Chapter 35: Rights of Shareholders
Independent directors
Sarbanes Oxley Act stipulates that all members of a board's audit committee must be independent- not compensated by company other than for duties as a director and at least one of these members must be a financial expert
shareholder activists
a new development in corporate democracy- they advise institutional investors on how to vote their shares
Right to Protection from Other Shareholders
-Anyone who owns enough stock to control a corporation has a fiduciary duty to the minority shareholders -Minority shareholders: those with less than a controlling interest -Controlling shareholders must include minority shareholders in any favorable arrangements they make for their own stock -Controlling shareholders cannot expel minority shareholders from the company unless they are paid a fair price for the stock and expulsion has a legitimate business purpose
Compensation for Officers and Directors: Solutions
-Proxy rules- amended by the SEC to require more information about executive compensation -must include a summary table setting out the full amount of compensation for the five highest earning executives -Under SOX- -cannot make personal loans to its directors or officers -must follow through the claw-back provisions: if a company has to restate its earnings, CEO and CFO must reimburse the company for any bonus or profits received within a year of the flawed financials
Rights of Shareholders
-Shareholders dont' have the right or obligation to manage the day-to-day business of the enterprise -Right to information: Shareholders with a proper purpose have the right to inspect and copy corporation's minute book, accounting records, and shareholder lists and annual report -Right to vote: corporation must have at least one class of stock with voting rights, shareholder meetings- norm for publicly traded companies -Proxies: the person whom a shareholder appoints to vote for her at a meeting of the corporation- the document a shareholder signs appointing this substitute voter
Election & Removal of Directors
-The NYSE and NASDAQ require that, for companies listed with them: -independent directors must compromise a majority of the board -they must meet regularly on their own, without inside directors -only independent directors can serve on audit, compensation, or nominating committees -audit committees must have at least there directors who are financially literate
Election & Removal of Directors
-a nominating committee from the board of directors produces a slate of director, with one name per opening- names are approved by the CEO -The slate of directors is then presented to the shareholders for vote -Plurality voting- to be elected, a candidate only needs to receive more votes than any other competitor, not a majority of the votes cast
Derivative lawsuits
-brought by shareholders to remedy a wrong that the board of directors has committed against the corporation -first shareholders must make a demand on the directors in order to file the d. lawsuit. The only way to overcome the demand is to show the demand is futile because directors violated duty of care, duty of loyalty as required by business judgment rule
Shareholder meeting
-every shareholder who owns stock on the record date must be sent notice of the annual meeting -there must be a quorum for any vote to count -shareholder meetings can happen online -shareholders can appoint proxies- someone to vote for them in their absence -companies must provide shareholders with a proxy statement and annual report 10K
direct lawsuits
-shareholders are permitted to sue the corporation directly only if their OWN RIGHTS have been harmed
Solutions continued...
-shareholders have right to nonbonding vote in the event of merger or sale of company assets -companies must disclose the relationship between financial performance and executive compensation paid -must disclose the CEO's compensation and the median compensation of all other company employees
compensation for officers and directors- problems
-stock options -termination, retirement plans, and death benefits -lavish perks -directors, not shareholders, set executive compensation -shareholders bear the risk -benchmarking games -CEO gets all the credit -the busier the directors, the higher the executive pay -most executives are above average -compensation consultants have conflicts of interest
In re Ebay, Inc v. Shareholders Litigation
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Compensation for officers and directors: solutions...
Dodd frank wall street reform act and consumer protection act (2010): -requires that compensation committees for all corporations listed on a stock exchange must be composed solely of independent directors -strengthen the claw-back provisions of SOX and extends it to three years -requires "say on pay" every three years companies must take a nonbonding shareholder vote on executive compensation -requires companies to take a nonbonding shareholder vote on "say on pay" every 6 years
Derivative Lawsuits Examples
- JP Morgan shareholder sued the bank - allegations that the directors put their short term financial interests ahead of the long term financial interests of the company. Creating "culture" of risk - NYC against Walmart- Walmart officers/directors breached their fiduciary duty by failing to handle claims of bribery
Fundamental Corporate changes
-A corporation must seek shareholder approval before going through the following fundamental changes: -mergers -sales of assets, dissolution, -amendments to the charter -amendments to bylaws
Brehn v. Eisner Case
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Independent directors
SOX (Sarbanes Oxley Act) stipulates that all members of a board's audit committee must be independent- not compensated by the company other than for duties as a director and at least one of these members must be a financial expert
