Deck 35: Shareholder Rights

Question 1

A majority of shareholders at Weed, Inc. wanted to reinstate the former CEO of the company and sell off an unprofitable division. Do shareholders have the right to make these two decisions? (a) Yes to both.
(b) No to both.
(c) The shareholders have the right to sell off an unprofitable division, but not to reinstate the president.
(d) The shareholders have the right to reinstate the president but not to sell off an unprofitable division.

Answer 1

Shareholders are the legal owners of a limited company. They become partial owner of a company by buying shares of that company. As a result they have certain rights but they do not control the day today activities of the company.
Shareholders possess the right to elect and remove directors from the board. They do not have the right to elect and remove an executive. At the same time the shareholders have the right to approve changes that are core to the business activities of the company. Thus, the shareholders can make choices related with the selling of a part of the company that is unprofitable.
Thus, in the present case the shareholders do not possess the right to reinstate the CEO of the company and at the same time they possess the right to sell the unprofitable part of the business.
Hence, the correct answer is option ( c ).

Question 2

William H. Sullivan, Jr., purchased all the voting shares of the New England Patriots Football Club, Inc. (the Old Patriots). He organized a new corporation called the New Patriots Football Club, Inc. The boards of directors of the two companies agreed to merge. After the merger, the nonvoting stock in the Old Patriots was to be exchanged for cash. Do minority shareholders of the Old Patriots have the right to prevent the merger? If so, under what theory?

Answer 2

Shareholders are the legal owners of a limited company. They become partial owner of a company by buying shares of that company. As a result they have certain rights but they do not control the day today activities of the company.
Minority shareholders are the shareholders who do not have the voting right in the company and their holding is less than the 50% of the total holding.
Any company that has enough stock in a company to control the company has a fiduciary relation towards the minority shareholders of the company. It has been decided by the courts many times that the majority shareholders have a right towards the minority shareholders as it is very easy for majority shareholders to take advantage of their position.
Minority shareholders also enjoy a right to overturn any business transaction that occurs between the majority shareholders and the shareholders. It is the responsibility of the majority shareholder or of corporation to show that the transaction was done in good faith and that the minority shareholders would also get benefit that would arise out of the transaction.
Thus, in the present case the minority shareholders have the right to prevent the merger between the controlling corporation and its subsidiary unless the controlling corporation could show that the merger would result in benefit for the minority shareholders as well.

Question 3

DeVry Inc. runs for-profit schools. Its shareholders submitted a proposal that would require the company to "annually report to shareholders on the expected ability of students at Company-owned institutions to repay their student loans." Must DeVry include this proposal in its proxy material for its annual meeting?

Answer 3

A suggestion provided by the shareholders is not binding on the company to comply with. The company is often under no obligation to comply with the suggestions provided by the shareholders.
But again, a proxy statement contains all the information that contains all types of information, therefore, the management can include list that contains the name of the students and their ability to repay the student loans and can share this list with the shareholders.

Question 4

Companies are not required to ____________. (a) disclose the relationship between financial performance and executive compensation
(b) disclose the ratio between the CEO's total compensation and the median total compensation for all other company employees
(c) appoint a lead director to run the meetings of the independent directors
(d) establish a clawback policy

Question 5

ETHICS Edgar Bronfman, Jr., dropped out of high school to go to Hollywood and write songs and produce movies. Eventually, he left Hollywood to work in the family business-the Bronfmans owned 36 percent of Seagram Co., a liquor and beverage conglomerate. Promoted to president of the company at the age of 32, Bronfman seized a second chance to live his dream. Seagram received 70 percent of its earnings from its 24 percent ownership of DuPont Co. Bronfman sold this stock at less than market value to purchase (at an inflated price) 80 percent of MCA, a movie and music company that had been a financial disaster for its prior owners. Some observers thought Bronfman had gone Hollywood; others that he had gone crazy. After the deal was announced, the price of Seagram shares fell 18 percent. Was there anything Seagram shareholders could have done to prevent what to them was not a dream but a nightmare? Apart from legal issues, was Bronfman's decision ethical? What ethical obligations did he owe Seagram's shareholders?

Question 6

ETHICS After a recent annual meeting, Cisco Systems reported the results of the votes on both management and shareholder proposals. The company reported the results of its own proposals as a simple ratio of those in favor divided by the total number of votes cast. But for shareholder proposals, it reported the percentage as a ratio of those in favor divided by all outstanding shares. As a result, it reported the favorable vote for one shareholder proposal as 19 percent when, in fact, 34 percent of the votes cast supported this proposal. Is Cisco behaving ethically?

Question 7

A company is allowed to hold its annual meeting online ____________. (a) if a majority of its shareholders approve
(b) if it also holds a live meeting for shareholders who want to attend in person
(c) if it simulcasts a video of the meeting
(d) without shareholder approval

Question 8

YOU BE THE JUDGE WRITING PROBLEM Two shareholders of Bruce Co., Harry and Yolanda Gilbert, were fighting management for control of the company. They asked for permission to inspect Bruce's stockholder list so that they could either solicit support for their slate of directors at the upcoming stockholder meeting, attempt to buy additional stock from other stockholders, or both. Bruce's board refused to allow the Gilberts to see the shareholder list on the grounds that the Gilberts owned another corporation that competed with Bruce. Do the Gilberts have the right to see Bruce's shareholder list? Argument for the Gilberts: If shareholders of a company have a proper purpose, they are entitled to inspect shareholder lists. Soliciting votes and buying stock are both proper purposes. Argument for Bruce: The Gilberts are simply offering a pretext. They could use this information to compete against the company. No shareholder has the right to cause harm.

Question 9

For several years, CSK Auto, Inc., fraudulently reported inflated earnings. During this period, Maynard Jenkins was CEO. He was not involved in the fraud, however, and was never charged with a crime. Nonetheless, the SEC sought to claw back some of his earnings during this period. Should Jenkins be financially responsible for fraud that occurred on his watch, even though he did not participate?

Question 10

By law, a candidate for the board of a publicly traded company must ____________. (a) receive a majority of the votes cast
(b) receive a majority vote of the shares outstanding
(c) receive a plurality of the votes cast
(d) receive a plurality of the shares outstanding

Question 11

Shareholders lost their gamble when they bought stock of Jackpot Enterprises, Inc. Fed up with management, a shareholder asked the company to include a proposal in the proxy statement that would require the board of directors to sell or merge the company. Must Jackpot include this proposal in its proxy statement?

Question 12

Would the following initiatives improve corporate governance? Can you think of others that would?
a. Require the board of directors to implement shareholder proposals that receive a majority vote
b. Require proxy access
c. Prohibit boards of directors from seating directors who fail to receive a majority vote of shares cast
d. Base compensation on net returns on invested capital
e. Make say-on-pay votes binding

Question 13

If directors and officers cause harm to their company, ____________. (a) shareholders have the right to file suit against them and recover damages
(b) shareholders have the right to file suit against them and recover damages only if the board permits the suit
(c) shareholders have the right to file suit against them and recover damages only if the board permits the suit or a court deems the demand futile
(d) shareholders do not have the right to file suit against them

Question 14

Pfizer Inc. paid $2.3 billion to settle civil and criminal charges alleging that it had illegally marketed 13 of its most important drugs. This settlement made history, but not in a good way. It was both the largest criminal fine and the largest settlement of civil health care fraud charges ever paid. Shareholders filed a derivative suit against the Pfizer board and top executives. Defendants responded with a motion to dismiss on the grounds that shareholders had not made demand on the board. Is demand necessary?

Question 15

Corporate executives are not the only people to earn fabulous salaries. Some athletes earn even more than CEOs. What is the difference between athletes and executives (besides a hook shot)?