Chapter 15 Shareholder Information Rights

Jackson Pollock, “Convergence” (1952)

Corporations:A Contemporary Approach

Chapter 15Shareholder Information Rights

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• Inspection rights– Procedure

• Qualified shareholder• Expedited court review

– Proper purpose ~ SWM– Proper shareholder

• State law– Notice – Duty of disclosure

• Federal law– Proxy regulation– Proxy antifraud rule

• Private cause of action• Elements: materiality, culpability, causation• Remedies (rescissionary damages)

Module VI – Corporate Governance

Citizen of world

Law profession

Corporate practice

Bar exam



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Vote

Inspection rights

Voice

SellSue



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Del GCL § 220Inspection of books and records.

(a) As used in this section:

(2) "Stockholder" means a holder of record of stock in a stock corporation, or a person who is the beneficial owner of shares of such stock held either in a voting trust or by a nominee on behalf of such person. …

• Any stockholder [in person or through lawyer/agent] … shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose, and to make copies and extracts from … corporation's stock ledger, a list of its stockholders, and its other books and records. … A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. * * *

• Where the stockholder seeks to inspect the corporation's … list of stockholders and establishes that such stockholder is a stockholder and has complied with this section …, the burden of proof shall be upon the corporation to establish that the inspection such stockholder seeks is for an improper purpose.



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Search for “proper purpose” …

Antiwar activistShareholder activist



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State ex rel Pillsbury v. Honeywell Inc.(Minn 1971)

“The power to inspect is the power to destroy”

“Pillsbury had utterly no interest in Honeywell before he learned about its production of fragmentation bombs”

“We do not mean to imply that a shareholder with a bona fide investment intent could not bring this suit”

Reframe purpose?

Anti-personnelfragmentation bombs



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Questions unanswered:

• Can a shareholder have a purpose other than SWM?

• Would the result have been different if Mr. Pillsbury alleged he was trying to save corporate image? Potential lawsuits?

• What result if Pillsbury seeking information on APFB, rather than shareholder list?



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Saito v. McKesson HBOC, Inc. (Del 2002)

HBO

PublicShareholders

Plaintiffs(Saito)

McKessonHBOC

HBOMcKesson

Before:

After:

merger



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Saito v. McKesson HBOC, Inc. (Del 2002)

A stockholder who demands inspection for a proper purpose should be given access to all of the documents in the corporation’s possession, custody or control, that are necessary to satisfy that proper purpose.

Thus, where a §220 claim is based on alleged corporate wrongdoing, and assuming the allegation is meritorious, the stockholder should be given enough information to effectively address the problem

(1)Documents related to actions before purchase of stock: OK, Sh not limited to information that could be used in derivative suit (Sh talks to board, makes proposal, anyway possible “continuing wrong”)

(2)Documents from third-parties: OK, so long as “in possession” of corporation and related to purpose to investigate possible wrongdoing

(3)Documents of wholly-owned subsidiary: OK, but only if given to corporation [statute revised: if parent “controls” subsidiary, unless agreement w/ sub of sub’s SOI]

Reframe purpose?



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Further questions:

• Is “books and records” inspection like FOIA? like Rule 34 document request?

• When can shareholder seek “books and records” about a consummated merger? Are proper purposes mentioned by court all about SWM?

• What third-party documents can be sought? Need parties’ permission? Seek directly from the third parties?

• When can shareholder of parent corporation obtain documents about subsidiary? What if confidential?

• Why not just leave Saito to discovery in the litigation he brought challenging the directorial lapses in the merger?



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Who is “stockholder”?

“Street name” ownershipFinancially “encumbered” shares



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Del GCL § 220Inspection of books and records.

(a) As used in this section:(2) "Stockholder" means a holder of record of stock in a stock corporation,

or a person who is the beneficial owner of shares of such stock held either in a voting trust or by a nominee on behalf of such person. …

(b) Any stockholder … shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose, and to make copies and extracts from … corporation's stock ledger, a list of its stockholders, and its other books and records. … A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. ***

(c) Where the stockholder seeks to inspect the corporation's … list of stockholders and establishes that such stockholder is a stockholder and has complied with this section …, the burden of proof shall be upon the corporation to establish that the inspection such stockholder seeks is for an improper purpose.



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Corporation

Shareholders• NOBO

• Non-NOBO

Depositary Trust Co.(CEDE & Co)

Broker-Dealer

“NOBO list”

“CEDE breakdown”

“Record list”

Shareholders



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Deephaven Risk Arb v. UnitedGlobalCom(VC Parsons, Del Ch 2004)

“Deephaven was net short 4.6 MM shares.”

“A stockholder is required only to provide documentary evidence of beneficial ownership.”

“To give effect to [company’s argument that Deephaven owed 8.6 MM shares to others] would force courts to determine shareholder’s position net of stock, options, derivatives.”

UnitedGlobalCom

Shareholders

Deephaven Brokerslend

buy(long)

sell(short)



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Different under the MBCA …



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NC Bus Corp Act § 55-16-02 Inspection of records by shareholders.

(b) A qualified shareholder of a corporation is entitled to inspect and copy ... any of the following records of the corporation if the shareholder meets the requirements of subsection (c) ... (1) Records of any final action … by the board of directors …(2) Accounting records (3) The record of shareholders

(c) A qualified shareholder may inspect and copy the records described in subsection (b) only if: (1) His demand is made in good faith and for a proper purpose; (2) He describes with reasonable particularity his purpose and the records he desires

to inspect; and (3) The records are directly connected with his purpose

(g) For purposes of this section a "qualified shareholder" of a corporation is a person who shall have been a shareholder in the corporation for at least six months immediately preceding his demand or who shall be the holder of at least five percent (5%) of the corporation's outstanding shares of any class.



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Pop quizInspection rights


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1. Del. shareholders have a right to obtain from the corporation a list of shareholders if …a. The corporation maintains such a

listb. The shareholder has a proper

purpose c. The Sh owns more than 1%

2. Del. shareholders have a right to inspect corporate documents:a. If specified in the articlesb. If the shareholder has a proper

purposec. If Sh owns more than 1%

3. A “proper purpose” is one related to the shareholder’s interest in …a. a voting insurgency to install CSR

boardb. deciding whether to sell c. bringing a derivative suit

4. Del. shareholders can obtain third-party documents:a. Only with permission of third partyb. If corporation has control of

document c. Even if the document has

attorney-client material

5. Under the MBCA, shareholders seeking inspection:a. Have “holding period” and

“quantity” requirementsb. Have access to “books and

records” as in Delawarec. Need not show a purpose

6. Beneficial owners are a. Investors who own shares on

behalf of anotherb. Investors whose shares are

owned by anotherc. Trusts and estates

Answers: 1-b / 2-b / 3-abc / 4-b / 5-a / 6-b Chapter 15

Shareholder Information Rights



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Proxy regulation

State law (notice) Federal law (“proxy solicitation”)



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Is this legal?• State law?• Federal law?

March 1, 2014Dear GE shareholder:

Please sign this proxy card for the upcoming shareholders' meeting at 9:00 am on April 23, 2014 in Chicago, Illinois.

* * *

I hereby appoint Jeffrey Immelt as my proxy, at the upcoming 2014 annual meeting, to vote in his discretion all my GE shares as if I were at the meeting.

_____________________ __________ Signature Date



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MBCA § 7.22 Proxies.

(a) A shareholder may vote his shares in person or by proxy.

(b) A shareholder or his agent or attorney-in-fact may appoint a proxy to vote or otherwise act for the shareholder by signing an appointment form, or by an electronic transmission. An electronic transmission must contain or be accompanied by information from which one can determine that the shareholder, the shareholder's agent, or the shareholder's attorney-in-fact authorized the transmission.

(c) An appointment of a proxy is effective when a signed appointment form or an electronic transmission of the appointment is received by the inspector of election or the officer or agent of the corporation authorized to tabulate votes. An appointment is valid for 11 months unless a longer period is expressly provided in the appointment form.



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MBCA § 7.05 Notice of Meeting.

(a) A corporation shall notify shareholders of the date, time, and place of each annual and special shareholders' meeting no fewer than 10 nor more than 60 days before the meeting date. Unless this Act or the articles of incorporation require otherwise, the corporation is required to give notice only to shareholders entitled to vote at the meeting.



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• “Public company”– Securities (debt or equity) listed on stock

exchange – Securities (equity) – 500 holders + $10 million

year-end assets– Deregistration: delisting or fall below 300

shareholders

• “Proxy solicitation”– (1) request for proxy, (2) request against, (3)

“reasonably calculated”– Second Circuit: part of continuous plan intended

to end in solicitation

• Federal proxy regulation– Form of proxy – not open-ended

• Each matter: Yes-No-Abstain• Directors: For/Withhold (plurality voting)

– Proxy statement – information on matters to be voted on

– Annual report to Shs – if directors to be elected

Federal regulation of PHC voting



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Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting

2014 GENERAL ELECTRIC COMPANY Annual Meeting of Stockholders

MEETING DATE: April 23, 2014For Holders as of: February 24, 2014CUSIP NUMBER: 369604103 ACCOUNT NUMBER: #####448CONTROL NUMBER: 106469577113 You can enter your voting instructions and view the shareholder material at the following Internet site.

http://www.proxyvote.com/0106469577113 [GO TO SITE] The relevant supporting documentations can also be found at the following Internet site(s):

Proxy Statement - http://www.ge.com/proxyAnnual Report - http://www.ge.com/ar2013

On Mar 15, 2014, Vanguard Brokerage Services, Inc sent one of its customers the following email:

http://www.proxyvote.com/0106469577113

http://www.wfu.edu/~palmitar/ICBCorporations-Companion/AdditionalReadings/Ch15%20GE%20proxy%20card.pdf

http://www.ge.com/proxy2014/

http://www.ge.com/ar2013/pdf/GE_AR13.pdf



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Proxy Card



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Proxy Card



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Proxy Card



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Notice / Proxy Statement• State law?• Federal law?

– Governance• Election of directors • Corporate governance• Board of directors / committees• Directors’ compensation

– Executive compensation• Management proposal #1• Compensation D&A • Committee report

– Audit committee• Management proposal #2• Committee report

– Shareholder proposals – Additional information

http://www.ge.com/proxy2014/pdf/GE_2014_Proxy_Statement.pdf



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Annual report

http://www.ge.com/ar2013/pdf/GE_AR13.pdf



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http://www.ge.com/sites/default/files/ge_jri_shareowners_2014_v1_0.pdf

http://www.ge.com/sites/default/files/ge_shareowners_meeting_2014_1.mp3



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GE management2007

2009

2011

20122013

http://www.ge.com/ar2011/pdf/GE_AR11_EntireReport.pdf



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Board of directors …



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Board of directors

(2008)

http://www.ge.com/ar2008/board_of_directors.html



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(2009)

Board of directors




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(2010)

Board of directors




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(2011)

Board of directors



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(2012)

Board of directors



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(2013)

Board of directors



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Director Outside/Inside Background SinceW Geoffrey Beattie O CEO, Woodbridge Co (Toronto) 2009

John J Brennan O Chair Emeritus, Vanguard Group 2012

James I Cash O Emeritus Prof, Harvard MBA 1997

Francisco D’Souza O CEO, Cognizant Technology Solutions 2013

Marijn Dekkers O Chair, Bayer AG 2012

Ann M Fudge O Former CEO, Young & Rubicam 1999

Susan Hockfield O President, MIT 2006

Jeffrey R Immelt I – not inde CEO, GE 2000

Andrea Jung O Former CEO, Avon Products 1998

Robert W Lane O Former CEO, Deere & Company 2005

Rochelle B Lazarus O Former CEO, Oglivy & Mather 2000

James Mulva O Former CEO, ConocoPhillips 2008

James E. Rohr O Former CEO, PNC Financials 1997

Mary L. Schapiro O Former Chair, SEC

Robert L Swearinga O Prof (ex-Dean), Cornell Accounting 2002

James Tisch O CEO, Loews Corp. 2010

Douglas A Warner O Former Chair, JP Morgan 1992



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Do you notice anything?



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The results, please ….



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“Scavenger hunt”

[questions]

[answers Odd = T / Even = F]



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The end



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Management(2006)



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Management(2007)

Corporate Executive Council

To our investors



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Management(2008)

Corporate Executive Council

To our investors



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Management(2009)

Corporate Executive Council – not shown

Dear fellow owners,

2008 was a tough year and we expect 2009 to be even tougher .



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Board of directors

(2006)



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Board of directors

(2007)