Monday, January 26, 2009

Share Wars: Stockholders and their Rights

By Obiter07

Proxy fights and voting disputes can be part and parcel of share ownership in certain companies, particularly those that are publicly listed. What exactly are shareholders fighting about? It can be all about controlling the company, appointing the management or just getting the right to own more shares which can translate to a bigger share in the dividends.

Stockholder Voting Rights

In the absence of any agreement, there are certain corporation actions matters that require a stockholder’s approval which the company must secure through a required vote. Depending on which item is brought for approval, a higher or lower threshold of voting may be required. With enough shares of your own or together with those of stockholders that think the same way as you do, you can veto certain actions that the company may wish to undertake.

Veto right

Requirement for 2/3 Vote

If a stockholder is able to maintain over 1/3 of the outstanding capital stock (or has allies that result in him having over 1/3 of the vote), then he effectively has a veto right over the following corporate actions which require the affirmative vote at least a 2/3 vote of the outstanding capital stock:

§ Amendment of the Articles;[1]

§ Removal of directors;[2]

§ Ratifying a director’s contract with the corporation or a director’s acquisition of a corporate business opportunity;[3]

§ Extending or shortening corporate term;[4]

§ Increase or decrease of capital stock or incurring bonded indebtedness;[5]

§ Denial of pre-emptive right;[6]

§ Sale, lease, mortgage or disposing of all or substantially all of the assets;[7]

§ Investment of corporate funds in another corporation or business or for any purpose other than the primary purpose;[8]

§ Issuance of stock dividends;[9]

§ Entry into management contracts where the managing and the managed corporation own or control more than 1/3 of the outstanding capital stock of the managed corporation or where a majority of the board of the managing also constitute a majority of the managed corporation;[10]

§ Delegation to the board of the power to amend, repeal or adopt new –bylaws;[11]

§ Corporation dissolution;[12] and

§ Merger or consolidation.[13]

The foregoing items can be crucial to the future of the company. For example, if the corporation wishes to get fresh capital by increasing the capital stock, then this may be blocked by some stockholders.

Majority vote

If a stockholder is able to maintain at least a “50% plus 1” ownership of the outstanding capital stock or partners with another stockholder to control 50% plus 1, then such a stockholder would have control and/or a veto right over the following corporate actions which require at least a majority vote of the stockholders:

§ Entry into a management contract where there are no interlocking interests of the managed and the managing corporation;[14]

§ To call a meeting to remove directors;[15]

§ To elect of directors;[16]

§ To adopt by-laws;[17]

§ To adopt, amend, repeal, adopt new by-laws;[18]

§ To revoke the delegation of the power to amend by-laws;[19] and

§ To fix the issued price of no par value shares.[20]

Other rights

And apart from voting, the following are some other rights of a stockholder:

§ To attend meetings and vote by proxy;

§ To compel the holding of a stockholders meeting;

§ To be issued stock certificates and to be registered as stockholder;

§ To receive dividends when declared;

§ To participate in the distribution of corporate assets upon dissolution;

§ Right to a transfer of stock to be recorded in the books;

§ Pre-emptive right to issuance of shares;

§ To inspect corporate books and records;

§ Right to financial reports;

§ To bring individual and derivative suits;

§ To recover stock unlawfully sold for delinquency;

§ To enter into voting trust agreements and

§ To demand payment of value of shares and to withdraw from the corporation in certain cases. [21]

Proxy Fights

What happens during a proxy solicitation fight? As mentioned earlier, one of the rights of a stockholder is to vote by proxy. In a proxy fight, 2 or more shareholders try to get votes from othershareholders in order to secure approval or denial of certain measures that are close to their hearts.

For example, a stockholder who wishes to control the board will try to get enough votes to have his slate of directors elected. If he elects enough directors, he could gain a board majority and thus control the company. This usually happens in listed companies and the SEC has strict rules on proxy solicitation.[22]

A company is almost akin to a country. Shareholders, just like citizens and their representatives, can vote into office their directors. Just like constitutional amendments, certain measures have to be approved by the stockholders and the number of votes required depends on their importance. And just like elections, share wars are won by those who get the most number of votes from the shareholders. And just like elections, they can be as dirty as can be.




[1] SECTION 16., Corporation Code.

[2] SECTION 28.

[3] SECTION 32

SECTION 34.

[4] SECTION 37.

[5] SECTION 38.

[6] SECTION 39.

[7] SECTION 40.

[8] SECTION 42.

[9] SECTION 43.

[10] SECTION 44.

[11] SECTION 48.

[12] SECTION 118.

[13] SECTION 119.

[14] Section 44,

[15] SECTION 28.)

[16] SECTION 24.

[17] SECTION 46.

[18] SECTION 48.

[19] Section 48.

[20] SECTION 62.

[21] De Leon, The Corporation Code of the Philippines Annotated (1980), pp. 397-398.

[22] SRC Rule 20.


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