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COPYRIGHT © 2010 South-Western/Cengage Learning.
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.
COPYRIGHT © 2010 South-Western/Cengage Learning.
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).
COPYRIGHT © 2010 South-Western/Cengage Learning.
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.
COPYRIGHT © 2010 South-Western/Cengage Learning.
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.
COPYRIGHT © 2010 South-Western/Cengage Learning.
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.
COPYRIGHT © 2010 South-Western/Cengage Learning.
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.
COPYRIGHT © 2010 South-Western/Cengage Learning.
Fundamental Corporate Changes
• A corporation must seek shareholder
approval before undergoing any of the
following fundamental changes:
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Mergers
Sales of Assets
Dissolution
Amendments to the Charter
Amendments to the Bylaws
COPYRIGHT © 2010 South-Western/Cengage Learning.
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.
COPYRIGHT © 2010 South-Western/Cengage Learning.
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.
COPYRIGHT © 2010 South-Western/Cengage Learning.
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.
COPYRIGHT © 2010 South-Western/Cengage Learning.
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.
COPYRIGHT © 2010 South-Western/Cengage Learning.
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.
COPYRIGHT © 2010 South-Western/Cengage Learning.
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.
COPYRIGHT © 2010 South-Western/Cengage Learning.
“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?”
COPYRIGHT © 2010 South-Western/Cengage Learning.