Ch 36 - Shareholders

Front 1

Directors:

Back 1

have the right to manage the corporate business, not shareholders.

Front 2

Inside Director:

Back 2

Also officers in the corporation, have typically controlled their company's board.

Front 3

Outside Directors:

Back 3

Also called independent directors, do not work for the company and have traditionally played a lesser role.

Front 4

Day to day operation:

Back 4

As a shareholder you have neither the right nor the obligation to manage the day-to-day besides of the enterprise.

Front 5

Right to Information:

Back 5

Under the Model Act, shareholders acting in good faith and with a proper purpose have the right to inspect and copy the corporation's minute book, accounting records, and shareholder lists.

Front 6

Proper Purpose:

Back 6

One that aids the shareholder in managing and protecting her investment.

Front 7

Right to Vote:

Back 7

A corporation must have at least one class of stock with voting rights.

Front 8

Proxies:

Back 8

(1) A person whom the shareholder designates to vote in his place. (2) The written form (typically a card) that the shareholder uses to appoint a designated voter.

Front 9

Quorum:

Back 9

The number of voters that must be present for a meeting to count.

Front 10

Proxy Statement:

Back 10

When a public company seeks proxy votes from its shareholders, it must include a proxy statement. This statement contains information about the company, such as a detailed description of management compensation.

Front 11

Annual Report:

Back 11

Contains detailed financial data.

Front 12

Shareholder Proposals:

Back 12

Under SEC rules, any shareholder who has continuously owned for one year at least 1 percent of the company or $2,000 of stock can require that one proposal be placed in the company's proxy statement to be voted on at the shareholder meeting.

Front 13

If the company refuses to include a shareholder proposal in its proxy material, shareholders can appeal to the SEC. These are the major SEC regulations on shareholder resolutions:

Back 13

1. If dissident shareholders are running for director, they must prepare their own proxy statement; they cannot piggyback on the company's.
2. The proposal cannot relate to the ordinary business operations of the corporation.
3. The proposal must relate to operations accounting for at least 5 percent of total assets, gross sales, or net earnings.
4. The proposal cannot interfere with the company's proxy solicitation.
5. the proposal cannot require the company to violate a federal or state law.
6. The shareholder cannot use a proposal to seek satisfaction of a personal grievance against the company.

Front 14

Shareholder Meetings:

Back 14

Annual shareholder meetings are the norm for publicly traded companies. Everyone who owns stock on the record date must be sent notice of a meeting, whether it is an annual or special meeting. the record date can be any day that is no more than 70 days before the meeting.

Front 15

Compensation for Officers and Directors: Why has executive pay become so lavish?

Back 15

1. Directors, not shareholders, set executive compensation.
2. Executives have a great deal of influence over their own pay.
3. The busier the directors, the higher the executive pay.
4. Most executives are above average.
5. Stock options.

Front 16

A corporation must seek shareholder approval before undergoing any of the following fundamental changes:

Back 16

1. Mergers: As a general rule, one corporation cannot merge with another unless a majority of both sets of shareholders approve. Shareholders must approve any sale that involves "all or substantially all" of the company's assets.
2. Dissolution: A corporation cannot voluntarily dissolve without shareholder approval.
3. Amendments to the Charter: Directors propose amendments to the charter, but these amendments are not valid unless approved by shareholders.
4. Amendments to the Bylaws: Both directors and shareholders have the right to amend the bylaws.

Front 17

Right to Dissent:

Back 17

If a private corporation decides to undertake a fundamental change, the Model Act and many state laws require the company to buy back the stock of any shareholders who object to this decision.

Front 18

Right to Protection from Other Shareholders:

Back 18

Anyone who owns enough stock to control a corporation has a fiduciary duty to minority shareholders.

Front 19

Ordinary Business Transactions:

Back 19

Minority Shareholders have the right to overturn an ordinary business transaction between the corporation and a controlling shareholder, unless the corporation can show that the transaction is fair to the minority shareholders.

Front 20

Excluding Minority Shareholders:

Back 20

Controlling shareholders must include minority shareholders in any favorable arrangements that they make for their own stock.

Front 21

Expelling Shareholders:

Back 21

Many states prohibit a company from expelling shareholders unless the firm pays a fair price for the minority stock and the expulsion has a legitimate business purpose.

Front 22

Right to Monitor:

Back 22

The right to receive information and the right to vote on proposals puts to them by the board. Shareholders do not, buy and large, have the right to initiate corporate changes.

Front 23

Sarbanes- Oxley Act (SOX) of 2002:

Back 23

This statute allies to all publicly traded corporations in the US as well as to all foreign companies listed on a US stock exchange.

Front 24

Under SOX:

Back 24

1. Rule 404 requires each company to adopt effective financial controls.
2. CEOs and CFOs must personally certify their company's financial statements. These officers are subject to criminal penalties for violations.
3. All members of a board's audit committee must be independent.
4. A company cannot make personal loans to its directors or officers.
5. If a company has to restate its earnings, its CEO and CFO must reimburse the company for any bonus or profits they have received from selling company stock within a year of the release of the flawed financials.
6. Each company must disclose if it has an ethics code and, if it does not, why not.
7. It is a felony to interfere with a federal investigation into fraud.
8. Whistle-blowing employees are protected.
9. A new Public Accounting Oversight Board has been established to oversee the auditing of public companies.

Front 25

The NYSE and Nasdaq responded to the Enron-era scandals by establishing a new role for independent directors at listed companies:

Back 25

1. Independent directors must comprise a majority of the board.
2. They must meet regularly on their own without inside directors.
3. Only independent directors can serve on audit, compensation, or nominating committees.
4. Audit committees must have at least three directors who are financially literate.

Front 26

Derivative Lawsuits:

Back 26

Brought by shareholders to remedy a wrong to the corporation. The suit is brought in the name of the corporation, and all proceeds of the litigation go to the corporation.

Front 27

Approval of Settlements:

Back 27

To ensure that lawyers consider the welfare of their clients when settling a derivative action, all settlements must be approved by the court.

Front 28

Making Demand:

Back 28

Before bringing suit, shareholders must first "make demand" on the board of directors. In other words, they must notify the board that the corporation has been wronged and ask the board to bring suit in the name of the corporation directly. One exception is if making demand would be futile because a majority of the directors either have a conflict of interest or were careless when making the decision.

Front 29

If Demand is Required:

Back 29

1. It can agree with the shareholders and file suit on behalf of the corporation.
2. The board can reject the demand.
3. The board can appoint a Special Litigation Committee (SLC).

Front 30

Direct Lawsuits:

Back 30

Shareholders are permitted to sue the corporation directly only if their own rights have been harmed.

Front 31

Class Action Lawsuits:

Back 31

If a group of shareholders all have the same claim, they can join together and file suit as a class action, rather than suing separately.

Front 32

Most jurisdictions have strict requirements governing class actions, such as the following:

Back 32

1. The case cannot proceed unless a judge certifies the class. to be certified, all members of the class must have a similar case without any conflicts of interest.
2. A judge will not certify a class unless it is so large that individual suits are impractical. A class comprised of all Enron shareholders would be large enough.
3. Any settlement must be approved by a judge. this requirement is meant to ensure fairness to all class members and to protect the class from their lawyers who may prefer to settle early on terms favorable to themselves (that is, with a large award of attorney's fees) rather than going to trial or insisting on a settlement that is best for shareholders.

Front 33

Chapter Conclusion:
The troubles that happened at Enron and other companies like it:

Back 33

1. A focus on stock prices.
2. Ineffectual board of directors.
3. Lax supervision by lawyers and accountants.

Front 34

Chapter Review #1

Back 34

The Securities and Exchange Commission (SEC) regulates the relationship between publicly held corporations and their shareholders. The SEC plays a less active role in privately held corporations.

Front 35

Chapter Review #2
Shareholders have the right to:

Back 35

1. Receive annual financial statements
2. Inspect and copy the corporation's records (for a proper purpose)
3. Elect and remove directors; and
4. Approve fundamental corporate changes, such as a merger or a major sale of assets.

Front 36

Chapter Review #3

Back 36

Virtually all publicly held companies solicit proxies from their shareholders. A proxy authorizes someone else to vote in place of the shareholder.

Front 37

Chapter Review #4

Back 37

Under certain circumstances, public companies must include shareholder proposals in the proxy statement.

Front 38

Chapter Review #5

Back 38

A shareholder who objects to a fundamental change in the corporation can insist that her shares be bought out at fair value. This protection is referred to as “dissenters' rights.”

Front 39

Chapter Review #6
Controlling Shareholders:

Back 39

1. May not enter into unfair business transactions with the corporation
2. Have a fiduciary duty to minority shareholders
3. May not exclude minority shareholders from beneficial arrangements involving stock; and
4. Are prohibited from expelling minority shareholders, unless the expulsion is done for a legitimate business purpose

Front 40

Chapter Review #7

Back 40

Congress, the NYSE, and Nasdaq have all taken steps to prevent management abuses. These new regulations require that companies adopt effective financial controls. They also require more independent directors on the board as a whole and on important subcommittees.

Front 41

Chapter Review #8

Back 41

A derivative lawsuit is brought by shareholders to remedy a wrong to the corporation. The suit is brought in the name of the corporation, and all proceeds of the litigation go to the corporation.

Front 42

Chapter Review #9

Back 42

If a group of shareholders all have the same claim against the corporation, they can join together and file a class action, rather than suing separately.

Front 43

Practice Test #1

Back 43

The New York State Common Retirement Fund wanted A&P (the grocery store chain) to permit large shareholders to place comments about the company's financial performance in its proxy statement. Which would be a better strategy for achieving this goal: a shareholder proposal or an amendment to the company's bylaws?

Front 44

Practice Test #2

Back 44

Shareholders lost their gamble when they bought stock of Jackpot Enterprises, Inc. Fed up with management, a shareholder asked the company to include a proposal in the proxy statement that would require the board of directors to sell or merge the company. Must Jackpot include this proposal in its proxy statement?

Front 45

Practice Test #3

Back 45

William H. Sullivan, Jr., purchased all the voting shares of the New England Patriots Football Club, Inc. (the Old Patriots). He organized a new corporation called the New Patriots Football Club, Inc. The boards of directors of the two companies agreed to merge. After the merger, the nonvoting stock in the Old Patriots was to be exchanged for cash. Do minority shareholders of the Old Patriots have the right to prevent the merger? If so, under what theory?

Front 46

Practice Test #4

Back 46

Daniel Cowin was a minority shareholder of Bresler & Reiner, Inc., a public company that developed real estate in Washington, D.C. He alleged numerous instances of corporate mismanagement, fraud, self-dealing, and breach of fiduciary duty by the board of directors. He sought damages for the diminished value of his stock. Could Cowin bring this suit as a direct action, or must it be a derivative suit?

Front 47

Practice Test #5

Back 47

The board of directors of Finalco Group, Inc., decided to sell most of the company's assets to Western Savings and Loan Association. Shortly after the proposed sale was announced, Finalco's largest shareholder said he opposed the transaction. Does Finalco need his approval for the sale?

Front 48

Practice Test #6

Back 48

Edgar Bronfman, Jr., dropped out of high school to go to Hollywood and write songs and produce movies. Eventually, he left Hollywood to work in the family business—the Bronfmans owned 36 percent of Seagram Co., a liquor and beverage conglomerate. Promoted to president of the company at the age of 32, Bronfman seized a second chance to live his dream. Seagram received 70 percent of its earnings from its 24 percent ownership of DuPont Co. Bronfman sold this stock at less than market value to purchase (at an inflated price) 80 percent of MCA, a movie and music company that had been a financial disaster for its prior owners. Some observers thought Bronfman had gone Hollywood, others that he had gone crazy. After the deal was announced, the price of Seagram shares fell 18 percent. Was there anything Seagram shareholders could do to prevent what to them was not a dream but a nightmare? Apart from legal issues, was Bronfman's decision ethical? What ethical obligations does he owe shareholds?

Front 49

Practice Test #7

Back 49

When Classic Corp. went public at $12 a share, its waterbed business was floating along nicely— the company had annual sales of $23 million and turned a hefty profit. The company then sprang a leak and suffered through many years of losses. Isaac Fogel, who owned 64 percent of the stock, decided to take the company private again (by buying shareholders' stock) at a price of 20 cents a share. Classic hired two financial advisers who opined that the buyout price was fair. The board of directors voted in favor of the sale and then scheduled a special shareholder meeting to vote on the buyout. Do the minority shareholders have any rights?

Front 50

Practice Test #8

Back 50

The president of R. Hoe & Co., Inc., refused to call a special meeting of the shareholders although 55 percent of the shareholders requested it. One purpose of the meeting was to demand that the former president be reinstated. Are these two requests within the power of the shareholders?

Front 51

Practice Test #9

Back 51

Prior to the DuPont Co.'s annual shareholder meeting, Friends of the Earth Oceanic Society submitted a proposal requiring the company to (1) accelerate its phaseout of the production of chlorofluorocarbons and halons, (2) present to shareholders a report detailing research and development efforts to find environmentally sound substitutes, and (3) report to shareholders on marketing plans to sell those substitutes. Must DuPont include this proposal in its proxy material for the annual meeting?

Front 52

Practice Test #10

Back 52

YOU BE THE JUDGE WRITING PROBLEM Two shareholders of Bruce Co., Harry and Yolan Gilbert, were fighting management for control of the company. They asked for permission to inspect Bruce's stockholder list so that they could either solicit support for their slate of directors at the upcoming stockholder meeting, or attempt to buy additional stock from other stockholders, or both. Bruce's board refused to allow the Gilberts to see the shareholder list on the grounds that the Gilberts owned another corporation that competed with Bruce. Do the Gilberts have the right to see Bruce's shareholder list? Argument for the Gilberts: If shareholders of a company have a proper purpose, they are entitled to inspect shareholder lists. Soliciting votes and buying stock are both proper purposes. Argument for Bruce: The Gilberts are simply offering a pretext. They could use this information to compete against the company. No shareholder has the right to cause harm.

Front 53

Practice test #11

Back 53

ROLE REVERSAL Write a short-answer question that focuses on whether a shareholder would be able to bring a derivative suit without first making demand.