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The Rights and Roles of the Shareholders

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In an annual meeting, it is not uncommon for a group of director candidates to combine their running platform together into a “slate”. The slate simply suggests that all candidates running under its name are concerned with the same issues for the company will vote in a way that supports those views.

Overview of the Rights and Roles of Shareholders

In theory, it is the shareholders who have ultimate ownership and control over the corporation. See 8 Del. C. § 141. However, as a group, shareholders are fairly limited in the scope of powers that they posses. Ultimately, however, when exercised effectively, the powers that the shareholders do possess, largely through their rights to elect the board of directors and vote on other key issues, are the most important powers in the corporation.

As a group, investors in corporations are typically a wildly diverse set of companies and individuals. Consider for a moment, a potential range of investors in the average public company:

  • Individual investors
  • State and private pension funds
  • Mutual funds
  • Companies
  • Employees

Each of these investors comes to the corporation with a set of concerns different from the concerns of the other investor groups. As such, each group has to individually voice and act on its concerns in order to realize the financial goals that it sought to achieve when it made its initial investment in the company. Given this situation, we should keep in mind that each group will need to act intelligently, and often, in concert with other investor groups, to achieve its own ends.

When Shareholders Act

The Annual Meeting
Most shareholder action occurs at the annual meeting. See 8 Del. C. § 211. The annual meeting is probably the single most important recurring event in the course of a company's operations. As such, states require that the annual meeting be held as a forum for shareholder action. See Hoschett v. TSI Int'l Software, 683 A.2d 43 (Del. Ct. of Chancery 1995). There are several functions of the corporate meeting. The annual meeting may generally be used to conduct any business that the company sees fit to conduct. However, absent the potential for some major corporate change, such as a sale of the company, (which will typically be the subject of a special meeting) the most important aspect of the annual meeting is the election of directors.

EXAMPLE: In the firm’s bylaws, X Corp. stipulates that it will have an annual meeting on the last day of every November to provide for the election of a new board of directors. Such a statement in the bylaws is provided in order to comply with the laws of X Corp’s state of incorporation.

Directors can be elected in several ways. See 8 Del. C. § 141(e). In a small firm with a small board and no immediate threat of hostile activity, the board may well be elected as a single slate. Such elections are typical in companies where the ownership of shares is either entirely private or limited to a small public float. The reason for this is that such elections are typical in companies where the elections are largely non-contested and are held merely for the purpose of complying with the law that requires such elections.

However, there are a great many companies who elect to construct a “staggered board.” The staggered board differs from a standard elected board in that portions of the board are elected separately, rather than the entire board being elected in a single slate. This version of the election process is preferred by companies for several reasons or for a specific situation. In the more general case, a staggered board is preferred for the purpose of consistency. One general problem with the standard election format is that it invites complication as the entire board is changed, along with the corresponding employees, over the course of a single election. The result is that years of learning and methods of doing business may well be lost in the course of a single election. The chaos that may ensue could potentially lose the company valuable time and market opportunity.

EXAMPLE: X Corp. was planning an IPO in a couple of years. It was concerned about the potential disruption of corporate functions that could occur if the entire board were to be elected in a single meeting. For this reason, the company decided to create a staggered board of nine directors, of whom three would be elected each year.

There are, additionally, some situations in which a staggered board can prove a valuable tool for a company. This is particularly the case in the scenario of a company that feels that it is being threatened by outsiders (i.e., the company is facing a takeover from a hostile bidder). In that circumstance, a company with a staggered board will have a degree of protection from the hostile bidder in that the buyer will not be able to take over the entire corporate management in a single election and will be forced to wait at least a year or more before fully gaining control of the board. Depending on one's perspective, such a situation might be viewed as either a positive or negative situation. The positive perspective is the fact that the staggering allows the current board time to organize itself and prepare a counter proposal prior to losing control of the company. Opposing this view, however, is the fact that for some investors, turnover in management may be viewed as a good thing.

EXAMPLE: Y Corp. was concerned about the level of takeover activity that was occurring in its industry. To that end, the company decided to stagger its board. While the firm’s management knew that such a proposal would not wholly deter a hostile bidder, it would make it more difficult for a buyer to stage a proxy contest that would give the buyer control within a single year.

The Special Purpose Meeting
Apart from the annual meeting, “special purpose” meetings may be called by the board at any time in order to either garner the shareholder's opinion on some specific issue or to obtain shareholder approval for certain fundamental changes to the corporation - such as sale or merger of the company to another company. Additionally, certain changes to the company's Articles of Incorporation may likewise require shareholder approval. In certain situations, such changes may be needed immediately, and a meeting might be called to those ends. See 8 Del. C. § 141(d)

EXAMPLE: High End, Inc. was finalizing talks in a merger it was contemplating with another firm. As such, the board of directors, after finalizing the merger plan, called for a special meeting of shareholders in order to have them vote on whether or not the transaction should proceed.

Notice of the shareholders’ special or annual meetings must be timely sent (generally, written), to the shareholders entitled to vote at the meeting, which notice must contain the proper contents of place, date and time of meeting. For special meetings, the purpose of the meeting must also be stated.

Why Shareholders Act

This chapter will discuss a variety of rights that investors have with regards to the corporation. However, the fundamental question of why shareholders act, as opposed to just passively watching their corporation function, is critical to considering these acts.

First off, the obvious answer to the above question is that shareholders want to see active appreciation in the value of their holdings. To this end, many shareholders view it as imperative that they take active steps to ensure that management is performing in the way that they, the shareholders, deem best for the firm. 

In addition to general ownership, shareholders are the “residual owners” of a firm. This means that upon dissolution of the firm, shareholders hold a claim on the company’s remaining assets after all other creditors are paid off. Thus, whether or not the firm succeeds, investors want to ensure that the value of their initial investment, if nothing else, is returned to them if the firm fails.