Pure corporate control in the United States of America : chapter 5 : part three : United States of America on corporate control

• DOI: 10.10520/EJC74132
• Date: 01 January 2010
• Published date: 01 January 2010
• Pages: 97-131

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PART THREE: UNITED STATES OF AMERICA ON

CORPORATE CONTROL

CHAPTER 5: PURE CORPORATE CONTROL IN THE

UNITED STATES OF AMERICA

5.1 Introduction

The concept of corporate control emerged because of a need for

corporations to regulate corporate interactions. Moreover, this has

become prevalent because of the separation of ownership from con-

trol. The board of directors and the managers on corporations can

exert control over corporate decisions in a number of ways.1 As cor-

porations grew, the role of shareholders also expanded in corpora-

tions through their ability to make certain corporate decisions.

5.2 Shareholders’ corporate control

Shareholders2 with a sizeable percentage of stock exercise power

and are in control of the business corporation.3 Shareholders have the

Shareholder Bill of Rights, by the Council of Institutional Investors,4

to protect them against violations of their rights to participate in the

corporate decision-making process. The Bill provides that:

(a) each share of common stock, regardless of its class, shall

be entitled to vote in proportion to its relative share in total

common stock equity of the corporation. The right to vote

is inviolate and may not be abridged by any circumstances

or by any action of any person;5

(b) each share of common stock, regardless of its class, shall

be treated equally in proportion to its relative share in the

total common stock equity of the corporation, with respect

to any dividend, distribution, redemption, tender or exchange

offer. In matters reserved for shareholder action, procedural

fairness and full disclosure is required;6

(c) a vote of the holders of a majority of the outstanding shares

of common stock, regardless of class, shall be required to

approve any corporate decision related to the f‌inances of a

1 Fligstein 1990: 33.

2 The word shareholder is used interchangeably with the word stock-

holder throughout the chapter as synonyms of each other.

3 Ivanhoe Partners v Newmont Mining Corporation 535 A.2d 1334 (Del.

Supr. Ct. 1987): 1344.

4 The Council is an organisation of large public, labour and corporate

pension funds which deals with investment issues affecting the size

and security of plan assets.

5 Council Institutional Investors: section I as discussed by Olson: section

2.16.

6 Council Institutional Investors: section II as discussed by Olson: sec-

tion 2.16.

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company which will have a material effect upon the f‌inan-

cial position of the company and the position of the com-

pany’s shareholders.7

It has been argued that in theory the shareholders are given a ‘sig-

nif‌icant amount’ of control over corporations but in practice this fails

to materialise.8 It could be argued that shareholders are technical-

ly the owners of the corporation; because of this they control the

corporation. However, shareholders do not manage a corporation.

They elect a board of directors to manage a corporation.9 Therefore,

the primary role of shareholders is limited to electing a board, which,

manages the corporation, determines policy, and appoints off‌icers

to execute managerial functions.10 Since shareholders11 do not man-

age a corporation, this can be interpreted to mean that they exer-

cise no control over a corporation. In most instances shareholders

exercise their votes to amend the articles or to veto the transactions

proposed by the board of the corporation.12 This, however, does not

give them the power to make corporate decisions. Nonetheless,

they have the right to vote on transactions and resolutions, which

7 Specif‌ically, decisions which would: (i) result in the acquisition of 5%

or more of the shares of the common stock by the corporation at a

price in excess of the prevailing market price of such stock; other than

pursuant to a tender offer made to all shareholders; (ii) result in, or is

contingent upon, an acquisition other than by the corporation of shares

of stock of the corporation having, on a pro-forma basis, 20% or more

of the combined voting power of the outstanding common shares or a

change in the ownership of 20% or more of the assets of the corpora-

tion; (iii) abridge or limit the rights of the holders of common shares

to: 1. Consider and vote on the election or removal of directors or the

timing or length of their term of off‌ice or, 2. Make nominations for the

directors or propose other action to be voted upon by shareholders

or, 3. Call special meetings of shareholders or take action by written

consent or, affect the procedure for f‌ixing the record date for such ac-

tion; (iv) permit any executive off‌icer or employee of the corporation

to receive, upon termination of employment, any amount in excess of

two times that person’s average annual compensation for the previ-

ous three years, if such payment is contingent upon an acquisition of

shares of stock of the corporation or a change in the ownership of the

assets of the corporation; (v) permit the sale or pledge of corporate

assets which would have a material effect on shareholder values; (vi)

result in the issuance of debt to a degree of which would leverage a

company and imperil the long-term viability of the corporation.

8 Blair 1995: 69.

9 Gevurtz 2000: 195.

10 Olson 2004: chapter 2; section 2.5.

11 If shareholders are not in a closely held corporation and are not also the

directors of that corporation. Meaning, the corporation is a public one.

12 Gevurtz 2000: 195-6.

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can only be adopted with their approval and this is where their con-

trol over corporate decisions lies.

The control of the shareholders over the affairs of a corporation de-

pends on the exercise of their voting stock. Thus shareholders can

vote for the amendment of the by-laws of a corporation affecting

the rights and duties of the off‌icers of a corporation without prior

approval of the board. Although an amendment of the by-laws does

not mean an amendment of the articles of association of a corpo-

ration. When amending the articles the board has to propose the

amendment before shareholders can vote for or against it. On the

other hand, by-laws lay out the rights and duties of the corporate

off‌icers and other issues pertinent to the existence of the board. By

amending by-laws dealing with the rights and duties of the corporate

off‌icers, shareholders can exercise more control over the powers

corporate off‌icers can have over corporate decisions.13

A meeting of the shareholders is another way of demonstrating the

power of the stockholders. Stockholders have to be given notice of

all meetings be they regular or special.14 The meeting, which can be

called by the board of directors, does not have to comply with spe-

cif‌ic requirements of a quorum in order to adopt decisions.15 How-

ever, a quorum still has to be present at the start of the meeting of

the stockholders, but departures of stockholders during the meeting

will not affect the validity of the adopted decisions.16 At the meet-

ing, shareholders have the power to elect and remove the directors,

amend by-laws, institute derivative actions and vote on extraordi-

nary corporate matters such as mergers, dissolutions, or sales of

substantially all of the assets of a corporation.17

5.2.1 Majority shareholders

5.2.1.1 Share signif‌icance

A share has been described not as money but as ‘an interest meas-

ured by a sum of money.’18 The ownership of shares by sharehold-

ers in a company represents their percentage of interest in that com-

pany. Shareholders can subscribe for voting or non-voting shares.

Berle concludes that ownership of voting stock is for exercising

13 Gevurtz 2000: 197.

14 Special shareholders’ meetings are normally called when shareholders

want to vote on removing a director or directors form off‌ice.

15 Gevurtz 2000: 198-9.

16 Model of Business Corporations Act 1950: section 7.25(b). The law is

prepared by the Committee on Corporate Laws of the Section of Busi-

ness Law of the American Bar Association. Most states adopt the provi-

sions of Model of Business Corporations Act.

17 Olson 2004: chapter 2; section 2.5.

18 Borland’s Trustee v Steel Brothers and Company Ltd [1901] 1 Ch. 279:

288.