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Stockholders do not have a general right to manage the business and affairs of the corporation. Nor do they have a general right to vote on matters related to the operation of the corporation's business. The principle power of stockholders is the power to vote for directors and certain corporate transactions which for which there is a statutory stockholder vote required. Stockholders who disagree with the strategy or direction of the corporation have the right to vote in favor of a different board and thus through the corporate ballot box to affect a change in corporate direction.
It's no surprise then that the stockholder meeting and stockholder votes will be consequential for stockholders. The following provisions lay out the requirements for stockholder meetings as well as stockholder voting at these meetings.EDIT PLAYLIST INFORMATION DELETE PLAYLIST
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|1||Show/Hide More||DGCL Sec. 211 - Stockholder meetings|
The following provision lays out the requirements for a corporation to hold an annual meeting of the stockholders. The principle business of any corporation's annual meeting is the election of the directors. It is through the annual election of directors that stockholders have their biggest voice and influence in the running of the corporation's business and affairs.
|2||Show/Hide More||DGCL. Sec. 228 - Action by written consent|
Stockholders may act by providing their written consent rather than at a meeting. Taking action by written consent rather than at a formal meeting may be preferrable in corporations, like start-up companies, where the number of stockholders is relatively small and easily identifiable. Any action that can be taken at a meeting of the stockholders can also be accomplished by written consent of the majority of the outstanding shares.
This default right to act by written consent can be stripped from stockholders. It is not uncommon for larger, publicly-traded corporations to include a prohibition against acting by written consent in the corporation's certificate of incorporation. By requiring stockholders to act only at a meeting – the time and place of which is controlled by the board of directors – managers of the corporation make it difficult for stockholder activists or for potential hostile acquirers of the corporation to organize stockholders against the incumbent board of directors and managers.
|3||Show/Hide More||DGCL Sec. 212 - Stockholder voting rights|
|5||Show/Hide More||DGCL Sec. 213 - Record dates|
Prior to any stockholder meeting, the board must set a “record date” for determining who are the stockholders of the corporation who have the right to vote at the meeting.
Determining who is a stockholder for the purposes of notice and the right to vote at a meeting can be more complex than you might initially think. in a private corporation, like a start-up, determining who are the record stockholders entitled to notice and to vote at a meeting is, typically, a simple matter. Shares of a private corporation are not transferrable and are held by a relatively small number of easily identifiable persons. One need only refer to the corporation's stock ledger (usually an Excel spreadsheet) to determine who are the stockholders.
On the other hand, determining who is a stockholder in a modern publicly-traded corporation is an altogether different matter. In publicly-traded corporations, there are potentially millions of stockholders and the demographic of the stockholding base turns over regularly as traders in the market buy and sell shares of the corporation. Determining who is a stockholder for purposes of receiving notice of a meeting and then being entitled to vote at that meeting is difficult. For one thing, a stockholder who is given notice today may very well not be a stockholder of the corporation in 45 when the meeting is actually held.
Later, when we discuss stockholder lists and §219, you will be introduced to the complexities of the system that has been gerry-rigged to try to deal with the question of record ownership in a fast paced trading environment. For now, though, note that §213 tries to deal with some obvious issues.
By permitting a board to separate a stockholder's right to receive notice of a meeting and the identification of stockholders entitled to vote at a meeting. by delaying the identification of those stockholders entitlted to vote, the statute acknowledges the reality that in many corporations there will be significant turnover in the stockholding demographic between notice and the meeting. By identifying stockholders entitled to vote at a later point closer in time to the meeting, drafters of the statute hope the actual stockholding demographic more closely resembles those who have been identified as having the right to vote at a meeting.
|6||Show/Hide More||DGCL Sec. 222 - Notice of meetings|
|7||Show/Hide More||Who Gets to Vote - 219 and Lists of Record Shareholders|
In advance of a meeting, stockholders have the right to seek a list of fellow stockholders of record for the purpose of communicating with them about the upcoming meeting. In the typical private corporation, identifying the stockholders of record is a relatively simple matter: every time the corporation issues a share, the corporate secretary records the name of the stockholder into the corporation's stock ledger. In order to determine the stockholders of record, one need only refer to the stock ledger.
This exercise is more complex when one wishes to determine the stockholders of record of a corporation which has its stock trading on the public markets, liek the NASDAQ or the NYSE. In the Dell case that follows, Vice Chancellor Laster provides a review of the US system of recording beneficial and record stockholders for public corporations.
|8||Show/Hide More||DGCL Sec. 216 - Quorum and required votes|
For any stockholder meeting to be a valid meeting, there must be sufficient representation of the corporation's underlying stockholder base. Quorum requirements exist to ensure that when a corporation's stockholders meet they are sufficiently representative such that their votes reflect the will of the stockholders as a whole.
This §216 also sets out the default rules for voting for directors.
|9||Show/Hide More||DGCL Sec. 214 - Cumulative voting option for directors|
Although plurality voting is the default rule for the election of directors under §216, a corporation may, in its certificate of incorporation, opt into a cumulative voting structure. The cumulative voting structure gives minority blockholders the power to elect representatives to the board in a manner that would be impossible under plurality voting. It does so by permitting stockholders to accumulate all their votes into a single (or multiple) block and then allocate that block of votes to a single candidate.
For example, if the election is for four directors and the stockholder has 500 shares, under the default plurality voting regime, the stockholder can vote a maximum of 500 shares for each one candidate. Under a cumulative voting regime, the stockholder has that number of votes equal to the number of shares owned by the stockholder multiplied by the number of available board seats in the election. In this case: 500 * 4 = 2,000 votes. The stockholder is then free to allocate those votes in any many she pleases, for example all 2,000 votes on candidate A, splitting her votes 1,000 each between candidate A and B while giving no votes to candidates C and D.
Under §141(k), the director removal provision, a director may be removed under cumulative voting, however, remova of a director may be blocked by minority stockholders. Under §141(k), no director in a cumulative voting regime may be removed when the votes cast against removal would be sufficient to elect the director if voted cumulatively at an election where all memberships entitled to vote were voted.
|10||Show/Hide More||Shareholder Proposals|
At the annual stockholder meeting, directors ask stockholders to vote on certain matters, including the election of directors and other matters, like the ratification of the board's selection of a corporate auditor. But, directors do not have exclusive control over the agenda at a stockholder meeting. Stockholders also have the right to put proposals and questions before the meeting. Some matters that are proposed by stockholders, including amendments to bylaws are expressly permitted by the state corporate law. Others are governed by bylaws, for example stockholder nomination of candidates for the position of director.
Other proposals put forward by stockholders, however, are not expressly contemplated by the corporate law. For these stockholder proposals, the SEC has developed a series of rules to govern when a board is required to put a shareholder proposal on the corporate proxy statement, or to be more precise rules governing when a board is permitted to exclude a shareholder proposal from the corporation's proxy materials sent to stockholders.
Although many shareholder proposals are focused on tradtional corporate governance issues, there is a long history of social activists using the shareholder proposal process to put important social issues on the agendas of corporate America. For example, during the 1970s and 1980s, the anti-Apartheid movement used the shareholder proposal process to raise awareness of the evils of Apartheid in South Africa.
|10.1||Show/Hide More||14a-8 - Shareholder Proposals|
A “proxy statement” is a required disclosure document that publicly traded companies must send to all beneficial stockholders prior to any meeting of the stockholders. The proxy statement lays describes for beneficial stockholders the business of the upcoming meeting and include a voting proxy that a beneficial stockholder can return to the record holder. The most common business at a meeting is the annual election of directors. However, a board can bring any business or question to the stockholders for consideration and a vote.
The contents of this document are laid out in a series of rules under the ‘34 Act. The rules governing how a stockholder can get access to a corporation's proxy statement for the purpose of presenting proposals to fellow shareholders for their consideration at annual shareholder meetings are presented below in a unique FAQ format.
The default rule is that any proposal put forward by an eligible stockholder in a timely manner must be included in the corporate proxy. However, the board is not required to include all proposals in the proxy. There are a number of very important exceptions to the inclusion requirement, and they are laid out in the 14a-8 rules that follow.
|10.2||Show/Hide More||Lovenheim v. Iroquois Brands Ltd.|
When a stockholder presents a proposal to a board of directors, the default rule is that such proposals shall be included in the proxy unless the board of the subject company has a legitimate reason to exclude the proposal.
In the case that follows, animal rights activists sought to include a proposal relating to the inhumane treatment of animals in the preparation of food products sold by the subjct company. The board of subject company sought to exclude the proposal. In seeking an no-action letter from the SEC, the board Iroquois argued that the stockholder's proposal lacked relevance and thus could properly be excluded.
In this opinion, the court provides guidance on how the SEC will typically treat these kinds of social proposals.
|10.3||Show/Hide More||CA INC. v. AFSCME Employees Pension Plan|
|10.4||Show/Hide More||Bylaw Amendments and Shareholder Proposals|
Stockholders have a statutory right to amend the bylaws. In public corporations, stockholders can put forward bylaw amendment proposals via the shareholder proposal process. A bylaw amendment included as a shareholder proposal in the company's proxy statement that receives sufficient votes in favor is binding on the corporation and becomes a valid bylaw of the corporation.
Because a stockholder bylaw amendment that is binding on the corporation is permitted by law, one of the most common avenues for blocking shareholder proposals (that the proposal is contrary to the law) is usually not available for companies seeking to exclude such proposals.
The court in CA opined that the bylaw amendment as offered was not permissible under Delaware law. However, the court offered up in dictum that if the stockholders did not like the result announced by the court that stockholders had the option of causing the corporation to amend its certificate of incorporation, or alternatively, working with the legislature to amend the DGCL to permit the proposed amendment. In the wake of CA, the Delawarenlegislature amended the corporate statute to make bylaws such at the one proposed by shareholders in CA permissible under the Delaware law.
|10.5||Show/Hide More||Say on Pay Vote [Frank-Dodd, Sec 951]|
In the wake of the Financial Crisis of 2008, Congress adopted the Frank-Dodd bill. Section 951 of Frank-Dodd requires regular votes by shareholders to approve executive compensation.
Note that the structure and effect of the vote are sensitive to the 14a-8 process and comport with what one might expect of other shareholder proposals. When approving the “say on pay” votes, Congress was sensitive to the traditional preeminance of the state corporate law. Consequently, “say on pay” votes are precatory in nature.
March 15, 2017
Brian JM Quinn
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