chapter 14 shareholder voting rights

Cubism: The Leonard A. Lauder Collection (The Met – Oct, 2014 to Feb 2015)

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Corporations:A Contemporary Approach

Chapter 14Shareholder Voting Rights

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• What and how– Rights in fundamental transactions

• Voting rights• Appraisal rights

– Compare: merger, sale of assets, tender offer• Power to initiate

– Shareholder resolutions– Bylaw amendments– Removing directors / filling vacancies

• Protection of voting rights– Blasius: board packing– Quickturn: dead-hand/deferred poison pills

Module VI – Corporate Governance

Citizen of world

Law profession

Corporate practice

Bar exam



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Shareholder self-protection

• Vote– Approve fundamental transactions – Elect directors (annually, special)– Remove directors / fill vacancies– Initiate action (bylaws, resolutions)

• Sue – Enforce fiduciary duties

(derivative)– Protect rights (disclosure, voting,

appraisal, inspection)

• Sell – Liquidity (except insider trading)– Takeovers (tender offer)

Prof. Robert Thompson

1. Fundamentals– Introduction to firm– Corporate basics

2. Corporations and policy– Corporate federalism– Corporate social responsibility – Corporate political action

3. Corporate form– Organizational choices– Incorporation– Locating corporate authority

4. Corporate finance– Numeracy for corporate lawyers– Capital structure

5. Corporate externalities– Piercing corporate veil– Corporate environmental liability– Corporate criminal liability

6. Corporate governance – Shareholder voting– Shareholder information rights– Public shareholder activism

7. Fiduciary duties– Shareholder litigation– Board decision making – Board oversight – Director conflicts– Executive compensation – Corporate groups

8. Stock trading– Securities markets– Securities fraud class actions– Insider trading

9. Corporate deals– Sale of control– Antitakeover devices– Deal protection

10. Close corporations– Planning– Oppression

1. Fundamentals– Introduction to firm– Corporate basics

2. Corporations and policy– Corporate federalism– Corporate social responsibility – Corporate political action

3. Corporate form– Organizational choices– Incorporation– Locating corporate authority

4. Corporate finance– Numeracy for corporate lawyers– Capital structure

5. Corporate externalities– Piercing corporate veil– Corporate environmental

liability– Corporate criminal liability

6. Corporate governance – Shareholder voting– Shareholder information rights– Public shareholder activism

7. Fiduciary duties– Shareholder litigation– Board decision making – Board oversight – Director conflicts– Executive compensation – Corporate groups

10. Close corporations– Planning– Oppression



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Shareholder voting rightsSubstance (what SHs vote on)

• Choose directors – Annual election – Removal/replacement of

directors

• Approve fundamental changes (usually after board initiation)

– Amendments to articles of incorporation

– Mergers / sales of assets – Dissolution

• Initiate and approve bylaw changes

• Adopt resolutions

Process (how SHs vote)

• Meetings of shareholders – annual meeting – special meeting – Action by consent

• Voting at meetings – quorum (purpose) – proxy (appointment of agent) – absolute vs. simple majority – supervision of voting



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What is a merger?

(statutory merger / triangular merger / sale of assets / tender offer)



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Hypothetical

• Mgmt of P and T agree that P will acquire T

• P will issue 40% of voting shares as consideration

P Corp.(acquiring

corporation)

T Inc.(acquired

corporation)

Acquisition



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plan of mergerP Corp.

(acquiring corporation)

T Inc.(acquired

corporation)

P board

• approves merger plan

P shareholders

• Vote – Yes (if more than 20% issuance)

• Appraisal – No

T board


T shareholders

• Vote – Yes

• Appraisal – Yes (unless mkt out)

Statutory merger(MBCA)

http://users.wfu.edu/palmitar/ICBCorporations-Companion/Conexus/MBCA/chapter11.htm







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plan of mergerP Corp.


T Inc.(acquired

corporation)

P. Corp.(surviving corporation)

assets + liabilitiesof both P and T

Statutory merger(MBCA)

After

Before



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Shareholder rightsP (surviving corporation) T (acquired corporation

Vote Appraisal Vote Appraisal

Statutory merger

MBCA (rev) Y N Y Y*

MBCA (pre-99) Y Y Y Y

DGCL Y Y* Y Y*

Triangular merger

MBCA (rev) Y N Y Y*

MBCA (pre-99) N N Y Y

DGCL N N Y Y*

Sale of assets

MBCA (rev) Y N Y Y*


DGCL N N Y N

* Unless “market out” exception applies



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Triangular merger (MBCA)P Corp.


T Inc.(acquired corporation)

Merger Sub Inc. (acquisition vehicle)

100% owner

statutory merger

P creates Merger Sub

• capitalized with P shares

MS board & MS Shs (P) approve

P shareholders

• Vote – Yes (more than 20% issuance)


T board


T shareholders

• Vote – Yes

• Appraisal – Yes (unless “market out” exception)



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Triangular merger (MBCA)

P Corp.(acquiring corporation)


Merger Sub Inc. (acquisition vehicle)

100% owner

statutory merger


T Inc. (surviving corporation

- reverse merger)

100% owner

Before

After



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Statutory merger

MBCA (rev) Y N Y Y*


DGCL Y Y* Y Y*

Triangular merger

MBCA (rev) Y N Y Y*


DGCL N N Y Y*

Sale of assets

MBCA (rev) Y N Y Y*


DGCL N N Y N




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Sale of Assets (MBCA)



consideration

assets + liabilities

P agrees to buy T assets for P shares (maybe assume liabilities)

• approved by P board

P shareholders

• Vote – Yes (if more than 20% issuance)


T agrees to sell T assets for P shares (maybe transfer liabilities)

• approved by T board

T shareholders

• Vote – Yes

• Appraisal – Yes (subject to “market out” exception)



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Sale of Assets (MBCA)



consideration

assets + liabilities


Assets + liabilitiesof P and T

Before

After

T Inc. dissolved

T shareholders receive P shares as consideration



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Statutory merger

MBCA (rev) Y N Y Y*


DGCL Y Y* Y Y*

Triangular merger

MBCA (rev) Y N Y Y*


DGCL N N Y Y*

Sale of assets

MBCA (rev) Y N Y Y*


DGCL N N Y N




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Compare shareholder rights …

(P acquires T with 40% of its stock)



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Statutory merger

MBCA (rev) Y N Y Y*


DGCL Y Y* Y Y*

Triangular merger

MBCA (rev) Y N Y Y*


DGCL N N Y Y*

Sale of assets

MBCA (rev) Y N Y Y*


DGCL N N Y N




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Tender Offer

P Corp.(bidder) T Inc.

(target)

T shareholders

Offer (cash, stock, etc)

shares Board

P board approves offer

P shareholders

• Vote – No (unless dilutive issuance or amend articles to authorize shares)


T board has no role

T shareholders

• Vote – No (each individual shareholder decides / coercion risk)

• Appraisal – No (take offer or risk becoming minority)



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Tender Offer

P Corp.(bidder)

T Inc.(target)

T shareholdersOffer (cash, stock, etc)

sharesBoard

Before

After P (majority)

T Inc.(target)

Board

T Shs (minority)

How get rid of minority?



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Two-step takeover

P Corp.(bidder)

T Inc.(target)

T shareholders

Board

1st step(tender offer)

2nd step(merger)

P (majority)

T Inc.(target)

Board

T Shs (minority)

P Corp.(bidder)

merger



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Pop quiz – shareholder voting rights



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1. Shareholders do vote on:a. Fundamental changes in

businessb. Mergersc. Sales of important corporate

assets

2. Shareholders do not vote on:a. Acquisition by another

corporationb. Amendment of bylawsc. Parent-sub merger (when

parent owns 90%+ of sub)

3. Shareholders get appraisal:a. When they receive publicly-

traded stock in a mergerb. In court proceeding paid by

companyc. For “fair market value” of their

shares

4. Shareholder meeting requires:a. Notice to shareholders (10-60

days before meeting)b. Statement of purpose of meeting

(both annual/special meetings)c. A quorum from beginning to end

of the meeting

5. At annual meeting:a. All directors are electedb. Only directors are elected where

seat is contested c. Only some directors are elected

(up to five classes)

6. Shareholders can:a. Amend bylaws, even

if inconsistent with articlesb. Approve non-binding resolutionsc. Remove directors only for cause

and fill vacancies

Answers: 1-b / 2-c / 3-b / 4-a / 5-a / 6-b



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Shareholders’ power to initiate ...



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Power to initiate

• Shareholder resolutions

• Remove directors (for cause)

• Fill board vacancies (after removal)

• Amend bylaws

Auer v. Dressel(NY 1954)

CA, Inc. v. AFSCME (Del. 2008)

Campbell v. Loew’s(Del. Ch. 1957)



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Auer v. Dressel (NY Court of Appeals 1954)

Majority shareholders were upset after a palace coup. They wanted to get rid of the incumbent majority, put in a new board, and reinstate the former president Auer. They ask for a special shareholders' meeting where shareholders would vote to --

• remove 4 directors for cause and

replace them with a new slate • amend the bylaws and articles so

board vacancies are filled only by shareholders

• endorse Auer's presidency and demand his reinstatement



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NY Court of Appeals:

Removal power: "... stockholders who are empowered to elect directors have the inherent power to remove them for cause. [service of specific charges, adequate notice and full opportunity of meeting the accusations] .... [Provision in articles that authorizes board to fill vacancies is not] an abdication by the stockholders of their own traditional, inherent power to remove their own directors.

Amend bylaws: "Since these particular stockholders have the right ... to remove [directors] on proven charges, [they can] amend the bylaws to elect the successors of such directors as shall be removed ...

Resolution: "The stockholders by expressing their approval of Mr.

Auer's conduct as president and their demand that he be put back in that office, will not be able directly to effect that change in officers, but there is nothing invalid in their so expressing themselves



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CA, Inc. v. AFSCME (Del. 2008)


Power to initiate




• Amend bylaws



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Reimbursement of expenses?



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DGCL

§ 102. Articles. (b) …. The certificate may contain ….”

(1) Any provision …. Limiting and regulating the powers of …. the directors

§ 109. Bylaws.(a) … The power to adopt, amend or repeal bylaws shall be in the

stockholders entitled to vote ….(b) The bylaws may contain any provision, not inconsistent with law or

with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.

§ 141. Board of directors…(a) The business and affairs of every corporation organized under this

chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in … its certificate of incorporation.



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Justice Jack Jacobs (standing right):

Proper subject: Implicit in CA's argument is the premise that any bylaw that in any respect might be viewed as limiting or restricting the power of the board of directors automatically falls outside the scope of permissible bylaws. That simply cannot be.

Fiduciary duties: As presently drafted, the Bylaw would afford CA's directors full discretion to determine what amount of reimbursement is appropriate, because the directors would be obligated to grant only the “reasonable” expenses of a successful short slate.

Delaware Supreme Court



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CA, Inc v. AFSCME (Del 2006)


Power to initiate




• Amend bylaws



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Campbell v. Loew's, Inc. (Del Ch. 1957)

Two minority factions in a public corporation (Vogels and Tomlinsons) vie for control of the board. The Vogel faction has control of corporate management and calls a shareholders' meeting to:

• amend the bylaws to increase # of directors

• remove 2 Tomlinson-faction directors.

• fill director vacancies with Vogel-faction directors



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Delaware Chancery Court:

• Fill vacancies. "stockholders have the inherent right between annual meetings to fill newly created directorships"

• Remove directors. "stockholders do have [inherent] power to remove directors for cause ... even where there is a provision for cumulative voting"

– Process of removal. "there must be ...

notice of charges .... opportunity to defend charges"

– Opportunity to be heard. "opportunity must be provided such directors to present their defense to stockholders [in company proxy mailing]"



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Delaware Chancery Court:

Meaning of “for cause”:

[A] charge that the directors desired to take over control of the corporation is not a reason for their ouster. Standing alone, its is a perfectly legitimate objective which is a part of the very fabric of corporate existence. Nor is lack of cooperation a legally sufficient basis for removal for cause.

The next charge is that these directors, in effect, engaged in a calculated plan of harassment to the detriment of the corporation. Certainly a director may examine books, ask questions, etc., but a point can be reached when his actions exceed the call of duty and become deliberately obstructive. ... The charges in this area ... are legally sufficient to justify the stockholders in voting to remove such directors.



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Pop quiz – shareholder initiation powers



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1. Shareholders have power:a. To require board to reinstate

presidentb. To request board that president

be reinstatedc. Only to elect new board

2. Shareholders have power:a. To remove director for causeb. Regardless of articles, to

remove D without causec. Only to give opinion on board

removing D

3. Shareholders have power to amend bylaws:a. On any matter board could

amendb. On procedural matters that

don’t interfere with boardc. Only if specifically allowed in

articles

4. Under a shareholder-passed bylaw to reimburse proxy expenses:a. Board must be able to refuse, inc

unreasonable expensesb. Board is bound by bylawc. Board can amend bylaw

5. Removal of directors under DGCL:a. Must be only for causeb. Can be without cause, if allowed

in articles (opt-in)c. Can be without cause, unless

articles disallow (opt-out)

6. To remove director in PHC:a. Directors must be able to present

“defense” at meetingb. Directors must have access to

proxy statementc. Cannot be done, shareholders

must wait for next election

Answers: 1-b / 2-a / 3-b / 4-a / 5-c / 6-b



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Board responses to shareholder initiatives …



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Limits on boardFiduciary duties

(constraints)

• During insurgency, interfere w/ SH voting– Blasius: only when

“compelling justifications”

• Adopt “shark repellents” – BJR: if approved by

shareholders– Heightened duty: Board

as negotiator for shareholders

Limits on power (ultra vires)

• Amend bylaws – CA v AFSCME:

Shareholders can amend bylaws

• Adopt poison pills– Quickturn: Directors

must retain independent judgment



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Blasius Indus v. Atlas Corp(Del Ch 1988)

1 2 3 4 5 6 7

15141312111098

Insurgent(Blasius)

Incumbentboard

(amend bylaws)

8 9



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Standard of review

Atlas's board acted –

• Consistent with Sh-approved staggered board – precisely to prevent “siren’s call”

• Without conflicting interest -- their board positions not jeopardized by Blasius board-packing plan

• In good faith -- they were motivated to protect the shareholders from the threat of impractical, dangerous recapitalization program

Judicial review

– BJR deference?• Board not exercising control

over operations• Inapplicable when

manipulates franchise– Per se prohibition?

• Board should have role• Board may sometimes know

better than shareholders– Heightened review?

• Compelling justifications• Protect deal already done



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Corporate democracy

“The shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests.

“Action designed principally to interfere with the effectiveness of a vote inevitably involves a conflict between the board a shareholder majority. ....

“The theory of our corporation law confers power upon directors as the agents of the shareholder; it does not create Platonic masters.

Chancellor William T. Allen



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Board power over SH voting …



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Quickturn Design Systems v. Shapiro(Del. 1998)

Quickturn

Shareholders

Mentor

Board

Bidder initiates two-step takeover

(1)Proxy contest - replace board (which will redeem “rights”)

(2) Tender offer • 50% premium, 20% below

high • Same price in back-end

merger



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Quickturn

Shareholders

Mentor

Board

Quickturn board responds

• Amend bylaws: Shareholder-called meeting delayed 90-100 days

• Amend poison pill:

– Delete “dead hand” feature

– Add “deferred redemption” (new Directors cannot redeem for 6 mos)




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Poison Pill

Creation: Board adopts “poison pill” plan – Shs receive rights to buy securities “out of the money” (rights attach to and trade with stock)

1st trigger: Bidder acquires or makes TO for specified percentage (such as 10%) – board has window in which to “redeem” rights

2nd trigger: If rights not redeemed and Bidder undertakes back-end transaction, rights allow holder to buy “discounted securities” of Bidder

Effect: To avoid buying target shares that carry “financial poison,” Bidder must negotiate with board (or replace board) to have rights redeemed.



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TITLE 8Corporations

CHAPTER 1. GENERAL CORPORATION LAWSubchapter IV. Directors and Officers

§ 141. Board of directors; powers …

(a) The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.



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Delaware Supreme Court:

One of the most basic tenets of Delaware corporate law is that the board of directors has the ultimate responsibility for managing the business and affairs of the corporation.

While the DRP limits the board’s authority in only one respect, suspension of rights plan, it restricts board’s power to negotiate sale of the corporation.

No defensive measure can be sustained which would require a new board of directors to breach its fiduciary duty.


Justice Randy Holland



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Pop quiz – board interference with voting



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1. Boards do not have power:a. To amend bylaws b. To fill vacancies on boardc. To disenfranchise shareholders

2. When interfering with SH insurgency, directors must:a. Have compelling justificationsb. Not oppose the insurgencyc. Offer a rational purpose (BJR)

3. A staggered board:a. Must be in the corporate

bylawsb. Reflects that shareholders

want director permanencec. Can be circumvented by

“removal without cause”

4. A poison pill:a. Forces bidders to negotiate with

the boardb. Is invalid, since it undermines

shareholder liquidity rightsc. Is valid, only if approved by

shareholders

5. A deferred-redemption pill:a. Can be redeemed at any timeb. Can be redeemed only by “old”

directorsc. Can be redeemed by “new”

directors after a wait

6. A deferred-redemption pill is invalid because it:a. Violates fiduciary duties b. Disempowers directorsc. Is not authorized in articles

Answers: 1-c / 2-a / 3-b / 4-a / 5-c / 6-b



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The end



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Note on poison pillsCreation. The board issues one right for each common

share outstanding. When issued, the rights are essentially worthless, entitling a shareholder to buy preferred stock at prices far in excess of current market value—that is, stock “out of the money.”

First trigger. The real impact of the rights arises if any acquirer buys at least 20 percent (or makes a tender offer for at least 30 percent) of the company’s shares. After this first trigger, the board has ten days to redeem the rights for a nominal amount (such as 10 cents per share). If the target fails to take this antidote, the rights became poison upon any further action by the acquirer.

Second trigger. Any back-end transaction with the tainted acquirer (such as a merger, sale of assets, or other self-dealing arrangement) activates a second trigger in which the target must swallow the plan’s poison. The poison? Upon the second trigger, each right becomes exercisable permitting the holder to purchase $200 worth of the acquirer’s or the target’s securities (depending on the structure of the back-end transaction) for $100. (A “flip-in” plan entitles the holder to buy discounted target securities and sensibly excludes the tainted acquirer from participating; a “flip-over” plan entitles the holder to buy discounted acquirer securities.)

Corporation

Shareholders

Board issuesrights



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Corporation

Shareholders

Board can redeem rights(or become poison)

Bidder

1st trigger



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Corporation

Shareholders(rights holders)

Shareholders can exercise rights(if bidder uses control)

Bidder

2nd trigger



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Note on poison pillsEffect. The purpose of this potentially devastating

financial dilution is to force any bidder, before beginning a hostile takeover, to negotiate with the board--which holds the redemption antidote. Such plans, which have become a favorite antitakeover tactic, have been adopted by a majority of large public companies.

Avoidance. One method to avoid a poison pill is for the bidder to seek first to replace the incumbent board in a voting contest, so the new board can then cancel the plan or redeem the rights and pave the way for the bidder’s tender offer. Another, still uncertain, option is for the shareholders to adopt a bylaw amendment that prevents the board from adopting a poison pill without shareholder approval.

Corporation

Shareholders

Rights

Bidder

Board



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Note on poison pillsEffect. The purpose of this potentially devastating

financial dilution is to force any bidder, before beginning a hostile takeover, to negotiate with the board--which holds the redemption antidote. Such plans, which have become a favorite antitakeover tactic, have been adopted by a majority of large public companies.

Avoidance. One method to avoid a poison pill is for the bidder to seek first to replace the incumbent board in a voting contest, so the new board can then cancel the plan or redeem the rights and pave the way for the bidder’s tender offer. Another, still uncertain, option is for the shareholders to adopt a bylaw amendment that prevents the board from adopting a poison pill without shareholder approval.

Corporation

Shareholders

Rights

Bidder

Board

Replace

chapter 14 shareholder voting rights

Documents

shareholder voting rightsslide

consent voting

contemporary approachchapter

board packingquickturn

specialremove directors

board initiationamendments

fundamental changes

bylaw changes