Allocation of Power between Owners and Managers

A. Introduction

1. SH power

   1. To elect board of directors

   2. Approve or disapprove non-ordinary changes

   3. But SH are largely powerless

      1. Can’t enter contracts on behalf of the corporation unless the board authorizes SH to do so

2. Officers

   1. Agents of the board

   2. Administer day-to-day affairs

3. Board of directors has broad power

   1. to manage the corporation’s business

   2. appoint officers (this power cannot be delegated)

B. The Power of the Board of Directors

1. Del. § 141(a): Business and affairs of the corporation managed by the board of directors except as otherwise provided in the statute or in the articles.

2. MBCA§8.01: All corporate powers shall be exercised by or under authority of board, and the business and affairs of the corporation shall be managed by the board.

C. Bylaw Initiatives

1. A bylaw is a proper subject for shareholder action if they are purely procedural and process-oriented, and do not make substantive business decisions that intrude upon the board’s managerial role (109) (CA case)

   1. Nomination 112

   2. Reimbursement 113: can reimburse SH in soliciting proxies in connection with an election of directors

2. MCBA

   1. §10.03: amendments to articles must be adopted by the board of directors

      1. Approval of amendment requires approval by a majority of the votes entitled to be cast

   2. §10.20: both board and shareholders can amend bylaws

   3. §10.21: if a bylaw increases quorum or voting requirement it can be amended or repealed

      1. If it was adopted by shareholders, it can only be amended by shareholders

      2. If it was adopted by the board, it can only be amended by shareholders or the board

   4. MBCA 2.06(c)(1) and (2): bylaws can contain requirement that shareholders nominate directors and that the corporate reimburse expenses incurred by shareholder in connection with an election of directors.

D. Equitable Limitations - Thwarting the Exercise of Shareholders’ Franchise

1. If the management of a corporation acts to interfere with the ongoing exercise of shareholder franchise, the burden of proof shifts to the board and it must prove a compelling justification for its actions. (Blasius)

E. Why Shareholders Vote and Supervoting Shares

1. Shareholders are the appropriate group to monitor the board and correct errors because they are uniquely sensitive to the principal signal indicating a deviation of the board from its duty to the corporation: the market price of the corporation’s stock

2. General rule: in most publicly held corporations, only common shareholders have voting rights, and each share of common stock carries one vote

3. Supervoting:

   1. Providence & Worcester v. Baker: allow more votes/share for the first number of shares issued (articles grant 1 vote/1 share for first 50 shares, then 1/20 shares for the rest)

   2. Tenure shares: provide that the number of votes associated with each share will increase over the period that a single owner owns the share. (Since management/founders will usually be longer term holders than investors, this serves the same function).

   3. Corp may have 2 or more classes of common stock, each with different voting rights

4. Empty voting

   1. Empty voting = arrangement under which a person holds more votes than shares, so that his votes have been emptied of an accompanying economic stake

   2. Methods for empty voting

      1. borrowing shares in the share lending market for a limited period around the record date

         1. Record date = shareholders who hold shares at the close of business on the record date have the right to vote at the meeting, which is typically a month or so after the record date

      2. Someone owns shares on the record date and is therefore entitled to vote, but sells shares to someone else before the actual vote

F. The Rise of Financial Institutions

1. Individual SH are ill-equipped to tackle bad corporate governance for three reasons:

   1. RATIONAL APATHY: a rational shareholder will not do the necessary research to find out whether corporate proxy proposals will negatively or...

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