Meetings, Voting, & Directors
What can shareholders vote on?
- Election and Removal of Directors - Approval of Board-Initiated Transactions * Fundamental Corporate Transactions * "Dilutive Issuance" of Shares * "Conflict of Interest" Transactions - Changes Initiated by Shareholders, Including: * Election/Removal of Directors Against Board Slate of Board Nominees (see above) * Binding Bylaw Amendments (by shareholders alone) * Non-Binding Precatory Recommendations
What is "Rational apathy"?
- Insurgents must be super committed and well-funded. If they lose, they (typically) absorb the full costs of the contest; and only if they win, can they (usually) get compensation from the firm for the costs of organizing a shareholder action for voting. - This "rational apathy" on the part of small shareholders is one of the big reasons that shareholder activism is extremely difficult.
What happens at the Annual Shareholder Meeting?
- the right to vote most commonly manifests itself during the annual shareholder meeting, where shareholders vote on directors, governance document amendments, and other matters and initiatives. - Shareholder initiatives (challenging board positions) often take the form of non-binding resolutions and consent solicitations. - Vote to adopt, amend, and repeal bylaws - Remove directors from their positions - Adopt shareholder resolutions that may: 1) Ratify Board Actions 2) Request the Board to take Certain Actions (within limitations)
What changes can be initiated by the shareholders?
1) Amendments to the bylaws: DGCL § 109) allows shareholders to adopt, amend, and repeal bylaws so long as they are modifying the bylaws in a way that is consistent with the Board's power to manage the corporation under DGCL § 141(a). 2) Amendments to the articles: some statutes allow shareholders to initiate amendments to the articles BUT the DGCL §242(b) gives the Board the exclusive power to initiate amendments to the articles 3) Nonbinding/ precatory recommendations: usually about governance structures and corporate management
Why do staggered boards matter?
1) Staggered boards make it more difficult for a shareholder to gain control of the Board, even if that shareholder is a majority shareholder. 2) Normally a staggered board cannot be avoided, however shareholders may have ways to "disassemble" a staggered board: o If the staggered board is established in the corporation's bylaws, shareholders can mobilize to eliminate it through amendment to those bylaws o If the staggered board is established in the corporation's charter, shareholders can mobilize to enlarge the board through a bylaw (which is where the size of the board is normally mandated - it's almost never in the charter) and designate new directors to fill the newly created spots
What are the Board's roles during a meeting?
1) oversee voting procedures 2) put the Board's favored nominees and proposals before the shareholders
What are the Major Default Powers of the Shareholders?
1. Right to Vote on Fundamental Corporate Transactions and Directors 2. Right to Sell their Shares to Third Parties 3. Right to Sue for Breaches of Fiduciary Duty
What is a "proper purpose" in the context of shareholder informational rights?
A proper purpose exists when the shareholder's request for records relates to the shareholder's interest in its investment in the corporation (e.g., the shareholder's property rights). It does NOT exist if the shareholder plans to give that information to competitors or to advance an unrelated business, political, or other type of agenda.
What kind of relationship does a proxy create?
A proxy creates an agency relationship in which the shareholder (principal) grants the proxy holder (agent) the power to hold their shares (subject to full discretion or specific instructions).
What are some impermissible attempts by the Board to manipulate voting?
Advancing the annual meeting date in a way that burdens insurgents in a pending proxy contest (this is Schnell v. Chris-Craft Industries) Postponing the annual meeting date such that opposing proxies already gathered by an insurgent would expire by the time of the newly-rescheduled meeting Adjourning the annual meeting to prevent the defeat of a board-recommended proposal to increase the number of shares available for an executive compensation plan Establishing bylaws that impose major hurdles to shareholder action (waiting periods, record-date procedures, inspection, advance-notice requirements)
Explain the Quorum Requirements.
An action at a shareholder meeting is only valid if there's a quorum. These requirements prevent minority factions from acting without the presence of a majority. DGCL § 216(a) sets the quorum as a majority of shares entitled to vote (an "ABSOLUTE MAJORITY" (versus "simple majority) Once there's quorum, most statutes, including DGCL, provide it cannot be broken if a faction walks out. For shareholders looking to prevent a quorum, they must refuse to attend (or submit their proxies in lieu of attendance). DGCL § 212 - For the purposes of a quorum, shareholders can appear at meetings and cast their votes either in person or by proxy.
What are the Record Date Requirements (§213(A))?
Before the meeting, the board sets a record date to determine which shareholders are entitled to vote. Only record holders (shareholders "of record" whose holdings are reflected on the corporation's books as of the record date) are entitled to notice and to vote.
How can shareholders prevent a quorum?
By refusing to attend the meeting (or failing to submit their proxies in lieu of attendance).
What can the Board do as part of overseeing voting procedures?
Choosing the location/date for the annual shareholders meeting Calling special meetings Setting the record date that fixes which shareholders are entitled to vote Imposing advance notice requirements for non-management candidates and proposals Conducting the shareholders' meeting through its choice of meeting chair Tabulating votes, including proxies and consents Deciding which shareholder proposals to accept or refuse for voting at the meeting Complying with all Fed Proxy Rules requirements, including information mailings and proxy solicitations to shareholders
Explain a "Staggered Board."
DGCL § 141(d) provides the option for a staggered board (limited to three annual "classes" of directors [not shares]). In a staggered board system, under DGCL 141(d), only a specified percentage of director seats (i.e., the incumbent directors) are up for election each year. (The DGCL provides that a minimum ⅓ of seats must be up for election.) Under DGCL 141(d), a staggered board can be created by a provision in the Articles, or by a bylaw in the initial bylaws, or by a later bylaw passed by shareholders (not the board unilaterally).
How much is one vote worth?
DGCL § 212(a) provides that generally, with some exceptions beyond the scope of this class, each share is worth one vote.
How long do proxies last under Delaware law?
DGCL § 212(b) sets this to statutory limit to three years
When do you elect directors?
Default is that all directors are elected annually by Shareholders if they bylaws or charter do not state a vote threshold requirement, the default is that the candidate is elected if the candidate receives a plurality of votes at a meeting with a quorum. (DGCL § 216) Normally, the Articles of Incorporation will specify a range of how many directors will serve on the Board, and the Bylaws will designate a specific number
What is a "Simple majority" vote?
Defined in DGCL § 216(2) as a majority of the shares represented at a meeting where quorum is present. Significance: Abstention of shares represented at a meeting count as votes against the proposal, but shares not represented are just neutral.
Name a couple self-help remedies to the shareholder majority.
Elect directors to the Board Approve fundamental corporate changes adopted by the Board Initiate limited changes to the corporation's governance structure Protect their position as last-in-line claimants of a corporation's profits
What is the Timing of Notice?
For both types of meetings, notice must arrive in time for shareholders to consider the matters on which they will vote, but not so early that the notice becomes stale. § 222(B) requires notice between a given timeline of dates prior to a meeting.
What vote is needed for electing directors?
For electing directors, DGCL § 216(3) holds the default voting mechanism for directors is plurality vote. Significance: Unless the articles (or, often or today even usually, the bylaws) specify otherwise, abstentions or withheld votes do not count against a director. It's just whoever gets the most votes wins.
Name some examples of board-initiated transactions that shareholders can vote on.
Fundamental corporate changes (amendments to the Articles, mergers with other corps, sale of all corp's assets) Dilutive issuance of shares (when the corp issues shares that will SIGNIFICANTLY [the shares to be issued need to have more than 20% voting power] dilute the value of the shares held by existing shareholders) Conflict of interest transactions (e.g., when the corp wants to enter a contract with a company owned by a board member's family, approval for indemnification for board members or officers against whom claims have been brought because of their relationship to the corp)
Define Defective Notice.
If notice is defective and the defect is not waived by all affected shareholders, the meeting is invalid and any action taken at it is void.
What are the Procedural Requirements of the Shareholder voting process?
Notice Requirements - Both Minimum and Maximum (DGCL § 222(b)) Quorum Requirements - For the general meeting (DGCL § 216) Record Date Requirements - Both Minimum and Maximum (DGCL § 211(c))
Who votes at the shareholder annual meeting?
Only shareholders of record actually cast votes. If shares are held by a "nominee" (e.g., your broker or 401(k) plan) the actual owners ("beneficial owners") must instruct the "record owner" (nominee) how to vote their shares or to whom to give a proxy.
Do insurgents in proxy contests get reimbursed for their expenses?
Only when they win.
What does a shareholder action by consent mean?
Shareholder Actions by Consent allow shareholders to describe and validate an action by giving their written consent. An action by consent has the same effect as a formal vote at a shareholders' meeting.
how are shareholder informational rights enforced?
Shareholders can enforce their information rights in direct actions against the corporation or directors in the form of expedited review of the shareholder's application for inspection of board records, accounting information, and shareholder lists (DGCL § 220(c)).
How do you remove directors?
State corporation law governs the right to remove directors as well. DGCL § 141(k) holds that shareholders may remove directors from office at any time and for any reason (i.e. with or without "cause"). However, the DGCL bars directors from removing fellow directors - for cause or otherwise - in the absence of express shareholder authorization. EXCEPTION for staggered boards: Per DGCL § 141(d), directors on a staggered board may only be removed for cause, unless the charter specifies otherwise.
Name some examples of shark repellant.
Supermajority voting requirements High-voting shares Staggered boards Aggregation caps on voting power Provisions dictating board size Elimination of written consent procedures
What is the Record Date?
The date on which the Board identifies which shareholders are entitled to notice and to vote at the annual meeting. Under state law, only "shareholders of record" vote; and "beneficial owners" generally have to give their voting instructions to those who formally hold their shares in the company records.
What's a Shareholder Voting Package?
This bundle of documents is sent on behalf of the corporate board at corporate expense and contains an annual report, proxy disclosure document, a proxy card, and a return envelope
What is Enforcement?
This raises three areas of focus about the governance relationship between shareholders and the Board: 1. Shareholders may bring a lawsuit for failing to seat a properly-elected director. 2. Procedural defects void the entire election unless shareholders acquiesce in or ratify the results. 3. Shareholders may also sue if the Board fails to observe procedural requirements intended to provide an opportunity for full representation of shareholders (e.g. quorum).
what are holdovers?
To ensure that a board remains intact even if an annual shareholder meeting is not held or if there is a voting deadlock, DGCL § 141(b) allows a director to hold office until a successor is elected and qualified, unless that director affirmatively resigns the board seat
Explain the Quorum Requirements for Proxies.
Unless irrevocable, the proxy can be revoked by the principal at any time by: - Submitting written notice to the corporation of an intent to revoke - Appointing another proxy holder in a subsequently-dated proxy. (This is normally what happens.) - Appearing in person to vote Generally, corporate statutes limit the duration of a proxy to 11 months. § DGCL § 212(b) sets this to statutory limit to three years.
Can proxies be revoked?
Yes, unless they are created to be irrevocable. 1) A proxy can be revoked by submitting written notice to the corporation of the intent to revoke. 2) A proxy can be revoked by appointing another proxy holder in a subsequently-dated proxy (TYPICAL OPTION) 3) A proxy can be revoked by the principal appearing in person to vote.
What is "shark repellant"?
a colloquial phrase to refer to Articles of Incorporation amendments that make voting insurgencies and hostile takeovers more difficult to accomplish
How many shareholders need to approve a board-initiated transaction?
an ABSOLUTE MAJORITY of the outstanding shares entitled to vote. Note: abstentions and no-shows count as votes AGAINST the proposal.
what do election inspectors do?
determine the shares represented at a meeting, count votes, determine the validity of proxies, and resolve voting disputes.
What are illegitimate Board motives?
illegitimately seek to "entrench themselves in office" as board members for their personal benefit like its members wanting to continue being board members or receiving fees for serving as the board as well as grants of shares in the corporation
What are Special/extraordinary meetings? When are they called?
meetings of shareholders called outside the standard annual shareholder meeting. Normally these meetings are called to permit shareholder votes on "fundamental" corporate transactions Oftentimes, these meetings are the only way shareholders may initiate an action (i.e. amending the bylaws) outside the annual shareholder meeting-or to remove directors outside of the shareholder annual meeting Given the items they consider, the details about who can call them and how they're called are important § DGCL § 211(d) doesn't provide a mandated minimum notice period - just says special meetings may be called by the Board or by such persons as are designated in the charter or bylaws. So the bylaws can contain a lot of special features and discretionary processes for special meetings. This can impact strategy between board and activist shareholders.
what informational rights do shareholders have?
the right to inspect corporate books and records upon showing a "proper purpose" Delaware allows inspection of books and records for a corporation's subsidiaries, provided the corporation could obtain such documents through exercise of control over the subsidiary DGCL § 219(a) makes access to shareholder lists available as a right ten days prior to the shareholder meeting.
What are legitimate Board motives?
to favor its own nominees and advocate for its own proposals, along with defending its corporate vision and strategy generally. insofar as the board members believe in good faith that the nominees and positions it advocates for do indeed further the corporation's interests
What are the contents of notice?
· Notice requirements are generally minimal. o For annual meetings, notice only needs to mention the date, time, and place of the meeting. If an extraordinary matter will be proposed/resolution voted on at an annual meeting, notice of the matter must be given.
How many shareholders need to approve board-initiated transactions?
· Under the DGCL, shareholder approval of board-initiated transactions (e.g. amendment of AOI, mergers, sales of substantially all assets, and dissolution) requires the favorable vote of an "absolute majority" of the outstanding shares entitled to vote. * Significance: Abstentions and no-shows count as votes against the proposal * Applicable DGCL provisions: § 242(b) (charter amendment); § 251(c) (merger); § 271(a) (sale of assets); § 275(b) (dissolution)
What is a proxy?
· a documented authorization - legally, a "power of attorney" that permits a shareholder to empower another to vote on their behalf. · shareholders are asked to fill out and return a "proxy card" for a side with its board candidates listed-but not the other board candidates' names.
What do both shareholder meetings and board meetings have?
- entitlement - notice - quorum - voting - material information
Who pays the expenses of the incumbent board/management in a proxy contest regardless of the outcome?
The corporate treasury