#11691 - Allocation Of Power Between Owners And Managers - Business Association (Duke Cox)

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

Officers

1. Agents of the board

2. Administer day-to-day affairs

Board of directors has broad power

1. to manage the corporation’s business

2. appoint officers (this power cannot be delegated)

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.

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.

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

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 §10.21: if a bylaw increases quorum or voting requirement it can be amended or repealed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

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)

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

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

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

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

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 positively affect his investment because the cost associated with that research usually outweighs the potential personal financial loss associated with a negative proxy proposal.

2. COLLECTIVE ACTION: even if such rational shareholder discovers a negative proxy proposal, he will face the problem of convincing other shareholders to act

3. FREE RIDERS: the rational shareholder will be further deterred from discovering and acting on a negative proxy proposal because the costs associated with such discovery and action will fall on him, while the benefits will fall on all shareholders.

INSTITUTIONAL SHAREHOLDERS do not have these same problems:

1. NO RATIONAL APATHY:

   1. because institutional shareholders have larger investments in companies, their portion of the expected value of any given negative proxy decision will be higher and therefore more likely to exceed the cost of spending the time to evaluate the proxy decision.

   2. because institutional shareholders have diversified investments, they will often see repeated proxy proposals when evaluating such proposals, such that the cost of spending the time to evaluate such proposals will be lower

2. NO COLLECTIVE ACTION PROBLEM: less players to convince

3. THE INSTITUTIONAL INVESTORS that are MOST LIKELY to be activists:

   1. Pension plans

   2. Labor funds

   3. Hedge funds

4. THE INSTITUTIONAL INVESTORS that are LEAST LIKELY to be activists:

   1. Insurers and banks (want to be able to sell their products to the very same companies in which they invest).

5. CORPORATE GOVERNANCE PROPOSALS: proposals by institutional investors for changes in corporate governance.

   1. Usually, these do not change the value of the relevant corporation

   2. BUT when hedge fund makes such a proposal, it often does change the value of the firm.

      1. Hedge funds are successful because they focus on making PROCEDURAL/GOVERNANCE changes to companies (focusing on OPERATIONS of the firm), rather than SUBSTANTIVE/DIRECT changes.

Proxy advisory firms

1. A proxy firm (also a proxy advisor) is a...