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CHAPTER II—SECURITIES AND EXCHANGE COMMISSION
PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934
SUBPART A—RULES AND REGULATIONS UNDER THE SECURITIES EXCHANGE ACT OF 1934
REGULATION 14A: SOLICITATION OF PROXIES
§ 240.14a-8 Proposals of security holders.
(a) If any security holder of a registrant notifies the registrant of his intention to present a proposal for action at
a forthcoming meeting of the registrant’s security holders, the registrant shall set forth the proposal in its proxy
(1) Eligibility. At the time he submits the proposal, the proponent shall be a record or beneficial owner of at
least 1% or $1000 in market value of securities entitled to be voted on the proposal at the meeting and have
the proponent’s claim of beneficial ownership shall include:
(i) A written statement by a record owner or an independent third party, accompanied by the proponent’s
written statement that the proponent intends to continue ownership of such securities through the date on
which the meeting is held; or
(ii) A copy of a Schedule 13D (s 240.13d-101 of this chapter), Schedule 13G (s 240.13d-102 of this chapter),
(B) The proponent’s affidavit, declaration, affirmation or other similar document provided for under applicable
(C) The proponent’s written statement that the proponent intends to continue ownership of such securities
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(2) Notice and Attendance at the Meeting. At the time he submits a proposal, a proponent shall provide the
registrant in writing with his name, address, the number of the registrant’s voting securities that he holds of
(3) Timeliness. The proponent shall submit his proposal sufficiently far in advance of the meeting so that it is
received by the registrant within the following time periods:
(i) Annual Meetings. A proposal to be presented at an annual meeting shall be received at the registrant’s
(4) Number of Proposals. The proponent may submit no more than one proposal and an accompanying
supporting statement for inclusion in the issuer’s proxy materials for a meeting of security holders. If the
proponent submits more than one proposal, or if he fails to comply with the 500 word limit mentioned in
paragraph (b)(1) of this section, he shall be provided the opportunity to reduce the items submitted by him to
the limits required by this rule, within 14 calendar days of notification of such limitations by the registrant.
statement a statement of the proponent in support of the proposal, which statement shall not include the name
and address of the proponent. A proposal and its supporting statement in the aggregate shall not exceed 500
words. The supporting statement shall be furnished to the registrant at the time that the proposal is furnished,
and the registrant shall not be responsible for such statement and the proposal to which it relates.
(1) If the proposal is, under the laws of the registrant’s domicile, not a proper subject for action by security
(b)(1) Supporting Statement. The registrant, at the request of the proponent, shall include in its proxy
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(2) If the proposal, if implemented, would require the registrant to violate any state law or federal law of the
(3) If the proposal or the supporting statement is contrary to any of the Commission’s proxy rules and
(4) If the proposal relates to the redress of a personal claim or grievance against the registrant or any other
(5) If the proposal relates to operations which account for less than 5 percent of the registrant’s total assets at
(6) If the proposal deals with a matter beyond the registrant’s power to effectuate;
(12) If the proposal deals with substantially the same subject matter as a prior proposal submitted to security
holders in the registrant’s proxy statement and form of proxy relating to any annual or special meeting of
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received from a proponent may properly be omitted from its proxy statement and form of proxy, it shall file with
the Commission, not later than 80 calendar days prior to the date the definitive copies of the proxy statement
such date as the Commission or its staff may permit, six copies of the following items:
(13) If the proposal relates to specific amounts of cash or stock dividends.
(d) Whenever the registrant asserts, for any reason, that a proposal and any statement in support thereof
(1) The proposal;
(2) Any statement in support thereof as received from the proponent;
(3) A statement of the reasons why the registrant deems such omission to be proper in the particular case;
registrant deems the omission of the proposal to be proper and a copy of such supporting opinion of counsel.
(4) Where such reasons are based on matters of law, a supporting opinion of counsel. The registrant shall at
the same time, if it has not already done so, notify the proponent of its intention to omit the proposal from its
(e) If the registrant intends to include in the proxy statement a statement in opposition to a proposal received
from a proponent, it shall, not later than 30 calendar days prior to the date the definitive copies of the proxy
statement and form of proxy are filed pursuant to Rule 14a-6, or, in the event that the proposal must be
C. SHAREHOLDER VOTING
1. Quorum Requirements
• A shareholder quorum is generally more than 50 percent. (Unanimous written, shareholder
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2. Voting Lists
Persons whose names appear on the corporation’s records as owners, as of a record date, are en–
titled to vote.
CASE SYNOPSIS—
Case 40.3: Case v. Sink & Rise, Inc.
During a shareholder meeting of Sink & Rise, Inc., James Case was the only shareholder present. He
elected himself and another shareholder to be directors, replacing his estranged wife, Shirley Case, as the
……………………….………………………..……………………………….………………………....………….……..
Notes and Questions
Were the shares that Cale owned jointly with Shirley voted at the meeting? How did the jointly
owned shares affect the business conducted? Explain. Cale and Shirley jointly owned sixteen shares of
Sink & Rise stock. All of the Sink & Rise shares were common stock with equal voting rights. But the lower
appearance of unanimity.
Thus, lower quorum requirements are arguably supported by policies to facilitate business, encourage
What policy reasons support the application of lower, instead of higher, quorum requirements?
Lower quorum requirements could allow corporate business to be accomplished more quickly and easily, with
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3. Cumulative Voting
In most states, shareholders elect directors by cumulative voting; otherwise, the vote is by a
majority of shares at the meeting.
a. Formula
Each shareholder casts a number of votes equal to the number of board members to be
b. How Cumulative Voting Works
The text provides an example.
4. Other Voting Techniques
IV. Rights of Shareholders
A. STOCK CERTIFICATES
• In jurisdictions that require the issuance of stock certificates, shareholders can demand a certificate
and that their names and addresses be recorded in the corporate record books.
B. PREEMPTIVE RIGHTS
• The articles of incorporation determine the existence and scope of preemptive rights. Generally,
C. STOCK WARRANTS
When preemptive rights exist and a corporation is issuing additional shares, each shareholder is given
transferable options to acquire a given number of shares from the corporation at a stated price.
Warrants are often publicly traded on securities exchanges.
D. DIVIDENDS
Dividends can be paid in cash, property, stock of the corporation that is paying the dividends, or stock of
other corporations. The sources of funds from which dividends may be paid are—
• Retained earnings.
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• Current net profits.
• Any surplus.
1. Illegal Dividends
A dividend paid while a corporation is insolvent is illegal and must be repaid if the shareholders
2. The Directors’ Failure to Declare a Dividend
That corporate earnings or surplus is available to pay a dividend is not enough for a court to compel
E. INSPECTION RIGHTS
1. Proper Purpose
The shareholder’s right of inspection is limited to the inspection and copying of corporate books and
2. Potential for Abuse
A shareholder can be denied access to prevent harassment or to protect trade secrets or other
confidential corporate information.
F. TRANSFER OF SHARES
Although stock certificates are negotiable and freely transferable, transfer of stock in closely held
corporations is generally restricted by contract, the bylaws, or a restriction stamped on the certificate.
Any restrictions on transferability must be noted on the face of the certificate.
G. THE SHAREHOLDER’S DERIVATIVE SUIT
• If directors fail to sue in the corporate name to redress a wrong suffered by the corporation,
shareholders can bring a shareholder’s derivative suit.
1. When Acts of Directors and Officers Cause Harm to the Corporation
This right is especially important when the wrong suffered by the corporation results from the
actions of corporate directors or officers.
2. Any Damages Awarded Go to Corporation
Any damages recovered by the suit usually go into the corporation’s treasury.
ADDITIONAL BACKGROUND—
Derivative Suits
The right of shareholders to sue derivatively on the behalf of their corporation was indicated as early as
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the 1830s. In 1855, the United States Supreme Court upheld a shareholder’s right to sue on behalf of a
corporation whose officer had paid a tax that the shareholder claimed was unconstitutional [Dodge v.
Woolsey, 59 U.S. 331, 15 L.Ed. 401 (1855)].
The derivative suit developed more fully in the second half of the nineteenth century. Procedural
CRITICAL THINKING
Are the circumstances significantly different when the shares of a close corporation are involved
in a case including allegations of oppression? Yes. The lack of marketability of the shares of a closely
held corporation means that minority shareholders are especially vulnerable to the loss of their investments.
Do corporations benefit from shareholders’ derivative suits? If so, how? A corporation can benefit
If a group of shareholders perceives that the corporation has suffered a wrong and the directors
refuse to take action, can the shareholders compel the directors to act? If so, how? The shareholders
ENHANCING YOUR LECTURE—
DERIVATIVE ACTIONS IN OTHER NATIONS
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Today, most of the claims brought against directors and officers in the United States are those alleged in
shareholders’ derivative suits. Other nations, however, put more restrictions on the use of such suits. German
law, for example, does not provide for derivative litigation, and a corporation’s duty to its employees is just as
FOR CRITICAL ANALYSIS
Should shareholder derivative actions be abolished in the United States? Why or why not?
V. Duties and Liabilities of Shareholders
Shareholders are not usually personally liable for the debts of a corporation.
A. WATERED STOCK
A shareholder may be liable personally if he or she receives watered stock without paying the share’s
B. DUTIES OF MAJORITY SHAREHOLDERS
• Shareholders are not usually personally liable for the debts of a corporation.
ENHANCING YOUR LECTURE—
CREATING AN E-DOCUMENT RETENTION POLICY
If a corporation becomes the target of a civil lawsuit or criminal investigation, the company may be
required to turn over any documents in its files relating to the matter during the discovery stage of litigation.
These documents may include legal documents, contracts, e-mail, faxes, letters, interoffice memorandums,
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to convince a jury that the company or its directors or officers had condoned a certain action that they later
denied condoning.
WHICH E-DOCUMENTS SHOULD BE RETAINED?
picnic, however, should be removed from the files and destroyed; obviously, it is just taking up storage space.
How does a company decide which e-documents should be retained and which should be
destroyed? By law, corporations are required to keep certain types of documents, such as those specified in
MODIFICATIONS MAY BE NECESSARY DURING AN INVESTIGATION
documents that are only remotely related to the dispute—at least until it has been resolved.
If the company becomes the target of an investigation, it usually must modify its document-retention
policy until the investigation has been completed. Company officers, after receiving a subpoena to produce
specific types of documents, should instruct the appropriate employees not to destroy relevant papers or e-
CHECKLIST FOR AN E-DOCUMENT RETENTION POLICY
1. Let employees know not only which e-documents should be retained and deleted but also which types of
documents should not be created in the first place.
2. Find out which documents must be retained under the Code of Federal Regulations and under other
government agency regulations to which your corporation is subject.
3. Retain other e-documents only if their retention is in the corporation’s interest.
4. If certain corporate documents are subpoenaed, modify your document-retention policy to retain any
document that is even remotely related to the dispute until the legal action has been resolved.
TEACHING SUGGESTIONS
1. Ask students to discuss the extent to which a director should be held liable for breaching his or her duty of
2. Ask students to discuss whether a director’s duty of care is absolute. Should a director always be pre-
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vented from having an interest in another company? Can any potential conflict of interest problems
be avoided by complete disclosure of the conflict to the boards of both companies?
such information or disseminating it to third parties.
3. Note that companies seeking to prevent a shareholder from exercising his or her right to inspect company
records and books will often argue that the inspection will reveal important trade secrets and should thus be
barred. How can a company protect itself from having confidential information revealed by
Cyberlaw Link
Could a corporation meet its obligation to hold board of directors meetings and shareholder
meetings by conducting those meetings online? Why or why not?
DISCUSSION QUESTIONS
1. Why is it incorrect to characterize a director as either an agent or a trustee of a corporation? Even
though directors act for and on behalf of the corporation, no individual director can act as an agent to bind the corpo-
2. What are the most common situations in which directors allegedly violate their duty of loyalty? A director
3. What actions must a director or officer take to avoid liability when a corporation enters into a contract or
engages in a transaction in which an officer or director has a material interest? The director or officer must
4. What sort of legal protection is offered to directors and officers by the business judgment rule? The
business judgment rule immunizes directors and officers from liability when a decision is within managerial authority,
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5. Are directors entitled to be indemnified for any legal costs they incur in defending suits against the
corporation? Because directors are often named as defendants in suits filed against their respective corporations,
6. What are some of the more important powers that may be exercised by shareholders? Shareholders must
7. Describe how cumulative voting works. Most states permit or require shareholders to elect directors by
8. What are the limits on the shareholder’s right to inspect corporate records and books? A shareholder is
limited to inspecting and copying corporate records and books for a proper purpose if the request is made in advance.
possessing his or her shares for a minimum period of time prior to his making the demand to inspect the records.
9. What are some of the ways in which a corporation or its shareholders can restrict the transferability of
10. Can a shareholder institute an action to dissolve a corporation and liquidate its assets? Yes. In some
states, a shareholder has the right to petition a court to appoint a receiver and to liquidate the business assets of the
ACTIVITIES AND RESEARCH ASSIGNMENTS
1. Ask each student to write a brief report on a case in which directors or officers of a corporation were accused of
breaching their duties of care or loyalty. The students should focus on the standards that were used in determining
that these breaches had occurred as well as the critical factors that ultimately resulted in findings of guilt or innocence.
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2. Different companies use different styles and levels of detail to inform their shareholders of their equal
employment and affirmative action policies. Have students obtain some of the different versions and compare them.
EXPLANATION OF A SELECTED FOOTNOTE IN THE TEXT
Footnote 4: The board of Chugach Alaska Corp. (CAC) split into two factions—one led by Sheri Buretta,
who had chaired the board for several years, and the other by director Robert Henrichs. A coalition of directors voted
to remove Buretta and install Henrichs. During his term, Henrichs committed a variety of acts of misconduct with
respect to CAC’s directors, shareholders, and employees. After six months, the board voted to reinstall Buretta. CAC
filed a suit in an Alaska state court against Henrichs, alleging a breach of fiduciary duty. A jury found Henrichs liable.
The court banned him from serving on the board for five years. Henrichs appealed. In Henrichs v. Chugach Alaska
Corp., the Alaska Supreme Court affirmed. The standard for liability under the business judgment rule was not gross
negligence If there is a breach of a fiduciary duty, the rule will not protect a director who makes bad business
decisions. In this case, the jury and the lower court found that Henrichs committed a breach of fiduciary duty. The
misconduct was serious and egregious. The lower court found “fraudulent or dishonest acts, gross neglect of duty, or
gross abuse of authority or discretion.” The business judgment rule did not protect Henrichs.
Do acts such as those in which Henrichs engaged satisfy any of the elements for the application of
Why do courts in their application of the business judgment rule give significant deference (weight) to
the decisions of corporate directors and officers? Courts give significant deference to the decisions of corporate
directors and officers by considering the reasonableness of a decision at the time it was made, without the benefit of
Does misbehavior such as the conduct at the heart of this case constitute a breach of business
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