Global Law lecture 3

Shareholder proposals

People who have a stake in the company can forward proposals on who they can vote on them during meeting of shareholders. It’s a recommendation or demand submitted by a shareholder (or group of shareholders) to the company’s board, asking the company to:

• Change a policy

• Improve corporate governance

• Adopt new sustainability practices

• Disclose specific information

Legal strategies

Mitigate the vulnerability of principals to the opportunism of their agents.

• Regulatory strategies (agent constraining), focus in the US. 

• Governance strategies (principal empowering), focus in the EU. A lot of regulations regarding shareholders.

“If limited liability is the most distinctive feature of corporate law, voting is second”

Fundamental decisions from shareholders

1. Appointment rights

2. Decision rights

3. Management proposals (veto/ratification)

4. Shareholder proposal (initiation)

Shareholders are the owners of the company

it is correct depending on the definition of ownership. Generally yes, when they have capital and control right (voting rights) of the company. It depends on the meaning of ownership. Contractual and property rights.

Voting rights

The right of a shareholder of a corporation to vote on matters of corporate policy. It is common to voice their vote to proxy by mailing in their reponse or by having a third party proxy voter vote for them.

Capital and control rights

• Capital rights: Shareholders economic rights, which is right to dividends, to a share of the company’s assets and to sell or transfer shares.

• Control rights: Ability to influence company decisions, such as voting rights, right to propose shareholder resolutions, and right to access certain company information.

Appointment rights

Shareholders vote on the selection of directors.

• One and two-tier boards (NL)

  • Codetermination (germany)

Plurality voting rule (delawere example)

 an default rule that holds when an election is uncontested,  that is, the number of candidates equals the number of directors to be elected—any number of votes suffices to elect a nominee to a board seat.

• Meaning: as many board members lined up as vacancies available, any number of votes is enough to get a nominee a seat in the board. Even one vote is enough. 

Decision making rights

• Amending articles of association [charter amendments] : need a shareholder vote to change. How this change happens depends on the jurisdiction. Some can list a whole list and get it approved at once and some have to list every item.

• Say on Pay: the shareholders say on executive remuneration. Approve what the compensation committee put

• RPT (related-party transactions): Corporate insiders, example a company that is owned by 60% shareholder, which has all voting power as it had majority votes. It would be beneficial to use company phones for his own gain as he negotiates a loan below market rates, which is free money for the shareholder, as he only pays 60%.

• Discharge: Super important, as shareholders do not provide discharge to ING. declaration of statement of shareholders, to not hold their shareholder liable disclosed for a certain financial year. It is a common thing in europe. When you do not discharge your board you do not hold them responsible for the mistakes, as the other shareholders also approved the changes made that year.

US rule 14a-8 (EXAM)

shareholders have the ability to include their proposals into the proxy materials along with the invitations to shareholder meetings. Also preferred to as proxy statements are essential as they inform all shareholders about al the voting items they can vote on during the shareholder meeting and on how hey can vote.

• There are rules they have to attend to

Proxy statements:

•  Important as they can make other shareholders ware of their proposal / voting items. Shareholders now know that they can vote on this item.

  • If they would have to contact them individually it would be both costly and time consuming.

In order to include their proposals into the proxy stetements (Rule 14a-8)

1. Need stake in company of : 2000; 15000 or 25,000 USD

2. One proposal rule

3. Resubmission threshold

Rule 14a-8 13 grounds of exclusion

Including a proposal related to inclusion of “a specific individual in the company’s proxy materials for election of the board of directors” (board elections), or management functions (if the proposal deals with a matter relating to the company's ordinary business operations).

• Exclude certain proposals from the proxy statements if it does not meet these requirements / 13 grounds for exclusion.

How to exclude proposals

Based on these grounds, a company can seek no-action relief from the SEC Staff to exclude a shareholder proposal from its proxy materials if the proposal fails to meet any of the procedural and substantive requirements of Exchange Act Rule 14a-8

2 grounds of exclusions

1. Not allowed: “ordinary business operations”: micromanagement is not allowed: too prescriptive, limiting the discretionary powers of the board of directors

   1. Correct way: Proposal that transcends the day-to-day business operations because it raises a policy issue so significant that it would be appropriate for a shareholder vote. (example on slide)

2. Not allowed: Board selection/proxy access, when you want to nominate your candidate you need to have a proxy contest, because it is seen as a hostile measure against management. So when you want to nominate your own board nominee, then you have to campaign yourself and shareholders have to know about the candidate.

   1. If proxy fight is successful (over50%), then the expenses of the proxy contest are potentially reimbursed. (not costly when u win)

Ordinary business operations (ground of exclusion)

1. Micromanagement is not allowed: too prescriptive, limiting the discretionary powers of the board of directors

   • Correct way: Proposal that transcends the day-to-day business operations because it raises a policy issue so significant that it would be appropriate for a shareholder vote. (example on slide)

Board selection/proxy access (grounds of exclusions)

1.  when you want to nominate your candidate you need to have a proxy contest, because it is seen as a hostile measure against management. So when you want to nominate your own board nominee, then you have to campaign yourself and shareholders have to know about the candidate.

   • If proxy fight is successful (over 50%), then the expenses of the proxy contest are potentially reimbursed. (not costly when u win)

Engagement tools

1. Formal: Voting rights, forum rights, and information rights

2. Informal: Engagement behing the scenes (one-on-one)