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

AuthorJames D. Cox/Thomas Lee Hazen
ProfessionProfessor of Law at Duke University/Professor of Law at the University of North Carolina, Chapel Hill
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
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
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
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
§ 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.
§ 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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