Rights And Powers Of Shareholders: Inspection Rights, Voting, And Proxies

• Author: James D. Cox/Thomas Lee Hazen
• Profession: Professor of Law at Duke University/Professor of Law at the University of North Carolina, Chapel Hill
• Pages: 294-348

13.14 Shares Entitled to Vote

13.15 Power to Vote Treasur y Shares and

Shares Held by a Subsidiary

13.16 Cumulative Voting

13.17 Plurality, Majority and Empty Voting;

Advance Notice Bylaws

13.18 Interference With the Stockholders’ Franchise

13.19 Vote-Buying and Coercion

PART D. STATE REGULATION OF

THE PROXY MACHINERY

13.20 The Nature of a Proxy

13.21 Revocation, Duration, and Termination of Proxies

13.22 The Proxy Voting System

13.23 Proxy Contest Expenses

PART E. FEDERAL REGULATION OF PROXIES

13.24 Section 14 of the Securities Exchange

Act of 1934: An Overview

13.25 Definition of “Solicitation” and “Proxy”

13.26 Shareholder Proposals Under the Proxy Rules

13.27 Implied Private Action Under Rule 14a–9

PART F. CORPORATE CONTROL DEVICES

13.28 Various Voting Control Devices

13.29 Nonvoting Shares and Voting-Only Shares

13.30 The Voting Trust

13.31 Voting Trusts—Scope of Trustee’s Powers

13.32 The Voting Trust in Operation

PART A. SHAREHOLDERS’ RIGHTS

§ 1. T N   S’ I

Under their share contract and by vir tue of their status as owners of sha res,

shareholders have three classes of rights aga inst the corporation: (1) rights

as to control and management, (2) proprietary r ights, and (3) remedial a nd

ancillary rights.

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The first class of shareholder rights includes: (a) voting rights for the

election—and usually for the removal—of directors, in addition to the

incidental right to the holding of annual a nd special meetings and due

notice thereof; (b) voting rights as to the making of amendments to the

charter and other fu ndamental changes in the corporate existence and

setup; (c) voting rights as to the maki ng and amending of bylaws, which

regulate many matters, i ncluding t he authority of directors and off icers

and their compensation; and (d) the right to have the corporation man-

aged honestly and prudently for the benef it and profit of the sharehold-

ers within t he scope of the authorized business.

The second class of shareholder rights, designated as proprietar y

rights, includes: (a) the right to participate ratably in dividend distribu-

tions when declared by the management; (b) the right to par ticipate in the

distribution of assets in total or partial liquidation; (c) the right to equality

and honesty of treatment by the management and by majority sharehold-

ers in corporate transact ions affecting share interests, such as new issues

of shares or amendments of the articles; (d) the right to be registered as a

shareholder on the corporate books, subject only to valid and authorized

transfers of the shares; and (e) immunity from personal liability for cor-

porate debts, subject to judicial lim itations ag ainst abuse of this privilege.

Remedial rights of shareholders include: (a) the right to information

and inspection of the corporate records; (b) the right to bring repre-

sentative or derivative suits on corporate causes of action to prevent or

remedy mismanagement and unauthoriz ed acts and compel the corpo-

ration to enforce its rights; and (c) common law, equitable, and statutory

remedies for infringement of individual rights.

PART B. RIGHT TO INFORMATION

§ 1. B  S’ R

 I 

A shareholder1 has a common law right to inspect corporate books and

records, in person or by an agent, for a proper purpose in order to pro-

tect the shareholder’s interest. Most states also provide shareholders a

statutory right of inspect ion, which is generally viewed as supplement-

ing rather than supplant ing the common law right.2 Many state s permit

reasonable charter and bylaw provisions regulating inspection.

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The shareholder’s right to ascertain how the affairs of the business

are being conducted by the officers and directors has traditionally been

founded on the ownership interest and the necessity of protecting that

interest.3 The common law right of inspection rests on the underlying

rights of ownership of the corporate propert y.

There has been much litigation over the proper scope of the share-

holder’s right to inspect corporate books, files, and records. Thus a statute

authorizing inspect ion of “books and records of account” has been held not

to authorize inspection of quarterly financial statements,4 but the statute

does reach recordations and contracts of ongoing business t ransactions.5

A court may limit the scope of a shareholder’s inspect ion to those records

that are necessar y to protect the shareholder’s interest in t he corporation.6

§ 1. P P  I

Shareholders today generally have the right of inspect ion only for legiti-

mate purposes related to their interest as i nvestors. The common law

privilege, however, is not absolute, and the corporation may show in

defense that the applicant is acting out of wrongful motives, or that the

information sought is not germane or necessary for the stated purpose.7

An examination of modern decisions reveals that among the pur-

poses held to justify a n inspection demand are to ascertain (1) the finan-

cial condition of the company or the propriety of dividends;8 (2) the

value of shares for sale or investment;9 (3) whether there has been mis-

management;10 (4) to obtain, in anticipation of a shareholders’ meeting,

a mailing list of shareholders to solicit proxies or otherwise inf luence

voting;11 or (5) informat ion in aid of litigation with the corporation or

its officers involving corporate transactions.12 A purpose is proper even

though it yields no direct benefit to the corporation, but it should not

be adverse to the corporation’s interest.13 Among the improper purpose s

that may justif y management denial of a shareholder’s claimed right of

inspection are: (1) to obtain information as to busi ness secrets or to aid a

competitor;14 (2) to secure business prospect s or investment or advertis-

ing lists;15 and (3) to find technical defect s in corporation transact ions

in order to bring strike suits for purposes of blackmail or extortion.16 In

general, a demand is improper if it is motivated merely by idle curiosity

or to annoy or harass management.17 In Delaware, a motive to further

social goals does not appear to render the proposal i mproper.

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