Corporations Chapter 9: Core Shareholder Rights

Legal Risks of Pay Rights

o Negative say on pay vote may provide evidence to help support a claim that directors have breached duties of care or loyalty. • No separate PCOA based on say on pay.

The Proper Purpose Challenge State Ex Rel Pillsbury v. Honeywell

o State Ex Rel Pillsbury v Honeywell • Bought shares b/c he heard that the co. was developing anti-personnel frag bombs. (Vietnam War) • Wants to contest the creation of this weaponry, and the war. Asks to inspect records in order to do so. • Co. insists that there is no proper purpose • Proper purpose must be germane to interest as a stockholder • As such, must show some concern with investment concern • Consequently, no proper purpose for inspection rights.

Re: Oracle Corp

• There are allegations of insider trading at Oracle. The Board went out, after losing the futility argument, and appointed an SLC made up of business and law professors from Stanford. They wrote a 1,100 page report. The company met with this SLC 35 times, 80+ hours. The SLC even agreed to give up fees if that made them biased. • One little problem (b/c otherwise this looks great): A lot of the ppl at Oracle had connections to Stanford. Some of the board members are even mentors to those professors. • Court finds: Human nature dictates that the profs will obviously be thinking about how their actions will tattoo the people they know at Oracle. This sets the bar for convincing the court of the impartiality of the SLC. There may not be one shred of evidence that suggests bias.

Sale of Assets

o Can trigger shareholder voting and dissenter appraisal rights like an outright merger. If the sale involves "substantially all of a corporation's assets." o It's a sale "not in the usual or regular course of business." o See page 413 as to what actually happens- effectively ends up like a merger though Target does not immediately cease to exist until it liquidates itself.

Suing Direct vs. Derivative

o Direct: personal, money goes to the Plaintiff o Derivative: injury to the co, money goes to the co.

Purpose of Pay Rights

o Dodd-Frank requires corporations to submit executive compensation arrangements to a yes or no no-binding advisory vote of the shareholders

Corporate Dissolution

o Dual process (BOD and Shareholders) similar to AOI o MBCA: approved by BOD and then submitted to the shareholders w/ recommendation to approve or statement why they can't make that recommendation (conflict of interest etc).

Bylaw Amendments

o Either BOD or Shareholders (as single body) may amend o Often board will choose to seek shareholder approval

Appraisal Rights

o Gives objecting shareholder (doesn't want merger, consolidation, or exchange) the right to seek adequate compensation for their stock by establishing a fair value. • Market-out exception: • 35 states (including Delaware) • No appraisal rights IF • There is a liquid market for stock (NYSE, NASDAQ) AND • The transaction does not involve a controlling shareholder (shareholder who owns 20%+ of corp) OR • The officers of the target yield a financial benefit that is not available to the shareholders. • In that case, no need for value appraisal b/c the shareholder has market driven liquidity option that will adjust to reflect the value of the deal. • Delaware: Exception to the market out exception • If you are required by the merger to cash out your shares, you have appraisal rights. Cash merger= appraisal rights.

What about Closely held corporations?

o In closely held corporations- the direct/ derivative distinction is not so crisp. Often treated as a conflict between owners (as if it were a partnership).

Results of Pay Rights

o Institutional Shareholder Services recommendations/ methodology must be taken seriously o Companies with negative ISS received an average shareholder support of 65% (bad). Those with positive ISS got 95% plus

Laborer's Local v Intersil

o Negative vote on say-on -pay does not on its own rebut business judgment presumption.

Amendments to the Articles of Incorporation

o Requires Board and Shareholder Approval o Exceptions under MBCA • Extend duration of corporation • Delete names and address of directors (initial) • Make authorize share changes if only one class of shares is outstanding • Change name re: use of "corporation" (use abbreviations) • Show reduction in authorized shares (when corp has bought those shores) • Delete a class of shares were none remain.

Inspection Rights

o Shareholder has the right to inspect the corporation's books and records. o Corporation must prove bad faith or improper purpose in order to deny shareholder access to those docs. o (pg 389 for more details) o MBCA: if you want to see docs beyond AIO, bylaws, minutes of shareholder meetings, resolution from BOD, shareholder communications, annual report etc.... (like financial docs), need to make a demand for those docs • In good faith for proper purpose • Describe with "reasonable particularity" the docs sought • Limited to docs "directly connected" with the stated purpose.

Major Transaction Approval? Shareholders

o Shareholders have the right to approve major events that fundamentally change the corporation. o Must be approved by the adequate quorum at shareholder meeting. o Often both board and shareholder approval.

Right to Sue Derivative Suits: Tooley v Donaldson Lufkin and Jenrette

• "The issue (of whether a claim is direct or derivative) must turn solely on the following questions: 1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and 2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)? • Direct Claim: plaintiff must have experience a special injury that is separate and distinct from that suffered by other shareholders. • Injury cannot be dependent on an injury to the corporation. • Case was dismissed on issue of ripeness, but the above rule stands.

Aronson v. Lewis (Aronson Rule)

• A claim of futility requires a showing of particularized facts that create a reasonable doubt that the directors' actions were entitled to the protections of the business judgment rule. • In order to invalidate business judgment, must show that the directors a) were not independent b) did not act on an informed basis c) acted without good faith and honest belief that the action taken was in the best interests of the company • Simply: abuse of discretion. Burden is on the Plaintiff to nullify this presumption.

Successor Liability Doctrine

• Can a creditor assert his claim against a purchaser (the survivor of a merger) when his claim was not previously known? • In asset sale, typically only liable for known liabilities (purchaser) • In this situation, however, it imports the merger liability to the asset sale and allows the claim to move against the successor... This is true where • There were foreseeable unknown tort claims o Same business continued post sale as pre sale o Creditor could not recover from selling entity/ owners • Purchaser had the opportunity to foresee and insure against he risk

Saito v. McKesson

• Claim to see docs under Del. §220 • Question as to whether §327, barring a stockholder from bringing a derivative action unless stockholder owned the corporation's stock at the time of the alleged wrong, puts a time limitation on §220 rights. • So long as the records are related to the stockholder's purpose in inspecting, there is no time bar (can pre-date stock ownership) • Also, source of documents does not limit inspection rights under §220 (eg, 3rd party documents not excluded) • Though there is a bar against a parent company inspecting a subsidiary's records w/o a showing of fraud (or corpate piercing), any docs provided from subsidiary to parent in a merger (before or after) may be accessed by the stockholder of the parent.

Zapata v. Maldonado

• Contention from lower Delaware Courts: Business judgment rule is not a grant of authority to dismiss the case when the plaintiff has already won on the futility claim. • Supreme Courts in Delaware establishes the Zapata Special Litigation Standard: • 1. SLC has the initial burden of proof to show that they are an independent committee acting in good faith. • 2. The court has to be convinced that equity will be served by shutting down this case. o If there is any question as per these 2 elements, the plaintiff gets to continue on. Only after both are satisfied will the Court look at the business judgment rule as a defense. o Auerbach and Zapata establish two different standards for evaluating the same issue. Some courts have gone w/ one or the other, some have chosen a middle ground.

Different Merger Types

• Merger Types (SEE THE ATTACHED CHAPTER 9 SLIDES) o Non-Whale o Whale o Short Form o Triangular o Share Exchange

Seinfeld Communications

• Must have "some evidence" to suggest a "credible basis" from a court that can infer mismanagement, waste, or wrongdoing to provide a "proper purpose" for inspection rights. • The mere assertion that a certain dollar amount is excessive pay does not meet this criteria. No proper purpose.

Implications of Say on Pay

• Practical Implications of Say on Pay o 1. ISS has become influential. They set the benchmark for say on pay rationale. (see above) o 2. Must be able to demonstrate that there is a reasonable rationale for this compensation. o 3. Must strategize about how to deal w/ a marginal say on pay vote.

Aurebach v. Bennett (Special Meetings)

• Special litigation committee (SLC), charged with making a decision on derivative law suits, may be questioned by the courts in two ways: • 1. Is the committee disinterested/ independent? • 2. Did they sufficiently investigate the issue at hand (did they actually inform themselves by viable procedures/ was it made in good faith)? o If both of those conditions are met, businesses judgment rule applies to their action.

Rales v. Blasband

• The Aaronson rule applies to double derivative suits (suits against a parent company for the acts of the subsidiary?), it just means that the subsidiary board will be the one evaluated for impartiality/ whether they were capable of properly exercising business judgment in a decision on a demand had one been made (proving futlity). o Role of Inspection Rights • In order to have particularized facts, you essentially need to exhaust your inspection rights before you allege futility.

Gimbel v. Signal Compaies

• The board of directors of Signal voted to sell one of their subsidiaries (Signal Oil) to Burmah Oil. o At the time, Signal Oil represented 26% of Signal's assets, 41% of its net worth, and produced 15% of their revenue. o Signal originally started as an oil company, but by this time had diversified into a lot of other businesses, and their oil business was no longer their 'core business'. • Gimbel, a Signal shareholder, sued to stop the sale. o Gimbel argued that directors lacked the authority to enter into such a significant transaction without a shareholder vote. • Delaware law (8 Del.C. §271(a)) requires majority shareholder approval for the sale of "all or substantially all" of the assets of a Delaware corporation. • Gimbel argued that Signal was at its heart an oil company, and selling off all of their oil assets so significantly changed the character of the company that it met the definition of §271. • The Trial Court found for Signal and allowed the sale. o The Trial Court found that based on §271, a sale of less than substantially all of a corporation's assets did not require a vote. o The Court looked at the numbers and found that Signal Oil was a significant part of Signal's over all assets, but did not meet the requirement of "all or substantially all." • The Court defined that to be any part that is "vital' to the corporation or assets substantial enough that there wouldn't be a viable business left after the sale. o The Court found that just because Signal started as an oil company, the fact it was completely getting out of the oil business did not give shareholders any particular rights. The Court noted that corporations change character. That's a normal part of the business world. • Basically, the Court found that sales that cause the corporation to depart radically from its historical line of business did not constitute a sale of substantially all of the corporation's assets. Under the Model Business Corporations Act §12.02(a), a shareholder vote is required if the corporation sells off more than 75% of the corporation's consolidated assets and 75% of either its consolidated revenues or pre-tax earnings.

De Facto Merger: Dead Doctine

• When a structured asset sale reached substantially the same end result as a merger, the court could declare a defacto merger and allow shareholder voting/ appraisal rights that were previously denied to them.