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LLM Law Outlines > Corporation Outlines

The Voting System Outline

Updates Available

This is an extract of our The Voting System document, which we sell as part of our Corporation Outlines collection written by the top tier of NYU School Of Law students.

The following is a more accessble plain text extract of the PDF sample above, taken from our Corporation Outlines. Due to the challenges of extracting text from PDFs, it will have odd formatting:

A. Corporate Voting and the Collective Action Problem

Public Corporations and the Voting system

  • When and how do shareholders vote

    • AGM

    • Special meetings – convene as prescribed by law/ written consent if permitted in co./ board called

  • What do shareholders vote on

    • Election of directors

    • Things board cannot do on its own: merger, dissolution, changes to certificate of incorporation, action plan

      • Cleansing acts: sometimes things that board cannot do on its own

    • In public co. - say on pay, a non-binding vote on executive compensation

    • Resolutions under rule 14A(a)

  • How many votes

    • One share on vote in general

  • Required votes for passage

    • General rule: mergers and charter amendment – majority of shares entitled to vote

    • Everything else (other than election of directors) majority of shares voting

    • Election of directors: people with most votes get elected (but now most large co. requires majority of the votes)

  • Record dates, record holders – how are votes collected

    • Proxy info given to shareholders Votes collected

    • Some co. have lawyers that is in charge of the mechanics of vote, complaining purposes, lopsided 90% would vote one way, hard task would be to get enough people to be bothered to vote

    • Complaints

      • Shareholders resolution 14A(a) – low level of complaining who gets to insert statement into the co. proxy statement

      • Intents complaint

      • Background

    • Record holders:

      • Previously shareholders himself would be the record holder (if certificate is lost can get another one)

      • Nowadays if you buy shares through banks no longer registered as the shareholder investment banks would act as intermediate record holders and passes voting instructions from the company to the owner

      • Record date – voting date vote still counts even if you sell the shares on the day you voted you vote will still count

Collective Action problem: cost of meaningful collective action paradigm/ model example

  • Unlike co. wholly owned by a single shareholder (no costs of collective action)

  • Co. held by 100,000 shareholders collective action costs are likely to be preclusive rational shareholders will never challenge board decisions/ inform themselves about co.’s performance beyond following the price of its stock Voting system largely a formality

    • Too many shareholders, who would pay no attention to what’s going on

    • So severe that it makes voting almost meaningless

    • Board likely to be dominated by top corporate officers (the insider directors), who control the board’s agenda and info

  • Cost of acquiring info

  • Benefits depend on

    • Likelihood that info will change one’s own vote

    • Likelihood that change in one’s own vote will change outcome (vote pivotal)

    • Change in value of stock if outcome is changed (= change in co. value x stake)

  • Example 1

    • Assume a co. with value of $10B asked to vote on deal that may lower value by 5% (i.e. 500M)

    • You are suspicious and think chances of this happening are 40%. If you decide to become ‘informed’, you will know for sure

    • You own 0.1% of the stock (10M value) a lot of money, few would own so many in a co.

    • You think that likelihood that your vote is outcome determinative is 0.2%

    • Benefit of becoming informed

      • Likelihood deal is bad: 40%

      • Expected loss to company from bad deal: $500M x 40% = $200M

      • Your portion of expected loss: $200M x 0.1% = $200,000

      • But you only benefit from casting informed vote if vote is pivotal.

        • So expected benefit: $200,000 x 0.2% = 400 pretty low for $10 stake

        • $400 (~30 mins legal advice) most shareholders would not bother to vote

  • Example 2

    • Assume co. that you own 3% other shareholders have raised questions about the deal, that you believe vote will be close and the likelihood that your vote is outcome determinative is 7%

    • Benefit of becoming informed is now: 200M x 3% x 7% = 420,000

    • Less severe if less diverse; more severe if more diverse

  • S. 14(a) of the Securities Exchange Act (SEC) was designed to introduce more ‘democracy’ by promulgating a set of proxy rules to encourage informed shareholders to be able to vote knowledgeably in corporate elections

    • As most do not attend shareholder meeting in person to cast their votes, but give proxies

    • Proxy = authorization to vote on their behalf for a certain candidate/ proposal

      • vote authorisation to other people – to vote my share in a following way in the next AGM

      • co. distribute proxy statements – disclosure statement relating to the vote, recommendation on how to vote

      • seeking return of a proxy marked voting the way you want them to vote

      • before AGM, vote is mostly settled

How has the paradigm changed? [11/1]

  • Reasons:

    1. Ownership structure changed

    2. People have observe that shareholders do not vote in accordance to their paradigm

      • Corporate election are less one-sided

  • Changes relating to voting: considered more important now (than 30 years ago)

    • Increased concentration of ownership

      • companies are often held by large shareholders less severe collective action problem

    • Increased institutionalization of voting:

      • large banks, mutual fund companies (usually own 2-9% in a co.), own a lot of stocks in many companies

      • With economies of scope, a company can be helpful to another company

      • Professionally managed, with a lot of advisers

      • ISS would issue voting recommendations to institutional investors

      • Proxy advisors

  • Shareholders’ precatory resolutions more likely to get implemented

    • Not all management proposals would get majority, sometimes it fails

  • Hedge fund: unregulated mutual fund, smaller, only very rich people buy shares in them

    • Some are smaller and have more specialised investment strategies

    • Active hedge fund: figuring what co. will benefit from the input that would increase in stock price – some are friendly and some are not

  • “Just say no” campaigns: shareholders vote against management

  • Voting is taken more seriously - ,ore contested issues:

    1. Shareholders often win

    2. Low no. of no votes will embarrass the board motivate them to do things differently

      • Board react to how shareholders vote their votes would move the board

  • Voting is regulated by State law (how to vote) and federal law (solicitation)

  • Development of shareholders vote

    • 1980s new shareholder’s right movement allowing investors to exercise their power through voting system; SEC amended proxy rules in 1992 to further lower the organising costs of large investors

    • No longer have collective action costs that are either non-existing (co. only have controlling shareholders) or preclusive (stock held by thousands of small stockholders)

    • For typical public corporation today, collective action costs may be large, but not large enough to prevent shareholders from monitoring managerial performance, depending on legal constraints, payoffs to shareholders, large culture of shareholder activism structure of the proxy rules and state regulation of voting rights matters the most to these co.

    • Voting standard in most director election

      • Plurality voting: nominees with the most votes are elected as director, but need not be majority

      • Uncontested election:

        • Previously: if no. of nominees is equal to the no. of vacant seats, a nominee could be elected by a single shareholder (even if all other shareholders refused to vote for that nominee)

        • Since 2006: companies shifted to majority voting, sometimes implemented via a by-law or a corporate governance guideline

        • Either case: nominee who receives an uncontested election more “against (or withhold)” votes than “for” votes is either not elected or is supposed to offer her resignation

        • Where no. of nominees exceeds no. of vacant seat plurality regime

  • Voting in Corporate Law – Frank Easterbrook & Daniel Fischel

    • Corporate form allows division of labor between people who have money but not managerial skills and those who have managerial skills but not capital

    • Legal rules serve as a standard form contract for issues of corporate structures – but structural rules and fiduciary principle together cover only the outline of the relationship and right to voting (including right to delegate such right) is needed to make all decisions that are not provided by the contract (e.g. electing directors and give them discretionary powers over things voters otherwise could control)

    • Delaware permits firms to give shareholders any no. of votes (including none), and give votes to bondholders in addition to (or instead of) shareholders

    • Firm may choose to cumulate votes: allowing shareholders to cast multiple votes

      • [thus a candidate may be elected by less than a majority of the shares]

    • Those with power to vote may

      • choose to vote in person or by proxy,

      • choose mangers directly or through mediation of the board, and

      • permit directors/ managers to serve full terms or oust them for any or no reason in mid-term

    • Necessary quorum may be set at less than half of the votes, and the firm may require supermajority approval on selected questions

    • Any of these rules may be set/ altered at any time by those with power to vote

    • Similar situation in other states - though different states create different presumptive rules, e.g. cumulative voting

      • Almost all shares have one vote; only shares possess votes

      • Preferred shares or bonds may acquire votes when the firm is in financial difficulty

      • Cumulative votes/ nonvoting stock/ stocks with seriously limited voting rights are rare in publicly-held corporations

    • Statutory limits on the ability of firms to create a voting structure

      • Investors may sell votes by selling the instrument to which the votes are attached

      • But cannot sell the votes independent of the instrument

      • Statute limit shareholders’ ability to grant irrevocable proxies

        • Proxy is revocable by the grant of a new proxy to someone else

        • A proxy purporting to be irrevocable is binding only if coupled with an interest in the stock, e.g. pledge to secure a loan

      • Voting trust: a form of irrevocable proxy in which several shareholders convey their shares and the attached votes to a trustee who must vote them as a bloc in accordance with instructions (unlawful in common law)

        • Statute only authorise voting trust in close corporations + time limits + periodic renewal of the trustee’s power

    • Most state statutes require votes on fundamental transactions:

      • E.g. mergers, sales of substantially all the assets of the firm

      • Board of director must submit other proposals to voters when a sufficient no. of voters/ directors request such a submission

      • Business shall be managed by board of directors

        • Shareholders do not vote on ordinary business judgement

        • Unless extraordinary action – fundamental corporate change must be submitted to shareholders were a requisite % of shareholders must approve

        • Rationale: reduction of agency cost

    • Counter argument: shareholders are merely passive financial investors who lack expertise and incentive to become involved in making business decisions little need for additional and costly monitoring by shareholders who are will equipped to provide

    • Charter amendment – commonly require shareholder’s approval

      • Shark-repellent amendments to deter potential bidders from making a tender offer

      • Amendments reduce the probability that the firms shareholder will be the beneficiaries of a tender offer at a significant premium over the market price reduce shareholders’ welfare

      • Shareholders may vote to monitor the management’ self-interested behaviour

    • Managers may submit issues for shareholders’ approval because legal rules encourage them to do so, despite not being required by law

      • Shareholders’ approval of a transaction decreases the probability of a successful judicial attack

      • If the transaction is approved by a vote of shareholders transactions between a director/ officer and a corporation will not be void/voidable, despite conflict of interest

      • Merger will more likely survive a judicial challenge under the entire fairness test if it is approved by a majority of the minority

    • Shareholders cannot ratify fraud + court end to scrutinize whether self-interested transaction are beneficial to the firm

    • Survivorship principle: there is a net benefit of legal rules encouraging shareholders’ approval of certain transactions

  • Limiting Contractual Freedom in Corporate law: the Desirable constraints on Charter Amendment - Lucian Bebchuk

    • Shareholder approval will not ensure the value-decreasing amendment be defeated

      • Though some might occasionally be defeated

      • Many conspicuously value-decreasing amendments that could benefit the management would not be proposed, due to the unlikelihood of being approved

    • Main problem: lack of info [cannot be eliminated]

      • Most shareholders don’t know whether proposed amendment is value-decreasing or increasing

      • Though some would easily be recognised as value-decreasing, e.g. allowing manager to purchase fraction of co.’s assets at a minimal price

      • Most shareholders choose to remain ignorant – as they lack incentive to make necessary investment in acquisition and processing of info

      • Decision on how to vote have very small chance of affecting the shareholder’s interest often imperfectly informed [c.f. decision whether to buy shares would have greater effect on decision maker’s interest]

    • Even large, informed shareholders who have acquired and assessed the info bearing on the desirability of the amendment are often unlikely to disseminate effectively their info to smaller, uninformed shareholders

      • Even if dissemination could be effective, large shareholders lack incentive – bear all costs despite benefits are shared by all shareholders

      • Dissemination often ineffective as small shareholders lack incentive to read materials sent to them

    • Interest of shareholders and managers sufficiently overlap on many issues so that shareholders can reasonably expect most amendments to be value-increasing

      • Usually vote uniformly in favor of these proposals

B. Federal Regulation: The Proxy Rules

Securities Exchange Act of 1934

  • Regulate activities by companies other than the issuance of securities [Securities Act 1933]

  • Mostly apply only to publicly-held companies, with large no. of shareholders

  • Supplemented by SEC Regulations – SEC is a federal agency that administer and enforce the federal securities law

  • Exchange Act regulates the flow of info between companies and investors (and among investors)

  • Exchange Act requires public companies to file periodic business activity reports

    • Lesser info on quarterly basis in 10-Q reports; more info on annual 10-K reports

  • Additional requirements in certain special circumstances

    • General anti-fraud provision prohibiting ‘false or misleading’ statements on purchase/ sale of securities (Rule 10b-5)

    • Disclosure requirements applicable to solicitation of proxies (Rule 14a) and tender offers

Regulation 14A Questions - Definition of solicitation §240.14a-1(l)

  • TarPERs holds 1% of NLS + 14 other institutions all own 1% of NLS each 15% in total

  • Wants to replace the board whether they need to file a proxy statement:

    • Proxy statement is troublesome: distribute campaign materials to NLS shareholders, and seek endorsement from ISS (group that gives voting advice to institutional investors)

  • Can TarPER avoid proxy statement (which entails lengthy disclosures)?

    • If no solicitation no need to file proxy whether a solicitation

Broad definition of solicitation - §14a-1 The terms “solicit” and “solicitation” include:

  • (i) Any request for a proxy whether or not accompanied by or included in a form of proxy:

    • Proxy = consent/ authorisation of another person to vote on behalf

  • (ii) Any request to execute or not to execute, or to revoke, a proxy; or

  • (iii) The furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy; or…

    • Giving people a proxy forms or other communication that result in proxy/ no proxy

    • Very broad, unclear line

  • If there is solicitation need to consider:

    • Whether subject to 14a-9, which prohibits false and misleading communication almost certainly yes

    • Whether need to file proxy statement which is costly and time consuming

  • Broad Exceptions in §14a-2 (b)(1)

    • Exceptions to Rules 14a-3 to 14a-6 (other than Rule 14a-6(g)),

Rule 14a-8, and Rule 14a-10 to Rule 14a-15 do not apply to the following:

  • (b)(1) Any solicitation by or on behalf of any person

    • who does not, at any time during such solicitation, seek directly or indirectly, either on its own or another's behalf, the power to act as proxy for a security holder and

    • does not furnish or otherwise request, or

    • act on behalf of a person who furnishes or requests, a form of revocation, abstention, consent or authorization.

    • Provided, however, that the exemption set forth in this paragraph shall not apply to…

  • Since

    • §14a-1 definition nth to comply with

    • §14a-2 exemptions only to companies nth to comply with

    • §14a-6(g) minimal filing requirement

    • §14a-7 applies only to co. and not individual person nth to comply with

    • §14a-9 anti-fraud provisions no false and misleading communication in a solicitation

If you fall under (b)(1) don’t need to file proxy statement (only need to comply with 14a-9 and 6(g))

  • How does 14a-2(b)(1) relate to the definition of solicitation 14a-1

    • 14a-1:

      1. request for a proxy;

      2. request to execute or not to execute, or to revoke, a proxy; or

      3. furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy

    • 14a-2(b)(1)

      • any solicitation by any person who does not seek the power to act as proxy for a security holder and does not furnish a proxy statement

      • If you fall within (b)(1), don’t need to file proxy statement

    • Difference between 14a-1 and 14a-2(b)(1)

      • E.g. NY Times is not seeking a proxy for itself, but someone else (b)(1)

        • Cannot say: give a proxy to me would not be (b)(1)

      • In order for the shareholders to vote, would need to distribute proxy

      • Communication under (b)(1) only relevant if shareholders can have proxy where they can vote in accordance – e.g. happens when

        • When the company distribute proxy that says you can vote + recommendation on what to vote shareholder can choose to vote for or against through proxy

        • If there is shareholders proposal can for or against the proposal

        • To get someone affirmatively elected to a board need to file a proxy

  • Rule 14a-2(b)(2)

    • Rules 14a-3 to 14a-6 (other than Rule 14a-6(g)), Rule 14a-8, and Rule 14a-10 to Rule 14a-15 do not apply to the following: …

    • Any solicitation made otherwise than on behalf of the registrant where the total number of persons solicited is not more than ten

  • Rule 14a-2(b)(3)

    • Rules 14a-3 to 14a-6 (other than Rule 14a-6(g)), Rule 14a-8, and Rule 14a-10 to Rule 14a-15 do not apply to the following: …

    • The furnishing of proxy voting advice by any person (the "advisor") to any other person with whom the advisor has a business relationship, if:

      • The advisor renders financial advice in the ordinary course of his business;

      • The advisor discloses to the recipient of the advice any significant relationship with the registrant or any of its affiliates, or a security holder proponent of the matter on which advice is given, as well as any material interests of the advisor in such matter

      • The advisor receives no special commission or remuneration for furnishing the proxy voting advice from any person other than a recipient of the advice and other persons who receive similar advice under this subsection; and

      • The proxy voting advice is not furnished on behalf of any person soliciting proxies or on behalf of a participant in an election subject to the provisions of Rule 14a-12(c);

  • §14a-3(a) If you engage in solicitation but doesn’t fall within the exception need to comply

    • No solicitation subject to this regulation shall be made unless each person solicited is concurrently furnished or has previously been furnished with:

    • A publicly-filed preliminary or definitive proxy statement, in the form and manner described in Rule 240.14a-16, containing the information specified in Schedule 14A

    • If doesn’t fall under need to file proxy statement (costly, time consuming)

  • §14a-6(g)

    • Solicitations subject to Rule 14a-2(b)(1), any person who:

      • Engages in a solicitation pursuant to Rule 14a-2(b)(1), and

      • At the commencement of that solicitation owns beneficially securities of the class which is the subject of the solicitation with a market value of over $5 million,

    • Shall furnish or mail to the Commission, not later than three days after the date the written solicitation is first sent or given to any security holder, five copies of a statement containing the information specified in the Notice of Exempt Solicitation (Rule 14a-103) which statement shall attach as an exhibit all written soliciting materials. Five copies of an amendment to such statement shall be furnished or mailed to the Commission, in connection with dissemination of any additional communications, not later than three days after the date the additional material is first sent or given to any security holder. Three copies of the Notice of Exempt Solicitation and amendments thereto shall, at the same time the materials are furnished or mailed to the Commission, be furnished or mailed to each national securities exchange upon which any class of securities of the registrant is listed and registered.

    • Notwithstanding paragraph (g)(1) of this section, no such submission need be made with respect to oral solicitations (other than with respect to scripts used in connection with such oral solicitations), speeches delivered in a public forum, press releases, published or broadcast opinions, statements, and advertisements appearing in a broadcast media, or a newspaper, magazine or other bona fide publication disseminated on a regular basis.

      • Only applies to people with more than $5M worth of stocks + small set of written material need to give a copy to SEC

  • §14a-7 If the registrant has made or intends to make a proxy solicitation … , upon the written request by any record or beneficial holder of securities … the request references this section, the registrant shall:

    • Perform the acts set forth in either paragraphs (a)(2)(i) or (a)2(ii) of this section … :

      • Send copies of any proxy statement, form of proxy, or other soliciting material, including a Notice of Internet Availability of Proxy Materials (as described in Rule 240.14a-16), furnished by the security holder to the record holders, including banks, brokers, and similar entities, designated by the security holder.

      • Deliver the following information to the requesting security holder within five business days of receipt of the request:
        - A reasonably current list of the names, addresses and security positions of the record holders … ;
        - The most recent list of names, addresses and security positions of beneficial owners as specified in Rule 240.14a-13(b), in the possession, or which subsequently comes into the possession, of the registrant …

    • The requesting security holder shall have the options set forth in paragraph (a)(2) of this section, and the registrant shall have corresponding obligations, if the registrant or general partner or sponsor is soliciting or intends to solicit with respect to: …

    • With respect to all other requests pursuant to this section, the registrant shall have the option to either mail the security holder's material or furnish the security holder list as set forth in this section.

    • The security holder shall reimburse the reasonable expenses incurred by the registrant in performing the acts requested pursuant to paragraph (a) of this section.

  • Delaware s.220

    • (b) Any stockholder, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose, and to make copies and extracts from:

    • (1) The corporation's stock ledger, a list of its stockholders, and its other books and records;

      • Entitled to get list of stockholders for proper purpose

      • Time is of the essence, Have to pay, takes time

  • Co. would have to send a proxy statement to stockholders, need records of shareholders (names and addresses)

    • Company can ask Content Delivery Network (CDN) to give details of shareholders records under:

    • 14a-7 (Federal law)

      • Requires CDN to give you the list or give the documents to CDN to mail it for them

      • Co. prefer mailing the documents themselves, may delay a bit to figure out strategies

        • Proxy statements has all required disclosures, often written by lawyers, to contains all info, legal way, difficult to read

        • Often also send other docs: affective campaigning material written by PR people

    • Delaware Law s.220: Co. entitled to get a list of stock holder for a proper purpose

    • Companies are usually more worried about compliance with securities law than Delaware law

      • Don’t want to annoy SEC

      • But Delaware court are fast at enforcing s.220, court often give orders to get shareholders’ list in weeks

  • SEC Rule 14a-9: anti-fraud provision applicable to proxy solicitations, prohibiting "false or misleading" statements of "material fact" in proxy solicitations.

  • Supreme Court case would lay down rules for lower non-expert courts to follow, as they may never see the issue again in years – less interested in specific facts (unlike Delaware Courts)

Virginia Bankshares Inc v Sandberg (1991) P.10

  • Facts: VBI owned 85% and 15% owned by minority shareholders of Bank

    • VBI owned by FABI

    • VBI wants to buy the 15% left of the Bank

    • KBW, investment bank opined that $42 a share would be a fair price for the minority stock

  • Merger whether voted in favor, if merger is approved, will buy-out the 15% minority shareholders

  • To be approved, need to be voted on by the shareholders in Virginia, such merger proposal need 2/3 votes in this case VBI have 85% (need not to ask anyone to vote in favor of it ) they circulated a proxy statement P claimed and jury found that it is a materially false proxy statement: the board falsely state that they believe that this was a good deal for minority

  • Supreme Court looked at:

    1. Materiality standard: whether it is material

      • A fact is material if there is a substantially likelihood that a reasonable shareholder would consider important in deciding how to vote

      • In this case: Statement of disbelief by corporate directors about a recommended course of action, or an explanation of their reasons for recommending it would be material [Whether director think it’s a good deal would be something that a reasonable shareholder would consider important]

      • Shareholders know that directors usually have knowledge and expertness far exceeding the normal investor’s resources, esp. common knowledge that state law customarily obliges directors to exercise their judgment in the shareholders’ interest Shareholders would naturally think it important to know the director’s belief about + reason for the course they recommend

      • Same as standard under 14a-9, 10(b)(5)

    2. Falsity as applied to opinion statement

      • Only misrepresenting you view but the underlying facts are true is not enough

        • Directors stating that they think the value is high despite not believing that it was high but naked (subjective) disbelieve is not enough also necessary that it was not a good price (objective)

        • Objective element required - false opinion but correct as to underlying fact (director doesn’t believe X is true, but said X is true; but X is in fact true) cannot be basis for law suit

      • Rationale: difficulty to distinguish among pool of cases

        • Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975)

          • Facts: Company made a false statement to its shareholders (false statement that the co. is expecting to make a lot of profit this year) basing upon this, some shareholder decided to buy the shares, the other was about to sell but decided not to sell only actual purchaser/ seller can sue, the person who ‘would be seller’ who remains, cannot sue:

          • Held: If we allow ‘would-be seller’ can sue all shareholder can claim themselves to be ‘would-be seller’ too many shareholders + difficult to distinguish whether they are actually ‘would-be seller’ (actually harmed) or just pretending (not harmed) court don’t want to adjudicate whether shareholders believe something is true or not treat them all alike let none of them sue

    3. Mills ‘Essential Link’ Test

      • Voting causation and non-voting causation

        • Damages under private lawsuit under 14a-9 need to show causation of damages

        • Causation: false statement in proxy statement caused the damages (“merger is a good deal/ fail to disclose certain facts”) if the false statement not made, result would have changed shareholders who voted for to attest that “had I known the statement is false, I would not have voted”

        • Rationale: Shareholders “If I had thought about this, what I would have done?” no one will ever know if the shareholder is lying as it cannot be proved court not interested in whether the shareholder would have voted the same/ different difficult and unproductive inquiry treat all of them alike assumes that everyone would have voted against it

        • Need the votes to pass the motion if directors deceives shareholders need not enquire into whether there is reliance (presumed reliance)

      • But Mills doesn’t help P in this case, as their votes are not required. Court rejected:

        • In factual

          • No benefit under state law as result of the false statement – it would take away any benefit from shareholders’ approval if the shareholder approval was procured through proxy statement that was false and misleading

          • A vote that is procured without full disclosure doesn’t have legal effect

        • In conception

          • Difficult and productive inquiry to distinguish whether the board where they don’t need the minority shareholder votes but they want the vote (wouldn’t do it without the vote)

          • So Need to treat them all alike cannot sue in any of them

      • Prof: agree with unproductive as it goes to people’s state of mind

        • Treat them all the same way, could have allowed everyone to sue (c.f. here the court didn’t allow any to sue)

  • Held: “Assuming that the material facts about the merger and Beddows’ interests were not accurately disclosed, the minority votes were inadequate to ratify the merger under state law, and there was no loss of state remedy to connect the proxy solicitation with harm to minority shareholders irrepressible under state law. Nor is there a claim that the statement misled shareholders into entering a false belief that they had no chance to upset the merger, until the time for brining suit had run out.” reversed

  • J Kennedy dissenting: shareholders substantiated a plausible claim that petitioners would not have proceeded without minority approval. FABI’s attempted freeze-out merger of a subsidiary failed when the subsidiary’s director rejected the proposal because of inadequate share price, there was evidence of FABI’s desire to avoid any renewal of adverse comment.

Heinz – Trian Proxy Contest I

  • What are the issues? How party frame the issues?

  • What is a Schedule 13D?

    • A document that active shareholders that have more than 5% have to file

    • They have to announce that they crossed 5% + provide other info (to get their story out and less worry that SEC would accuse it is soliciting)

    • [Sch 14G – passive investors to file]

    • Trian (group of funds) joint forces with filed the Sch 13D

    • Before that, Trian met with Heinz Heinz thought about it and rejected it

    • Trian wants to elect 5/11 directors to the board

      • (note: it is minority, because they can claim that they are only minority and won’t have the power to do anything so shareholders shouldn’t worry about Trian’s power as they are only seeking a minority)

  • How does Heinz describe Peltz (director nominee) and Trian?

    • Heinz file preliminary proxy with SEC to urge shareholders to reject Pelz and his board nominees

    • Trians as a Cayman Island based hedge fund

      • suggests offshore bank accounts for tax avoidance)

    • Self-interested

      • Trian would make money and the rest of the shareholders would lose money – not after what is good for shareholders but what is good for themselves implicit message

    • Trians’ plan is vague and unrealistic bad ideas

      • the company would lose value/ share price decrease if we try to implement it, shareholders would also think it’s a bad idea

  • What is Trian’s main argument?

    • We are the second biggest shareholder

      • Would want the share price to go up as well

      • If the ideas are bad the co. will lose value shareholders would suffer Trians will suffer more

      • Heinz’s counter: Trian would benefit and all other shareholders would suffer – once you give them power, they will pursue the power for self-interest

    • Not a majority trying to do what is good for everyone

      • They are minority, are not taking power if the majority is against them

      • Need not worry about their power, need not trust them

  • Heinz performance – compare

    • Trian 6/22/06 release, page 7

      • 6 failed restructuring, as it didn’t increase shareholder’s return

      • Share price and dividend both depreciated

    • Heinz 6/28/06 release, page 3

      • Heinz claim it over performed - comparing to other food companies

    • Different analysis from the same stats because:

      • Different comparison group

      • Different starting date and ending date

        • Trian’s release tracked: April 30, 1998 – Feb 6 2006

          • April 30, 1998: Johnson became CEO

          • Feb 6, 2006: day where there is a

            • No one know when the rumor started, trade volume increase over a period Trian clearly picked the date which makes Heinz look particularly bad

          • Started when current plan is launched, ended on the last restructuring plan, but there are so many of them maybe less plausible

          • Endnote 2 (P.8): “All calculations of share prices throughout this press release are as of Feb 6, 2006. Total Shareholder Returns reflect changes in share price plus dividends.

          • From Feb 6, 2006 through June 20, 2006, the Company’s share price rose 23%. During that time period, we believe nothing material changed at the Company operationally or strategically. In addition, Feb 6, 2006 marked the beginning of a period during which the Company’s average daily trading volume rose significantly above historical levels and, on or about that time, rumors began to spread of activist involvement in the stock. Therefore we do not believe that shareholder returns during that period are reflective of fundamental changes in the performance of the Company or actions of management” Trian should get the credit for raising the stock price – eliminated the credit from the management

          • Stock price doing poorly and company need change if co. doing well, it would not need new management

        • Heinz’s release tracked: 2002 – 2006 (last 4 years)

          • Only the last 4 years as it is when the current board begun its tenure

          • Since strategy was launched in Dec 2002, Heinz’s total shareholder return

          • Seems plausible trying to evaluate the current management

  • How – in form and substance – does Trian respond to Heinz’s claim regarding the record of lawsuits and pattern of alleged self-dealing?

    • Heinz’s press releases (to its shareholders)

      • On lawsuits against Trian’s nominees to highlight that they are self-interested

    • Trian’s press release (to the board)

      • If you say bad things about us, we will say bad stuff about you

      • But if you are not...

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