Rights and equitable treatment of shareholders

Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

Under state corporate law, shareholders generally have the right to elect directors (see DGCL, section 216).

For many years, it was common practice for directors to be elected by a plurality of shareholders that can either vote in favour of, or withhold their votes from, the director candidates nominated by the board; ‘withheld’ votes are not counted. Accordingly, absent a contested election, the candidates nominated by the board are automatically elected whether or not a majority of shareholders vote for them. Relatively recently, shareholders have pressed companies for the ability to veto the election of a particular director nominee or nominees in the context of an uncontested election. This can be achieved through the adoption of charter or by-law provisions requiring that director nominees receive the approval of a ‘majority of the votes cast’ to be elected, or, in lieu of a charter or by-law provision, the adoption of corporate policies that effectively require a director who has not received a majority of the votes cast to resign. In 2006, the Delaware legislature adopted amendments to the DGCL that facilitate both of these options. Specifically, the amended DGCL, section 141(b) expressly permits a director to irrevocably tender a resignation that becomes effective if he or she fails to receive a majority vote in an uncontested election. The amended DGCL, section 216 provides that a by-law amendment adopted by shareholders specifying the vote required to elect directors may not be repealed or amended by the board alone (generally by-law provisions may be amended by the board).

The proportion of companies in the Standard & Poor’s (S&P) 500 that have adopted some form of majority voting in uncontested director elections has increased dramatically from 16 per cent in 2006 to over 95 per cent in 2017.

Shareholders can also nominate their own director candidates either before or at the annual general meeting (AGM). To solicit the proxies needed to elect their candidates, however, at a company that has not adopted ‘proxy access’ (discussed in question 38) a shareholder must mail to all other shareholders, at the shareholder’s own expense, an independent proxy solicitation statement that complies with the requirements of section 14 of the Exchange Act. Given these constraints, independent proxy solicitations are rare and usually undertaken only in connection with an attempt to seize corporate control (see also question 38).

In addition, shareholders generally have the right to remove directors with or without cause or, where the board is classified, only for cause (unless the certificate of incorporation provides otherwise); the vote required to remove directors is a majority of the shares then entitled to vote at an election of directors (subject to certain modifications, eg, where the company has adopted cumulative voting in director elections) (see DGCL, section 141(k)). However, as many publicly held companies do not permit shareholders to call special meetings or act by written consent, this power can be difficult to exercise in practice.

Shareholders’ liability for corporate actions is generally limited to the amount of their equity investment. In keeping with their limited liability, shareholders play a limited role in the control and management of the corporation. As discussed in question 4, a number of corporate decisions require shareholder approval. In addition, shareholders can typically enjoin ultra vires acts (see DGCL, section 124), and vote on certain issues of fundamental importance at the AGM, including the election of directors (see DGCL, section 216 and question 4).

Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

Under state corporate law, shareholders typically have a right to participate in the following types of decisions:

  • election of directors, held at least annually;
  • approval or disapproval of amendments to the corporation’s certificate of incorporation (which requires prior board approval) or by-laws, although the board is also typically authorised (in the certificate of incorporation) to amend the by-laws without shareholder approval (see DGCL, sections 109, 241 and 242);
  • approval or disapproval of fundamental changes to the corporation not made in the regular course of business, including mergers, dissolution, compulsory share exchanges, or disposition of substantially all of the corporation’s assets (see, for instance, DGCL, sections 251(c), 271 and 275); and
  • authorisation of additional shares for future issuance by the corporation. Upon shareholder authorisation, the board has discretion to determine when and how many shares to issue at any time.

Commencing in 2011, the Dodd-Frank Act requires US public companies to conduct a separate shareholder advisory vote on:

  • executive compensation - to be held at least once every three calendar years;
  • whether the advisory vote on executive compensation should be held every year, every two years or every three years - to be held at least once every six calendar years; and
  • certain ‘golden parachute’ compensation arrangements in connection with a merger or acquisition transaction that is being presented to shareholders for approval.

The rules of the NYSE and Nasdaq also require that shareholder approval be obtained prior to:

  • any adoption of an equity compensation plan pursuant to which officers or directors may acquire stock, subject to limited exceptions;
  • issuance of common stock to directors, officers, substantial security holders or their affiliates if the number of shares of common stock to be issued exceeds either 1 per cent of the number of shares of common stock or 1 per cent of the voting power outstanding before the issuance, with some exceptions including in connection with certain transactions by early stage companies (NYSE), or could result in an increase in outstanding common shares or voting power of 5 per cent or more (Nasdaq);
  • issuance of common stock that will have voting power equal to or greater than 20 per cent of the voting power prior to such issuance or that will result in the issuance of a number of shares of common stock that is equal to or greater than 20 per cent of the number of shares of common stock outstanding prior to such issuance, subject to certain exceptions; and
  • issuance of securities that will result in a change of control of the company.
Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

Under state law, a corporation may issue classes of stock with different voting rights, limited voting rights and even no voting rights, if the rights are described in the corporation’s certificate of incorporation (see DGCL, section 151). If, however, a corporation issues a class of non-voting common stock, it must have an outstanding class of common shares with full voting rights.

The NYSE and Nasdaq listing rules also permit classes of stock with different voting rights; however, the listing rules prohibit listed companies from disparately reducing or restricting the voting rights of existing shareholders unilaterally.

The CII and CalPERS have recently expressed their opposition to non-voting shares.

In July 2017, two major stock index providers (S&P Dow Jones and FTSE Russell) announced changes to their index eligibility requirements that would exclude most companies going public with multiple classes of stock from the primary indices in the United States. Nevertheless, some technology companies have subsequently gone public with dual-class or multi-class stock.

Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

Generally, all shareholders, at the record date set by the board, may participate in the corporation’s AGM, and are entitled to vote (unless they hold non-voting shares) in person or by proxy (see DGCL, sections 212(b) and (c) and 213). The proxy appointment may be in writing (although there is no particular form) or provided by telephone or electronically.

In addition, section 14 of the Exchange Act and related SEC regulations set forth substantive and procedural rules with respect to the solicitation of shareholder proxies for the approval of corporate actions at AGMs and special shareholders’ meetings. Foreign private issuers are exempt from the provisions of section 14 and related regulations insofar as they relate to shareholder proxy solicitations.

Shareholders may act by written consent without a meeting unless the certificate of incorporation provides otherwise (see DGCL, section 211(b)). The majority of companies in the S&P 500 do not permit shareholder action by written consent.

DGCL, section 211 permits a Delaware corporation to hold a meeting of shareholders virtually if it adopts measures to enable shareholders to participate in and vote at the meeting and verify voter identity, and maintains specified records. A small but growing number of US companies have held virtual annual shareholder meetings, typically in one of two formats: exclusively online with no ability for a shareholder to attend an in-person meeting; or a hybrid approach whereby an in-person meeting is held that is open to online participation by shareholders who are not physically present at the meeting. The primary benefits of virtual shareholder meetings are increased shareholder participation and cost savings. In April 2017, the New York City Pension Funds announced a campaign to vote against governance committee members at companies that hold exclusively virtual annual shareholder meetings. For the past several years, CII Policies on Corporate Governance have provided that companies should only hold virtual meetings as a supplement - rather than a substitute - for in-person shareholder meetings. Under a new policy, beginning in 2019, Glass Lewis will generally recommend voting against governance committee members where the board plans to hold a virtual-only shareholder meeting and the company does not provide robust disclosure assuring shareholders that they will have the same participation rights as at an in-person meeting. Finally, ISS has suggested that it may make adverse recommendations against directors if virtual-only meetings are being used to prevent shareholder discussions or proposals.

Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

Generally, state law provides that every shareholder has the right to petition the court to compel an AGM if the board has failed to hold the AGM within a specified period of time (see DGCL, section 211). Special shareholders’ meetings may be called by anyone authorised to do so in the company’s certificate of incorporation or by-laws. The majority of S&P 500 companies permit shareholders meeting a minimum beneficial ownership requirement (such as 20 per cent or 10 per cent) to call special meetings.

Any shareholder of a reporting company who is eligible to bring matters before a shareholders’ meeting under state law and the company’s certificate of incorporation and by-laws may, at the shareholder’s own expense, solicit shareholder proxies in favour of any proposal. Such shareholder proxy solicitations must comply with section 14 of the Exchange Act and related SEC regulations, but need not be approved by the board.

Under circumstances detailed in Rule 14a-8 under the Exchange Act, a reporting company must include a shareholder’s proposal in the company’s proxy materials and identify the proposal in its form of proxy. The shareholder may also submit a 500-word supporting statement for inclusion in the company’s proxy solicitation materials. This allows the proponent to avoid the costs associated with an independent solicitation. To qualify, a shareholder must have continuously held at least US$2,000 in market value or 1 per cent of the company’s securities entitled to vote for at least one year by the date the shareholder submits the proposal. The shareholder must continue to hold those securities until the date of the meeting. Under specific circumstances, a company is permitted to exclude a shareholder proposal from its proxy solicitation, typically after obtaining ‘no-action’ relief from the SEC staff that confirms the company is entitled to exclude the proposal (for example, if the proposal deals with a matter relating to the company’s ordinary business operations).

Effective since September 2011, companies can no longer exclude from their proxy materials shareholder proposals (precatory or binding) relating to by-law amendments establishing procedures for shareholder nomination of director candidates and inclusion in the company’s proxy materials, as long as the proposal is otherwise not excludable under Rule 14a-8. This amendment to Rule 14a-8 has facilitated the development of ‘proxy access’ via private ordering at companies chartered in states where permissible, as shareholders are able to institute a shareholder nomination regime via binding by-law amendment or request, via precatory shareholder proposal, that such a by-law be adopted by the board. The private ordering process to adopt proxy access has gained considerable momentum since the beginning of 2015; see question 38.

As noted in question 6, shareholders may act by written consent without a meeting unless the certificate of incorporation provides otherwise. The majority of companies in the S&P 500 do not permit shareholder action by written consent.

Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

Controlling shareholders owe a fiduciary duty of fair dealing to the corporation and minority shareholders when the controlling shareholder enters into a transaction with the corporation. When a controlling shareholder transfers control of the corporation to a third party, this obligation may be extended to creditors and holders of senior securities as well. A controlling shareholder who is found to have violated a duty to minority shareholders upon the sale of control may be liable for the entire amount of damages suffered, instead of only the purchase price paid or for the amount of the control premium. Minority shareholders can bring claims against a controlling shareholder for breach of fiduciary duty on either a derivative or direct basis, depending on the nature of the harm suffered.

Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

Shareholders’ liability for corporate actions is generally limited to the amount of their equity investment. In unusual circumstances, exceptions may apply.