US Corporate Law/Shareholders

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Shareholder governance

Powers of shareholders

Shareholders have limited powers over the corporation. The only powers they generally exercise are the powers to elect directors, approve amendments to the articles of incorporation and approve "fundamental transactions." Some states grant shareholders additional powers, such as approval of "gifts" from corporate funds, and the power to enact bylaws.

Removal of directors

Shareholders have an inherent power to remove directors for cause. They must serve specific charges on the director and provide adequate notice and a full opportunity to meet the accusation. See Auer v. Dressel, 118 N.E.2d 590 (N.Y. 1954); Campbell v. Loew's, Inc., 134 A.2d 852 (Del. Ch. 1957).

DGCL § 141(k) allows a majority vote of shareholders to remove directors with or without cause, unless the corporation has opted for a staggered board or cumulative voting.

Amendment of the articles of incorporation and bylaws

Under DGCL § 242 and MBCA § 10.03, shareholders must approve any substantive amendments to the articles of incorporation, but such amendments must be proposed by the board first. The board may make minor amendments and corrections to the articles without shareholder approval.

In Oklahoma, which has a statute similar to the DGCL, shareholders have the power to amend the bylaws. Intl. Brotherhood of Teamsters Gen. Fund v. Fleming Cos., 975 P.2d 907 (Okla. 1999). Delaware has not made a conclusive ruling on this issue, but ruled that a bylaw depriving the board of its inherent power is legally invalid in Quickturn Design Systems, Inc. v. Shapiro, 721 A.2d 1281 (Del. 1998), leading many to believe that shareholder-originated bylaws may not pass under Delaware law.

Approval of fundamental transactions

Shareholders have the statutory power to approve fundamental transactions—those which fundamentally change the nature of the corporation. The three basic types of fundamental transaction are dissolution, merger and sale of substantially all assets.

Sale of substantially all assets

Under DGCL § 271(a), shareholders must approve any sale of "all or substantially all" of the corporation's assets. "Substantially all" was defined by the Court of Chancery in Gimbel v. Signal Cos., Inc., 316 A.2d 599 (1974):

If the sale is of assets quantitatively vital to the operation of the corporation and is out of the ordinary and substantially affects the existence and purpose of the corporation, then it is beyond the power of the Board of Directors.

Shareholder meetings

The shareholders of a corporation generally exercise their limited powers of control at a shareholder meeting. There are two kinds of shareholder meetings: the annual meeting usually happens once a year, and a special meeting may be called for particular purposes from time to time.

The board of directors has great control over shareholder meetings. The actual date for the annual meeting is fixed in the bylaws of the corporation: since the bylaws are written by the board, the board picks when and where the meeting takes place.

There are some legal restrictions on the board in this respect. Under MBCA § 7.03(a), if the board does not call an annual meeting within 15 months of the last one, any shareholder can force the company to call a meeting. The board also has to send written notice of each shareholder meeting to every shareholder, usually between 10 and 60 days before the meeting.

Special meetings can be called by the board, or by any other party named in the articles of incorporation or bylaws. Many statutes also allow shareholders to call special meetings, but they have to have a certain percentage of the stock in order to do so: 10 percent under MBCA § 7.02(a). DGCL § 211(d) does not allow shareholders to call a meeting unless authorized by the articles. (Delaware makes up for this by making it comparatively easy for shareholders to vote in writing without a meeting: see below.)

There has to be a quorum at the meeting for its actions to be effective. The quorum is usually a majority unless the articles of incorporation state otherwise. Some corporations might have a quorum of one-third or two-thirds.

The actual voting can be very complicated. In corporations with more than one class of stock, each class votes separately, and the approval of every class might be required to pass a measure. Many states practice a further convolution: cumulative voting, where a holder of more than one share can "spread their votes" across multiple choices.

The only thing that has to be discussed at an annual meeting is the election of directors.

Proxies and proxy statements

In larger corporations, shareholders usually don't attend the meetings: instead, they get a form in the mail which authorizes a proxy to vote on their behalf.

Shareholder action outside meetings

Most states allow shareholders to act by "written consent" without calling a meeting. Under MBCA § 7.04(a), every shareholder entitled to vote must give their consent. DGCL § 228 is more liberal: a simple majority of shareholders entitled to vote can give their written consent.

Shareholder liability: piercing the corporate veil

Piercing the corporate veil is a metaphor for ignoring the limited liability of a corporation. When a corporate veil is pierced, the corporation's creditors can go after the assets of its shareholders.

There are no hard and fast rules for determining when the corporate veil should be pierced. The determination is left largely to the determination of judges, who look at the totality of the circumstances to make their ruling, and choose to pierce the veil if it's necessary to prevent fraud or achieve equity.

Piercing other entities

Limited liability companies are similar enough to corporations that many courts have been willing to pierce their veils as well. Piercing a limited liability partnership has been more problematic. Partners in LLPs are generally liable for any torts they commit. The tougher issue involves huge LLPs, like accounting firms, and whether the assets of partners can be used to satisfy the demands of the many people claiming against the firm. The ongoing litigation against Arthur Andersen and other big LLPs may shed more light on this issue in the near future.

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