Control & Mgmt of Corp: Axn by Dir'or & Officers

Actors

Sources of Pwr

SH & Dir'ors Dist. of Pwr

  1. Views of Corp. Mgmt
    1. Formalistic / Trad'al Model: Limited
      1. SH elect dir'ors, dir'ors manage & elect officers, & officers do daily stuff
    2. Nexus of K: Dynamic
      1. Series of K'al rel. & SH is 1 of groups conducting econ. activity
    3. ALI Princ. of Corp. Gov.
      1. Pub. corp. managed by sr. exec. officers, not dir'ors
      2. SH's pwr 2 elect dir'ors & remove dir'ors w/o showing cause
      3. SH has rt 2 vote on cert. maj. events like merge
      4. If corp. sell subst'ly larget asset, SH approval
      5. Corp. code gen'ly specify what maj. trxns SH approval needed
      6. Passive SH in gen.
  2. Auer v. Dressel
    1. SH Can't Elect Officer But Can Tell Dir'ors How They Feel

Bd of Dir'ors

  1. Structure
    1. At Least 1 Annual Mtng w/Spec. Notice 4 Spec. Mtngs
    2. Bd Takes Axn Through Rsln's Reflected in Minute Bk
    3. Insider & Outsider Where Insider Is Also Officer
    4. Committee Delegation
      1. Stts allow mgmt delegation 2 committee (DL)
      2. ALI breaks into 3 tier corps
        1. Giant corps, 2k SH up & $100m up asset, must have audit, compensation, & nominating committees composed of outsiders
        2. Smaller pub. corp., 500-2k SH & $3m-100m asset, recommend audit committee
        3. All smaller corp's only sugg.

Officer

  1. Three Types of Auth.
    1. Actual which is real auth. created by bylaws / bd. delegation by superior officer
    2. Apparent / Extended created when superior officer acted in way 3rd party believed there was auth.
    3. Ratified where auth'ed officer subseq'ly ratified unauth'ed act of officer

Control by Owners

Control of Pub. Corp

  1. Pub. Control Divorced From Ownership
    1. SH's Passive So Dir'ors & Officers Control
      1. Indiv. SH's dispersed
      2. Institutional SH's only view stock as investing
  2. Mgmt Acct'ability
    1. ALI §2.01
      1. Duty of managers 2 max SH wealth but can take ethical consid. & divert rsbl res's 4 soc. purposes
      2. Dodge v. Ford Motors said mgmt not acct'able 2 other constituents
      3. Smith Mfg Co v. Barlow ok'ed b/c not pet charity
    2. Soc. Responsibilities 4 Mgmt
      1. Hard 2 implement from inside but can respond 2 buyers' influence
    3. Stt's
      1. DL said dir'ors duty always 2 SH if there's conflict
      2. NY stt. allows dir'or 2 consid. efect on ee's, buyers, & creditors but SH can still remove dir'ors

Voting

  1. SH's Vote of Dir'ors of Corp
    1. SH's Rt 2 Cast Votes
      1. Calculated by # of shares SH has multiplied by # of dir'ors 2 elect
      2. If cumulative voting, then can cumulate vote 2 1 / more dir'ors
      3. Cumulative voting pt'less @ around 10% of stock

Inspection of SH List & Corp. Records

  1. Stand. 4 SH 2 Get SH List & Bks / Records
    1. Access 2 Either Things If Proper Purpose 4 Req'ing the Info
      1. Corp. has b/p 4 improper purpose 4 SH list (Compaq Computer Corp)
      2. SH has b/p 4 proper purpose 4 bks & records

Mandated Discl. & Intro 2 Fed. Sec. Law

  1. Flow of Cap. & Investment Cap
    1. Vertical Flow / Primary Trxn
      1. Issuer exch's sec. 4 investor's $
    2. Hz'al Flow / 2ndary Trxn
      1. Investor 2 investor in auction mkt / dealer mkt
  2. Fed. Sec. Law
    1. Sec Act / 33 Act
      1. Req's discl. 4 vertical trxn through reg. stmt before sec. sold
    2. SEC Act / 34 Act §10)b
      1. Reg's vertical & hz by forbidding fraud & insider trading
      2. Need cont. discl. by reporting co.'s
        1. More than $10m asset
        2. More than 500 Sh
    3. Eff. Mkt Hypothesis
      1. Mkt so people respond fast 2 info which leads 2 eff. pricing
    4. Mech. of Info 2 Mkt
      1. Report Filed w/SEC by 34 Act 4 Reporting Co's
        1. Annually by 10k 4 audited fin. stmt & mgmt analysis
        2. Quarterly by 10k 4 unaudited fin. stmt
      2. Proxy Reg.

Proxy Reg. : §14 of 34 Act

  1. Reg's
    1. Discl. before / w/proxy stmt in proxy solicitation dir'ly 2 SH
    2. Proxy stmt filed w/SEC before dist'ing 2 SH
    3. Other groups (dissident / SH) than mgmt can solicit proxies
    4. Solicitation is comm. 2 SH rsbly designed 2 resolve procurement / revocation of proxies
    5. Can't have material omission / inaccurate stmt
      1. Not vote would've changed but SH would've wanted 2 know (Mills)
  2. Conseq's of Viol'ing Stt's
    1. Crim. so jail X
    2. Civil
      1. SEC can pursue injunction
      2. SH can pursue sanction against prof'ls
      3. Priv. C/A not auth'ed in §14 but implied (Borak)
  3. SH Proposals
    1. Ez'er 4 SH 2 Solicit Proxy
      1. Sec 14)a)7 says if mgmt solicits proxies, then mgmt must give SH a SH list / mail SH proxy solicitation @ SH expense if another SH req's
      2. Sec 14)a)8 req's mgmt 2 incl. SH proxy w/own not @ SH cost but excl's
        1. If not @ least $1k stock & SH 4 @ least 1 yr.
        2. Proper subj. 4 SH axn
        3. Proposal is pers'al grievance against corp
        4. Matter beyond corp. pwr 2 effectuate
        5. SH proposal rel's 2 ord. busi. operation conduct
        6. Election of dir'ors
        7. SH proposal opposite of mgmt proposal

Close Corp. Control

  1. Dif. Prob. of Control
    1. Control by 1 / more SH w/pwr 2 detriment other SH's
    2. Fiduciary Stand.: Duty 2 Utmost Good Faith & Loyalty by Controlling SH (Donahue, wanted 2 sell stock)
      1. Duty 2 act fairly 2 those not in control b/c close corp. more pers'al
      2. Borrowed from partnership
      3. But balance maj. rt's 2 mgmt (Wilkes)
    3. Limited Equal Opp. Doc. (Donhue, Wilkes)
      1. Min. SH 2 get = opp. access 2 corp. assets
  2. Ways 2 Shift Control
    1. Cumulative Voting
      1. Min. rep. in bd. pwrful w/another proced. like supermaj. b/c of veto pwr
    2. SH Voting Agmts 2 Consolidate Pwr
      1. Can't sell votes 4 cash but could 4 econ. benefit
      2. Pooling
        1. K'al but weak b/c alliance can shift (Ringling)
      3. Proxy
        1. Self exec'ing b/c remedy is agmt itself
        2. Can revoke b/c agent but if gency w/some int. 2 part of agent & suff. 2 make irrevocable, then irrevocable
      4. Voting trust
        1. Strongest where transfer ownership of shares 2 trustee who becomes legal owner & trustee can B 3rd party / SH's
        2. Specif. stt. reqt 2 limit duration 2 10 yrs & register in corp. bk / file w/corp. of voting trust 2 know derivative v. true owners
    3. Classif. of Stock
      1. Multiple class of common stock 2 shift pwr (Auer v. Dressle w/old pres.)
    4. SH Mgmt Agmt
      1. Gen'ly matter 4 bd of dir'ors but SH K (officers, divid., etc.)
      2. Legal validity quest.
        1. McQuade in 1934 said couldn't have it (pwr of dir'or limited)
        2. Clark said SH agmt ok if K not harm anybody
        3. Galler ok's SH agmt as long as [1] no complaining min. SH, [2] no fraud 2 pub. / creditor, & [3] no clear stt. prohibition
      3. Stt's
        1. DL §354 broadly approves SH mgmt agmt in stt. close corp. 2 structure corp. as partn.
        2. CA approves SH mgmt agmt in stt. close agmt if all SH's in it
  3. Restriction in Transfer of Shares
    1. Dif. Methods
      1. SH Agmts
      2. Rt of 1st refusal: corp. / another SH have rt 2 match any offer by 3rd party
      3. 1st option: must offer 2 corp. / SH @ predet'ed price before transf.
        1. Rsbl restraint on alienation ok (Allen v. Biltmore)
        2. Consid. notice, rsn 4 restraint, & history of corp. but not price
      4. Consent restraint: must get consent before transfer
      5. Abs. prohibition: transf. 2 cert. people / only allow transf. 2 cert. people
    2. Valuation on Restriction
      1. Harder 2 value close corp. than pub.
      2. Value by earning capacity, cap's earnings, & asset value but all subj.
    3. Stt's on Restriction
      1. DL §202 & Model Act
        1. Approves [1] rt of 1st refusal, [2] consent restraint, & [3] 1st option w/o regard 2 rsblness after conspicuous notice
        2. Rsbl prohibition on transf. 2 class of indiv. ok
        3. Any other rsbl restriction ok
      2. CA §418
        1. Need notice on face of certif.
        2. All restrictions valid if rsbl in §204 so restriction must B in articles of incorp.
  4. Dissolution (Dsln)
    1. Death of Corp. So Liq. Asset
    2. Balance of Pwr
      1. Min. SH's Adv.
        1. Compel dsln 4 exit
        2. Can get $ by liq.
      2. Maj. SH's Adv.
        1. Can buy all corp. asset in nominal price by dsln
    3. Vol Dsln
      1. By SH vote (maj. SH gen'ly)
      2. K'al Agmt
        1. Could have buy-sell agmt triggered by cert. event
    4. Invol Dsln
      1. Stt grants
        1. DL §355 allows articles of incorp. 4 stt. close corp. 2 give any SH compel dsln
      2. Ct order if maj. SH guilty of fraud, oppression, / unfair conduct
        1. Oppression means culpable / wrongful conduct by maj. SH causing harm 2 min. SH & need more than min. SH suffering
        2. Min. view if maj. SH acted so rsbl expectation by min. SH, then guilty of oppression w/o rsn / wrongful conduct (Kemp & Beatley)
        3. Rsbl expectation + maj. SH's wrongful axn (Brenner v. Berkowitz)
        4. Ct has equitable pwr 2 order buyout @ ct price (Brenner)
      3. Stt. 4 ct. order dsln if busi. in deadlock (= shares) / no profit
  5. Compared 2 Partn. Dsln
    1. UPA: @ Will Partn.
      1. Can dslv any X by anybody w/o exception
      2. Change rel. 2 winding up per. where X nec. 2 compl. pending busi. of partn.
      3. Then, term. old partn. & create new partn's w/left over partn's
      4. If w/o agmts, share income & liab. during winding up(Rosenfeld, Meyer)
    2. Fixed Term Partn.
      1. Est. partn. term by K so if dslv earlier w/o rsn, wrongful & can get damages
    3. Dsln Conseq.
      1. Liq. of asset & elim. / exit somebody
      2. K can waive dsln liq. rt but can't waive dsln
      3. Fid. duty can check on dsln if use it 2 misapprop. (Page)
    4. RUPA: Goal of Entity
      1. Can have @ will partn. that UPA has
      2. Term partn. where can dissociate w/o dsln
        1. Must buyout int. of dissoc'ed partn. by agreed value / jud. value
        2. Can still dslv by maj. vote

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12/2/1996

Ms. Haeji Hong

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