Nelson Mullins Riley & Scarborough LLP
Every U.S. corporation generally is required by the corporate law of its state of incorporation to hold a meeting of shareholders at least once each year. At those annual meetings, shareholders elect directors and transact other appropriate business, including, in some cases, approving fundamental corporate changes, such as mergers, dissolutions or amendments to the company’s articles or certificate of incorporation. State law, coupled with the corporation’s organizational documents (e.g., articles of incorporation, bylaws), also governs many of the procedural aspects of the annual meeting of shareholders, including, among others, location, notice and record date requirements, quorum requirements, number of votes required for approval of certain matters, the ability of shareholders to vote by proxy, the right of shareholders to review the company’s shareholder list, the duties and powers of inspectors of election and the procedures for adjourning the meeting.
At common law, in order to exercise their voting rights, shareholders were required to attend a shareholders meeting in person. Many corporate actions also were required to be approved by a majority, if not all of the shareholders. The advent of the publicly held corporation with widespread ownership, however, rendered these requirements, at best, problematic. Additionally, during the early part of the twentieth century, the shareholder’s role as an owner of the corporation underwent a dramatic change. The shareholders’ ultimate authority to control the corporation was eroded, if not outright removed, through a variety of developments—the disappearance of the common-law right to remove directors at will, fewer transactions requiring unanimous shareholder approval, increased judicial deference to directors’ business judgment, and a growing view that shareholders had more or less permanently delegated managerial power over the corporation and could not exercise such power directly. This was reinforced by the adoption of state corporation statutes directing that the business and affairs of every corporation be “
Under state corporate law and current practice, the basic allocation of powers and duties between boards of directors and shareholders is as follows: the business affairs of the corporation are managed by the corporation’s executive officers under the direction and policy guidance of the board of directors. Shareholders have the right to vote to elect directors and to approve extraordinary matters such as mergers, sales of substantially all of the corporation’s assets, dissolutions, and amendments to the articles of incorporation. In some circumstances, they also may vote to adopt, amend and repeal bylaws; to remove directors; and to adopt shareholder resolutions to ratify board actions or to request the board to take certain actions. They may not, however, involve themselves in the management of the corporation.
The developments that led to a diminution in the importance of shareholder voting necessarily led to a diminution in the importance of shareholder meetings. State corporate laws, however, continued to mandate annual meetings at which directors were elected and also restricted the business that could be conducted at shareholders meetings unless holders of a certain percentage of the stock (a “quorum”) are present. Also, some items (e.g., certain mergers) continued to require shareholder approval. Finally, large public corporations often have a widely dispersed shareholder base, which makes it impossible for many shareholders to attend the annual meeting. Without state law provisions permitting shareholders to be present by “proxy,” corporations simply would be unable to secure the quorum necessary to conduct business at a shareholders meeting. This led to the
Proxy voting allows shareholders to vote without being physically present at a meeting. Proxy voting is governed by agency principles—think of a “proxy” in that sense as nothing more than a power of attorney—which permits a shareholder to authorize another person to vote on the shareholder’s behalf. “Proxy” is sometimes used to denote the person given that authority. More often, however, “proxy” is used to denote the instrument (or “proxy card”) that gives the authority, which can give either discretionary authority or specific authority stating how the shares are to be voted. Although many state laws originally restricted the use of proxies, their use became necessary as corporations became unable to obtain sufficient shareholder presence to meet the quorum requirements. Accordingly, state statutes now address proxy voting and expressly
Proxy voting, as it developed, generally required shareholders to delegate their voting power to someone else—usually a nominee chosen by the corporation’s management, further limiting the effective participation by shareholders in corporate governance. Some speculate that the continuing erosion of shareholder influence and power contributed in part to some of the abuses that led to the 1929 stock market crash. State corporate law and provisions found in corporate organizational documents were, and continue, generally, to be, silent on disclosure requirements relating to the solicitation and grant of proxies, and until the 1930s, the federal government did not involve itself in the proxy solicitation process. In the federal legislation that followed the 1929 stock market crash (e.g., Securities Act of 1933 (Securities Act), Securities Exchange Act of 1934 (Exchange Act)), Congress identified the ability of corporate insiders to use their power to take advantage of investors as a primary problem. The practices so identified became the explicit target of the federal legislation.
The federal government’s involvement in the proxy solicitation process began with the adoption of the Exchange Act. In the Exchange Act, among other things, Congress created the Securities and Exchange Commission (SEC) and in Exchange Act section 14(a), made it “unlawful for any person . . . , in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors, to solicit or to permit the use of his name to solicit any proxy or consent or authorization in respect of any security (other than an exempted security) registered pursuant to section 12 of [the Exchange Act].” Section 14(a) imposed no substantive requirements—instead, Congress gave the SEC carte blanche authority to regulate proxies and proxy solicitation and, with the phrase “it shall be unlawful” gave the SEC’s rules the force of law. Congress also has given the SEC broad enforcement tools, including the ability to impose monetary penalties for noncompliance and issue cease-and-desist orders.
In response to this broad authority, the SEC has promulgated
Roll-up transactions. To the extent specified in the rules, certain provisions of the SEC’s proxy rules apply to roll-up transactions that do not involve an entity with securities registered pursuant to section 12 of the Exchange Act.
If and when applicable, the SEC’s proxy rules require anyone soliciting proxies to make certain required disclosures, to follow specified procedures, and to abstain from making false or misleading statements. The disclosure requirements increase if the proxy solicitation relates to a meeting at which directors are to be elected.
Following adoption of the Exchange Act and the initial proxy rules, the SEC has played an active role in the proxy solicitation process by reviewing solicitation materials and periodically amending the proxy rules—sometimes extensively. Indeed, proxy regulation has become a core function of the SEC. In charging the SEC with proxy regulation, the Exchange Act created a federal role in vindicating shareholders’ state law rights. The federal interests include the importance of fair corporate suffrage and the prevention of abuses that would frustrate the free exercise of shareholders’ voting rights. Congress and the SEC nevertheless recognize the traditional role of state corporation law, particularly with respect to the board’s power to manage the corporation’s affairs. Over time, this has often led to a debate, with some commenters expressing concern that federal regulation increasingly intrudes upon corporate matters that historically have been the province of state law while others believe the federal role should be enlarged.
The proxy system that Congress authorized the SEC to devise was meant to replicate as nearly as possible the opportunity that shareholders would have to exercise their voting rights at a meeting of shareholders, if they were personally present. State law generally allows shareholders to nominate candidates for director at the company’s annual meeting. State law also generally allows shareholders to present proposals for a vote at the company’s annual meeting. For example, shareholders may present proposals from the floor at an annual meeting, including nominations of directors, subject to compliance with applicable state law requirements and the requirements contained in the company’s bylaws, such as an advance notice requirement. While the federal proxy rules require shareholders to conduct their own proxy solicitation for the nomination and election of directors, the SEC has permitted (in Rule 14a-8) use of the corporation’s (i.e., management’s) proxy statement and proxy card for proposals less closely connected to the fundamental state law rights of shareholders. The increasing incidence of non-binding shareholder proposals utilizing Rule 14a-8 no doubt is due in part to the fact that shareholders are relatively advantaged under the SEC’s proxy rules.
Although annual shareholders meetings are usually held in person, most state statutes allow actions required or permitted to be taken at an annual meeting, including the election of directors, to be taken without a meeting upon the written consent of the shareholders. These statutory provisions typically provide that action may be taken without a meeting only if a consent in writing, setting forth the action to be taken, is signed by the holders of outstanding shares having at least the minimum number of votes required to take such action at the meeting. If a matter is approved by less than unanimous consent of shareholders without a meeting, these statutes also typically require that notice of the action be provided to the shareholders who did not consent to the matter. If a public corporation wishes to take action by written consent (i.e., not solicit proxies) (and its articles of incorporation or bylaws do not prohibit such action), it must provide its shareholders with an
In modern practice, most shareholders vote by proxy in advance of a meeting, and personal attendance at a shareholders meeting is a rare and primarily symbolic gesture. Therefore, an important function of the SEC’s proxy rules is to provide a mechanism for shareholders to present proposals to other shareholders and to permit other shareholders to instruct their proxy how to vote on such proposals. The SEC’s proxy rules provide various means for shareholders to propose matters to other shareholders at the annual meeting. Some are required by the SEC’s proxy rules to be included in the corporation’s proxy materials. Others are included in proxy materials prepared by the proposing shareholder. As an example, the proxy rules permit shareholders to nominate a director for election to the board through a proxy solicitation by that shareholder. The proxy rules, however, do not require a corporation to include a shareholder’s nominee for director in its (management’s) proxy materials, either directly or through a proposal that would establish a mechanism for the means for the inclusion of such a shareholder nominee in the corporation’s proxy materials.
This article is an excerpt from Gary M. Brown’s new book,
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