CHAPTER 36

1. CHAPTER 36 Shareholders

2. Rights of Directors • Directors, not shareholders, have the right to manage the corporate business. • Inside directors -- officers in the corporation, typically control their company’s board. • Outside directors (also called independent directors) -- do not work for the company and typically have less control.

3. Rights of Shareholders • Shareholders have neither the right nor the obligation to manage the day-to-day business of the enterprise. • Right to Information • Under the Model Act, shareholders with a proper purpose have the right to inspect and copy the corporation’s minute book, accounting records, and shareholder lists. • Right to Vote • A corporation must have at least one class of stock with voting rights. • Shareholders may vote by proxy (substitute voter).

4. Shareholder Proposals • Any shareholder who for the past year has owned at least 1 percent of the company or $2,000 of stock can require that one proposal be placed in the company’s proxy statement to be voted on at the shareholder meeting. • Only a small percentage of these proposals are passed, but their presence may cause the directors to adopt the proposals’ statements anyway.

5. Shareholder Meetings • A publicly-traded company must hold an annual meeting of shareholders (required by the NY Stock Exchange, though not required by all states). • The board of directors and shareholders owning at least 10 percent of the stock have the right to call special meetings as needed.

6. Election & Removal of Directors • In theory, shareholders have the right to elect directors and also to remove them from office. • In reality, a nominating committee from the board of directors chooses candidates – one candidate for each opening. Shareholders can either approve or refuse to vote. • The only way shareholders can nominate their own candidates is through a complex and expensive process of submitting their own slate of candidates to all the shareholders.

7. Compensation • The board of directors sets the CEO’s salary, which usually includes perks beyond a monthly check. • CEOs often get signing bonuses for extended contracts. • Stock options are often part of the payment. • Even when a CEO has done a poor job, he may receive an exorbitant severance pay. • In 2005, the top 100 CEO’s earned over 1000 times as much as the average American worker.

8. Fundamental Corporate Changes • A corporation must seek shareholder approval before undergoing any of the following fundamental changes: • Mergers • Sales of Assets • Dissolution • Amendments to the Charter • Amendments to the Bylaws

9. Right to Dissent • If a private corporation decides to undertake a fundamental change, the Model Act and many state laws require the company to buy back the stock of any shareholders who object to this decision.

10. Right to Protection • Controlling shareholders have a fiduciary duty to the minority shareholders. • Minority shareholders have the right to overturn a transaction between the corporation and a controlling shareholder, unless the the transaction is fair to the minority shareholders.

11. Right to Protection (cont’d) • Controlling shareholders must include minority shareholders in any favorable arrangements that they make for their own stock. • Many states prohibit a company from expelling shareholders unless the firm pays a fair price for the minority stock and the expulsion has a legitimate business purpose.

12. Sarbanes-Oxley Act • In response to corporate scandals, Congress passed the Sarbanes-Oxley Act in 2002. • Requires publicly-traded companies to adopt effective financial controls. • CEOs and CFOs must personally certify their company’s financial statements. • A board’s audit committee must be independent. • No personal loans to directors or officers. • If a company has to restate its earnings, its CEO and CFO must reimburse the company for any bonus or profits they have received from selling company stock in the past year. • Company must disclose if it has an ethics code and, if not, why not. • It is a felony to interfere with a federal fraud investigation. • Whistleblowing employees are protected. • A new Public Accounting Oversight Board has been established to oversee the auditing of public companies.

13. NYSE & Nasdaq Reforms • In response to corporate scandals, the NYSE and Nasdaq established a new role for independent directors at listed companies: • Independent directors must comprise a majority of the board. • They must meet regularly on their own without inside directors. • Only independent directors can serve on compensation or nominating committees. • Audit committees must have at least three independent directors who are financially literate.

14. Enforcing Rights • Derivative Lawsuits • Brought by shareholders to remedy a wrong to the corporation. All proceeds of the litigation go to the corporation. • Direct Lawsuits • Shareholders are permitted to sue the corporation directly only if their own rights have been harmed.

15. “In theory, corporate shareholders are immensely powerful. They own $13 trillion in assets worldwide. But shareholders are carefully constrained in their efforts to exercise this power. Is the balance between shareholders and corporate managers reasonable and fair?”