BusOrg – Palmiter (Fall 2012)

Module VI Notes (chapters 14-16)

Candace Cain

10/16/12

When subsidiary is owner and operator, the only way to hold parent liable is through derivative liability  must be able to pierce the corp. veil.

  • Alternatively, can say that the parent was the operator by virtue of its actions, and thus is directly liable.

Unanswered questions:

  1. Why does the Supreme Court adopt “state” PCV standards – isn’t CERCLA fed. law?
  2. State piercing standards are uniform.
  3. Compare direct liability to PCV – different?
  4. Court seems to reward laxity: Which parent corp. is better off – one that oversees its sub’s polluting activities or not?
  5. Why is the S. Ct. so in awe of state-based corp. limited liability – “bedrock principle”?
  6. Wants to respect where corps. incorporate and private choice.

BP Oil Spill Example

  • BP Exploration was actually a sub of BP plc, BP America, Inc., BP Corp. N.A., etc.
  • Liability capped at $75 million.
  • Oil Pollution Act of 1990: Responsible party= the lessee of the area in which facility is located, or the holder of a right of use
  • Rule: Liability of a responsible party shall not exceed the total of all removal costs plus $75 million.
  • The Oil Pollution Act makes the leaseholder liable for offshore spills. Parent not liable unless PCV.
  • Derivative liability: Courts respect LL, but depends on parent’s $, involvement, environmental supervision, incorporating state.
  • ANSWER: Court is unlikely to pierce – parent will not be held liable.
  • No (direct) operator liability
  • No (indirect) owner liability
  • Class advice: GP should accept responsibility and avoid public outcry, or set up relief/compensation fund, or liquidate, dissolve, pay SHs, and seek asylum.

Chapter 14: SH Voting Rights

Outline

  • What and how
  • Rights in fundamental transactions
  • Voting rights
  • Appraisal rights
  • Compare: merger, sale of assets, tender offer
  • Power to initiate
  • SH resolutions
  • Bylaw amendments
  • Removing directors/filling vacancies
  • Protection of voting rights
  • Blasius: board packing
  • Quickturn: dead-hand/deferred poison pills

SH self-protection

  • Vote: Approve fundamental transactions, elect directors (annually or special), remove directors, fill vacancies, and initiate action (bylaws, resolutions).
  • SHs can remove directors by voting them out in special meetings.
  • Citizens don’t get this same protection in the election process.
  • Precatory resolutions: major part of corp. landscape. Nonbinding, but show a consensus of many SHs.
  • Sue: Enforce fiduciary duties (derivative), protect direct rights (disclosure, voting, appraisal, inspection)
  • Don’t have to go through derivative suit procedures to protect direct rights.
  • Sell: Liquidity (except insider trading), takeovers (tender offer)
  • Citizens of U.S. can’t simply leave the country when they are dissatisfied with American gov’t.
  • SHs, conversely, can move (sell shares). Effect is that price of stock drops, value overall declines. Power to sell is not totally unlimited, but it is an important disciplining rule for mgmt. and protection for SHs.

Shareholder checklist

  1. Financial rights
  2. Corp. externalities
  3. Limited liability/PCV
  4. Criminal/environmental liability
  5. Corp. governance
  6. SH voting rights: veto, initiate
  7. Information rights: inspection, antifraud
  8. Activism in public corp.
  9. Fiduciary duties
  10. Directors
  11. Controlling SHs
  12. Liquidity Rights
  13. Stock trading
  14. Corp. deals
  15. Close corp. (a corp. w/o liquidity)

SH Voting Rights

  1. Substance (what they vote on)
  2. Choosing directors: annual election, and removal/replacement of directors.
  3. Approve fundamental changes (usually after board initiation)
  4. Amendments to articles of incorporation, Mergers/sales of assets, and dissolution.
  5. After board authorizes these things, SHs can essentially vote to veto them.
  6. Initiate and approve bylaw changes
  7. Adopt resolutions
  8. Even though SH resolutions are nonbinding, board members do everything they can to satisfy SHs. They listen to resolutions.
  9. Process (how they vote)
  10. Meetings of SHs: annual meeting, special meeting, and action by consent: SHs may be allowed to consent in writing to something as if they were having a meeting.
  11. Voting at meetings: Must have a quorum (typically 50%). Meetings must stick to their designated purpose. Proxy may be appointed to vote for a SH. Absolute v. simple majority rule (today, more common for SHs to act only by a simple majority). Supervision of voting sometimes occurs.

What is a merger?

  • Types:
  • Statutory merger
  • Triangular merger
  • Similar phenomena
  • Sale of assets
  • Tender offer

Hypo: P Corp (acquiring corp.) and T Inc. (acquired corp.)

  • Mgmt. of P and T agree that P will acquire T.
  • Assume P will issue 40% of voting shares as consideration.
  • Statutory merger: Boards of both companies agree. T SHs get consideration, and P SHs may or may not get anything. SHs of P and T must approve by default rule, but there are exceptions. P takes on all the assets and liabilities of T. The “plan of merger” detailing the terms is put together by corp. lawyers and agreed to by both boards. P SHs must approve the plan IF issuing more than 20% of your shares. P SHs have NO appraisal right (cannot force corp. to pay fair value to buy back your shares). T SHs must approve the plan, and T SHs have the right to appraisal (unless market out applies).
  • Fair value: not the same thing as “fair market value” (which is the going price for your shares.) Fair value takes into account the full value of the company and your pro-rata share, and it is usually higher than the market value.

Candace Cain

10/17/12

Statutory merger cont.

Appraisal

  • SH who is unhappy with the merger may have the right to seek a cash appraisal (fair value, judicial) of his shares.
  • MBCA
  • Market out exception: If there were a market to which SH could have sold his shares in order to get out before the merger, then the SH has NO appraisal right.
  • Conflict of interest: if reason to believe that the terms of the merger were set in an unfair way, then appraisal rights are given back.
  • Market out exception does not apply to close corps. because there is NEVER a ready market for close corp. shares.

DGCL

  • Market exception: If there were a market in which SH could sell before OR after the merger, then SH has NO appraisal right.
  • If a close corp. is merged into a public corp., after the merger there is a market for SH’s shares, so the market out exception DOES apply and SH does not have appraisal rights.

The corp. that survives after the merger (P) takes on all assets and liabilities of both P and T.

Chart of SH rights – see slide 9, Ch. 14

  • Statutory merger
  • MBCA today
  • P has vote, but not appraisal, rights.
  • T has vote AND appraisal rights.
  • MBCA past
  • P has vote and appraisal
  • T has vote and appraisal
  • DGCL
  • P and T have vote and appraisal

Triangular merger: There is a 3rd entity involved in the merger – the subsidiary of P. The sub can be a shell corporation. P’s sub acquires T, so that Sub acquires all of T’s assets and liabilities.

  • P corp. does this to insulate itself from T’s liabilities.
  • P creates Sub: capitalized with P shares, approved by P board. Sub board and SHs approve, because it’s just an outgrowth of P board. P SHs have voting right (if more than 20% issuance), but not appraisal right.
  • T board approves merger plan.

Reverse Triangular Merger: It is where T is the surviving corp., and Sub disappears. May prefer reverse triangular merger if P wants to keep T’s contracts, leases, intact (some contracts say that if T entity dies, the contract ends).

SH rights – Triangular merger

  • MBCA today
  • P SHs have vote, but not appraisal rights.
  • T SHs have both vote and appraisal rights.
  • MBCA past
  • P SHs have no vote and no appraisal rights
  • T SHs have both vote and appraisal rights
  • DGCT
  • P no vote, no appraisal
  • T vote and appraisal

Sale of Assets

  • Can be essentially the same as a statutory merger when all of T’s assets and liabilities go to P. P pays consideration in the form of P shares.
  • Approved by P board; P SHs have voting (if more than 20% issuance) but not appraisal rights.
  • Approved by T board; T SHs have voting and appraisal rights.
  • However, T SHs do not get appraisal rights in Delaware.
  • After P acquires all assets (and/or liabilities) of T, T dissolves. T SHs must approve dissolution.
  • Doctrine of independent legal significance: If you can accomplish a transaction through a merger, then merger rules apply. If you can accomplish same thing through sale of assets, then sale of assets rules apply.
  • Can’t argue for appraisal rights for SHs when whatever relevant transaction rule doesn’t allow the right.

No matter what statute we’re looking at, T SHs have voting rights in ALL transactions.

  • Also, the MBCA revised version always gives voting to P and T, and appraisal only to T.
  • DGCL varies a lot.

Tender Offer

  • Used to get control of T while sidestepping T’s board’s approval.
  • Offering to purchase shares directly from T SHs may be harder than merger b/c SHs may not be selling for whatever reason.
  • Tender offer: Gets T SHs’ attention by offering well over market price for their stock, but with a time limit (fed. law says within 20 business days), and a participation requirement (e.g. I want 51% of the shares).
  • If only 25% of SHs want to buy, then that is not worth it.
  • Can offer SHs cash or your own shares.
  • P board can approve offer. P SHs have NO vote (unless P must amend articles to give more shares as consideration), and no appraisal right.
  • T board has no role. T SHs have no vote, and no appraisal, because they can simply decide not to take the offer.
  • After tender offer, P can become a majority SH. P can get rid of the minority by proposing a merger of P and T, because T board will say yes. This is because P voted in the directors.
  • 1st step is tender offer, and 2nd step is merger.
  • At the merger step, T SHs have appraisal rights.

Quiz: SH voting rights

  1. SHs vote on (b) mergers, but not (a) fundamental changes in business (change= e.g. business will now sell computers instead of calculators) or (c) sales of corp. assets.
  2. SHs do not vote on (c) parent-sub merger when parent owns 90% of sub. But, they do vote on (a) acquisition by another corp., and (b) amendment of bylaws.
  3. SHs get appraisal (b) under MBCA in a court proceeding paid by company, but not (a) when they get publicly-traded stock in merger, nor (c) for fair market value of shares (it’s fair value of shares)
  4. SH meeting requires (a) notice to SHs 10-60 days before a meeting, but not (b) statement of purpose for annual meeting, or (c) a quorum from beginning to end of the meeting (director may break a quorum in a board meeting).
  5. At annual meeting, (a) all directors are elected.
  6. SHs can (b) approve non-binding resolutions, but cannot amend bylaws if inconsistent with articles, and cannot remove directors ONLY for cause – they can remove without cause as well.

Candace Cain

10/22/12

SH Power to Initiate Action

Power to initiate: 4 ways

  • SH resolutions
  • Remove directors (for cause)
  • Fill board vacancies (after removal)
  • Amend bylaws

Auer v. Dressel (NY 1954)

  • Considers all 4 SH powers to initiate action.
  • Class A SHs elect 9 of the 11 board members, and common SHs elect the remaining 2.
  • Auer was the former president; Class A SHs wanted to reinstate Auer as president, but the current president was preventing this. SHs wanted to pass a (nonbinding) resolution endorsing Auer.
  • SHs also wanted to remove certain directors with cause.
  • SHs also wanted to fill vacancies once certain directors were removed. There was no statute to grant SHs this power at the time.
  • Holding: Each of these powers are appropriate. Even though a resolution is an “idle gesture,” it is legitimate because it sends notice that directors will have to answer to whether they followed SH resolutions. Auer’s presidency is related to the economic well-being of the corp., so it is valid for SHs to express their views.
  • We assume that SHs have the power to initiate action if it is related to their role in the corp.
  • SH role is NOT to decide day-to-day management, so they couldn’t pass resolutions regarding daily management policies. They can, however, pass resolutions related to the selection of board members.
  • SHs cannot amend the articles – only board can authorize, and SHs can approve, amendments to articles.
  • MBCA allows removal with or without cause, but articles can specify only removal with cause.

CA, Inc. v. AFSCME (Del. 2008)

  • Considers the SH power to amend bylaws.
  • AFSCME is a labor union. It got to be a party because it owns stock in different companies. It is trying to maximize returns on the stock.
  • AFSCME made a request to include a provision in bylaws to require the corp. to reimburse SH campaign expenses.
  • It defers to the Del. court to interpret Del. law. Del. S. Ct. is authorized to give the SEC advisory opinions on Del. law. SEC asked the Del. S. Ct. to give an advisory opinion on whether a bylaw provision could be enacted to require reimbursement of campaign expenses.
  • DGCL:
  • Certificate may contain any provision limiting and regulating the powers of the directors.
  • Bylaws – power to adopt, amend, or repeal are in the SHs.
  • Bylaws may contain any provision, not inconsistent with law or the cert. of inc., relating to the business of the corp., the conduct of its affairs, and its rights or powers or the rights or powers of SHs, directors, officers, or employees.
  • Board of directors manage business and affairs of every corp.
  • SHs can initiate certain bylaws that are exclusively within the domain of SHs to amend. Board also has certain bylaw powers that are exclusively within their domain. There is also some overlap between SHs and board bylaw powers.
  • Another question in case was whether amendment of bylaws would cause any problems with the board’s fiduciary duties. The bylaw would interfere with exercise of fiduciary duties.
  • Board may be duty-bound NOT to reimburse expenses in some situations. For instance, if the candidate is a competitor who is going to pass on secrets.
  • Any bylaw might be seen as limiting the power of the board. Just because a bylaw limits board power doesn’t mean that SHs cannot pass the bylaw. The bylaw is a proper subject for SH action.
  • Fiduciary duties: prohibition against board violating fiduciary duties. Reimbursing expenses may in some cases hurt the corp. Doing this would cause board to violate its fiduciary duties.
  • SHs could draft bylaw that requires corp. to reimburse campaign expenses as long as it doesn’t violate fiduciary duties.
  • “Fiduciary out” proviso: contract term that says that we will not impose anything by contract that would lead to the violation of fiduciary duties.

Campbell v. Loew’s (Del. 1957)

  • Considers SH powers to remove directors for cause, fill board vacancies after removal, and amend bylaws.
  • Loew’s is a publicly held corp. Two minority factions vying for control of the board. Vogel faction calls SH meeting to amend bylaws to increase # of directors, remove 2 Tomlinson-faction directors, and fill director vacancies with Vogel-faction directors.
  • Holding: SHs have the power to remove directors for cause. SHs have power to remove directors with or without cause, by default. SHs have power to fill board vacancies, even though the board also has this power.
  • For cause=directors doing something illegal or something that is harming the corp.
  • SHs must serve director with notice of the charges and afford him a full opportunity of defending himself.
  • Since SHs have the authority to choose their mgmt. team, the power to remove a member of the team should also belong to SHs.
  • SHs have the inherent right between annual meetings to fill newly created directorships.
  • SHs have inherent power to remove directors for cause even where there is a provision for cumulative voting. Must have notice and opportunity to be heard.

Candace Cain

10/23/12

Take note – changed assignments for the rest of the semester (see Materia on website)

Last class:

  • SH resolutions are nonbinding, must related to SH’s economic interest in corp., but no need to get board permission to create resolutions.
  • SH inherent right to remove directors. Removal power can happen outside of the annual meeting. Whether SH can get special meeting for this purpose is determined by statute.
  • SHs and board can amend bylaws separately; in some cases, board and SH powers to amend overlap. Certain bylaws are exclusively within SH jurisdiction to amend.

Board Responses to SH Initiatives

Limits on the board in responding to voting insurgency:

  1. Fiduciary duties
  2. No interfering with SH voting.
  3. Blasius: only when “compelling justifications” exist for interfering with voting.
  4. Adopting “shark repellents”: anticipatory structures that make it harder for someone to seek control of a company (by voting off the incumbent board, by making tender offers)
  5. BJR: if approved by SHs
  6. Heightened duty: Board as negotiator for SHs.
  7. Limits on power (ultra vires)
  8. Amend bylaws
  9. CA v. AFSCME: SHs can amend bylaws
  10. Adopt poison pills
  11. Quickturn: Directors must retain independent judgment.

Blasius Indus. v. Atlas Corp. (Del. 1988)

  1. Corp. has 7 incumbent board members and an insurgent 10% SH.
  2. Blasius (SH) delivered a signed written consent to increase the board to 15 members w/ bylaw amendment, to place 8 named people on the board, and to adopt a corp. restructuring plan.
  3. Board didn’t want this to happen b/c they had their own restructuring plan. Emergency board meeting results in bylaw amendment to increase the size of the board to 9, and then the appointment of 2 new board members.
  4. Holding:
  5. The board acted consistent with articles of inc., which set up a staggered board (2 or 3 directors elected at any one time), and which SHs approved.
  6. Board’s action was without conflicting interest, b/c their position wasn’t challenged by Blasius’s board-packing plan.
  7. Board’s action was in good faith (motivated to protect SHs from threat of dangerous recapitalization program).
  8. HOWEVER, board’s decision doesn’t fall under the BJR, because it is not exercising control over operations and is manipulating franchise.
  9. There should not be a per se prohibition against interfering with SH vote. Sometimes board should have a role, and may know better than SHs.
  10. There SHOULD be heightened review – board needs compelling justifications to interfere with vote.

Corp. democracy (Blasius)