Corporations:

1
Chapter 14Shareholder Voting Rights
Module VI Corporate Governance

• What and how
• Rights in fundamental transactions
• Voting rights
• Appraisal rights
• Compare merger, sale of assets, tender offer
• Power to initiate
• Shareholder resolutions
• Bylaw amendments
• Removing directors / filling vacancies
• Protection of voting rights
• Blasius board packing
• Quickturn dead-hand/deferred poison pills

Bar exam
Corporate practice
Law profession
Citizen of world
2
Shareholder self-protection

• Vote
• Approve fundamental transactions
• Elect directors (annually, special)
• Remove directors / fill vacancies
• Initiate action (bylaws, resolutions)
• Sue
• Enforce fiduciary duties (derivative)
• Protect rights (disclosure, voting, appraisal,
  inspection)
• Sell
• Liquidity (except insider trading)
• Takeovers (tender offer)

Prof. Robert Thompson
3

• Fundamentals
• Introduction to firm
• Corporate basics
• Corporations and policy
• Corporate federalism
• Corporate social responsibility
• Corporate political action
• Corporate form
• Organizational choices
• Incorporation
• Locating corporate authority
• Corporate finance
• Numeracy for corporate lawyers
• Capital structure
• Corporate externalities
• Piercing corporate veil
• Corporate environmental liability
• Corporate criminal liability
• Corporate governance

• Fundamentals
• Introduction to firm
• Corporate basics
• Corporations and policy
• Corporate federalism
• Corporate social responsibility
• Corporate political action
• Corporate form
• Organizational choices
• Incorporation
• Locating corporate authority
• Corporate finance
• Numeracy for corporate lawyers
• Capital structure
• Corporate externalities
• Piercing corporate veil
• Corporate environmental liability
• Corporate criminal liability
• Corporate governance

(shareholder checklist)
4
Shareholder voting rights

• Substance (what SHs vote on) 
• Choose directors 
• Annual election 
• Removal/replacement of directors
• Approve fundamental changes (usually after board
  initiation) 
• Amendments to articles of incorporation 
• Mergers / sales of assets 
• Dissolution
• Initiate and approve bylaw changes
• Adopt resolutions

• Process (how SHs vote) 
• Meetings of shareholders 
• annual meeting 
• special meeting
• Action by consent
• Voting at meetings 
• quorum (purpose) 
• proxy (appointment of agent) 
• absolute vs. simple majority 
• supervision of voting

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What is a merger?
(statutory merger / triangular merger / sale of
assets / tender offer)
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Acquisition
P Corp. (acquiring corporation)
T Inc. (acquired corporation)

• Hypothetical
• Mgmt of P and T agree that P will acquire T
• P will issue 40 of voting shares as
  consideration

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Statutory merger(MBCA)
P Corp. (acquiring corporation)
T Inc. (acquired corporation)

• plan of merger

• P board approves merger plan
• P shareholders
• Vote Yes (if more than 20 issuance)
• Appraisal No

• T board approves merger plan
• T shareholders
• Vote Yes
• Appraisal Yes (unless mkt out)

Corporations A Contemporary Approach
Chapter 14 Shareholder Voting Rights
Slide 7 of 59
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Statutory merger(MBCA)
Before
T Inc. (acquired corporation)
P Corp. (acquiring corporation)

• plan of merger

After
P. Corp. (surviving corporation) assets
liabilities of both P and T
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Shareholder rights
P (surviving corporation) P (surviving corporation) T (acquired corporation T (acquired corporation
Vote Appraisal Vote Appraisal
Statutory merger Statutory merger Statutory merger Statutory merger Statutory merger
MBCA (rev) Y N Y Y
MBCA (pre-99) Y Y Y Y
DGCL Y Y Y Y
Triangular merger Triangular merger Triangular merger Triangular merger Triangular merger
MBCA (rev) Y N Y Y
MBCA (pre-99) N N Y Y
DGCL N N Y Y
Sale of assets Sale of assets Sale of assets Sale of assets Sale of assets
MBCA (rev) Y N Y Y
MBCA (pre-99) N N Y Y
DGCL N N Y N
Unless market out exception applies
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Triangular merger (MBCA)
P Corp. (acquiring corporation)
T Inc. (acquired corporation)
100 owner
statutory merger
Merger Sub Inc. (acquisition vehicle)

• P creates Merger Sub
• capitalized with P shares
• approved by P board
• MS board Shs (P) approve
• P shareholders
• Vote Yes (more than 20 issuance)
• Appraisal No

• T board approves merger plan
• T shareholders
• Vote Yes
• Appraisal Yes (unless market out exception)

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Triangular merger (MBCA)
Before
P Corp. (acquiring corporation)
T Inc. (acquired corporation)
100 owner
statutory merger
Merger Sub Inc. (acquisition vehicle)
P Corp. (acquiring corporation)
After
100 owner
T Inc. (surviving corporation - reverse merger)
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Shareholder rights
P (surviving corporation) P (surviving corporation) T (acquired corporation T (acquired corporation
Vote Appraisal Vote Appraisal
Statutory merger Statutory merger Statutory merger Statutory merger Statutory merger
MBCA (rev) Y N Y Y
MBCA (pre-99) Y Y Y Y
DGCL Y Y Y Y
Triangular merger Triangular merger Triangular merger Triangular merger Triangular merger
MBCA (rev) Y N Y Y
MBCA (pre-99) N N Y Y
DGCL N N Y Y
Sale of assets Sale of assets Sale of assets Sale of assets Sale of assets
MBCA (rev) Y N Y Y
MBCA (pre-99) N N Y Y
DGCL N N Y N
Unless market out exception applies
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Sale of Assets (MBCA)
P Corp. (acquiring corporation)
T Inc. (acquired corporation)
consideration
assets liabilities

• P agrees to buy T assets for P shares (maybe
  assume liabilities)
• approved by P board
• P shareholders
• Vote Yes (if more than 20 issuance)
• Appraisal No

• T agrees to sell T assets for P shares (maybe
  transfer liabilities)
• approved by T board
• T shareholders
• Vote Yes
• Appraisal Yes

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Sale of Assets (MBCA)
Before
P Corp. (acquiring corporation)
consideration
T Inc. (acquired corporation)
assets liabilities
After
P Corp. (acquiring corporation) Assets
liabilities of P and T
T Inc. dissolved T shareholders receive P
shares as consideration
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Shareholder rights
P (surviving corporation) P (surviving corporation) T (acquired corporation T (acquired corporation
Vote Appraisal Vote Appraisal
Statutory merger Statutory merger Statutory merger Statutory merger Statutory merger
MBCA (rev) Y N Y Y
MBCA (pre-99) Y Y Y Y
DGCL Y Y Y Y
Triangular merger Triangular merger Triangular merger Triangular merger Triangular merger
MBCA (rev) Y N Y Y
MBCA (pre-99) N N Y Y
DGCL N N Y Y
Sale of assets Sale of assets Sale of assets Sale of assets Sale of assets
MBCA (rev) Y N Y Y
MBCA (pre-99) N N Y Y
DGCL N N Y N
Unless market out exception applies
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Compare shareholder rights (P acquires T with
40 of its stock)
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Shareholder rights
P (surviving corporation) P (surviving corporation) T (acquired corporation T (acquired corporation
Vote Appraisal Vote Appraisal
Statutory merger Statutory merger Statutory merger Statutory merger Statutory merger
MBCA (rev) Y N Y Y
MBCA (pre-99) Y Y Y Y
DGCL Y Y Y Y
Triangular merger Triangular merger Triangular merger Triangular merger Triangular merger
MBCA (rev) Y N Y Y
MBCA (pre-99) N N Y Y
DGCL N N Y Y
Sale of assets Sale of assets Sale of assets Sale of assets Sale of assets
MBCA (rev) Y N Y Y
MBCA (pre-99) N N Y Y
DGCL N N Y N
Unless market out exception applies
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Tender Offer
T shareholders
Offer (cash, stock, etc)
P Corp. (bidder)
Board
shares
T Inc. (target)

• P board approves offer
• P shareholders
• Vote No (unless dilutive issuance or amend
  articles to authorize shares)
• Appraisal No

• T board has no role
• T shareholders
• Vote No (each individual shareholder decides /
  coercion risk)
• Appraisal No (take offer or risk becoming
  minority)

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Tender Offer
Before
T shareholders
Offer (cash, stock, etc)
P Corp. (bidder)
shares
Board
T Inc. (target)
After
T Shs (minority)
P (majority)
Board
How get rid of minority?
T Inc. (target)
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Two-step takeover
T shareholders
1st step (tender offer)
P Corp. (bidder)
Board
T Inc. (target)
P (majority)
T Shs (minority)
2nd step (merger)
Board
P Corp. (bidder)
merger
T Inc. (target)
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Pop quiz shareholder voting rights
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• Shareholders do vote on
• Fundamental changes in business
• Mergers
• Sales of important corporate assets
• Shareholders do not vote on
• Acquisition by another corporation
• Amendment of bylaws
• Parent-sub merger (when parent owns 90 of sub)
• Shareholders get appraisal
• When they receive publicly-traded stock in merger
• In court proceeding paid by company
• For fair market value of their shares

• 4. Shareholder meeting requires
• Notice to shareholders (10-60 days before
  meeting)
• Statement of purpose  (both annual/special
  meeting)
• A quorum from beginning to end of the meeting
• 5. At annual meeting
• All directors are elected
• Only directors are elected where seat is
  contested
• Only some directors are elected (up to five
  classes)
• Shareholders can
• Amend bylaws, even if inconsistent with articles
• Approve non-binding  resolutions
• Remove directors only for cause and fill vacancies

Answers 1-b / 2-c / 3-b / 4-a / 5-a / 6-b
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Shareholders power to initiate ...
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• Power to initiate
• Shareholder resolutions
• Remove directors (for cause)
• Fill board vacancies (after removal)
• Amend bylaws

Auer v. Dressel (NY 1954) CA, Inc. v. AFSCME
(Del. 2008) Campbell v. Loews (Del. Ch. 1957)
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Auer v. Dressel (NY Court of Appeals 1954)

• Majority shareholders were upset after a palace
  coup.  They wanted to get rid of the incumbent
  majority, put in a new board, and reinstate the
  former president Auer.  They ask for a special
  shareholders' meeting where shareholders would
  vote to --  
•  
• remove 4 directors for cause and replace them
  with a new slate
• amend the bylaws and articles so board vacancies
  are filled only by shareholders
• endorse Auer's presidency and demand his
  reinstatement

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• NY Court of Appeals
• Removal power "... stockholders who are
  empowered to elect directors have the inherent
  power to remove them for cause.   service of
  specific charges, adequate notice and full
  opportunity of meeting the accusations  ....
  Provision in articles that authorizes board to
  fill vacancies is not an abdication by the
  stockholders of their own traditional, inherent
  power to remove their own directors.
• Amend bylaws "Since these particular
  stockholders have the right ... to remove
  directors on proven charges, they can amend
  the bylaws to elect the successors of such
  directors as shall be removed ... 
•  
• Resolution "The stockholders by expressing
  their approval of Mr. Auer's conduct as president
  and their demand that he be put back in that
  office, will not be able directly to effect that
  change in officers, but there is nothing invalid
  in their so expressing themselves

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Auer v. Dressel (NY 1954) CA, Inc. v. AFSCME
(Del. 2008) Campbell v. Loews (Del. Ch. 1957)

• Power to initiate
• Shareholder resolutions
• Remove directors (for cause)
• Fill board vacancies (after removal)
• Amend bylaws

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Reimbursement of expenses?
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• DGCL
• 102. Articles.
• (b) . The certificate may contain .
• (1) Any provision . Limiting and regulating the
  powers of . the directors
• 109. Bylaws.
• (a) The power to adopt, amend or repeal bylaws
  shall be in the stockholders entitled to vote .
• (b) The bylaws may contain any provision, not
  inconsistent with law or with the certificate of
  incorporation, relating to the business of the
  corporation, the conduct of its affairs, and its
  rights or powers or the rights or powers of its
  stockholders, directors, officers or employees.
• 141. Board of directors
• (a) The business and affairs of every corporation
  organized under this chapter shall be managed by
  or under the direction of a board of directors,
  except as may be otherwise provided in its
  certificate of incorporation.

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• Justice Jack Jacobs (standing right)
• Proper subject Implicit in CA's argument is the
  premise that any bylaw that in any respect might
  be viewed as limiting or restricting the power of
  the board of directors automatically falls
  outside the scope of permissible bylaws. That
  simply cannot be.
• Fiduciary duties As presently drafted, the Bylaw
  would afford CA's directors full discretion to
  determine what amount of reimbursement is
  appropriate, because the directors would be
  obligated to grant only the reasonable expenses
  of a successful short slate.

Delaware Supreme Court
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• Power to initiate
• Shareholder resolutions
• Remove directors (for cause)
• Fill board vacancies (after removal)
• Amend bylaws

Auer v. Dressel (NY 1954) CA, Inc v. AFSCME
(Del 2006) Campbell v. Loews (Del. Ch. 1957)
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Campbell v. Loew's, Inc. (Del Ch. 1957)

• Two minority factions in a public corporation
  (Vogels and Tomlinsons) vie for control of the
  board.  The Vogel faction has control of
  corporate management and calls a shareholders'
  meeting to 
• amend the bylaws to increase of directors 
• remove 2 Tomlinson-faction directors. 
• fill director vacancies with Vogel-faction
  directors

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• Delaware Chancery Court
• Fill vacancies. "stockholders have the inherent
  right between annual meetings to fill newly
  created directorships"
• Remove directors. "stockholders do have
  inherent power to remove directors for cause
  ... even where there is a provision for
  cumulative voting"
• Process of removal. "there must be ... notice of
  charges .... opportunity to defend charges"
• Opportunity to be heard. "opportunity must be
  provided such directors to present their defense
  to stockholders in company proxy mailing"

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• Delaware Chancery Court
• Meaning of for cause
• A charge that the directors desired to take
  over control of the corporation is not a reason
  for their ouster.  Standing alone, its is a
  perfectly legitimate objective which is a part of
  the very fabric of corporate existence.  Nor is
  lack of cooperation a legally sufficient basis
  for removal for cause.
• The next charge is that these directors, in
  effect, engaged in a calculated plan of
  harassment to the detriment of the corporation. 
  Certainly a director may examine books, ask
  questions, etc., but a point can be reached when
  his actions exceed the call of duty and become
  deliberately obstructive.  ...  The charges in
  this area ... are legally sufficient to justify
  the stockholders in voting to remove such
  directors.

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Pop quiz shareholder initiation powers
36

• Shareholders have power
• To require board to reinstate president
• To make request of board
• Only to elect new board
• Shareholders have power
• To remove director for cause
• Regardless of articles, to remove D without cause
• Only to give opinion on board removing D
• Shareholders have power to amend bylaws
• On any matter board could amend
• On procedural matters that dont interfere with
  board
• Only if specifically allowed in articles

• 4. Under a shareholder-bylaw to reimburse proxy
  expenses
• Board must be able to refuse, inc unreasonable
  expenses
• Board is bound by bylaw
• Board can amend bylaw
• 5. Removal of directors under DGCL
• Must be only for cause
• Can be without cause, if allowed in articles
  (opt-in)
• Can be without cause, unless articles disallow
  (opt-out)
• To remove director in PHC
• Directors must be able to present at meeting
• Directors must have access to proxy statement
• Cannot be done, wait for next election

Answers 1-b / 2-a / 3-b / 4-a / 5-c / 6-b
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Board responses to shareholder initiatives
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(No Transcript)
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Limits on board

• Limits on power (ultra vires)
• Amend bylaws
• CA v AFSCME Shareholders can amend bylaws
• Adopt poison pills
• Quickturn Directors must retain independent
  judgment

• Fiduciary duties
• (constraints)
• During insurgency, interfere w/ SH voting
• Blasius only when compelling justifications
• Adopt shark repellents
• BJR if approved by shareholders
• Heightened duty Board as negotiator for
  shareholders

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Blasius Indus v. Atlas Corp(Del Ch 1988)
Incumbent board
1
2
3
4
5
6
7
15
14
13
12
11
10
9
8
8
9
Insurgent (Blasius)
(amend bylaws)
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Standard of review

• Atlas's board acted
• Consistent with Sh-approved staggered board
  precisely to prevent sirens call
• Without conflicting interest -- their board
  positions not jeopardized by Blasius
  board-packing plan
• In good faith -- they were motivated to protect
  the shareholders from the threat of impractical,
  dangerous recapitalization program

• Judicial review
• BJR deference?
• Board not exercising control over operations
• Inapplicable when manipulates franchise
• Per se prohibition?
• Board should have role
• Board may sometimes know better than shareholders
• Heightened review?
• Compelling justifications
• Protect deal already done

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Corporate democracy

• The shareholder franchise is the ideological
  underpinning upon which the legitimacy of
  directorial power rests.
• Action designed principally to interfere with
  the effectiveness of a vote inevitably involves a
  conflict between the board a shareholder
  majority.  ....  
• The theory of our corporation law confers power
  upon directors as the agents of the shareholder
  it does not create Platonic masters.

Chancellor William T. Allen
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Board power over SH voting
44
Quickturn Design Systems v. Shapiro(Del. 1998)
Mentor
Shareholders

• Bidder initiates two-step takeover
• Proxy contest - replace board (which will redeem
  rights)
• (2) Tender offer
• 50 premium, 20 below high
• Same price in back-end merger

• Board

Quickturn
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Quickturn Design Systems v. Shapiro(Del. 1998)
Mentor
Shareholders

• Quickturn board responds
• Amend bylaws Shareholder-called meeting delayed
  90-100 days
• Amend poison pill
• Delete dead hand feature
• Add deferred redemption (new Directors cannot
  redeem for 6 mos)

• Board

Quickturn
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Poison Pill
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• TITLE 8
• Corporations
• CHAPTER 1. GENERAL CORPORATION LAW
• Subchapter IV. Directors and Officers
• 141. Board of directors powers
• (a) The business and affairs of every
  corporation organized under this chapter shall be
  managed by or under the direction of a board of
  directors, except as may be otherwise provided in
  this chapter or in its certificate of
  incorporation.

48

• Delaware Supreme Court
• One of the most basic tenets of Delaware
  corporate law is that the board of directors has
  the ultimate responsibility for managing the
  business and affairs of the corporation.
• While the DRP limits the boards authority in
  only one respect, suspension of rights plan, it
  restricts boards power to negotiate sale of the
  corporation.
• No defensive measure can be sustained which would
  require a new board of directors to breach its
  fiduciary duty.
• Quickturn Design Systems v. Shapiro(Del. 1998)

Justice Randy Holland
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Pop quiz board interference with voting
50

• Boards do not have power
• To amend bylaws
• To fill vacancies on board
• To disenfranchise shareholders
• When interfering with SH insurgency, directors
  must
• Have compelling justifications
• Not oppose the insurgency
• Offer a rational purpose (BJR)
• A staggered board
• Must be in the corporate bylaws
• Reflects that shareholders want director
  permanence
• Can be circumvented by removal without cause

• 4. A poison pill
• Forces bidders to negotiate with the board
• Is invalid, since it undermines shareholder
  liquidity rights
• Is valid, only if approved by shareholders
• 5. A deferred-redemption pill
• Can be redeemed at any time
• Can be redeemed only by old directors
• Can be redeemed by new directors after a wait
• A deferred-redemption pill is invalid because it
• Violates fiduciary duties
• Disempowers directors
• Is not authorized in articles

Answers 1-c / 2-a / 3-b / 4-a / 5-c / 6-b
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The end
52
Note on poison pills

• Creation. The board issues one right for each
  common share outstanding. When issued, the rights
  are essentially worthless, entitling a
  shareholder to buy preferred stock at prices far
  in excess of current market valuethat is, stock
  out of the money.
• First trigger. The real impact of the rights
  arises if any acquirer buys at least 20 percent
  (or makes a tender offer for at least 30 percent)
  of the companys shares. After this first
  trigger, the board has ten days to redeem the
  rights for a nominal amount (such as 10 cents per
  share). If the target fails to take this
  antidote, the rights became poison upon any
  further action by the acquirer.
• Second trigger. Any back-end transaction with the
  tainted acquirer (such as a merger, sale of
  assets, or other self-dealing arrangement)
  activates a second trigger in which the target
  must swallow the plans poison. The poison? Upon
  the second trigger, each right becomes
  exercisable permitting the holder to purchase
  200 worth of the acquirers or the targets
  securities (depending on the structure of the
  back-end transaction) for 100. (A flip-in plan
  entitles the holder to buy discounted target
  securities and sensibly excludes the tainted
  acquirer from participating a flip-over plan
  entitles the holder to buy discounted acquirer
  securities.)

Shareholders
Board issues rights
Corporation
53
Note on poison pills

• Creation. The board issues one right for each
  common share outstanding. When issued, the rights
  are essentially worthless, entitling a
  shareholder to buy preferred stock at prices far
  in excess of current market valuethat is, stock
  out of the money.
• First trigger. The real impact of the rights
  arises if any acquirer buys at least 20 percent
  (or makes a tender offer for at least 30 percent)
  of the companys shares. After this first
  trigger, the board has ten days to redeem the
  rights for a nominal amount (such as 10 cents per
  share). If the target fails to take this
  antidote, the rights became poison upon any
  further action by the acquirer.
• Second trigger. Any back-end transaction with the
  tainted acquirer (such as a merger, sale of
  assets, or other self-dealing arrangement)
  activates a second trigger in which the target
  must swallow the plans poison. The poison? Upon
  the second trigger, each right becomes
  exercisable permitting the holder to purchase
  200 worth of the acquirers or the targets
  securities (depending on the structure of the
  back-end transaction) for 100. (A flip-in plan
  entitles the holder to buy discounted target
  securities and sensibly excludes the tainted
  acquirer from participating a flip-over plan
  entitles the holder to buy discounted acquirer
  securities.)

Bidder
1st trigger
Shareholders
Board can redeem rights (or become poison)
Corporation
54
Note on poison pills

• Creation. The board issues one right for each
  common share outstanding. When issued, the rights
  are essentially worthless, entitling a
  shareholder to buy preferred stock at prices far
  in excess of current market valuethat is, stock
  out of the money.
• First trigger. The real impact of the rights
  arises if any acquirer buys at least 20 percent
  (or makes a tender offer for at least 30 percent)
  of the companys shares. After this first
  trigger, the board has ten days to redeem the
  rights for a nominal amount (such as 10 cents per
  share). If the target fails to take this
  antidote, the rights became poison upon any
  further action by the acquirer.
• Second trigger. Any back-end transaction with the
  tainted acquirer (such as a merger, sale of
  assets, or other self-dealing arrangement)
  activates a second trigger in which the target
  must swallow the plans poison. The poison? Upon
  the second trigger, each right becomes
  exercisable permitting the holder to purchase
  200 worth of the acquirers or the targets
  securities (depending on the structure of the
  back-end transaction) for 100. (A flip-in plan
  entitles the holder to buy discounted target
  securities and sensibly excludes the tainted
  acquirer from participating a flip-over plan
  entitles the holder to buy discounted acquirer
  securities.)

Bidder
2nd trigger
Shareholders (rights holders)
Shareholders can exercise rights (if bidder uses
control)
Corporation
55
Note on poison pills
Bidder

• Effect. The purpose of this potentially
  devastating financial dilution is to force any
  bidder, before beginning a hostile takeover, to
  negotiate with the board--which holds the
  redemption antidote. Such plans, which have
  become a favorite antitakeover tactic, have been
  adopted by a majority of large public companies.
• Avoidance. One method to avoid a poison pill is
  for the bidder to seek first to replace the
  incumbent board in a voting contest, so the new
  board can then cancel the plan or redeem the
  rights and pave the way for the bidders tender
  offer. Another, still uncertain, option is for
  the shareholders to adopt a bylaw amendment that
  prevents the board from adopting a poison pill
  without shareholder approval.

Shareholders
Rights
Board
Corporation
56
Note on poison pills
Bidder

• Effect. The purpose of this potentially
  devastating financial dilution is to force any
  bidder, before beginning a hostile takeover, to
  negotiate with the board--which holds the
  redemption antidote. Such plans, which have
  become a favorite antitakeover tactic, have been
  adopted by a majority of large public companies.
• Avoidance. One method to avoid a poison pill is
  for the bidder to seek first to replace the
  incumbent board in a voting contest, so the new
  board can then cancel the plan or redeem the
  rights and pave the way for the bidders tender
  offer. Another, still uncertain, option is for
  the shareholders to adopt a bylaw amendment that
  prevents the board from adopting a poison pill
  without shareholder approval.

Shareholders
Replace
Rights
Board
Corporation