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Chapter 14 Shareholder Voting Rights

Module VI – Corporate Governance. Chapter 14 Shareholder Voting Rights. Bar exam. Corporate practice. Law profession. What and how Rights in fundamental transactions Voting rights Appraisal rights Compare: merger, sale of assets, tender offer Power to initiate

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Chapter 14 Shareholder Voting Rights

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  1. Module VI – Corporate Governance Chapter 14Shareholder Voting Rights Bar exam Corporate practice Law profession 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 Citizen of world Chapter 14 Shareholder Voting Rights

  2. 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 Chapter 14 Shareholder Voting Rights

  3. Fundamentals Introduction to firm Corporate basics Corporations and policy Corporate federalism Corporate social responsibility Corporate political action Corporate form Organizational choices Incorporation Locating corporate authority Corporate finance Numeracy for corporate lawyers Capital structure Corporate externalities Piercing corporate veil Corporate environmental liability Corporate criminal liability Corporate governance Shareholder voting Shareholder information rights Public shareholder activism Fiduciary duties Shareholder litigation Board decision making Board oversight Director conflicts Executive compensation Corporate groups Stock trading Securities markets Securities fraud class actions Insider trading Corporate deals Sale of control Antitakeover devices Deal protection Close corporations Planning Oppression • Fundamentals • Introduction to firm • Corporate basics • Corporations and policy • Corporate federalism • Corporate social responsibility • Corporate political action • Corporate form • Organizational choices • Incorporation • Locating corporate authority • Corporate finance • Numeracy for corporate lawyers • Capital structure • Corporate externalities • Piercing corporate veil • Corporate environmental liability • Corporate criminal liability • Corporate governance • Shareholder voting • Shareholder information rights • Public shareholder activism • 10. Close corporations • Planning • Oppression • 7. Fiduciary duties • Shareholder litigation • Board decision making • Board oversight • Director conflicts • Executive compensation • Corporate groups (shareholder checklist) Chapter 14 Shareholder Voting Rights

  4. Substance(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 Shareholder voting rights Chapter 14 Shareholder Voting Rights

  5. What is a merger? (statutory merger / triangular merger / sale of assets / tender offer) Chapter 14 Shareholder Voting Rights

  6. Acquisition P Corp. (acquiring corporation) T Inc. (acquired corporation) Hypothetical • Mgmt of P and T agree that P will acquire T • P will issue 40% of voting shares as consideration Chapter 14 Shareholder Voting Rights

  7. plan of merger Statutory merger(MBCA) P 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 approves merger plan • T shareholders • Vote – Yes • Appraisal – Yes (unless mkt out) Corporations: A Contemporary Approach Chapter 14 Shareholder Voting Rights Slide 7 of 59

  8. Statutory merger(MBCA) Before T Inc. (acquired corporation) P Corp. (acquiring corporation) plan of merger After P. Corp. (surviving corporation) assets + liabilities of both P and T Chapter 14 Shareholder Voting Rights

  9. Shareholder rights * Unless “market out” exception applies Chapter 14 Shareholder Voting Rights

  10. Triangular merger (MBCA) P Corp. (acquiring corporation) T Inc. (acquired corporation) 100% owner statutory merger Merger Sub Inc. (acquisition vehicle) • P creates Merger Sub • capitalized with P shares • approved by P board • MS board & Shs (P) approve • P shareholders • Vote – Yes (more than 20% issuance) • Appraisal – No • T board approves merger plan • T shareholders • Vote – Yes • Appraisal – Yes (unless “market out” exception) Chapter 14 Shareholder Voting Rights

  11. Before Triangular merger (MBCA) P Corp. (acquiring corporation) T Inc. (acquired corporation) 100% owner statutory merger Merger Sub Inc. (acquisition vehicle) P Corp. (acquiring corporation) After 100% owner T Inc. (surviving corporation - reverse merger) Chapter 14 Shareholder Voting Rights

  12. Shareholder rights * Unless “market out” exception applies Chapter 14 Shareholder Voting Rights

  13. Sale of Assets (MBCA) P Corp. (acquiring corporation) T Inc. (acquired corporation) 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) • Appraisal – No • T agrees to sell T assets for P shares (maybe transfer liabilities) • approved by T board • T shareholders • Vote – Yes • Appraisal – Yes Chapter 14 Shareholder Voting Rights

  14. Sale of Assets (MBCA) Before P Corp. (acquiring corporation) consideration T Inc. (acquired corporation) assets + liabilities After P Corp. (acquiring corporation) Assets + liabilities of P and T T Inc. dissolved T shareholders receive P shares as consideration Chapter 14 Shareholder Voting Rights

  15. Shareholder rights * Unless “market out” exception applies Chapter 14 Shareholder Voting Rights

  16. Compare shareholder rights …(P acquires T with 40% of its stock) Chapter 14 Shareholder Voting Rights

  17. Shareholder rights * Unless “market out” exception applies Chapter 14 Shareholder Voting Rights

  18. Tender Offer T shareholders Offer (cash, stock, etc) P Corp. (bidder) Board shares T Inc. (target) • P board approves offer • P shareholders • Vote – No (unless dilutive issuance or amend articles to authorize shares) • Appraisal – No • T board has no role • T shareholders • Vote – No (each individual shareholder decides / coercion risk) • Appraisal – No (take offer or risk becoming minority) Chapter 14 Shareholder Voting Rights

  19. Tender Offer Before T shareholders Offer (cash, stock, etc) P Corp. (bidder) shares Board T Inc. (target) After T Shs (minority) P (majority) Board How get rid of minority? T Inc. (target) Chapter 14 Shareholder Voting Rights

  20. Two-step takeover T shareholders 1st step (tender offer) P Corp. (bidder) Board T Inc. (target) P (majority) T Shs (minority) 2nd step (merger) Board P Corp. (bidder) merger T Inc. (target) Chapter 14 Shareholder Voting Rights

  21. Pop quiz – shareholder voting rights Chapter 14 Shareholder Voting Rights

  22. 4. Shareholder meeting requires: • Notice to shareholders (10-60 days before meeting) • Statement of purpose  (both annual/special meeting) • A quorum from beginning to end of the meeting • 5. At annual meeting: • All directors are elected • Only directors are elected where seat is contested • Only some directors are elected (up to five classes) • Shareholders can: • Amend bylaws, even if inconsistent with articles • Approve non-binding  resolutions • Remove directors only for cause and fill vacancies • Shareholders do vote on: • Fundamental changes in business • Mergers • Sales of important corporate assets • Shareholders do not vote on: • Acquisition by another corporation • Amendment of bylaws • Parent-sub merger (when parent owns 90%+ of sub) • Shareholders get appraisal: • When they receive publicly-traded stock in merger • In court proceeding paid by company • For “fair market value” of their shares Answers: 1-b / 2-c / 3-b / 4-a / 5-a / 6-b Chapter 14 Shareholder Voting Rights

  23. Shareholders’ power to initiate ... Chapter 14 Shareholder Voting Rights

  24. Auer v. Dressel (NY 1954) CA, Inc. v. AFSCME (Del. 2008) Campbell v. Loew’s (Del. Ch. 1957) Power to initiate • Shareholder resolutions • Remove directors (for cause) • Fill board vacancies (after removal) • Amend bylaws Chapter 14 Shareholder Voting Rights

  25. 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 Chapter 14 Shareholder Voting Rights

  26. 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 Chapter 14 Shareholder Voting Rights

  27. Auer v. Dressel (NY 1954) CA, Inc. v. AFSCME (Del. 2008) Campbell v. Loew’s (Del. Ch. 1957) • Power to initiate • Shareholder resolutions • Remove directors (for cause) • Fill board vacancies (after removal) • Amend bylaws Chapter 14 Shareholder Voting Rights

  28. Reimbursement of expenses? Chapter 14 Shareholder Voting Rights

  29. 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. Chapter 14 Shareholder Voting Rights

  30. 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 Chapter 14 Shareholder Voting Rights

  31. 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 2006) Campbell v. Loew’s (Del. Ch. 1957) Chapter 14 Shareholder Voting Rights

  32. 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 Chapter 14 Shareholder Voting Rights

  33. 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]" Chapter 14 Shareholder Voting Rights

  34. 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. Chapter 14 Shareholder Voting Rights

  35. Pop quiz – shareholder initiation powers Chapter 14 Shareholder Voting Rights

  36. 4. Under a shareholder-bylaw to reimburse proxy expenses: • Board must be able to refuse, inc unreasonable expenses • Board is bound by bylaw • Board can amend bylaw • 5. Removal of directors under DGCL: • Must be only for cause • Can be without cause, if allowed in articles (opt-in) • Can be without cause, unless articles disallow (opt-out) • To remove director in PHC: • Directors must be able to present at meeting • Directors must have access to proxy statement • Cannot be done, wait for next election • Shareholders have power: • To require board to reinstate president • To make request of board • Only to elect new board • Shareholders have power: • To remove director for cause • Regardless of articles, to remove D without cause • Only to give opinion on board removing D • Shareholders have power to amend bylaws: • On any matter board could amend • On procedural matters that don’t interfere with board • Only if specifically allowed in articles Answers: 1-b / 2-a / 3-b / 4-a / 5-c / 6-b Chapter 14 Shareholder Voting Rights

  37. Board responses to shareholder initiatives … Chapter 14 Shareholder Voting Rights

  38. Chapter 14 Shareholder Voting Rights

  39. Limits on board • Limits on power (ultra vires) • Amend bylaws • CA v AFSCME: Shareholders can amend bylaws • Adopt poison pills • Quickturn: Directors must retain independent judgment Fiduciary 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 Chapter 14 Shareholder Voting Rights

  40. Blasius Indus v. Atlas Corp(Del Ch 1988) Incumbent board 1 2 3 4 5 6 7 8 8 9 9 10 11 12 13 14 15 Insurgent (Blasius) (amend bylaws) Chapter 14 Shareholder Voting Rights

  41. Standard of review • 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 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 Chapter 14 Shareholder Voting Rights

  42. 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 Chapter 14 Shareholder Voting Rights

  43. Board power over SH voting … Chapter 14 Shareholder Voting Rights

  44. Quickturn Design Systems v. Shapiro(Del. 1998) Mentor Board Shareholders • Bidder initiates two-step takeover • Proxy contest - replace board (which will redeem “rights”) • (2) Tender offer • 50% premium, 20% below high • Same price in back-end merger Quickturn Chapter 14 Shareholder Voting Rights

  45. Quickturn Design Systems v. Shapiro(Del. 1998) Mentor Board Shareholders • 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) Quickturn Chapter 14 Shareholder Voting Rights

  46. Poison Pill Chapter 14 Shareholder Voting Rights

  47. TITLE 8 Corporations CHAPTER 1. GENERAL CORPORATION LAW Subchapter 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. Chapter 14 Shareholder Voting Rights

  48. 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. Quickturn Design Systems v. Shapiro(Del. 1998) Justice Randy Holland Chapter 14 Shareholder Voting Rights

  49. Pop quiz – board interference with voting Chapter 14 Shareholder Voting Rights

  50. 4. A poison pill: • Forces bidders to negotiate with the board • Is invalid, since it undermines shareholder liquidity rights • Is valid, only if approved by shareholders • 5. A deferred-redemption pill: • Can be redeemed at any time • Can be redeemed only by “old” directors • Can be redeemed by “new” directors after a wait • A deferred-redemption pill is invalid because it: • Violates fiduciary duties • Disempowers directors • Is not authorized in articles • Boards do not have power: • To amend bylaws • To fill vacancies on board • To disenfranchise shareholders • When interfering with SH insurgency, directors must: • Have compelling justifications • Not oppose the insurgency • Offer a rational purpose (BJR) • A staggered board: • Must be in the corporate bylaws • Reflects that shareholders want director permanence • Can be circumvented by “removal without cause” Answers: 1-c / 2-a / 3-b / 4-a / 5-c / 6-b Chapter 14 Shareholder Voting Rights

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