- A Hirschman, Exit, Voice and Loyalty: Responses to Decline in Firms, Organizations, and States (Cambridge, MA, Harvard University Press, 1970).
- See, eg J Coffee Jr, “Liquidity versus Control: The Institutional Investor as Corporate Monitor” (1991) 91 Columbia Law Review 1277; E Rock, “The Logic and (Uncertain) Significance of Institutional Shareholder Activism” (1991) 79 Georgetown Law Journal 445, n 25; B Black, “Agents Watching Agents: The Promise of Institutional Investor Voice” (1992) 39 UCLA Law Review 811, n 6: R Thompson, “Exit, Liquidity, and Majority Rule: Appraisal's Role in Corporate Law” (1995) 84 Georgetown Law Journal 1; E Ferran, Company Law and Corporate Finance (Oxford University Press, 1999), 239.
- Hirschman, supra n 1, 15–17.
- “The decision whether to exit will often be taken in the light of the prospects for the effective use of voice. If customers are sufficiently convinced that voice will be effective, then they may well postpone exit.” ibid, 37.
- ibid, 33.
- “The availability to consumers of the exit option, and their frequent resort to it, are characteristic of ‘normal’ (non-perfect) competition, where the firm has competitors but enjoys some latitude as both price-maker and quality-maker—and therefore, in the latter capacity, also as a quality-spoiler. As already mentioned, the exit option is widely held to be uniquely powerful: by inflicting revenue losses on delinquent management.” ibid, 21.
- “The extent to which customer-members are willing to trade off the certainty of exit against the uncertainties of an improvement in the deteriorated product… is clearly related to that special attachment to an organization known as loyalty… As a rule, then, loyalty holds exit at bay and activates voice.” ibid, 77–78.
- ibid, 40.
- ibid, 101.
- “If I disagree with an organization, say, a political party, I can resign as a member, but generally I cannot stop being a member of the society in which the objectionable party functions… the individual is at first both producer and consumer of such public goods as party politics… he can stop being producer, but cannot stop being consumer.” ibid, 102.
- See Thompson, supra n 2, 3–4. Therefore, the enormous undertaking in market regulation performed by the Securities and Exchange Commission, the National Association of Securities Dealers and the national securities exchanges has served to make the exit option more practical for shareholders.
- It is also true that the sale of stock is less communicative of possible non-public information than is the purchase of stock, for although market participants often are in need of liquidity, they are less often under pressure to invest immediately in a particular security. See S Thel, “$850,000 in Six Minutes—The Mechanics of Securities Manipulation” (1994) 79 Cornell University Law Review 219, 242, with further citations.
- See remarks of L Harris, SEC Chief Economist, in “Unofficial Transcript of SEC Roundtable on Proposed Security Holder Director Nominations Rules” (10 March 2004), available at http://www.sec.gov/spotlight/dir-nominations/transcript03102004.txt, accessed on 10 June 2005.
- Shareholders of corporations generally have rights that have been traditionally categorised in: “(1) rights as to control and management; (2) proprietary rights; (3) remedial and ancillary rights”. H Ballantine, Ballantine on Corporation (Chicago, Gallaghan & Co., 1946), 375. These rights are found in contemporary corporate law statues such as the Delaware General Corporation Law (Del Code Ann tit 8) and the Revised Model Business Corporation Act (RMBCA). The rights as to control and management are mainly voting rights that may be exercised in various circumstances (Del Code Ann tit 8, ss 212, 141(k), 211(b), 242(b), 251(c), 271, 275(c); RMBCA, ss 7.21(a), 7.28, 8.08, 9.21, 9.52, 10.03, 10.20, 11.04, 12.02, 14.02). Under this traditional categorisation, the “proprietary” rights are primarily rights to share pro rata in dividend payments (see, eg Del Code Ann tit 8, s 151(c); RMBCA, s 6.01(c)(3)) and payouts upon liquidation of the corporation (Del Code Ann tit 8, s 151(d); RMBCA, s 6.01(b)(2)). The remedial and ancillary rights include the right to bring a derivative suit (Del Code Ann tit 8, s 327; RMBCA, s 7.40) and the right to inspect corporate books and records (Del Code Ann tit 8, s 220; RMBCA, ss 16.02, 16.04, 16.20). See also R Clark, Corporate Law (New York, Aspen Publishers, 1986), 13; J Cox, T Hazen and F O'Neal, Corporations (New York, Aspen Publishers, 2002), s 13.1; F Gevurtz, Corporation Law (St Paul, West Group, 2000), 179, 195, 210, 387.
- “Corporate practice has come a long way from the common law's nonrecognition of the proxy device. The widespread distribution of corporate securities, with the concomitant separation of ownership and management, puts the entire concept of the stockholder’ meeting at the mercy of the proxy instrument. This makes the corporate proxy a tremendous force for good or evil in our economic scheme.” L Loss and J Seligman, Securities Regulation (New York, Aspen Publishers, 3rd edn, 2004), s 6-C-1.
- See, eg R Thomas and C Dixon, Aranow & Einhorn on Proxy Contests for Corporate Control (New York, Aspen Publishers, 3rd edn, 1998), s 3.01; Del Code Ann tit 8, s 220; Shamrock Associates v Texas American Energy Corporation, 517 A 2d 658 (Del Ch 1986).
- See Coffee, “Liquidity v Control”, supra n 2, 1353–54. For a discussion of the power of ISS recommendations, see S Rosenblum, “The Shareholder Communications Proxy Rules and Their Practical Effect on Shareholder Activism and Proxy Contests”, in A Goodman and J Olson (eds), A Practical Guide to SEC Proxy and Compensation Rules (New York, Aspen Publishers, 3rd edn, 2005), s 11.3[2].
- See Clark, supra n 14, 390–92, and J Coffee Jr, “The SEC and the Institutional Investor: A Half-time Report” (1994) 15 Cardozo Law Review 837, 866–68.
- For a discussion of these remedies, see Cox, Hazen and O'Neal, supra n 14, s 15; Loss and Seligman, supra n 15, s 11-D-4; Clark, supra n 14, 639–74.
- See Clark, supra n 14, 397–98.
- See LA Bebchuk, “The Case for Increasing Shareholder Power” (2005) 118 Harvard Law Review 833, 837, citing further references; John Pound, “The Rise of the Political Model of Corporate Governance and Corporate Control” (1993) 68 New York University Law Review 1003, 1012, 1029–30; R Monks and N Minow, Corporate Governance (Malden, MA, Blackwell Publishing, 3rd edn, 2004), 126. See also Unitrin, Inc. v American General Corp, 651 A 2d 1361, 1378 (Del 1995).
- As the Court of Chancery of Delaware has famously remarked: “The shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests.” Blasius Industries, Inc. v Atlas Corporation, 564 A 2d 651, 659 (Del Ch 1988).
- “The combination of explicit contracts, the structural rules of corporate law, and the fiduciary principle still leave much to discretion… Something must fill in the details… Voting serves that function.” F Easterbrook and D Fischel, The Economic Structure of Corporate Law (Cambridge, MA, Harvard University Press, 1991), 66.
- See, eg R Harris, “The Formation of the East India Company as a Deal between Entrepreneurs and Outside” (July 2004) Working Paper, Boalt Hall School of Law, UC Berkeley; M Kohn, “Business Organizations in Pre-Industrial Europe” (2003) Working Paper 03–09, Department of Economics, Dartmouth College; F Gevurtz, “The Historical and Political Origins of the Corporate Board of Directors” (March 2004), 16–32, available at http://ssrn.com/abstract=546296, accessed on 10 June 2005; P Mahoney, “Contract or Concession? An Essay on the History of Corporate Law” (2000) 34 Georgia Law Review 873.
- As Prof Melvin Eisenberg explains, “the managerialists… would achieve ends of social policy by increasing management power, on the theory that while shareholders are interested only in profits, and client-groups only in their own welfare, management is in a position to balance the claims of all groups dependent on the corporation, including not only client-groups and shareholders, but the general public; in a position, that is, to run the corporation in the public interest.” M Eisenberg, The Structure of the Corporation (Boston, Little, Brown & Co, 1976), 25. This term has had significantly more currency in its French forms—“dirigiste” and “dirigisme”—used to apply to a centrally managed economy.
- See M Blair and L Stout, “A Team Production Theory of Corporate Law” (1999) 85 Virginia Law Review 247, 253.
- Dean Bayless Manning outlines his understanding of the public corporation in 1958: “We have known since 1932 that widespread public holding of shares erodes a chasm between ‘ownership’ and ‘control’ and… that the faceless mass of small stockholders is increasing by millions. We have known, too, that today's large corporation may for many purposes be best viewed as an intricate, centralized, economic-administrative structure run by professional managers who hire capital from the investor… Here, the buyer of stock does not know even what business the company may be in tomorrow. He is betting on a management, banking on its expert judgement to steer his small investment through the swift currents of today's commercial stream.” B Manning, “Book Review of JA Livingstone, The American Stockholder” (1958) 67 Yale Law Journal 1475, 1489–90.
- Martin Lipton and Steven Rosenblum argue that “many institutional and other activist shareholders have competing interests that may conflict with the best interests of the public corporation and its shareholder body and other constituencies taken as a whole…. Some may seek to push the corporation into steps designed to create a short-term pop in the company's share price so that they can turn a quick profit…. In addition, investors may have competing interests over and above their financial interests as shareholders. For example, labor unions may use shareholder activism as an element of their collective bargaining strategy or to gain leverage over or access to managers in order to advance union-related objectives.” M Lipton and S Rosenblum, “Election Contest in the Company's Proxy: An Idea Whose Time Has Not Come” (2003) 59 The Business Lawyer 67, 78.
- Blair and Stout, supra n 26, 255.
- “The charter of incorporation of the EIC [East India Company] defined its basic governance structure. This included a Governor, a Deputy Governor, a Committee of 24—also called the ‘Court of Committees’ (and after 1709, the ‘Court of Directors’)—and a General Court. In fact, the full official name of the EIC (until 1709) was “The Governor and Company of Merchants of London Trading into the East-Indies”. The General Court was composed of all members of the company. Every member, of whatever status and however large a share in the joint stock, had one vote in the General Court.” Harris, supra n 24, 31.
- See Section B of this article.
- See Section D of this article.
- See Section C of this article.
- The language used to describe shareholders who seek to use their voting rights to support ideas not initiated by management (ie the “insurgents”, “dissidents” or “activists”) is also amusing. Here is a dramatised description of how statistical data on shareholder proposals has encouraged previously uninformed shareholders in exercising their voting rights: “Groups such as IRRC [Investor Responsibility Research Center], ISS [Institutional Shareholder Services], and CII [Council of Institutional Investors] track and publish databases of company responses to shareholder proposals. As more companies accede to the demands of shareholder activists, thereby ‘raising the bar’ of what is perceived to be shareholder-friendly behavior, it becomes harder for the remaining companies to resist shareholder pressure when it is applied.” A Brownstein and I Kirman, “Can a Board Say No When Shareholders Say Yes? Responding to Majority Vote Resolutions” (2004) 60 The Business Lawyer 23, 66–67 (emphasis added).
- See Easterbrook and Fischel, supra n 23, 63–89.
- See, eg A Berle and G Means, The Modern Corporation and Private Property (New Brunswick, Transaction Publishers, revised edn, 1968); M Roe, Strong Managers Weak Owners: The Political Roots of American Corporate Finance (New Jersey, Princeton University Press, 1994); Curtis J Milhaupt, “Property Rights in Firms” (1998) 84 Virginia Law Review 1145.
- From the managerialist perspective, see Manning, supra n 27, 1490; Lipton and Rosenblum, supra n 28, 70–74. From the team theorist perspective, see Blair and Stout, supra n 26, generally; M Blair and L Stout, “Director Accountability and the Mediating Role of the Corporate Board” (2001) 79 Washington Law Quarterly 403, 409 (“Yet from a logical perspective, the naked claim that shareholders own the corporation is just that—a naked claim.”); L Stout, “Lecture and Commentary on the Social Responsibility of Corporate Entities: Bad and Not-so-bad Arguments for Shareholder Primacy” (2002) 75 Southern California Law Review 1189. The arguments of Professors Blair and Stout have also been cited in support of related arguments regarding shareholder duties. See R Karmel, “Should a Duty to the Corporation Be Imposed on Institutional Shareholders?” (2004) 60 The Business Lawyer 1.
- See J Armour and MJ Whincop, “Proprietary Foundations of Corporate Law” (March 2005) Working Paper No. 2993, ESRC Centre for Business Research, University of Cambridge. Professors Armour and Whincop comment that “recent developments in the theory of the firm, whilst identifying the significance of allocations of control rights, have failed to explain the role played by property law in facilitating the sharing or partitioning of control between different participants in a firm. An understanding of the significance of the scope of proprietary rights—their ‘in rem’ character—points the way to a more complete explanation of the role played by law in supporting business enterprise. In particular, only property law can provide automatic enforcement of the ‘second-order’ allocations of entitlement to residual control in relation to assets used in productive enterprise.” ibid, 13.
- See Stout, supra n 37, 1191.
- “Corporate property is owned by the corporation as a distinct legal person; its shareholders have only an indirect interest in the assets and business.” Cox et al, supra n 14, s 7.2; “When a corporation acquires property the title vests in it as a legal person distinct from its shareholders.” Ballantine, supra n 14, s 119.
- Lipton and Rosenblum, supra n 28, 72 et seq. This failure to grasp the function of the corporate entity in separating the shareholders’ ownership of the company from the company's ownership of its assets also crops up in the arguments against what some call “shareholder primacy.” Prof Roberta Karmel repeated in 2004: “In reality, shareholders have a property interest in their shares, not in the corporation's assets.” Karmel, supra n 37, 1.
- In an analysis of corporate law in the US, the UK, Switzerland, France, Germany and Japan, a team of international authors observe that “today, limited liability has become a nearly universal feature of the corporate form.” R Kraakman, P Davies, H Hansmann, G Hertig, K Hopt, H Kanda and E Rock, The Anatomy of Corporate Law A Comparative and Functional Approach (Oxford University Press, 2004), 8–9.
- “In our view… the separation between the firm's bonding assets and the personal assets of the firm's owners and managers… is the core defining characteristic of a legal entity, and establishing this separation is the principal role that organizational law plays in the organization of enterprise.” H Hansman and R Kraakman, “The Essential Role of Organizational Law” (2000) 110 Yale Law Journal 387, 393.
- Borland's Trustee v Steel [1901] 1 Ch 279, 288.
- P Davies, Gower and Davies’ Principles of Modern Company Law (London, Sweet & Maxwell, 7th edn, 2003) 616–17.
- W Blackstone, Commentaries on the Laws of England (University of Chicago Press, 1979, facsimile of the 1st edn, Oxford, 1766), 2.
- Stout, supra n 37, 1191.
- Lipton and Rosenblum, supra n 28, 72–73. Lipton and Rosenblum appear to take literally an argument that Dean Manning presented about 40 years earlier only analogically in a description of a shareholder's economic and psychological position: “the model is useful because, in the case of a large, publicly-held modern corporation, it approximates reality. Except in the context of the closely-held corporation, the limited notion of the shareholder as owner of a ‘share'—a reified legal and economic bundle—is surely more valid than our historical image of the shareholder as ‘owner’ of the corporation. To view the shareholder as the owner only of a share of stock—as a bondholder is said to own ‘the bond'—conforms far more closely to the shareholder's own expectations and describes far more accurately what he in fact handles as his own—buying, selling and giving away.” Manning, supra n 27, 1492.
- “Today, the bundle of rights conception of property rules the academic roost.” Abraham Bell and Gideon Parchomobsky, “What Property Is” (2004), Research Paper No. 04–05, University of Pennsylvania Law School Institute for Law and Economics, 15. The US Supreme Court routinely uses the “bundle of rights” metaphor in its decisions on the Takings Clause, US Const, amend V. For example, in Lucas v South Carolina Coastal Council, 505 US 1003 (1992), the Court explained: “the question must turn, in accord with this Court's ‘takings’ jurisprudence, on citizens’ historic understandings regarding the content of, and the State's power over, the ‘bundle of rights’ that they acquire when they take title to property.” Ibid. 1004. See also T Merrill, “The Landscape of Constitutional Property” (2000), 86 Virginia Law Review 885. For a discussion of problems with and challenges to the “bundle” theory, see A Mossoff, “What Is Property? Putting the Pieces Back Together” (2003) 45 Arizona Law Review 371.
- AM Honoré, “Ownership”, in AG Guest (ed), Oxford Essays in Jurisprudence (Oxford University Press, 1961), 107, 113. “A.M. Honoré played a decisive role in advancing the bundle or rights metaphor by cataloguing a generally accepted list of the ‘incidents’ or property or ownership.” Bell and Gideon, supra n 49, 15.
- Easterbrook and Fischel, supra n 23, 11.
- See, eg Del Code Ann tit 8, ss 275 and 281, and RMBCA, s 14.01(5).
- Armour and Whincop, supra n 38, 6.
- See Del Code Ann tit 8, s 151, and RMBCA, s 6.01.
- Del Code Ann tit 8, s 141(a): “The… corporation… shall be managed by or under the direction of a board… except as may be provided otherwise in this chapter or in its certificate of incorporation” (emphasis added). RMBCA, s 7.32(a): “An agreement among the shareholders… is effective… even though… it… eliminates the board of directors or restricts the discretion or powers of the board of directors.”
- Del Code Ann tit 8, ss 211(b) and 141(k), and RMBCA, ss 8.03(c) and 8.08(a).
- Del Code Ann tit 8, s 251(c), and s 11.03(b).
- See, eg Del Code Ann tit 8, s 271(a), and RMBCA, s 12.02.
- See, eg Del Code Ann tit 8, ss 170 and 154, and RMBCA, s 6.40.
- See, eg Del Code Ann tit 8, s 327, and RMBCA, s 7.40.
- Armour and Whincop, supra n 38, 3.
- “For our purposes, the attribute that distinguishes a property right from a contract right is that a property right is enforceable, not just against the original grantor of the right, but also against other persons to whom possession of the asset, or other rights in the asset, are subsequently transferred. In the parlance of property law, the burden of a property right ‘runs with the asset’.” H Hansmann and R Kraakman, “Property, Contract and Verification: The Numerus Clauses Problem and the Divisibility of Rights” (2002) 31 Journal of Legal Studies 373, 378–79.
- Mohawk Carpet Mills, Inc v Delaware Rayon Co, 110 A 2d 305 (Del Ch 1954).
- Armour and Whincop, supra n 38, 11.
- “The ‘bundle of sticks’ conception views the law of property as creating an almost random variety of rights and duties that the law recognizes in the standard owner. While Honore's list of property ‘incidents’ has been extremely influential, there is little agreement among scholars as to the relative importance of sticks in the bundle, and even as to the usual bundle's contents.” Bell and Gideon, supra n 49, 53.
- In addressing federal issues of taxation, the US Supreme Court has observed that “The interest of the shareholder [here, in a bank] entitles him to participate in the net profits earned by the bank in the employment of its capital, during the existence of its charter, in proportion to the number of his shares; and, upon its dissolution or termination, to his proportion of the property that may remain of the corporation after the payment of its debts. This is a distinct independent interest or property, held by the shareholder like any other property that may belong to him.” Van Allen v The Assessors, 70 US 573, 584, (1865). The Supreme Judicial Court of Massachusetts, citing the foregoing decision 50 years later, also found classic property rights to exist in the shares of a stock corporation: US v Evans, 375 F 2d 730 (9th Cir 1967), citing: 3 Paul and Mertens, Law of Federal Income Taxation (1934), 170.
- See supra n 48 and accompanying text displaying the importance that Lipton and Rosenblum place on a share of stock not being the same as a car or a building.
- WM Fletcher, Fletcher Cyclopedia of the Law of Private Corporations (WestLaw Database, updated to 2004), s 5097.
- Equitable Trust Co v Gallagher, 67 A 2d 50, 54 (Del Ch 1949).
- JC Vaines, Personal Property (London, Butterworths, 3rd edn, 1962), 221, citing Channel J, Torkington v Magee [1902] 2 KB 247, 430.
- “In English law property is classified into real property (‘land, tenements and hereditaments’) and personal property. The latter is divided into chattels real (interests in land, e.g. a lease) and chattels personal (all property other than real property and chattels real). Chattels personal are subdivided into things (or ‘choses’) in possession (which can be recovered by reduction into possession) and things (or ‘choses’) in action (which can only be recovered by action in the courts). The former includes tangible moveable property, the latter intangible personal property such as rights and debts. Shares are ‘property’ within R.S.C. 1965, Ord. 86: Woodlands v Hinds [1955] 1 WLR 688, 690. They are personal estate (s 182(1)(a)).” G Morse (ed), Palmer's Company Law (London, Sweet & Maxwell, 2003), 2.006.
- Vaines, supra n 70, 13.
- Registrar & Transfer Co v Director, Division of Taxation, Dept of Treasury, 398 A 2d 1335, 1338 (NJ Super Ct App Div, 1979).
- See Allen v Biltmore Tissue Corp, 2 NY 2d 534, 541 (1957). For the actual position in Massachusetts, see Bellows Falls Power, supra n 66, and with regard to England, see Palmer's Company Law, supra n 71 and Davies, supra n 45 and accompanying text.
- See First Nat Bank v Smith, 1872 WL 8367 (1872).
- Succession of Heckert, 160 So 2d 375, 383 (La App, 1964). See also Hook v Hoffman, 16 Ariz 540, 546 (Arizona S Ct 1915) (“shares of stock—this peculiar species of property, though denominated as of the nature of a chose in action, and classified as personal property—has by the analogy of its immobility a strong resemblance to realty.”); Barksdale v Finney, 55 Va 338 (Gratt) (Va 1858).
- In re Marriage of Margaret and Grant Palin, 2002 Cal App Unpub LEXIS 4318, 31 January 2002.
- Ballantine, supra n 136, 289.
- See s 8–503(b) Uniform Commercial Code: “An entitlement holder's property interest with respect to a particular financial asset… is a pro rata property interest in all interests in that financial asset held by the securities intermediary, without regard to the time the entitlement holder acquired the security entitlement or the time the securities intermediary acquired the interest in that financial asset.”
- See Mahoney, supra n 24, 877–78.
- Armour and Whincop, supra n 38, 16.
- ibid, 15.
- ibid, 16 (emphasis in original).
- ibid, 19.
- See Stout, supra n 37, 1192.
- See Lipton and Rosenblum, supra n 28, 79, and Blair and Stout, supra n 26, 291, 314–19.
- The use of declaratory judgments can extend beyond preventative measures, and courts may no longer in all circumstances require that a defendant have already violated a duty owed to the plaintiff. Restatement (Second) Judgments s 33 (1982). However, the opponents of shareholder voice do not allege any specific circumstances to exist in which shareholders lack a duty that would be prerequisite for them to have more power.
- See Lipton and Rosenblum, supra n 28, 82–83, and Karmel, supra n 37, 9–14.
- See Section B.2.
- See LA Bebchuk, “The Case for Shareholder Access to the Ballot” (2003) 59 The Business Lawyer 43, 58.
- Securities Exchange Act of 1934, 15 USC.A ss 78a–78mm (2000).
- 15 USC.A ss 78m and 78p.
- DG Smith, “The Critical Resource Theory of Fiduciary Duty” (2002) 55 Vanderbilt Law Review 1399, 1402.
- ibid, 1403.
- T Frankel, “Fiduciary Law” (1983) 71 California Law Review 795, 805.
- Lipton and Rosenblum, supra n 28, 79.
- Lipton and Rosenblum, supra n 28, 73.
- See Menier v Hooper's Telegraph Works [1873–74] LR 9 Ch App 350 (the majority shareholder may not liquidate a company in order to unfairly profit from purchase of its assets to the detriment of the minority); Ervin v Oregon Ry & Nav Co, 27 F 625 (CCSD NY 1886) (a majority that controls the corporation freely assumes the trust relation occupied by the corporation towards its stockholders).
- For an excellent analysis of the duties of controlling shareholders under Delaware law, see R Gilson and J Gordon, “Controlling Controlling Shareholders” (2005) 152 University of Pennsylvania Law Review 785, 786.
- See Cox et al, supra n 14, s 11.10, and, disagreeing with the imposition of such duties, P Dalley, “The Misguided Doctrine of Stockholder Fiduciary Duties” (2004), 33 Hofstra Law Review 175.
- Ivanhoe Partners v Newmont Mining Corp, 535 A 2d 1334, 1344 (Del 1987). See also The American Law Institute, Principles of Corporate Governance: Analysis and Recommendations (1994), s 5.10. Such duties are particularly evident for the shareholders of closed corporations, who are often attributed fiduciary duties resembling those of a partner. See Donahue v Rodd Electrotype Co, 328 NE 2d 505 (Mass 1975), and R Thompson, “The Shareholder's Cause of Action for Oppression” (1993) 48 The Business Lawyer 699.
- Citron v Fairchild Camera & Instrument Corp, 569 A 2d 53, 70 (Del 1989), cited in Kahn v Lynch Communications Systems, Inc, 638 A 2d 1110, 1114 (Del 1994).
- Sinclair Oil Corporation v Levien, 280 A 2d 717, 720 (Del 1971); Kahn, 638 A 2d, 1115.
- Gilson and Gordon, supra n 99, 791.
- Weinberger v UOP, Inc, 457 A 2d 701, 710 (Del 1983), citing Gottlieb v Heyden Chemical Corp, 91 A 2d 57, 57–58 (Del 1952).
- W Allen, J Jacobs and L Strine Jr, “Function Over Form: A Reassessment of Standards of Review in Delaware Corporation Law” (2001) 56 The Business Lawyer 1287, 1289.
- For a detailed discussion of each of these elements, see Smith, supra n 93, 1402–4.
- See, eg Del Code Ann tit 8, ss 251(c) and 271(a).
- Such “cooperative efforts”, even if not formally regulated by statutory rules, always present a certain agency relationship. See M Jensen and W Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure”, in M Jensen, A Theory of the Firm: Governance, Residual Claims, and Organizational Forms (Cambridge, MA, Harvard University Press, 2000), 83, 86. Rather than looking at this as a contractual, agency relationship, the delegation of power to the majority could also be understood as an inherent characteristic of the property interests that shareholders hold in the firm. See the discussion of joint-owner agency problems, in Armour and Whincop, supra n 38, 10. Smith also notes that his own “description of fiduciary relationships bears a strong resemblance to the description of ‘firms’ in the property rights theory pioneered by economists Sanford Grossman, Oliver Hart, and John Moore…. The central insight of the property rights theory of the firm is that an appropriate allocation of ownership rights over the assets of a firm reduces the likelihood that one party will unfairly take advantage of the other participants within the firm.” Smith, supra n 93, 1404–5.
- 280 A 2d 717 (Del 1971).
- Sinclair, 280 A 2d, 719.
- ibid, 722–23.
- ibid, 723.
- Ibid.
- 638 A 2d 1110 (Del 1994).
- Kahn, 638 A 2d, 1112.
- ibid, 1114–15.
- ibid, 1117.
- See, eg In re Digex, Inc Shareholders Litigation, 789 A 2d 1176 (Del Ch 2000) (in the context of negotiating a possible parent-subsidiary merger, the subsidiary's waiver of the protective devices such as Delaware General Corporation Law s 203 must be evaluated under the entire fairness standard); In re Pure Resources, Inc Shareholders Litigation, 808 A 2d 421 (Del Ch 2002) (in the context of a squeeze-out tender offer, the subsidiary should be empowered to use all defensive measures against the controlling shareholder that are acceptable for a third party tender offer).
- Smith v Atlantic Properties, Inc, 422 NE 2d 798, 802 (1981) (in a close corporation with four shareholders, one shareholder's refusal to approve dividends needed to reduce danger of an assessment under the Internal Revenue Code violated the shareholder's fiduciary duty by recklessly running serious and unjustified risks that penalty taxes—which were in fact then assessed—would be assessed). This case presented a clear measure of whether the decision of the minority had breached the shareholder's fiduciary duty. In the case of a minority that refuses to tender its shares into an offer with a minimum tender requirement, the courts can be less sure that the minority has breached its duty by failing to tender and causing the collapse of the offer, rather than acting on the basis of legitimate business reasons. See Medical Air Technology Corporation v Marwan Investment, Inc, 303 F 3d 11, 21 (1st Cir 2002).
- The American Law Institute, supra n 101, s 1.10.
- Karmel, supra n 37, 1.
- ibid, 3. This assertion that institutional investors twisted the arms of executive management until they accepted outrageous compensation packages is not only counterintuitive, but is also contrary to at least anecdotal evidence. Eg, in the Delaware case of State of Wisconsin Investment Board v Peerless Systems Corp, No 17,637, 2000 Del Ch LEXIS 170 (Del Ch Dec 4, 2000), shareholders attempted to vote down the board's attempt to expand a stock option plan, only to be meet with board tactics designed to thwart the shareholder's vote by manipulating the machinery used to effect such vote.
- Karmel, supra n 37, 8.
- ibid, 9.
- ibid, 7.
- ibid, 20–21.
- ibid, 20–21.
- As early as 1991, Coffee sketched the broad lines of a policy to encourage shareholder monitoring. Such a policy should try to (i) free shareholders from conflicts of interest; (ii) encourage shareholders to take stakes large enough to make monitoring worthwhile; (iii) encourage shareholders to adopt a holding term that is long enough to make monitoring a good investment; and (iv) structure contracts with external managers in such a way that they have an incentive to engage in monitoring. See Coffee, “Liquidity v Control”, supra n 2, 1336–42.
- ibid, 14.
- See L Harris, supra n 13.
- See Allen et al., supra n 106.
- Pursuant to Regulation S-K under the Exchange Act, a registered company must disclose any transaction exceeding $60,000 between itself or any of its subsidiaries and a shareholder who owns more than 5% of any class of its voting securities or a family member of such shareholder. 17 CFR s 229.404(a).
- “The core fiduciary duty of a trustee is an obligation to act in the interest of the beneficiary of the trust. The most important aspect of this obligation is a duty to avoid self-interested transactions.” Smith, supra n 93, 1453.
- In addition to specific duties, the Exchange Act also contains provisions that create risks for shareholders who become too closely involved with a portfolio company. For example, the shareholder runs the risk of being found guilty of trading on inside information. See 15 USCA s 78j(b) (2000) and 17 CFR s 240.10b-5. It may also incur liability and restrictions on the transferability of its stock as a “controlling shareholder” pursuant to the Securities Act 1933 s 15, 15 USCA s 77o (2000) the “Securities Act”, and liability as a controlling shareholder under the Exchange Act, s 20, 15 USCA s 78t (2000). See Coffee, “Liquidity v Control”, supra n 2, 1345–51. For a recent discussion of these risks, see E Fogel, D Addis and E Harris, “Public Company Shareholders Acting as Owners: Three Reforms—Introducing the ‘Oversight Shareholder’” (2004), 29 Delaware Journal of Corporate Law 517.
- This article will not discuss the numerous duties connected with the solicitation of proxies, except in a brief, historical overview presented in Section E.
- “Voting power” includes “the power to vote, or to direct the voting of, such security”. 17 CFR s 240.13d-3(a)(1).
- “Investment power” includes “the power to dispose, or to direct the disposition of, such security”. 17 CFR s 240.13d-3(a)(2).
- Securities must be registered under Exchange Act, s 12, 15 USCA s 78l (2000), if either (i) they are listed on a national securities exchange (Exchange Act, s 12(a)) or (ii) the issuer of the securities has more than 500 shareholders and total assets exceeding $10 million (Exchange Act, s 12(g) in connection with Exchange Act Rule 12g-1, 17 CFR s 240.12g-1). In addition to securities registered under Exchange Act, s 12, Rule 13d-1 also applies to “any equity security of any insurance company which would have been required to be so registered except for the exemption contained in section 12(g)(2)(G) of the Act, or any equity security issued by a closed-end investment company registered under the Investment Company Act of 1940”. 17 CFR s 240.13d-1(i).
- 17 CFR s 240.13d-1(a).
- 17 CFR s 240.13d-5(b).
- Bath Indus., Inc v Blot, 427 F 2d 97, 110 (7th Cir 1970).
- Evidence of a group for these purposes has been found where there is a common plan and goal, a coordination of activities and communications, public expression of a position among the shareholders, and parallel and continued purchases of the company's shares during a specific time period. See Champion Parts Rebuilders, Inc v Cormier Corp, 661 F Supp 825, 850 (ND Ill 1987). This is discussed in Loss and Seligman, supra n 15, s 6-D-2.b, n 144.
- The legislative purpose of this section of the Williams Act is quite clear: “The purpose of this Section is to prevent ‘a group of persons who seek to pool their voting or other interests in the securities of an issuer from evading the provisions of the statute because no one individual owns more than [the triggering threshold] percent of the securities’.” S Rep No 550, 8 (1967); HR Rep No 1711, 8–9 (1968), discussed in Loss and Seligman, supra n 15,s 6-D-2.b, n 137.
- 17 CFR s 240.13d-1(a); s 240.13d-5(b)(1).
- 17 CFR s 240.13d-101, items 1–7.
- Any “material increase or decrease in the percentage of the class beneficially owned” must promptly be disclosed in an amendment to the existing Schedule 13D, and any “acquisition or disposition… in an amount of 1% percent or more of the class of securities shall be deemed ‘material’ for purposes of [the Rule]; acquisitions or dispositions of less than those amounts may be material, depending upon the facts and circumstances”. 17 CFR s 240.13d-2(a).
- Declarations and documents “filed” with the SEC are subject to civil liability for misstatements and omissions pursuant to Exchange Act, s 18, 15 USCA s 78r (2000), as well as the penalties of fine and imprisonment pursuant to Exchange Act, s 32, 15 USCA s 78ff (2000).
- The adopting release was Final Rules: Filing And Disclosure Requirements Relating To Beneficial Ownership, SEC Release Nos 33–5925 and 34–14692, 1978 WL 170898 (21 April 1978) (“Schedule 13G Adopting Release”). The current requirements are found in 17 CFR s 240.13d-1(b)(1)(i). After the 1998 amendments discussed below, the passive investors eligible to file Schedule 13G are split into two categories. The first category is “certain institutional investors”, such as brokers, banks, investment companies, investment advisors and employee benefit plans. When they acquire a holding in the ordinary course of business that exceeds 5% but does not exceed 10% they may file a Schedule 13G within 45 days after the calendar year in which the holding exceeds the lower threshold, and if the holding does exceed 10% the Schedule 13G must be filed within 10 days after the calendar month in which the holding exceeds such threshold. 17 CFR s 240.13d-1(b)(2). This category must file an amended Schedule 13G during the first 45 days of each calendar year if there are any changes (17 CFR s 240.13d-2(b)), and with 10 days after any change of at least 5%. 17 CFR s 240.13d-2(c). A separate, statutory exemption from s 13(d) filings is provided for purchases of securities in connection with an offering registered under the Securities Act. See Exchange Act, s 13(d)(6)(A), 15 USCA s 78m(d)(6)(A) (2000).
- Final Rule: Amendments to Beneficial Ownership Reporting Requirements, SEC Release No 34–39538, 63 Fed Reg 2854, 2855 (16 January 1998) (“Schedule 13G Amending Release”). These “passive investors” now constitute the second category of investors that qualify to use Schedule 13G. The category is not limited to any particular type of person or entity, but may only use Schedule 13G if their holdings do not reach or exceed 20% of any class of equity. 17 CFR s 240.13d-1(c)(3). If this threshold is crossed, such persons must within 10 days file a Schedule 13D. 17 CFR s 240.13d-1(f)(1). This second category must make its initial filing on Schedule 13G within 10 days of exceeding the 5% threshold (17 CFR s 240.13d-1(c)), and must file an amended Schedule 13G during the first 45 days of each calendar year if there are any changes (17 CFR s 240.13d-2(b)(2)), and within 10 days of exceeding the 10% threshold and thereafter upon any change of at least 5%. 17 CFR s 240.13d-2(d).
- Schedule 13G Amending Release, ibid, 2859.
- Proposed Rule: Security Holder Director Nominations, SEC Release No 34–48626, 68 Fed Reg 60784, 60806 (14 October 2003) (“Security Holder Nominations Proposal”).
- 15 USCA s 78p(a)(1).
- 15 USCA s 78p(a) and (b); See Loss and Seligman, supra n 15, s 6-E-1, and T Hazen, Treatise on the Law of Securities Regulation (St Paul's, WestGroup, 5th edn, 2005), s 13.
- Loss and Seligman, supra n 15, s 6-E-2.
- See 17 CFR s 240.16a-1(a)(1); Morales v Freund, 163 F 3d 763, 766–67 (2nd Cir 1999), and Hazen, supra n 154, s 13.3[2][B].
- See Feder v Martin Marietta Corp, 406 F 2d 260 (2nd Cir 1969) and Blau v Lehman, 368 US 403 (1962). Both cases are discussed in Loss and Seligman, supra n 15, s 6-E-7.b and Hazen, supra n 145, s 13.3[1][A].
- “While the usual remedy in legal actions is money damages measured by reference to the harm incurred by the plaintiff, the remedy most often associated with a breach of fiduciary duty is disgorgement of profits. Disgorgement is measured by the amount of the fiduciary's gain rather than by the amount of the beneficiary's loss, implying that the primary goal of providing the remedy is deterrence.” Smith, supra n 93, 1493.
- See Coffee, “Liquidity v Control”, supra n 2, 1343–45.
- M Jensen, “The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems”, in Jensen, supra n 109, 53.
- See Clark, supra n 14, 390–92. For an excellent discussion of the “empirical” condition of shareholders as well as of the constraints that federal law places on shareholder action, see B Black, “Shareholder Passivity Revisited” (1990) 89 Michigan Law Review 520.
- See Clark, supra n 14, 398.
- See, eg F Easterbrook and D Fischel, “Takeover Bids, Defensive Tactics, and Shareholders’ Welfare” (1981) 36 The Business Lawyer 1733.
- See supra n 55 and accompanying text.
- See Bebchuk, “Shareholder Power”, supra n 21.
- See infra n 173 and accompanying text.
- “If ‘control’ is the economically important feature of ‘ownership’, then to build a theory of corporations on the premise that ownership (and, hence, control) lies with shareholders grossly mischaracterizes the legal realities of most public corporations.” Blair and Stout, supra n 26, 260.
- This article does not argue that such a redistribution of ultimate entitlements from those with property rights to those who contribute other factors to the company is reprehensible. However, any such redistribution should be accomplished consciously, voluntarily and legally, rather than by a subtle, unseen process in which legal theorists slowly chisel away property rights. If partially incorrect and partially confusing assertions regarding shareholder property rights are made often enough by respected professionals in respected publications, one court, and then another, could eventually deem the property rights of shareholders nonexistent. We should remember that unfortunate, polemical distortions of property rights in the late nineteenth and early twentieth centuries brought much unrest and unhappiness to significant parts of the globe.
- Del Code Ann tit 8, s 141(a).
- S 8.01 RMBCA.
- As discussed in Section B.1, the second sentence of s 141(a) allows the certificate of incorporation to specify that “the powers and duties conferred or imposed upon the board of directors by this chapter” shall be exercised “to such extent and by such person or persons as shall be provided in the certificate of incorporation” Del Code Ann tit 8, s 141(a) (emphasis added). s 8.01 RMBCA provides: “All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed under the direction of, its board of directors, subject to any limitation set forth in the articles of incorporation or in an agreement authorized under section” (emphasis added). On the Delaware provision, Franklin Balotti and Jesse Finkelstein comment: “Use of the special provisions relating to close corporations is not the only example of arrangements which may be made to provide for a form of management other than that carried out by or under the direction of the board. Shareholders’ agreements are commonplace in ‘regular’ corporations (ie those not formed as close corporations) as well. Moreover, even in regular corporations the certificate could provide for special management measures.” RF Balotti and JA Finkelstein, The Delaware Law of Corporations and Business Organizations (New York, Aspen Publishers, 2002), s 7.57.
- About four-fifths of the S&P 500 went public before 1985. See Bebchuk, “Shareholder Power”, supra n 21, 866.
- Del Code Ann tit 8, s 242(b)(1), and RMBCA, s 10.03.
- If a number of possible amendments could be proposed, the proposal actually selected “will be very much influenced by which change would best serve management's interests”. Bebchuk, “Shareholder Power”, supra n 21, 862. For a detailed discussion of the power dynamics in making charter amendments and the board's reluctance to enact amendments that decrease their own power, see LA Bebchuk, “Limiting Contractual Freedom in Corporate Law: The Desirable Constraints on Charter Amendments” (1989) 102 Harvard Law Review 1820, 1820–25.
- Bebchuk, “Shareholder Power”, supra n 21, 836.
- Bebchuk, “Shareholder Power”, supra n 21, 862.
- See Del Code Ann tit 8, s 251(c), and RMBCA, s 11.04(b).
- See Del Code Ann tit 8, s 271(a), and RMBCA, s 12.02. The board alone may sell or lease the corporation's assets in the ordinary course of business. RMBCA, s 12.01.
- Bebchuk, “Shareholder Power”, supra n 21, 889.
- See Del Code Ann tit 8, s 271(b).
- See Del Code Ann tit 8, s 170(a), and RMBCA, s 6.40(a). The Delaware Court of Chancery held, for example, in Leibert v Grinnell Corp, 194 A 2d 846 (Del Ch 1963), that stockholders may not force directors to declare dividends even in the face of a large surplus and a charter provision emphasising a corporate purpose to receive and distribute dividends.
- See Bebchuk, “Shareholder Power”, supra n 21, 903–6, citing numerous empirical studies that confirm a tendency of management to build empires with excess cash rather than distributing it to shareholders.
- See Del Code Ann tit 8, s 275(a), and RMBCA, s 14.02.
- See Del Code Ann tit 8, s 275(c).
- See Del Code Ann tit 8, s 109, and RMBCA, s 10.20. Delaware courts regard by-laws generally “as the proper place for self-imposed rules and regulations deemed expedient for [the corporation's] convenient functioning” as opposed to the certificate of incorporation, which “is an instrument in which the broad and general aspects of the corporate entity's existence and nature are defined”. Gow v Consolidated Coppermines Corp, 165 A 136, 140 (Del Ch 1933).
- See J Coffee Jr, “The Bylaw Battlefield: Can Institutions Change the Outcome of Corporate Control Contests?” (1997) 51 University of Miami Law Review 605, 614.
- 17 CFR s 240.14a-8. Management may exclude a shareholder proposal from its proxy materials for a number of reasons, including when the proposal would be improper under state law because, for example, it conflicted with a statutory allocation of power. 17 CFR s 240.14a-8(i)(1). In a note to this section, the SEC has explained: “Depending on the subject matter, some proposals are not considered proper under state law if they would be binding on the company if approved by shareholders. In our experience, most proposals that are cast as recommendations or requests that the board of directors take specified action are proper under state law. Accordingly, we will assume that a proposal drafted as a recommendation or suggestion is proper unless the company demonstrates otherwise.”
- See R Romano, “Less is More: Making Institutional Investor Activism a Valuable Mechanism of Corporate Governance”, in J McCahery et al (eds), Corporate Governance Regimes: Convergence and Diversity (Oxford University Press, 2002), 507. The line separating acceptable proposals to enhance board independence from those that may be excluded under Rule 14a-8 is a fine one. For example, the SEC reports that it did not allow management to exclude a Rule 14a-8 proposal to amend the by-laws of General Motors Corp to require “a transition to independent directors for each seat on the audit, compensation and nominating committees as openings occur.” SEC Division of Corporation Finance, Staff Legal Bulletin No 14, “Shareholder Proposals” 7 (13 July 2001), available at http://www.sec.gov/interps/legal.shtml, accessed on 10 June 2005. In this way, shareholders were able to take measures against insider entrenchment in the key committees of GM's board of directors.
- Bebcuk provides empirical evidence gathered by the Investor Responsibility Research Center showing that although resolutions to eliminate staggered boards were repeatedly adopted during the period between 1997 and 2003, boards refused to implement more than two-thirds of the resolutions adopted. Bebchuk, “Shareholder Power”, supra n 21, 854.
- See Brownstein and Kirman, supra n 34, 45.
- See RMBCA, s 7.04(a).
- Del Code Ann tit 8, s 228(a).
- Del Code Ann tit 8, s 228(a). If directors seriously believed that, in spite of the logistical difficulties, written consents offered shareholders a realistic avenue to circumvent their monopoly over the decision-making process, they would likely propose to amend the charter to remove consents. Thus, the possibility of using consents should probably be made a mandatory provision.
- Del Code Ann tit 8, s 211(b).
- Del Code Ann tit 8, s 228(a).
- Del Code Ann tit 8, s 216.
- Del Code Ann tit 8, s 251(c) requires approval by “majority of the outstanding stock of the corporation entitled to vote thereon” to approve a merger, and Del Code Ann tit 8, s 271(a) requires approval by the same majority.
- E Welch and A Turezyn, Folk on the Delaware General Corporation Law (New York, Aspen Publishers, 2002), s 228.2.
- See Del Code Ann tit 8, s 220, and its interpretation in The Conservative Caucus Research Analysis & Education Foundation, Inc v Chevron Corp, 525 A 2d 569 (Del Ch 1987).
- Consents may be delivered by “electronic transmission”. See Del Code Ann tit 8, s 228(d)(1).
- On the impediments created by the indirect holding system, see Loss and Seligman, supra n 15, s 6-C-6 and Task Force on Shareholder Proposals of the Committee on Federal Regulation of Securities, Section of the Business Law of the American Bar Association, “Report on Proposed Changes in Proxy Rules and Regulations Regarding Procedures for the Election of Corporate Directors” (2003) 59 The Business Lawyer 109, 117–17. Delaware courts have strictly required that record holders, as opposed to actual beneficiary owners, sign written consents. See Welch and Turezyn, supra n 198, s 228.3.2. Although the proxy rules created to assist procuring necessary authorisations from both record and beneficial shareholders (17 CFR ss 240.14a-13, 14b-1 and 14b-2) also apply to consents, the effectiveness of this system is, even in the case of proxy solicitations, questionable and costly.
- See RF Balotti and J Bodnar, “Solicitation of Written Consents”, in Shareowner Activism: The Emerging Role of Institutional Investors (New York, Practicing Law Institute, 1987), 185.
- See Del Code Ann tit 8, s 211(b), and RMBCA, s 7.28(a).
- Bebchuk, “Shareholder Access”, supra n 90, 45. Bebchuk discusses a study he performed on proxy contests held by listed companies between 1996 and 2002, which showed that, on average, less than two contests were run each year for companies with market capitalisation exceeding $200 million. ibid, 45–46.
- ibid, 49. The domination of the nomination process by incumbent management is well known and documented. “It is a notorious fact that in the over-whelming majority of elections for directorships in public corporations the public shareholders simply vote for whomever is proposed by the corporation's nominating committee. At least in the past…. Nominees tended to be agreeable, chummy persons, usually of the same social class as the incumbents…. This characterization frequently had to be qualified, however, when the corporation had a large shareholder whose director-representatives were really looking out for that shareholder's interest.” Clark, supra n 14, 109. See also Task Force on Shareholder Proposals, supra n 44, 118; Monks and Minow, supra n 21, 212 et seq; L Strine Jr, “Derivative Impact? Some Early Reflections on the Corporation Law Implications of the Enron Debacle” (2002) 57 The Business Lawyer 1371, 1377.
- See Del Code Ann tit 8, s 216, and RMBCA, s 7.28(a).
- “Plurality. A large number or quantity that does not constitute a majority; a number greater than another, regardless of the margin…” B Garner (ed), Black's Law Dictionary (St Paul's, WestGroup, 7th edn, 1999), 1176.
- 17 CFR s 240.14a-4(b)(2).
- Remarks of Prof Joseph Grundfest in “Symposium on Corporate Elections”, 95 (LA Bebchuk, ed, November 2003), available at http://ssrn.com/abstract=471640, accessed on 10 June 2005. A recent ISS white paper reports that a task force of the American Bar Association and a working group of corporations and labor pension funds have been set up to study the possibility of introducing majority—as opposed to plurality—voting for the election of directors. Institutional Shareholder Services, “Majority Voting in Director Elections: From the Symbolic to the Democratic” (2005) ISS White Paper Series, 1, available at http://www.issproxy.com/governance/whitepapers.jsp, accessed on 10 June 2005.
- The argument is sometimes raised that the “withholding” of votes is by itself a “very potent weapon” against management. Remarks of Martin Lipton in Symposium on Corporate Elections, ibid, 22. However, the strength of such message depends not on any binding nature of withholding the vote, but only on how management might interpret its effect on their reputations, which in turn depends on the current understanding of shareholder rights. The case of Walt Disney Co presents a good example. At its 2004 shareholders’ meeting, votes withheld from the much criticised Michael Eisner exceeded 42% of votes cast, yet the only reaction was to replace him as chairman with one of his closest allies, and to announce that he would step down from his CEO position two years later, at the normal expiration of his contract in 2006. See Institutional Shareholder Services, “2004 Postseason Report” (2004), 5, available at http://www.issproxy.com/governance/issreports/index.jsp, accessed on 10 June 2005. As a result of the events and governance structures described in this article, expectations for shareholder voice have sunk so low that any reaction at all to a measure like a withhold campaign can realistically be interpreted as a victory, but such campaigns, which have no legally binding effect, are certainly not “very potent weapons”.
- Balotti and Finkelstein, supra n 171, s 7.57.
- This procedure is discussed in Stroud v Grace, 606 A 2d 75, 96 (Del 1992). See also Millenco LP v meVC Draper Fisher Jurvetson Fund I, Inc, 824 A 2d 11, 19 (Del Ch 2002) (“the ‘right of shareholders to participate in the voting process includes the right to nominate an opposing slate'”) and Hubbard v Hollywood Park Realty Enterprises, Inc, Del Ch, CA No 11779, 12–13.
- See n 192 supra and accompanying text, as well as Del Code Ann tit 8, s 211(b), and Balotti and Finkelstein, supra n 171, s 7.31, citing Pabst Brewing Co v Jacobs, 549 F Supp 1068 (D Del 1982).
- See Del Code Ann tit 8, s 211(b).
- Pursuant to Delaware law, for example, the directors must call the annual meeting within a certain time frame (Del Code Ann tit 8, s 211) and provide adequate notice of the meeting to the shareholders (Del Code Ann tit 8, s 222(a)). Notice to an annual meeting need not specify the meeting's purpose if proxies are not solicited (Stroud v Grace, 606 A 2d 75 (Del Supr 1992)), but such specification is necessary where the meeting is called for a specific transaction (Del Code Ann tit 8, s 222(a)). Notice must be given at least 10 days before the meeting (Del Code Ann tit 8, s 222(b)), but the date of the meeting cannot be used to disenfranchise shareholders. Schnell v Chris-Craft Indus, Inc, 285 A 2d 437 (Del Supr 1971).
- 17 CFR ss 240.14a-1–14a-15.
- 17 CFR s 240.101.
- 17 CFR s 240.14a-3(a).
- See Section E.2.(h), infra.
- See 17 CFR s 240.101, Item 7. Disclosure requirements regarding the nominating committee are discussed in Section E.2.(h), infra.
- In order to qualify to submit a proposal, a shareholder must “have continuously held at least $2,000 in market value, or 1%, of the company's securities entitled to be voted on the proposal at the meeting for at least one year by the date” it submits the proposal, and continue to hold such securities through the date of the meeting. 17 CFR 240.14a-8(b)(1).
- Remarks of SEC Chairman Ganson Purcell, Security and Exchange Commission Proxy Rules, Hearings on HR 1493, HR 1821, and HR 2019 before the House Committee on Interstate and Foreign Commerce, 78th Congr, 1st Sess 172 (1943), quoted and discussed in J Fisch, “From Legitimacy to Logic: Reconstructing Proxy Regulation” (1993) 46 Vanderbilt Law Review 1129, 1142.
- 17 CFR 240.14a-8(i)(8).
- Fisch, supra n 222, 1162–63.
- Lipton and Rosenblum stress the virtues of informal collaboration as opposed to shareholder entitlement. See Lipton and Rosenblum, supra n 28, 84. Any “voluntary” or “informal” cooperation that takes place in any kind of negotiations for anything of value always takes place against the background of the legal rights of each party. This is just as true for corporate governance as for settlement negotiations in the litigation context. Indeed, while the threat of adopting a rule to allow shareholders to nominate a limited number of candidates for the board was being considered, the “voluntary” cooperation of management in such negotiations improved. See Institutional Shareholder Services, supra n 210, 5.
- See Loss and Seligman, supra n 15, s 6-C-1.
- A study of proxy contests conducted by all listed companies between 1996 and 2002 showed that only 80 companies experienced proxy contests to replace management outside of the takeover context. See Bebchuk, “Shareholder Access”, supra n 90, 45–46.
- Bebchuk, “Shareholder Access”, supra n 90, 45; see also R Pozen, “Institutional Perspective on Shareholder Nominations of Corporate Directors” (2003) 59 The Business Lawyer 95, 99.
- Hall v Trans-Lux Daylight Picture Screen Corp, 171 A. 226, 227 (Del Ch 1934).
- See Steinberg v Adams, 90 F Supp 604 (SDNY, 1950), where Judge Rifkind happily overcame the “policy”/“personnel” divide by observing: “The simple fact, of course, is that generally policy and personnel do not exist in separate compartments. A change in personnel is sometimes indispensable to a change of policy. A new board may be the symbol of the shift in policy as well as the means of obtaining it.” 90 F Supp 608. Although newer cases contradicting this position are not available, it is quite possible that the twist of the policy/personnel divide can still be used to prevent payment for a winning challengers’ proxy contest costs.
- See Bebchuk, “Shareholder Access”, supra n 90, 47, and LA Bebchuk and M Kahan, “A Framework for Analyzing Legal Policy Towards Proxy Contests” (1990) 78 California Law Review 1073, 1096–1100.
- See comments submitted on the Security Holders Nominations Proposal, available at http://www.sec.gov/rules/proposed/s71903.shtml, accessed on 10 June 2005.
- Strine, supra n 8, 1377.
- ibid, 1397.
- Blasius Industries, Inc v Atlas Corporation, 564 A 2d 651, 659 (Del Ch, 1988). See also MM Companies, Inc v Liquid Audio, Inc, 813 A 2d 1118, 1126 (Del 2003).
- Berle and Means, supra n 36, 8.
- “The short of the matter is that at the present time one-third of the stock in corporations listed on the New York Stock Exchange is held by highly sophisticated investors…” M Eisenberg, “The Legal Roles of Shareholders and Management in Modern Corporate Decisionmaking” (1969) 57 California Law Review 1, 53.
- See, eg Back, “Passivity”, supra n 161, 567–69; Black, “Agents”, supra n 2, 827–29, and Coffee, “Half-time Report”, supra n 18, 847–49.
- See RAG Monks, The New Global Investors (Oxford, Capstone Publishing, 2001), Ch 5.
- See Coffee, “Liquidity v Control”, supra n 2, 1302–06, and F Barca and M Becht, The Control of Corporate Europe (Oxford University Press, 2001), 143.
- Board of Governors of the Federal Reserve System, “Flow of Funds Accounts of the United States: Annual Flows and Outstandings, 1955–1964, 1965–1974, 1985–1994, 1995–2004” (10 March 2005), 82, Corporate Equities, available at http://www.federalreserve.gov/releases/z1/Current/data.htm, accessed on 10 June 2005. The Federal Reserve figures do not provide a breakdown showing the amount of corporate equities that commercials banks, savings banks and brokers and dealers manage rather than simply hold (with voting rights passed through to their customers). Thus, excluding these groups from the category of institutional investors for purposes of this table shows a lower percentage of holding for institutions than a more accurate breakdown might yield. If the categories of commercial and savings banks and brokers and dealers were counted as “institutions” for 2004, the percentage of institutional holdings would be the slightly higher figure of 61.6%. On the other hand, a significant percentage of the “bank personal trusts” may pass through the voting rights of the shares held in trust to the trust beneficiary, who may be a private person, and which would thus render proxy voting decisions more “individual” than “institutional”.
- See Manning, supra n 27, 1489.
- See Eisenberg, supra n 237.
- Coffee, using the then-fashionable terminology of Thomas Kuhn, aptly referred to this swing of attention toward institutions as a “paradigm shift”: “While the old paradigm saw the structure of the corporation as the product of a Darwinian competition in which the most efficient design emerged victorious, this new perspective sees political forces as constraining that evolutionary process and possibly foreclosing the adoption of a superior organisational form. Thus, my colleague Professor Mark Roe has argued that the Berle/Means corporation, in which ownership and control are separated, was not ‘an inevitably natural consequence’ of the economic and technological forces that shaped modern capitalism, but rather was an adaptation to political forces that limited the scale, scope, and power of financial institutions. Absent these politically imposed constraints, he suggests, the evolution of the modern corporation might have resulted in the emergence of a very different dominant organisational form, one more nearly resembling the Japanese or German industrial system in which financial institutions are the major shareholders of, and closely monitor, industrial corporations.” Coffee, “Liquidity v Control”, supra n 2, 1278–79.
- According to the Board of Governors of the Federal Reserve System, non-profit organisations make up about 6% of the total given for this category. See Board of Governors of the Federal Reserve System, “Guide to the Flow of Funds Accounts”, vol 2 Table F-100, available at http://www.federalreserve.gov/releases/z1/fofguide.pdf, accessed on 10 June 2005.
- For an excellent analysis of many reasons that could explain why institutional investors do not engage more aggressively in monitoring, such as the differing needs and horizons of different institutional investors, the nature of fund manager contracts and the market's view of activism, see Coffee, “Half-time Report”, supra n 18, 843–71.
- Fisch, supra n 222, 1137.
- Coffee, “Half-time Report”, supra n 18, 863.
- R Sidel, “‘Calpers Effect’ May Boost Stocks: Underachievers Identified By Big Fund Often Rebound By Posting Solid Returns”, Wall Street Journal Europe, 20 April 2004, M1.
- For a summary of Calpers investment policies and historical information on recent “focus lists”, see California Public Employees’ Retirement System, “Facts At A Glance: Corporate Governance”, available at http://www.calpers.ca.gov/eip-docs/about/facts/corpgov.pdf, accessed on 10 June 2005.
- The Private Securities Litigation Reform Act of 1995 (Pub L No 104–67) was promulgated to reduce the number of abusive law suits filed against heavily capitalized persons to seek compensation for losses from bad investments and raised the hurdles for plaintiffs in a securities fraud action. Although it is highly doubtful that the Court was reacting to this trend, the Supreme Court's decision in Central Bank of Denver v First Interstate Bank of Denver, 511 US 164, 128 L Ed 2d 119 (1994) read the language of Exchange Act, s 10 as restricting actions for securities fraud to primary actors who themselves commit fraud, thereby eliminating actions for aiding and abetting. This also reduced the reach of shareholder litigation. Neither of these changes was reversed by the Sarbanes-Oxley Act of 2002. As between small and large shareholders, however, the suit for a breach of fiduciary duty, discussed in Section C.1, remains to safeguard against breaches of duty among joint owners.
- In 1991, Coffee described how statues and court decisions effectively halted the takeover wave of the 1980s: “The rate of takeovers and other acquisitions has declined significantly and continues to decline. During the first quarter of 1991, merger and acquisition activity declined 18% over the corresponding quarter in the preceding year and hit an eleven year low… The reasons for this decline are various: The drying up of the junk bond market; restrictive state antitakeover legislation… and judicial decisions that have accepted preemptive defensive tactics by target management… This decline in takeover activity, particularly as a result of restrictive state legislation, has supplied the impetus, in my judgment, for scholars to consider the thesis that politics, more than economics, shaped the modern American corporation.” Coffee, “Liquidity v Control”, supra n 2, 1278, n. 1.
- For a discussion of shareholder voting and the use of proxy contests as a “political” model opposed to the “transaction” model of the market for corporate control, see Pound, supra n 21.
- 222 F Supp 516 (SDNY 1963).
- 222 F Supp 517–18.
- 222 F Supp 518.
- See the historical description provided in Thomas and Dixon, supra n 16, s 8.02[B]; J Robert Brown Jr, “The Shareholder Communication Rules and the Securities and Exchange Commission: An Exercise in Regulatory Utility or Futility?” (1988) 13 Journal of Corporation Law 683; and Shaun M. Klein, “Rule 14b-2: Does it Actually Lead to the Prompt Forwarding of Communications to Beneficial Owners of Securities?” (1997) 22 Journal of Corporation Law 155.
- 17 CFR s 240.14b-1. See Proposed Rules: Facilitating Shareholder Communications, SEC Release Nos 34–19291 and 40–12866, 47 Fed Reg 5549126 (10 December 1982) and Final Rules: Facilitating Shareholder Communications Provisions, SEC Release Nos 34–20021 and 40–13408, 48 Fed Reg 35082 (3 August 1983).
- See The Shareholders Communication Act of 1985, 99 Stat 1737 (1985).
- 17 CFR s 240.14b–2. See Final Rules: Shareholder Communication Facilitation, SEC Release No 34–23847, 51 Fed Reg 44267 (9 December 1986); Proposed Rules: Facilitation of Shareholder Communications, SEC Release No 34–24274, 52 Fed Reg 11083 (7 April 1987); Final Rules: Facilitating Shareholder Communications; Miscellaneous Amendments, SEC Release No 34–24606, 52 Fed Reg 23646 (24 June 1987); Proposed Rules: Facilitating Shareholder Communications—Proposal Excluding Certain Employee Benefit Plan Participants From Application of the Proxy Processing and Direct Communications Provisions, SEC Release No 34–24607, 52 Fed Reg 23855 (25 June 1987); Final Rules: Facilitation of Shareholder Communications; Exclusion of Specified Employee Benefit Plan Participants From Application of the Proxy Processing and Direct Communications Provisions, SEC Release No 34–25631, 53 Fed Reg 16399 (9 May 1988).
- The duty of inquiry is imposed on registered issuers by Rule 14a-13, 17 CFR s 240.14a-13 and the duty of depositories to provide a breakdown of participants who have the issuer's securities in their accounts is imposed by Rule 17Ad-8(b), 17 CFR s 240.17Ad-8(b).
- The relevant duty is imposed on brokers by Rule 14b-1, 17 CFR s 240.14b-1, which requires brokers or dealers to provide an issuer upon request with an accurate number of copies of proxy materials needed, and in a timely manner forward the proxy materials to their customer shareholders, and an almost identical duty is imposed on banks by Rule 14b-2, 17 CFR s 240.14b-2, with the exception that banks must also provide the issuer with prompt notice if they hold for correspondent banks, together with contact details for such banks. Rules 14b-1 and -2 also allow brokers and banks to provide issuers with a list of the names and addresses of customers who do not object to having their names disclosed, but issuers may use this list only for distributing annual reports, not for proxy materials.
- See Section C.2.(a), supra.
- See Schedule 13G Adopting Release, supra n 149.
- See Notice of Proposed Rulemaking: Reporting of Beneficial Ownership in Publicly-held Companies, SEC Release No 34–26598, 54 Fed Reg 10552 (14 March 1989).
- See Reproposed Rules: Amendments to Beneficial Ownership Reporting Requirements, SEC Release No 34–37403, 61 Fed Reg 36521 (11 July 1996).
- See Schedule 13G Amending Release, supra n 150.
- J Heard and H Shearman, Conflicts of Interest in the Proxy Voting System (Washington, IRRC, 1987), 40–49.
- The “Institutional Investor Study Report” described the “Wall Street rule” as follows: “institutions tend to vote with management on questions put to a shareholder vote and… if they lose confidence in management they tend to sell their holdings in a company rather then to attempt to control or influence management decisions. This conclusion appears attributable to two factors. First, institutions are inclined to believe that their responsibility is to make investment decisions rather than to attempt to influence management decisions. Second, while there are no statutory restrictions upon the right of institutions to attempt to influence management decisions, institutions tend to believe that an effort to do so would be inappropriate and would subject them to criticism…. In general, it can be concluded that even where institutions have the potential power to influence management decisions they tend to be reluctant to exercise this power, particularly in an open and public way.” Quoted in Heard & Shearman, ibid, 40.
- See Rock, supra note 2, 476.
- The Employee Retirement Income Security Act of 1974, 29 USCA ss 1001–2008 (2000).
- Quoted in Heard and Sherman, supra n 268, 32.
- ibid, 49.
- Labor Department letter to Avon Products, Inc on proxy voting by plan fiduciaries, 15 Pens Rep (BNA) 391 n 4 (29 February 1988).
- DOL Interpretive bulletin relating to written statements of investment policy, including proxy voting policy or guidelines, 29 CFR s 2509.94-2 (2004).
- ibid, “(1) Proxy Voting” and “(2) Statements of Investment Policy”.
- ibid, “(3) Shareholder Activism”. This section provides: “An investment policy that contemplates activities intended to monitor or influence the management of corporations in which the plan owns stock is consistent with a fiduciary's obligations under ERISA where the responsible fiduciary concludes that there is a reasonable expectation that such monitoring or communication with management, by the plan alone or together with other shareholders, is likely to enhance the value of the plan's investment in the corporation, after taking into account the costs involved.”
- Thomas and Dixon, supra n 16, s 1.01[C].
- Final Rule: Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies, SEC Release Nos 33–8188, 34–47304, 68 Fed Reg 6564 (7 February 2003).
- Final Rule: Proxy Voting by Investment Advisers, SEC Release No IA-2106, 68 Fed Reg 6585 (7 February 2003).
- See Institutional Shareholder Services, at http://www.issproxy.com/about/index.jsp, accessed on 10 June 2005.
- See Investor Responsibility Research Center, at http://www.irrc.org/, accessed on 10 June 2005.
- See Coffee, “Liquidity v Control”, supra n 2, 1358.
- See supra n 249, and accompanying text.
- See Steven Rosenblum's criticism of the influence wielded by ISS, cited supra in n 17. For an opinion advocating the role of proxy advisory organisations, see M Latham, “The Road to Shareholder Power” (1999) Working Paper no. 81, Institute for Banking Law, University of Frankfurt, available at http://www.jura.uni-frankfurt.de/ifawz1/baums/Arbeitspapiere.html, accessed on 10 June 2005.
- SEC Interpretive Release: Use of Electronic Media for Delivery Purposes; Action: Interpretation; Solicitation of comment. 17 CFR Parts 231, 241 and 271, Release No 33–7233 (6 October 1995).
- See Final Rules: Regulation of Communications Among Shareholders, SEC Release No 34–31326, 57 Fed Reg 48276 (22 October 1992) (“Shareholder Communications Release”).
- See Thomas and Dixon, supra n 16, s 8.02, and Coffee, “Half-time Report”, supra n 18, 837–41.
- Coffee phrased it thus: “Nothing that the [SEC] has done in recent years has been as controversial or significant as its efforts to reform the proxy rules to permit greater communication among shareholders….” Coffee, “Half-time Report”, supra n 18, 837. Fisch described the adoption of the amendments as follows: “On October 16, 1992, after a comprehensive review of its system of proxy regulation and after two separate amendment proposals that drew more than 1700 letters of comment from the public, the [SEC] voted to reform the federal proxy rules.” Fisch, supra n 222, 1129–30.
- See 17 CFR s 240.14a-1(l) for the current definition of solicitation.
- See Thomas and Dixon, supra n 16, s 1.01[E], and Loss and Seligman, supra n 15, s 6-C-2.b. The SEC explained: “The amendments eliminate unnecessary regulatory obstacles to the exchange of views and opinions by shareholders and others concerning management performance and initiatives presented for a vote of shareholders.” Shareholder Communications Release, supra n 287, 48276.
- 17 CFR s 240.14a-1(l)(2)(iv). See Shareholder Communications Release, supra n 287, B. The Revised Proposals.
- 17 CFR s 240.14a-2(b). See Shareholder Communications Release, supra n 287, II.A1.
- Rule 14a-3 was amended to allow proxies to be solicited by public broadcast, speech or publication without delivering a proxy statement to the audience, provided a definitive proxy statement is on file with the SEC. Rules 14a-3(a) and 14a-4 were amended to allow proxy solicitation to commence on the basis of a preliminary proxy statement filed with the SEC, as long as a form of proxy is not provided until the definitive proxy statement is delivered. Rule 14a-6 was amended to allow solicitation materials other than the proxy statement and form of proxy to be filed with the Commission in definitive form at the time of dissemination. See Shareholder Communications Release, supra n 287, II.C and D.
- See Coffee, “Liquidity v Control”, supra n 2, 1327.
- 17 CFR s 240.14a-4(a), (b)(1). See Shareholder Communications Release, supra n 287, II.H.
- 17 CFR s 240.14a-4(d). See Shareholder Communications Release, supra n 287, II.I.
- Fisch, supra n 222, 1144.
- 163 F 2d 511 (3rd Cir 1947).
- See 17 CFR s 240.14a-8. In addition to eligibility requirements and procedural requirements to qualify for submission, a proposal may be excluded if (1) it is not a proper subject for action by shareholders under the laws of the jurisdiction of the company's organisation; (2) if implemented, it would cause the company to violate any state, federal or foreign law to which it is subject; (3) it or its supporting statement is contrary to an SEC proxy rule, including Rule 14a-9, prohibiting materially false or misleading statements in proxy soliciting materials; (4) it relates to the redress of a personal claim or grievance against the company or any other person, or seeks a personal benefit; (5) it relates to operations which account for less than 5% of the company's total assets and for less than 5% of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company's business; (6) the company would lack the power or authority to implement it; (7) it deals with a matter relating to the company's ordinary business operations; (8) it relates to an election for membership on the company's board of directors or analogous governing body; (9) it directly conflicts with one of the company's own proposals to be submitted to shareholders at the same meeting; (10) the company has already substantially implemented the proposal; (11) it substantially duplicates another proposal previously submitted that will be included in the proxy materials; (12) it deals with substantially the same subject matter as another proposal that has been previously included in the proxy materials in the past 5 years and has received little support; or (13) it relates to specific amounts of cash or stock dividends. 17 CFR s 240.14a-8(i).
- Fisch, supra n 222, 1151.
- See Section D.2.
- Fisch, supra n 222, 1158–60.
- For example, in 1995, the SEC allowed a proposal seeking to strengthen auditor independence to be excluded as “ordinary business”. See LTV Corp, SEC No-Action Letter, 1995 SEC No-Act LEXIS 826 (22 November 1995) (“There appears to be some basis for your opinion that the proposal may be omitted from the Company's proxy material under Rule 14a-8(c)(7), since it appears to deal with a matter relating to the conduct of the Company's ordinary business operations (ie the determination of criteria for the selection of independent auditors)”). The late Linda C. Quinn, former head of the SEC Division of Corporate Finance, explains that, following the high-profile scandals like that of Enron Inc, the SEC began refusing exclusion of shareholder proposals seeking increased auditor independence, “citing: ‘widespread public debate concerning the impact of non-audit services on auditor independence and the increasing recognition that this issue raises significant policy concerns’.” L Quinn and O Jarmel, “The Shareholder Proposal Process”, in Goodman and Olson, supra n 17, s 15.7[1]. For an example of such letters citing “widespread public debate”, see TXU Corp, SEC No-Action Letter, 2002 SEC No-Act LEXIS 357 (7 March 2002).
- SEC no-action letters as late as August and September of 2002 allowed management to exclude shareholder proposals to expense stock options from their proxy materials. See Zale Corp, SEC No-Action Letter, 2002 SEC No-Act LEXIS 705 (4 September 2002) and Meredith Corp, SEC No-Action Letter, 2002 SEC No-Act LEXIS 673 (9 August 2002). “On December 6, 2002, the Commission reversed an SEC staff letter granting… no-action relief with respect to a shareholder proposal seeking stock option expensing.” Quinn and Jarmel, in Goodman and Olson, supra note 17, s 15.7[2].
- See Aurthur Levitt, Take on the Street (Waterville, ME, Thorndike Press, 2002), 26–27.
- Fisch, supra n 222, 1162.
- Quinn and Jarmel, in Goodman and Olson, supra note 17, s 15.7.
- 17 CFR s 243.100.
- See 17 CFR s 243.100(a) and (b).
- Coffee, “Liquidity v Control”, supra n 2, 1323.
- See Final Rule: Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors, SEC Release Nos 33–8340, 34–48825, 68 Fed Reg 69204 (11 December 2003).
- Item 7 of Schedule 14A, 17 CFR s 240.14a–101 now contains a “comply or explain” duty under which a registrant company must state in its proxy statement whether it has undertaken a number of acts and, if not, explain why. Disclosures include the presence of a nominating committee (describing its composition and whether its charter has been posted on the company's website), whether its members are independent, whether it has a policy for considering shareholder nominees (describing its material elements and the procedure), any specific minimum requirements for a board candidate, the process used to evaluate candidates, the origin of the candidates recently included on the proxy card, any service used to evaluate candidates, any candidate nominated in a timely manner by a 5%, one-year shareholder or group of shareholders who was not included on the card (provided the shareholder and the rejected candidate consent to disclosure). 17 CFR s 19a-101, item 7(d).
- See Kraakman et al, Anatomy, supra n 42, 46–51.
- This is certainly the case with the preferred method of creating independent directors to act in a tutelary fashion for shareholders on the board rather than making directors accountable to shareholders for their appointments. This faith in the trusteeship strategy is evidenced by recourse to independent directors in s 10A(m)(3)(A) Securities Exchange Act of 1934, as amended by s 301 of the Sarbanes—Oxley Act of 2002, Pub L No 107–204, 116 Stat 745 (“Each member of the audit committee of the issuer shall be a member of the board of directors of the issuer, and shall otherwise be independent.”). The US Securities and Exchange Commission has explained the utility of this requirement as follows: “Management may face market pressures for short-term committee with adequate resources helps to overcome this problem and to align corporate interests with those of shareholders.” Final Rule: Standards Relating to Listed Company Audit Committees, SEC Release Nos 33–8220, 34–47654, 68 Fed Reg 18788, 18790–91 (16 April 2003). For an older formulation of a similar requirement, see The American Law Institute, supra n 101, s 3A.01: “It is recommended as a matter of corporate practice that (a) the board of every large publicly held corporation [s 1.24] should have a majority of directors who are free of any significant relationship [s 1.34] with the corporation's senior executives…”. Robert Monks describes the attitude of trusting wise (disinterested, independent, prudent) managers to care for shareholders, rather than allowing shareholders to speak for themselves, as a yearning for the “benevolent dictatorship” of the “philosopher king”. See Monks, supra n 239, 112–14.
- See Security Holder Nominations Proposal, supra n 152.
- Security Holder Nominations Proposal, supra n 152, 60785–86.
- The mechanism of the proposed rule would be applicable under two conditions. First, shareholders could simply opt in to its application by voting to do so. See Security Holder Nominations Proposal, supra n 152, 60819. The second trigger would be if “At least one of the registrant's nominees for the board of directors for whom the registrant solicited proxies received ‘withhold’ votes from more than 35% of the votes cast at an annual meeting of security holders”, except in the case of a contested election. Ibid.
- A nominating shareholder or shareholder group would have to have held more than 5% of the registrant's securities that are “eligible to vote for the election of directors” continuously for at least two years and intend to continue to hold those securities through the date of the subject election of directors. See Security Holder Nominations Proposal, supra n 152, 60820.
- One nominee would be permitted in a board of up to eight members, two nominees in a board of between nine and 19 members, and three nominees in a board of 20 or more members. See Security Holder Nominations Proposal, supra n 152, 60822.
- The proposed independence requirement resembles existing, similar requirements for all independent board members, but focus on guarding against ties specifically between the nominee and the nominating shareholder or group of shareholders. It would prohibit the nominee from being first, the nominating shareholder or a member of the nominating group; secondly, an employee of the nominating shareholder or any group member; thirdly, a recipient of fees from the nominating shareholder or group member; fourthly, an executive officer or director of the nominating shareholder or any group member; fifthly, either controlling or controlled by the nominating shareholder or any group member; and sixthly, it would require the nominee to be in compliance with the applicable independence requirements for directors under the relevant stock exchange rules. See Security Holder Nominations Proposal, supra n 152, 60820–21.
- The blind triggering event of a 35% withhold vote (See supra n 318) would ascribe a secondary meaning to votes that shareholders intend to cast in favor of or withhold from the election of a particular director, ascribing a symbolic value to a totally different action, and treating shareholders as constituting a group that cannot think and act for itself. This blind trigger would also interfere with the exercise of a state law right. As Coffee has remarked, this secondary meaning would “skew” the vote on the principal issue of the resolution. See Remarks of Prof J Coffee Jr, in “Symposium on Corporate Elections”, supra n 209, 98–99.
- Georgeson Shareholder, “2004 Annual Corporate Governance Review” (2004), i, available at http://www.georgesonshareholder.com/html/index1.asp?id=t17, accessed on 10 June 2005.
- Public Citizen, “Corporate Cronies: How the Bush Administration Has Stalled a Major Corporate Reform and Placed the Interests of Corporate Donors over the Nation's Investors” (October 2004), 11–13, available at http://www.citizen.org/publications/index.cfm?sectionID=108, accessed on 10 June 2005.
- A Murray, “Shareholders Lose an Advocate at the SEC”, Wall Street Journal Europe, 23 March 2005, A2.
- See Press Release, “US Securities and Exchange Commission, SEC Chairman William H. Donaldson to Step Down on June 30” (1 June 2005), available at http://www.sec.gov/news/press/2005–82.htm, accessed on 2 June 2005.
- “To an impressive degree, constructive dialogue between shareholders and corporations replaced confrontation. The action took place off stage, the results out of the limelight. But evidence suggests that the consequences were real—and to the mutual benefit of both corporations and institutional investors.” Institutional Shareholder Services, supra note 210, 3, and “Like the proverbial elephant in the drawing room, the access rule was an unacknowledged but powerful factor influencing the mood and behavior of companies and shareholders at 2004 annual meetings”. Georgeson Shareholder, supra note 323, i.
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Original Articles
Shareholder Voice and Its Opponents
David C. Donald Research Associate, Institute for Law and Finance, Johann Wolfgang Goethe-Universität, Frankfurt am Main.
Pages 305-361
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Published online: 27 Apr 2015
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