two standards of review for vote buying

1. Per se illegal - Never allowed when done with intent to defraud other SH 2. Intrinsic Fairness test - absent fraudulent intent, there is no per se rule - Courts decision must be guided by the potential injury that might flow to other SH--each arrangement is evaluated in light of its object or purpose

Exemptions to the exemptions for filing proxy statements (2)

1. Prohibits false or misleading statements 2. if shareholder owns more than $5 million worth of stock, must file communication and "Notice of Exempt Solicitation" within 3 days This filing destroys secrecy but is cheaper than filing a reg statement under 14a

Why are E-Proxies uncommon, even though they reduce overall cost?

1. Reduces responsiveness of individual investors to be asked just to fill out an online form;

What are the two fundamental types of requests for SH info in DE?

1. Request for a stock list 2. Request for inspection of books and records

Exceptions to the right to remove directors in DE (2)

1. Staggered boards: can only remove the director for cause unless the charter says otherwise 2. Cumulative voting rule IF less than the entire board is to be removed - No director may be removed without cause *Note the controlling SH can remove the entire board unilaterally and then elect the replacement board with cumulative voting.

Formal requirements of SH proposals under 14a-8 (4)

1. State identity of the shareholder 2. file one proposal per SH, per meeting 3. Proposal may not exceed 500 words 4. Proposal cannot "run afoul of subject matter restrictions."

What are the two systems of voting?

1. Straight 2. Cumulative (required in CA) (rare today; HP still has it for the hewlett and packards families)

What are the effects of the following proxy reimbursements? 1. Everyone 2. directors only 3. winners only 4. no one

1. Too expensive to do; but would decrease passivity 2. Self dealing and then SH would never bring proxies 3. Discourages reasonable SH w/o funds 4. Discourages everyone

Circular voting in DE; what types of shares cannot be counted toward a quorum?

1. Treasury shares (no voting rights) 2. Shares held by a subsidiary, where the parent corporation owns a majority of their stock. Cannot invest in a subsidiary for the sole purpose of controlling votes in the parent corporation

Elements of a claim for relief under 14a-9 antifraud (3) and remedies (3)

1. material factual statement - fact essential to making a decision 2. knowingly false (but some circuits allow negligently false) 3. Causation + reliance - Essential link theory: Was the false statement an essential link in getting authorization for the transaction - can use fraud on the market for reliance too Remedies: injunctive relief, rescission, or monetary damages

Exemptions created under 1992 amendments to filing proxy statements 14a-2 (3)

1. solicitation that "does not...seek directly or indirectly...the power to act as proxy" is exempt from filing requirements (most fall within this) 2. announcement on how shareholders intend to vote (even if it includes the shareholders' reasoning) are not subject to proxy rules 3. solicitation to ten or fewer other shareholders is exempt Meant to allow SH coordination

What is the possible effect of a multi-class vote?

A certain class may have a veto power on a given transaction

Vote required for dissolution

A majority of the board agrees to dissolution and a majority of "outstanding stock" "entitled to vote" affirms the decision

Dual-class stock structures and voting rights

American law does not require all shares to have voting rights, nor does it require equal voting rights Can have "Super-voting" Stock to protect ownership interests in a small minority class

14a-7 "list or mail rule" + costs, control, and alternatives

An insurgent has the right to request a shareholder list from MGMT. BUT MGMT has the choice to: Give the insurgent the shareholder list; or Send out the insurgent's solicitation on the insurgent's behalf. Costs - Rule 14a-7(e) - the insurgent must reimburse the corporation's costs in complying with this right. Control - this gives MGMT control over the form of the insurgent's solicitation. Alternatives - insurgent retains his state rights, e.g., DGCL 220(c), right to shareholder list. State law alternative—company would have to show improper purpose. Soliciting proxies is probably a proper purpose.

How often must directors hold a meeting for reelection?

Annually (13 months in DE). Not necessarily reelecting all board seats if there is a staggered board.

Argument about E-proxies and SH reimbursement

Boards say reimbursement should be limited because SH can initiate E-proxies which are much less expensive. Counter: They could do the same

Why is selling a "block" of shares more advertising w/ cumulative voting?

Can guarantee the election of one board seat if it is a large enough block. (W/o it being a controlling block)

14a-3 amendment for proxy statements

Central Regulatory Requirement: may not solicit a proxy unless you provide a proxy statement "containing the information provided in Schedule 14A," (unless exempt under Rule 14a-2(b))

Procedure for corporation to exclude shareholder proposal

Company can exclude a shareholder by seeking SEC approval in the form of "No action letter" 80 days before it files proxy statement. Burden is on the corporation

Describe cross-ownership ties

Controller owns 30% of A and 30% of B; A owns 30% of B; B owns 30% of A. The cross-ownership of A and B reinforces Controllers power in each firm. It also obfuscates who exactly truly controls the set-up. This structure is common abroad, but rare in America because of tax and regulatory issues.

Describe a stock pyramid

Controlling minority shareholder holds a controlling stake in a holding company that, in turn, holds a controlling stake in an operating company

What is the time limitation on a proxy in DE? in NY?

DE: 3 years, unless the proxy provides for a longer period. NY: 11 months, unless stated in the proxy

Action by written consent in the model act vs DE

DE: Need written consent signed by the minimum number of votes required Model act: Need unanimous written consent (minority needs an opportunity to voice concerns through debate).

What is cumulative voting? Impact on minority holders?

Each shareholder may cast a total number of votes equal to the number of directors for whom she is entitled to vote, multiplied by the number of voting shares they own, with the top overall vote getters getting a seat on the board System never popular among managers because they think boards function best when collegial, cooperative and cohesive. BUT it allows for minorities to elect a seat by pooling votes together behind one candidate

Requirements for a class vote in NY (3)

If the action: 1. Excludes or limits their right to vote 2. Reduces par value of shares 3. Subordinate the class's rights to a new class of preferred stock. Model act protects the economic rights too. BUT no class vote if issuing more shares of the existing class.

Explain the proxy system

If you cannot attend the shareholder meeting, you are allowed to send someone who may vote on your behalf through power of attorney (In U.S., Registered Shares System depends on who is listed on the register) (EU may still need the physical certificate).

Fraud on the market theory

In an open securities market, the price is determined by the available info. Even if the purchaser wasn't lied to directly, if the market is influenced by the lack of disclosure to all shareholders then the purchaser was defrauded indirectly.

How to dodge the broker-voting rule for quorum purposes

Include an "ordinary" (routine) transaction along with the out-of-the-ordinary transactions (i.e., the uncontested slate). Broker cannot vote w/o instruction, but it can satisfy the quorum requirement.

Who gets proxy costs reimbursed?

Incumbents and winners

Securities exchange act of 1934 disclosure requirements: intended effect and unintended consequence

Intended to force the disclosure by corporations to the shareholders from whom they sought proxies Unintended Consequence: Discourages Proxy Fights: these disclosure requirements apply to third parties that may seek to oust incumbent management

Is a shareholder list hard to get? Who has the burden to show purpose?

It is not hard to get and plaintiff almost always wins. Burden on the corporation to show improper purpose. Once 1 proper purpose has been shown, the court will not consider any other improper purposes. Further--this is not proprietary information and it is easy to produce.

Staggered boards explained

Limited to 3 classes--needed in the charter. Vote on one class at the annual meeting Board cannot unilaterally stagger itself. Strong anti-take over mechanism that entrenches management and increases stability and long-term focus

Can brokers vote client shares in uncontested board elections? The effects? (2)

No because "not in the ordinary course of business." Need client instruction. Brokers cannot vote their clients' shares, which: 1) Hurts a corporation's ability to satisfy the true majority voting rule, because Brokers vote more often than shares held by non-Brokers; and 2) Hinders MGMT control, because Brokers tended to vote with MGMT.

Is it equally easy for a shareholder to access books and records, like it is SH lists? What must the court balance?

No. SH must allege a need for broad access. Court must balance the Value of Shareholder Access to Corporate Information against the Corporate Interest in Confidentiality

Requirement to remove directors in DE?

None--can remove with or without cause.

Minimum and maximum notice period for election meetings

Not less than 10 days and not more than 60 days.

NYSE and NASDAQ history with super-voting stock structures

Originally NYSE did not allow unequal voting rights on the exchange Then only allowed if IPO had super-voting structures (this was struck down by the courts) Now "midstream" rules allow modification but only if that is to lower the voting rights

What is the effect of the proxy rules implemented to inform shareholder voting?

Outcome = increased cost so suggests encouragement for shareholder passivity

Structure of corporate governance SH proposals

Precatory--often "asks" the board to alter the charter Can be used to displace anti-takeover mechanisms

14a-9 "the anti-fraud rule"

Prohibits (1) making false or misleading solicitations with respect to any material fact or (2) omitting to state any material fact necessary to make the statements not false or misleading *Courts have implied private rights of action for securities acts

Shareholder information rights; State vs. Federal

Rights are almost non-existent under state law--it all falls under federal securities law and the SEC Rules

How have hedge funds assisted in the SH collective action problem?

SH and institutional investors have proven disinterested in active investing. Hedge funds have assumed the role of active SH because their appetite for risk Be wary of too much risk and short term goals

What if there isn't an annual director's meeting held?

SH can go to court and require one.

Removing directors at common law

SH could only remove directors "for cause"

Why is it important for common stock to have a voting right? (Compare to bonds)

Security has no maturity date; No legal right to periodic payments (creditors receive interest payments); COMPARE: Bondholders protected by hard contractual right to interest payments and to the return of their principal

Definition of vote buying

Separating a share's control from its equity

The relationship between staggered boards and cumulative voting

Staggered Boards and Cumulative Voting work against one another. Less seats up for vote = higher percentage of minority needed to win the election

How are interim or newly created board vacancies filled?

Unless the charter or bylaws provide otherwise, the remaining board members fill vacancies. If the number of board members is set by bylaw, then the shareholders can change the number.

What is the main reason SH proposals are excluded?

Vagueness, which can come from failure to define a term.

Vote buying after Schreiber and Brady cases

Vote buying in secret is illegal. Vote buying to get rid of a holdout w/ veto right is ok if done with shareholder approval

Can a broker count for quorum purposes?

Yes but only if its a transaction he is allowed to vote in. If not, needs client instruction to count for quorum

Can statements about directors' beliefs be material facts?

Yes if plaintiff shows it was false as to whether the directors believed the statement, AND false as to the underlying subject matter of the statement

Can a broker vote client shares?

Yes, for transactions in the ordinary course of business even without client instruction!

What if the charter requires a super majority to verify a certain transaction, but the charter only requires a simple majority to amend it?

You would need a super majority to amend the specific provision that requires a super majority.

Firm offer

a buyer might promise to buy X number of shares from A in 2 years, on the condition that the buyer gets control of the board

What is a special meeting? Who may call them under DE? Difference with the model act?

called for special purposes (often to vote on fundamental transactions) Under DE: not an automatic right for shareholders to call a Special Meeting: special meeting may be called by: (1) Board of Directors; or (2) Persons designated in the charter or bylaws Under the Model act: (3) allows any SH w/ 10% equity to call special meetings too.

14a-8 "Town meeting rule" and SH metrics to qualify and timing of filing

entitles shareholders to include certain proposals in the company's proxy materials at no additional cost to the shareholders or filing with SEC Must hold $2,000 or 1% of the corporation's stock for a min of 1 year Must file with management 120 days before management plans to release its proxy statement:

14a-4(d)(4) "The short slate rule"

previously, solicitors could not list management's nominees, which prevented SH from coordinating by "targeting" a member to be removed from the board. The new rule allows someone to "fill out" their short slate to improve coordination

Shareholders' right to information in DE

shareholders are recognized to have a right to inspect the company's stock ledger, stock holder lists, and other books and records. Need written demand and proper purpose

What is the "record-date" for voting?

shareholders who are registered as of the record date are legal shareholders entitled to vote at the meeting

Collective action problem specific to proxies

since proxies require the initial expenses of soliciting proxy to be incurred by one or more persons, and costs are substantial, shareholders deterred

DE test for SH to inspect books and records

π has burden to show proper purpose, and (informally) screening π's motives and consequences of granting the request

NY test for SH to inspect books and records

Shareholders have the right to inspect the key financial statements, balance sheet, and income statement Stock lists and meeting minutes are available unless the corporation can prove improper purpose; all other records are available if proper purpose

What is straight voting? Impact on minority holders?

"Traditional" Voting System: Each shareholder gets one vote for each share of voting stock owned and may cash it for each directorship (or board position) that is to be filed at the election Suppresses Minority Shareholders (Undesirable)

14a-1 amendment limiting the term "solicitation"

"any communication reasonably calculated to result in procurement of a proxy"

Rosenfeld test for successful insurgents to recover expenses (2)

1) Ratification by Shareholders 2) Subject to Judicial Scrutiny (Fair and Reasonable expenditures in SH Best Interest)

What is the remedy a SH can pursue if the company receives a "no action letter"?

Can sue under federal law. Court has the final say--not the SEC

Complications with vote buying in an evolving corporate environment

Derivative markets make it very tough to regulate Short selling a stock w/ a long position is pure vote buying

Federal Proxy Rules: qualifying corporations

If a corporation qualifies, it is unlawful to solicit proxies without following §14a's regulations. Qualifying Corporation, either: i. 500 shareholders; or, ii. Assets greater than $10 million.

What is a problem w/ dual class capital structures and a family business

If control is held with super voting shares it could persist through generations. No promise that heirs have the same incentive to maximize profits

Why can't majority share holders recover under the anti-fraud rule?

It will fail on causation because minority shareholders fail the "essential link" test.

Pro-Rata alternative to reimbursement of proxy (a proposed change to the rule)

Reimburse expenses in proportion to the number of votes they recieve

Can proxies ever be irrevocable?

Yes, but must state it is irrevocable and coupled with a sufficient interest in law to support the irrevocable power

Definition of "proxy"

any solicitation or consent whatsoever (very broad)

Quorum requirements for elections

cannot consist of less than one-third of the business or in the event of a vote by class or series, less than one-third of the shares of such class or series (depends on charter) In absence of a provision, majority of the shares constitutes a quorum