- Main content
- What is a shareholder?
- How shareholders work
- Types of shareholders
Shareholders vs. bondholders vs. stakeholders
- The financial takeaway
What is a shareholder? Understanding the rights that come with owning stock of a company
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- A shareholder is an individual or entity that holds shares or stocks in a company.
- Owning shares or stocks of a company entitles investors to partial ownership of a specific company.
- Shareholders may receive dividends and have limited liability if the company is in hot water.
When you invest in public companies, you purchase shares of the company's stock . Each share of stock you own reflects a small portion of ownership of the company, making you a shareholder.
A shareholder can be an individual or entity — such as a company or organization — that owns stocks in a particular company. If you invest in the stock market, you're already considered a shareholder, or what is also referred to as a stockholder.
Shareholders, as part owners of a company, also have the right to vote in some cases regarding matters of the company and can receive dividend payouts when the company is doing well financially.
"As long as he or she has that ownership, the shareholder has certain rights and obligations afforded to him or her by law," explains Jenna Lofton, who has an MBA in Finance and is the founder of StockHitter.com . "The rights of a shareholder include the right to attend shareholders' meetings and vote in proxy elections. A shareholder can also see corporate records, inspect the corporation's premises, receive notice of stockholder meetings, and be paid dividends."
How shareholders work
Shareholders work by providing money upfront to companies as part of their investment.
You can become a shareholder by investing in a publicly traded company. In exchange for providing capital, companies offer shareholders certain rights to vote and make decisions about the company.
While it's possible to invest in private companies to become a shareholder, that process involves working directly with the company, rather than through the stock market.
A company may already be public and traded on the stock market, or a company may go from private to public with an initial public offering (IPO).
To get started, individuals can invest in company stock through their brokerage account and a brokerage firm by using the company's ticker symbol, which you can find using a search tool .
Companies must file reports with the Securities and Exchange Commission (SEC) to keep shareholders updated on certain matters. For example, companies file annual reports and quarterly reports to share financial information and updates with shareholders.
There may also be additional disclosures about mergers or other important events that affect a company as well as proxy statements. Proxy statements share information about the company as part of the shareholder voting process. You can review many of these documents on the SEC's EDGAR website.
"One of the most important rights of the shareholders is their voting power as it allows them to influence management composition," explains David Clark, lawyer and partner at The Clark Law office . "Shareholders elect the board of directors who manage the company. Their ownership of the company is also protected by law by giving them the right to purchase company shares before these are offered to the public."
Shareholders have residual rights, which means they're entitled to a portion of a company's profit, even if the company goes under. The SEC states that companies must distribute residual profits to shareholders proportionally, based on their percentage of ownership through shares.
"Shareholders do not actually manage the corporation. However, the law gives them the responsibility of making sure that the company is well-managed through their voting powers, power to declare dividends, and approval of the company's financial statements," says Clark.
Shareholders of a company are entitled to certain rights as well.
Economic rights. Shareholders invest in companies to get returns on their investment through economic gains. Shareholders are entitled to profits of a company through dividend payments or through the sale of the stock. Additionally, if a company goes under, shareholders are entitled to net proceeds of the company after it's dissolved according to Delaware Code § 281(a) .
Control rights. Shareholders have the right to vote on matters that relate to the business, including electing directors, which offers some control and influence without managing the business itself. Shareholders also typically receive proxy statements via email from their broker. If a shareholder doesn't vote, brokers still may be able to vote on their behalf by something called uninstructed voting — but only on routine matters. After the government passed Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, it placed limits requiring the New York Stock Exchange (NYSE) and Nasdaq to prohibit voting on executive compensation and board members.
Information rights. Shareholders are entitled to some information about the company, like financial statements. Investors may also receive information on board meeting minutes and inspect articles of incorporation if requested in writing with five day's advance notice. It's possible to review a list of shareholders as well as basic documents such as the charter and bylaws. To receive additional information when it comes to inspecting articles of incorporation or the books, investors must show that their request is legitimate and with a purpose.
Litigation rights. Shareholders have the right to sue the corporation if there are wrongdoings from its directors that aren't in line with their fiduciary duty. Though investors can't sue for just any reason, if the company has violated certain practices, it's possible to sue with a direct lawsuit or a derivative lawsuit.
"The Corporation Law grants common shareholders the right of ownership, power to vote, right to dividends, right to transfer ownership, right to sue, and right to inspect documents of the corporation," explains Clark.
Types of shareholders
When you invest in a stock, you become a shareholder or stockholder — the terms refer to the same thing, which is owning a portion of the company through shares of stock. The two basic types of shareholders are:
1. Common shareholders. This type of shareholder owns part of a company through common stock and has voting rights and potential dividend payments.
2. Preferred shareholders. This type of shareholder doesn't have the same voting rights and is more rare. A major difference is that they have priority over dividend payments over common shareholders.
There are some differences between shareholders, bondholders, and stakeholders.
- Shareholders own a portion of a company by investing in their stocks and are sometimes referred to as a stockholder — because you hold stock.
- Bondholders can buy corporate bonds to lend money to a company and in return get interest on the investment. As the bond matures, you'll be repaid your principal investment. Unlike a shareholder, you don't own a portion of the company and are only eligible to receive interest on the bond as well as your principal.
- Stakeholders refers to a larger group of people that have an interest in a company's outcomes. Stakeholders can include employees, shareholders, customers, and more. Stakeholders can mean anyone who has a stake in the company, which is different from a shareholder who specifically owns shares of the company.
The bottom line
As a shareholder, it's possible to own shares — or portions of ownership — of a public company. You can become a shareholder or might be one already if you invest in the stock market. As with anything in the stock market, there is the potential for great reward but also great risk that can come with losses.
You may have certain rights that you can take advantage of as well, such as voting, and potentially have access to dividend payments. To help you manage as a shareholder, it's always a good idea to check out reports from the SEC to see how a company is doing so that you can be an informed investor.
- Corporate Governance
The Responsibilities of the Shareholders
Any public limited or private limited company has shareholders who contribute capital towards the setting up and running of the company. While in the case of private limited companies, the shareholders are usually the promoters and a few close friends or family, the public limited companies have a large body of shareholders drawn from all walks of life.
The shareholders of any company have a responsibility to ensure that the company is well run and well managed . They do this by monitoring the performance of the company and raising their objections or giving their approval to the actions of the management of the company. Whereas many shareholders act through institutional and large investors as their representatives, minority shareholders have the option of expressing either their disapproval or agreement at the Annual General Meetings of the companies.
The concept of having shareholders for the companies is to make the companies accountable for their actions. As mentioned above, the shareholders are usually represented on the board of directors and the board of directors acts as the custodian for shareholder interests.
In cases where the board is not acceding to the requests of the shareholders, the shareholders can act directly by asking the management to convene an extraordinary general meeting so that they can voice their opinions.
In past, the Indian IT bellwether, Infosys has been facing the heat from the shareholders because of its huge cash reserves where the shareholders have demanded that the company buyback some of the shares to compensate for the declining dividends and falling stock prices.
In the West, shareholder activism is usually in the form of putting pressure on the board and the management to take decisions that are in line with environmental, social and ethical norms and this is reflected in the way the global multinational, Vedanta, was forced to drop some controversial projects in India because its shareholders in the UK objected to this on humanitarian grounds.
The point here is that left to themselves, the managements of companies might act in ways that would enhance their personal benefit at the expense of the company. This is where shareholders play a crucial role in mediating between the agency problems and issues of conflict of interest along with asymmetries of information.
For instance, in the recent past, the Public Sector Coal India has been forced to explain several of the decisions taken by its management and the board of directors because of objections raised by the shareholders. The examples that have been cited in this article point to the fact that shareholders can indeed influence the outcomes that the board and the management take on their behalf.
Further, shareholders have a responsibility towards society as well since the companies that they have invested in cannot be allowed to flout ethical and social norms. Hence, the responsibilities of shareholders are many and varied and some of them have been touched upon in this article .
In conclusion, shareholders are increasingly demanding a greater say in the conduct of the companies where they have invested and this is a good sign.
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- 4. What is an Initiating Coverage Report ?
- 5. How can Dividends,FPOs and Rights Issues help you be a Better Investor
- 6. Stock Promoters - How do they affect equity markets?
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What are the rights and duties of a shareholder?
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Essentially, shareholders are owners in a company to reap benefits of a business’ success. A shareholder can be a person, company, or organization with at least a minimum of one share in a company’s stock. Shareholders play an important role in the framing profits of the company. There are two main types of shareholders:
1. Equity Shareholders
As the name suggests, they are owners of a company’s equity. These shareholders enjoy voting rights over matters concerning the company. Moreover, they can also exercise the aforementioned rights, including filing class-action lawsuits against any matter that can harm the company.
2. Preference shareholders
Preferred shareholders are prioritised over Equity Shareholders when considering a company’s profit distribution. On the other hand, they do not hold a right to vote in matters pertaining to a company’s executive decisions. Also, preference shareholders are entitled to fixed dividend rates, even if said company’s profitability is at stake.
Though both Equity Shareholders and Preference Shareholders see their value increase with the positive performance of the company. However, it is the Equity Shareholders that experiences higher capital gains or losses.
Importance of Shareholders
Along with earning profit by investing in a company’s stocks, these shareholders also play an important role in operating, financing, governing and controlling various aspects of a business. For instance:
1. Company operations
These shareholders directly influence company operations by appointing senior management personnel. For instance, investors choose to invest in stocks that can meet their expected earnings, thus keeping companies under regular force to meet their sales and profit estimations.
2. Financing a company
Companies receive financing from shareholders in lieu of ownership rights. Start-ups and private businesses can also raise funding by way of private placements or share issues to select funding institutions and individuals.
3. Governing a company
Board members of public companies are required to maintain transparency with the list of shareholders regarding its business condition and operations. In fact, senior leaders of such companies spend time, discussing matters pertaining to the company’s governance with market analysts, shareholders and such entities.
4. Control over a company
Shareholders can utilise their powers over opting to choose the personnels to control a company’s operations. For example, shareholders can effectively prevent takeover attempts, if they don't agree upon the sufficient price.
Thus, with control over the majority of aspects of a company’s operations, shareholders play a significant role in its overall performance and profits.
Shareholders’ Roles and Rights:
1. Appointment of directors
Shareholders play a direct role in the appointment of directors, with passing of an ordinary resolution. Apart from this, shareholders can also appoint various types of directors. They are:
- An additional director who will hold the office until the next general body meeting;
- An alternate director who will act as an alternate director for a period of 3 months;
- A nominee director; Director appointed in the case of a casual vacancy in the office of any director appointed in a general meeting in a public company.
Apart from this shareholder also can challenge any resolution passed for the appointment of a director in the general body meeting.
2. Legal action against directors
Shareholders also can bring legal action against the director by the rules laid down in the Companies Act 2013. They are:
- Any act done by the director in any manner which is prejudicial against the affairs of the company.
- Any act done which is beyond the law or against the constitution.
- When the assets of the company are being transferred at an undervalued rate.
- When there is a diversion of funds of the company.
- Any act done in a mala fide manner.
- Appointment of company auditors
3. Right to appoint the company auditors.
Under Companies Act 2013, the first auditor of the company is to be appointed by the board of directors. Furthermore, the shareholders at the annual general body meet at the recommendation of directors and audit committee. The appointment is usually done for a period of five years and further can be approved by passing a resolution in the annual general body meeting.
4. Voting rights
Shareholders also have the right to attend and vote at the annual general body meeting. Every company registered in India is required to comply with the provisions in the Companies Act 2013. It is mandatory for every company to hold at least one annual general meeting. At the meeting, various mandatory agendas are discussed such as, adoption of financial statements, appointment or ratification of directors and auditors etc.
When a resolution is brought by members of a company then according to companies act 2013 it can be passed only by the means of voting by the shareholders. Companies Act 2013 recognizes following types of voting:
- Voting by the showing of hands
- Voting done by polling
- Voting done by electronic means
- Voting by means of postal ballot
A shareholder also has a right to appoint a proxy on his behalf when he is unable to attend the meeting. Though the proxy is not allowed to be included in the quorum of the meeting in case of voting, it is allowed by following a procedure mentioned in the Companies Act 2013.
5. Right to call for general meetings
Shareholders have the right to call a general meeting. They also can approach the Company Law Board for the conduction of general body meetings, if it is not done according to the statutory requirements.
6. Right to inspect registers and books
As shareholders are the main stakeholders in a company, they have the right to inspect the accounts register and also the books of the firm and can ask questions about the same if they feel so.
7. Right to get copies of financial statements
Shareholders have the right to get copies of financial statements. It is the duty of the company to send the financial statements of the company to all its shareholders either in a quarterly or annual statement.
8. Winding up of the company
Before the company is wound up the company has to inform all the shareholders about the same and also all the credit has to be given to all the shareholders.
What Liabilities Does a Shareholder Have?
There are very few risks with becoming a shareholder in a company. The underlying reason for this is that a company is a separate legal entity.
It is also worth noting that you may take on a much wider range of liabilities than a normal shareholder if you are also a director of the company. This may occur if you have powers that are ordinarily reserved for directors. Directors are responsible for the management of the company and its day-to-day affairs. Under the law, director’s duties place a heavier burden on directors than on shareholders.
Duties of shareholders
The main duty of shareholders is to pass resolutions at general meetings by voting in their shareholder capacity. This duty is particularly important as it allows the shareholders to exercise their ultimate control over the company and how it is managed. Shareholders can vote in one of two ways: on a show of hands or through a poll vote where each vote will be proportionate to the number of shares held by each shareholder. A show of hands is usually the preferred method of voting that takes place at general meetings.
There are two resolutions that can be voted on at a shareholders meeting: an ordinary resolution, and a special resolution.
1. Ordinary resolution
An ordinary resolution is passed by the shareholders if a simple majority of shareholders present at the meeting vote in favour of the proposal. Therefore, more than 50% of the votes cast must be in favour, usually displayed through a show of hands.
2. Special resolution
A special resolution is sometimes required by the Companies Act in certain cases; for instance, to change the Articles of Association, or for other important or sensitive matters. The Articles can also require a special resolution. For a special resolution to be passed, a 75% majority must vote in favour. If there is no specific mention of what type of resolution is required, the presumption is that there will be a vote on an ordinary resolution.
Now that you know the Rights & Duties of a shareholder i.e How to start trading in equities ? it’s only logical that we move on to the next big question -The taxes and finances of Insurance To discover the answer, head to the next chapter.
A quick recap
- A shareholder can be a person, company, or organization with at least a minimum of one share in a company’s stock.
- There are two types of shareholders i.e Equity Shareholders and Preference Shareholders.
- Shareholders directly influence company operations by appointing senior management personnel.
- Shareholders also have the right to attend and vote at the annual general body meeting.
- The main duty of shareholders is to pass resolutions at general meetings by voting in their shareholder capacity.
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What Is a Shareholder or Stockholder of a Corporation?
Definition & Examples of Shareholders
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Shareholders or stockholders own shares of publicly or privately held corporations . Their ownership also usually includes voting rights when it comes to certain company decisions.
Shareholders profit when a company does well and lose money when a company does poorly. Learn more about how this process works, as well as other responsibilities stockholders have.
What Is a Shareholder or a Stockholder?
Shareholders and stockholders are the same things. Both words describe someone who owns shares of stock in a business. For the purposes of this article, we'll use the term "shareholders."
Shareholders are individuals, companies, or trusts that own shares of a for-profit corporation. The individuals own a specific number of shares, which they each purchased at a specific price.
The shareholders have invested their money to purchase these shares and they gain on their investment in two ways:
- Through per-share dividends paid out the corporation's profits
- By selling their shares at a profit
How Does Being a Shareholder Work?
Shareholders have different responsibilities and implications depending on the type of company and the number of shares you own.
Shareholders in Public vs. Closely Held Corporations
Most small corporations are closely held . That is, they have a few shareholders, most of whom know each other and in many cases, these shareholders are from the same family or have other business or personal relationships. Closely held companies are usually private.
- A closely held corporation (sometimes called a "close corporation") has a small number of shareholders and is not a public corporation. The number depends on the individual state's business laws, but it's usually defined as 35 shareholders.
- A publicly held corporation sells securities (stock) in a public offering and it discloses certain business and financial information regularly to the public. Once the company reaches a certain size, it must comply with certain public reporting requirements mandated by the Securities and Exchange Commission (SEC).
A public corporation can have millions of shareholders holding millions of shares. The individual shareholders have no direct involvement with the company, except to vote their shares on issues brought up at the annual meeting.
A shareholder has a controlling interest in a corporation if the shareholder has a majority (50% or more) of the voting shares of stock in that corporation. Having controlling interest means that the owner of the controlling shares can control any decision made by the shareholders and override any other shareholder opinions or votes.
How Shareholder Income Is Taxed
Shareholders pay tax on their income in two ways:
- They pay tax on dividends they receive based on their stock ownership. Dividends can be taxed as ordinary income or as capital gains, depending on the type of dividend. Ordinary dividends are paid out of earnings and profits and are taxed as ordinary income. Qualified dividends are ordinary dividends, but they are taxed at the capital gains rate, based on specific qualifications.
- They pay capital gains tax when they sell their shares at a profit. Capital gains taxes are based on how long the stock is owned (short-term vs. long-term capital gains).
A shareholder's income from both dividends and sale of shares is included in their personal tax return.
If you were paid a dividend or other distribution from a corporation during the year, you will receive a Form 1099-DIV, Dividends and Distributions form. Give this form to your tax preparer or include it with other income on your tax return.
Shareholders and the Annual Meeting
One of the most interesting things about being a shareholder of a corporation is that you have the right to attend the annual meeting. Even if you have only one share in a company, you can go to this meeting.
If you have shares of stock, you may have received a proxy notification from the company. Since many shareholders are not able to attend the annual meeting, they can vote by proxy. Before the meeting, shareholders receive a proxy form or card to send back showing their vote on specific matters that come up in the annual meeting.
Public corporations must abide by SEC regulations for annual meetings.
Shareholders and Double Taxes
For years there has been a discussion about the perceived unfairness of what is called " double taxation " on corporate shareholders. Briefly, double taxation, as imposed by the IRS, is first a tax on the earnings of the corporation, then a tax on those earnings distributed to shareholders as dividends.
Corporations often elect S corporation status to avoid double taxation. An S corporation (subchapter S corporation) is a special kind of corporation that treats its shareholders differently from those of a C corporation for tax purposes. The S corp shareholders receive a pro-rata share of the company's income, loss, deductions, and credits for the year, even if they haven't been distributed to them. This is a type of pass-through income that is only taxed once.
The shareholder receives a Schedule K-1 form showing the various forms of income or loss for the year, which is included in the shareholder's personal tax return.
Shareholders in a Corporate Bankruptcy
The rights of the shareholders are subordinated (placed under) the rights of bond-holders so that shareholders lose the value of their shares if the corporation becomes bankrupt.
The investors who take the least risk are paid first. Secured creditors come first, then unsecured creditors such as banks, suppliers, and bondholders. The owners are the last in line to be repaid if the company fails and they may not receive anything if there is no money left.
Different Types of Shareholders
Large corporations have different types of shareholders and types of stock that they own. Usually, a corporation will start out with common stock. Shareholders holding common stock have voting rights (one vote per share) at the annual meeting, they get dividends when the corporation pays them, and they can sell their shares for a profit (or a loss).
Some companies also have preferred stock. Preferred shareholders receive dividends before common stockholders do, they have priority over common shareholders in bankruptcy. Preferred shareholders do not have voting rights.
- Shareholders or stockholders own a portion of a publicly or privately traded corporation.
- They can profit—or lose money—based on increases or decreases in the company's value.
- Shareholders are taxed on income they receive through owning stock.
- Being a shareholder usually grants you the right to vote on certain company decisions.
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Responsibilities of Stockholders
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It is easy to buy stock and just forget about it until you are ready to sell. But as a stockholder, you are an owner of the company in which you invested. As an owner, you have certain responsibilities to the company and its other stakeholders in addition to the responsibilities you have to your own financial affairs. Each company in which you invest affects many stakeholders locally, nationally and globally. What you do as a responsible stockholder can make a difference in the value of your investment to you and others.
Monitor Your Investments
Your first duty to your own financial well-being is to monitor the company's public announcements, quarterly and annual reports and any stock analyst comments and news articles written about the company or its industry. Any company that disregards environmental concerns, workplace conditions and employment problems and posts questionable revenues is not likely to remain a good investment. Consider the cases of companies that have had problems, including Allied Chemical, Exxon, Enron and British Petroleum. Evaluate your holdings according to their levels of good corporate citizenship as well as their abilities to post high revenues.
Update Your Records
Your duty to the companies in which you invest is to keep your stockholder records up to date. If you move, add an email address, change your phone number, change your name or create a living trust, inform the company's transfer agent and investor relations department. Most major transfer agents have online forms to use in updating your contact information. Call or email the investor relations department with the same information to update the department's mailing lists.
Vote Your Proxy
Every company occasionally presents a vote to the shareholders. This must be done to install new board directors and to ratify certain decisions made by the company and its directors. Most stockholders never receive voting material, which consists of your voting ballot or form assigning voting proxy to the brokerage firm holding your securities. If you do not register your vote, the brokerage firm is likely to vote in favor of board incumbents and their recommendations.
Corporate Social Responsibility
Many people complain about the attitude and ethics of some big corporations. Other complaints include CEO pay and outsourcing of jobs to other countries. Shareholders have some control over these situations. If shareholders write company management and vote against board incumbents, the pressure for change could sway company policy. As a shareholder, you can encourage corporate social responsibility and that is one of the obligations you have as an owner of the company.
- "The New York Times Magazine"; The Social Responsibility of Business to Increase its Profits; Milton Friedman; Sept. 13, 1970
Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager. Since 1995 she has written many articles for e-zines and was a regular columnist for "Digital Coast Reporter" and "Developments Magazine." She holds a Bachelor of Arts in public administration from the University of California at Berkeley.
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Shareholder vs. Stakeholder: What's the Difference?
Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).
Shareholder vs. Stakeholder: An Overview
When it comes to investing in a corporation, there are shareholders and stakeholders. While they have similar-sounding names, their investment in a company is quite different.
Shareholders are always stakeholders in a corporation, but stakeholders are not always shareholders. A shareholder owns part of a public company through shares of stock, while a stakeholder has an interest in the performance of a company for reasons other than stock performance or appreciation. (They have a "stake" in its success or failure.) As a result, the stakeholder has a greater need for the company to succeed over the longer term.
- Shareholders are always stakeholders in a corporation, but stakeholders are not always shareholders.
- Shareholders own part of a public company through shares of stock; a stakeholder wants to see the company prosper for reasons other than stock performance.
- Shareholders don't need to have a long-term perspective on the company and can sell the stock whenever they need to; stakeholders are often in it for the long haul and have a greater need to see the company prosper.
Understanding the Role of the Shareholder
A shareholder can be an individual, company, or institution that owns at least one share of a company and therefore has a financial interest in its profitability. A shareholder can also be known as a stockholder.
For example, a shareholder might be an individual investor who is hoping the stock price will increase because it is part of their retirement portfolio. Shareholders have the right to exercise a vote and to affect the management of a company. Shareholders are owners of the company, but they are not liable for the company’s debts. For private companies, sole proprietorships , and partnerships, the owners are liable for the company's debts.
A sole proprietorship is an unincorporated business with a single owner who pays personal income tax on profits earned from the business.
A shareholder is interested in the success of a business because they want the greatest return possible on their investment. Stock prices and dividends go up when a company performs well and increases its value, which increases the value of stocks the shareholder owns.
The more stock a shareholder owns, the more they have invested in the company and the more stake they have in it. The votes of shareholders who own more stock have more weight within the company.
There are generally two different types of shareholders.
- Common shareholders : Anyone who owns common stock in a company. Common stock gives you part ownership of the company and often has higher rates of return over the long term. Common shareholders can vote on board members or other company policies.
- Preferred shareholders : Anyone who owns preferred stock. Preferred stock has lower rates of return in the long term but guarantees a yearly dividend. Preferred shareholders can't vote on policies or board members, but they can claim assets before common shareholders if a company fails and its assets are liquidated.
Understanding the Role of the Stakeholder
Stakeholders are those who either affect or are affected by a project or company. They have a "stake" in its success or failure. Stakeholders might be shareholders or owners. They can also be:
- Employees of the company
- Bondholders who own company-issued debt
- Customers who may rely on the company to provide a particular good or service
- Suppliers and vendors who may rely on the company to provide a consistent revenue stream
- Community members who are impacted by the company's decisions and actions
- Partners in events, promotions, or other activities that the company engages in
In general, stakeholders can be divided into two types:
- Internal stakeholders : Those who are employed by the company or have a direct relationship with it. These are usually employees, shareholders, executives, and partners.
- External stakeholders : Those who are impacted by your company but don't have a direct relationship with it. These are usually customers, suppliers, and community members.
What Is Stakeholder Theory?
Stakeholder Theory is a recent theory of business that argues against the separation of economics and ethics. It states that short-term profits—prioritizing shareholders—should not be the primary objective of a business.
Under this theory, prioritizing the needs and interests of stakeholders over shareholders is more likely to lead to long-term success, both for the business and for the communities that it is a part of. This stakeholder mindset is, in turn, likely to create long-term value for both shareholders and stakeholders.
A shareholder can sell their stock and buy different stock; they do not have a long-term need for the company. Stakeholders, however, are bound to the company for a longer term and for reasons of greater need.
For example, if a company is performing poorly financially, the vendors in that company's supply chain might suffer if the company no longer uses their services. Similarly, employees of the company, who are stakeholders and rely on it for income, might lose their jobs.
Stakeholders and shareholders also may have competing interests depending on their relationship with the organization or company. For example, shareholders may want a company to maximize profits, which could be done by keeping wages low, reducing employees' hours so the company does not have to pay them benefits, or using less expensive manufacturing processes even if they pollute the local ecosystem. But these ways of increasing profits go directly against the interests of stakeholders such as employees and residents of the local community.
Stakeholder vs. Shareholder in CRS Companies
The emergence of corporate social responsibility (CSR), a self-regulating business model that helps a company be socially accountable to itself, its stakeholders, and the public, has encouraged companies to take the interests of all stakeholders into consideration. During their decision-making processes, for example, companies might consider their impact on the environment instead of making choices based solely upon the interests of shareholders. Under CSR governance, the general public is now considered an external stakeholder.
When a company's operations could increase environmental pollution or take away a green space within a community, for example, the public at large is affected. These decisions may increase shareholder profits, but stakeholders could be impacted negatively. Therefore, CSR encourages corporations to make choices that protect social welfare, often using methods that reach far beyond legal and regulatory requirements.
Are Shareholders or Stakeholders More Important?
Shareholders have the power to impact management decisions and strategic policies. However, shareholders are often most concerned with short-term actions that affect stock prices. Stakeholders are often more invested in the long-term impacts and success of a company. Stakeholder Theory states that ethical businesses should prioritize creating value for stakeholders over the short-term pursuit of profit, as this is more likely to lead to long-term health and growth for both the business and everyone connected to it.
Are Employees Shareholders or Stakeholders?
Are employees are stakeholders in a business, since they are impacted by its decisions and actions. Some employees may also be shareholders if they own stock in the company that employs them.
Are CEOs Stakeholders?
A CEO is a stakeholder in the company that employs them, since they are affected by and have an interest in the actions of that company. Many CEOs of public companies are also shareholders, especially if stock options are a part of their compensation package. However, if a CEO does not own stock in the company that employs them, they are not a shareholder. A CEO may be an owner of a private company without being a shareholder (as there are no shares to buy).
A stakeholder is anyone who is impacted by a company or organization's decisions, regardless of whether they have ownership in that company. Shareholders are those who have partial ownership of a company because they have bought stock in it. All shareholders are stakeholders, but not all stakeholders are shareholders.
Both shareholders and stakeholders are important, but ethical business ownership and management recognizes that the short-term profit goals of shareholders may not always be in the best long-term interest of either the company or the community that it is a part of. Stakeholder Theory suggests that prioritizing the needs and interests of stakeholders over those of shareholders is more likely to lead to long-term success, health, and growth across a variety of metrics.
U.S. Securities and Exchange Commission. " Shareholder Voting ."
U.S. Small Business Administration. " Sole Proprietorship. "
University of Michigan. " Stakeholder Theory and "The Corporate Objective Revisited" ," Page 1-3.
UVA Darden Ideas to Action. " Principles and Purpose: A Statement on Stakeholders ."
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Shareholder Obligations: Everything You Need to Know
Shareholder obligations vary depending on the type of business and shares involved, the shareholder's agreements, and the company's articles of incorporation. 3 min read
Shareholder obligations vary depending on the type of business and shares involved, the shareholder's agreements, and the company's articles of incorporation. Even the type of shareholder makes a difference.
However, because a shareholder holds important stakes in the company, there are some similarities of obligations:
- If a shareholder violates or contributes to a violation of the law or articles of association, or causes the company, a third party, or another shareholder harm, they can be held liable for damages.
- Shareholders are not required to attend general meetings, but if stipulated in the articles of association, they should alert the company if they will be doing so. Notice is also required if they obtain more shares that should be added to the shareholder register.
- If a shareholder controls more than nine-tenths of the company's shares and votes, they can redeem the rest of the minority shares.
The main goal of corporate managers and directors is to build long-term shareholder wealth. The reason for this goal is to provide accountability to the managers. If these leaders were tasked with pursuing the interests of everyone in the company, no one's interests would be realized.
Personal Liability of Shareholders
Shareholders are generally not responsible for the corporation's debts and obligations, but in some cases, courts will pierce the corporate veil if a plaintiff sues the shareholder directly. The "alter ego theory" is invoked when arguing shareholders should be accountable for the corporation. For a plaintiff to successfully argue the alter ego theory, they must prove the corporation is essentially a shell and not a separate business entity from the shareholder. If the corporation is proven to be an alter ego of the shareholder, limited personal liability protections of the shareholder should be ignored.
To evaluate the plaintiff's allegations, courts will investigate the following:
- Were business formalities, such as meeting minutes or organizational filings, maintained?
- Were personal and business funds kept separate ?
- Does the corporation have liability protection in place or has it been capitalized?
- Did shareholders neglect or disregard their responsibilities to the corporation?
Even if a shareholder is damaged by a wrong done to the corporation, they can't personally pursue litigation because the corporation is a separate entity. Should a shareholder feel their stock depreciated unfairly, they cannot take action for their own interests alone. To receive restitution, the shareholder must file a derivative lawsuit in the name of the company, which will allow all shareholders to be made whole if compensation is received for wrongdoing.
Even though the plaintiff shareholder will be representing the company's interests, they will need to name their company as the nominal defendant. Typically, derivative suits allege that directors, officers, or someone in control of the company has breached their fiduciary duties -- such as compensating themselves or others excessively -- thereby damaging the corporation.
Often, the corporation's regular counsel will represent both parties, the shareholder bringing the suit or the company, and those accused of looting it. This results in the defendant's attorney arguing against the corporation obtaining damages.
The choice to involve outside counsel for joint representation is left up to the corporation, not the court. However, even forcing the defendants to retain an independent legal counsel will not fix the issue. Since the independent counsel would still work for the corporation, which is controlled by the defendants, it would take orders from them, even if they weren't technically defending them. The result would be the same — the corporation's best interests would be ignored and legal counsel would still oppose the company.
To remedy this from happening, courts will sometimes allow the counsel who has been providing joint representation to continue representing the corporation, while the defendants are required to obtain outside counsel. However, even if two different counsels are used, the defendants still control the corporation, and by extension, its legal counsel. It's important for the corporation's lawyer to realize that a conflict of interest can arise if they direct their litigation to favor the defendants. It's easier for the attorney if there are disinterested directors and legal teams they can take direction from.
If you need help with shareholder obligations, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.
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Even though your small company does not have any stockholders right now, you may choose at a later time to turn your company into a corporation with stockholders investing in the company. Understanding the role of stockholders in the corporate hierarchy helps in deciding whether a corporate structure is right for your company.
A stockholder is someone, or even another entity such as a group of investors or another company, who owns one or more shares of the stock in a corporation. The corporation’s stock may be publicly traded in an open stock market such as the New York Stock Exchange, or the stock may be privately traded. The corporation benefits from stockholders’ purchase of stocks, since the dividends from the sale of the stocks give the company money to conduct its business. The owners of a corporation are not the company’s management, but rather the stockholders.
Stockholders do not simply turn their money over to a corporation and surrender any say in how that money is used. Instead, stockholders may vote on different matters of business within the corporation, such as the appointment of new members to the board of directors. Stockholders also receive a certain portion of the dividends earned by the corporation, according to the number of shares each stockholder purchases. Stockholders generally have one vote per share of the company that they own. If one stockholder owns the majority of the corporation’s stocks, or 51 percent of the stocks or more, then that stockholder has the ability to outvote other stockholders.
Board of Directors
The members of the board of directors for a corporation deal directly with the shareholders. The board of directors oversees the operations of the corporation, ideally with the best interests of the shareholders in mind. A board of directors may replace the chief executive officer or CEO of the corporation if they believe he is not managing the corporation to optimize the shareholders’ profits. If the shareholders believe that any members of the board of directors are not acting with the shareholders’ best interests in mind, the shareholders can vote to replace those members of the board.
Corporate officers include the chief executive officer, president of the corporation, the chief financial officer, the chief operating officer, vice presidents, controller and treasurer. The officers of a corporation answer to the board of directors, but that does not mean the officers do not have any dealings with the stockholders. The officers prepare financial reports that show the activity of the corporation and also address what the corporation plans for future activities. These documents help stockholders monitor the officers’ activity and make decisions on whether they wish to retain or sell their shares of the corporation’s stock.
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Rights and Role of Shareholders of the Corporation - Explained
What are the Rights of Shareholders of the Corporation?
Written by Jason Gordon
Updated at April 5th, 2023
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What is the role of shareholders of the corporation?
Shareholders are the owners of the corporation. They have ownership rights in the shares of corporate stock. The role of the shareholder in the corporation is limited, however, as they have neither the right nor the obligation to manage the day-to-day business of the enterprise. Shareholder rights vary pursuant to the type of stock owned and the applicable state law. State law is heavily influenced by authoritative sources, such as the Model Business Corporations Act (Model Act). Below is an explanation of common rights afforded corporate shareholders under state law.
Next Article: Characteristics of Corporate Ownership Interests (Stock) Back to: CORPORATE GOVERNANCE
What is a Shareholder's Right to Information?
Shareholders have the right to access and examine corporate records and information concerning the governance and financial performance of the entity. In public companies, much of the operational and financial information about a corporation must be reported to the public by filing with the Securities Exchange Commission. Companies must also disclose this information directly to shareholders on largely standardized reporting documents. Private companies, on the other hand, do not publicly report information. Further, there is no specific requirement to make periodic disclosures to shareholders. As such, shareholders in non-public entities must generally make requests for information. State law provides for the substantive and procedural rights of shareholders to access and review corporate records.
- Example : James is concerned that directors of ABC Corp are not exercising due care in the management of the company. She may seek access to company information to further understand managements actions. This may include minutes from director meetings. The company must generally afford her access to these records.
What is a Shareholder's Right to Vote
All corporations must have at least one class of stock representing an ownership interest in the company. In most corporations, the basic ownership share is known as common stock. These shares entail voting rights for the shareholder.
- Note : Shareholders may also nominate their own candidates to the board. This generally requires the shareholders to justify their nomination and prepare and distribute their own proxy material. This is process is known as a proxy contest. Some state laws, as well as the NYSE and NASDAQ, both require that the members of the nominating committee be independent or not employees of the company.
- Example : ABC Corp is having an election of directors. ABC appoints Tom and Jerry, who are friends of the current directors but are not board members, to the nominating committee. Tom and Jerry recommend Sarah for director. The board agrees and places Sarah's name on the proxy solicitation. I am a shareholder and receive the proxy with Sarah's name. The board follows plurality voting, so Sarah must receive a majority of all votes cast, rather than a majority of votes outstanding. I can vote for Sarah, abstain from voting, or wage my own proxy contest to recommend a director of my choosing. I disagree with Sarah as director but know that sending proxy solicitations to all shareholders would be burdensome and expensive. Further, I know that it is unlikely that I will receive more votes for my nominee that Sarah will receive, so Sarah will win anyway. I decided to abstain from voting.
What is the Difference Between Straight Voting and Cumulative Voting?
Boards generally employ either straight voting or cumulative voting to elect directors.
- Example : Gail owns 100 common shares of stock in ABC Corp. When two director seats come open, she may cast up to 100 votes to elect each director.
- Note : Cumulative voting amplifies the voting power of a shareholder.
- Example : Tammy owns 100 common shares of stock in ABC Corp. When two director seats come open, she has 200 votes (100 shares x 2 director seats) to cast. She can cast all 200 votes for one director or split up her votes as she wishes.
What are the Rights to Vote for Fundamental Changes in Corporation?
Shareholders must approve any fundamental changes to the corporation. Fundamental changes include:
- Note : The corporate bylaws will lay out the number or percentage of shareholder votes required for approval. In the absence of specific rules in the bylaws, the default state-law rules will control.
- Sale of Assets - Shareholders must approve the sale of all or substantially all of the corporate assets. The idea is that this is effectively the equivalent of merger or shutting down the corporation.
- Note : Shareholder approval is not required when a state takes action to involuntarily dissolve a corporation.
- Changes in Governing Documents - Shareholders have the right to vote for any changes or amendments to the governing corporate documents. This includes rights to vote on:
- Amendments to the Charter - Directors must initiate any changes to the articles of incorporation or charter. Once proposed, shareholders vote to approve or disapprove the directors proposal.
- Amendments to the Bylaws - The bylaws will direct the requirements and procedure for amendment. In the absence of provisions in the bylaws addressing this issue, state corporation law will supply the default rules. All shareholders are entitled to vote on matters presented at shareholder meetings.
What are the Shareholder Meeting Rights ?
All state corporate statutes (as well as large public exchanges) require corporations to hold annual shareholder meetings. During these meetings, the corporation will conduct any required or desired corporate governance actions, such as electing directors. The requirement to hold meetings may be relieved for small corporations that handle these matters through unanimous written consent by the shareholders. Directors and large blocks of shareholders may call special meetings for any number of purposes. Notably, special meetings are appropriate when shareholders must vote upon a fundamental change to the corporation. Various state laws protect shareholder meeting rights.
- Note : Under many state laws (specifically those conforming to the Model Act), large shareholders may have the right to call special meetings to vote on matters of immediate concern.
- Note : Generally, shareholders holding 10% or more of a corporations shares are considered large shareholder and may call a special meeting.
- Example : Some states require 70 days notice of any intended meeting and specific requirements that a quorum of shareholder be present or represented during any meeting.
What is the Shareholder Right to Make Proposals?
Certain shareholders have the right to propose specific corporate actions to be taken at corporate meetings. This is normally done through adding these agenda items to corporate proxy statements. Under state law, a shareholder holding 1% of the outstanding shares or $2,000 worth of shares may request a proposal be placed in the corporate proxy material for shareholder vote. The primary limitation is that the shareholder proposal cannot usurp managements authority by making proposals related to ordinary business operations. If the shareholder proposal relates to the authority or rights reserved for shareholders, the result of the vote on the shareholder proposal is binding on the corporation. Proposals that are outside the ordinary authority of shareholders (i.e., it is a decision reserved to directors or officers), the proposal is not binding upon the board or officers.
- Note : The board may reject a shareholders proposal for material to be included in the proxy material. State law and the corporate governance documents will determine the ability of a shareholder to make proposals above director approval. The types of proposals that shareholders may wish to make commonly include resolutions regarding environmental practices, political spending, labor practices, etc.
- Example : I am a corporate shareholder of ABC Corp. I own 2% of the corporate stock. I want the corporation to vote on a resolution to mandate that corporate boards consist of 75% outsiders who have no relationship with current directors or officers. As a qualified shareholder, I can require that this proposal be included in the proxy material. The election of directors is a fundamental right of shareholders. It is possible that shareholder approval of such a resolution would be binding upon the board.
What is the Shareholder Right to Dissent ?
In most states (and under the Model Act), corporate law allows for dissenter rights. Dissenter rights are a special group of rights designed to provide protections to shareholders in corporations that are not actively traded in the market. In a widely-held, public company, shareholders who do not agree with fundamental issues of corporate management or governance can sell their ownership interest. This is generally not an option for shareholders in closely-held and private corporations. Dissenter rights allow these shareholders to force the corporation to buy back their shares at fair value.
- Note : This right is not available for shareholders who disagree with non-fundamental aspects of corporate governance.
- Example : I am very upset that the corporation allows for plurality vote in the election of directors. The board is not very receptive to shareholder input regarding the nomination committee or the qualifications of directors. As such, I may exercise my dissenters rights and require the corporation to purchase my shares of ownership.
How do you feel about the fundamental rights of shareholders? Should the rights be more or less extensive? Why or why not? Can you think of an example of any other rights or authority that could serve to further protect shareholder rights?
Mark suspects that the directors of the corporation have engaged in actions that are detrimental to the corporation and shareholder interests. What rights does Mark have to investigate the directors actions? If Mark is correct, what shareholder rights provide Mark with the ability to prevent this type of activity in the future?
- Shareholders have a number of rights conferred upon them by virtue of owning a percentage of the company. One such right is the right to inspect the corporate books and records. This right means that the shareholder can ask for financial reports by the directors. The shareholders also have a right to information pertaining the company dealing and financials. In case a shareholder through investigation discovers wrongful acts being conducted by the directors of the corporation, they have a right to sue so as to avoid a recurrence of the same in the future. Suing the corporations takes the form of a shareholder derivative lawsuit. If the evidence produced is sufficient, the courts may order the corporation to compensate the shareholders for any loss experienced.
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Definition of stockholder
These examples are programmatically compiled from various online sources to illustrate current usage of the word 'stockholder.' Any opinions expressed in the examples do not represent those of Merriam-Webster or its editors. Send us feedback about these examples.
1753, in the meaning defined above
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Cite this Entry
“Stockholder.” Merriam-Webster.com Dictionary , Merriam-Webster, https://www.merriam-webster.com/dictionary/stockholder. Accessed 28 Aug. 2023.
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The Director’s Guide to Shareholder Activism
Maria Castañón Moats is Leader, Paul DeNicola is Principal, and Leah Malone Director at the Governance Insights Center, PricewaterhouseCoopers LLP. This post is based on their PwC memorandum. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here ); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here ); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here ).
This post is divided into two principal parts. The introduction analyzes the most important current trends in shareholder activism. The chapters that follow take a longer-term perspective.
We take an expansive view of shareholder activism. For many people, the phrase may conjure images of hedge funds waging proxy battles as they try to win control of their target’s board. That’s a part of activism, to be sure. But, for the purposes of this post, the term refers to the efforts of any investor to leverage their rights and privileges as an owner to change a company’s practices or strategy.
In this sense, shareholder activism may include an institutional investor’s engagement with companies around governance matters or a retail investor’s shareholder proposal, as well as a hedge fund’s proxy fight.
Shareholder activism in 2021
The COVID-19 crisis has left its mark on all aspects of society and business. Shareholder activism is no exception. In 2020, activists targeted fewer companies and put less capital to work in their campaigns as the pandemic roiled financial markets and sparked a deep economic recession. But there is ample evidence of a resurgence in 2021. What do boards of directors need to know to navigate this environment?
The pandemic’s impact
Shareholder activism slowed considerably as COVID-19 spread. In the US, activists launched 34% fewer campaigns and targeted 25% fewer companies in 2020 than they had the previous year.  But the fourth quarter of 2020 saw activity begin to rebound. During the first quarter of 2021, the number of campaigns launched increased 48% over the first quarter of the prior year. Activists initiated 37 campaigns, almost half of 2020’s total activity. 
Mergers and acquisitions (M&A) have historically been among shareholder activists’ top objectives. This could mean pushing a company they invest in to sell all or part of itself, or to seek better terms if it’s already in talks to be acquired. These kinds of outcomes remained activists’ most common goals in 2020 and into the first quarter of 2021.  With the pandemic causing economic turmoil worldwide, activists pushed more companies to unlock value by breaking themselves up or selling business units. Such moves were the most common objective of M&A-focused campaigns last year. 
The strong start to 2021 suggests that the 2020 slowdown was temporary. Several activist hedge funds made no secret of the fact that they were taking advantage of the steep decline in equity prices during the early days of the pandemic to build up stakes in potential target companies. Investments like this position activists to continue to increase their activities in 2021.
The pandemic has put boards and management teams to the test. It may also open their companies up to additional shareholder scrutiny, as well as make them an activist target, if their performance is underwhelming.
ESG in focus
Environmental, social, and governance (ESG) matters remain a priority for institutional investors when engaging with the companies whose shares they hold—and climate change is arguably at the top of their agenda. In addition, widespread protests against racial injustice in 2020 prompted several of the largest asset managers to emphasize diversity and inclusion (D&I) in their public statements and proxy voting policies to a greater degree than in years past.
ESG is expanding beyond being just a concern of institutional investors. Hedge fund activists are increasingly pushing companies to increase disclosures and adopt more sustainable business practices. They see better ESG metrics as a path to unlock value. Some traditional activists have begun to press companies in which they invest on ESG matters.  A handful of recently launched firms are dedicated specifically to ESG-focused investing and activism. Some have even undertaken proxy fights in the hope of placing their own directors on company boards.
Other emerging trends
Special-purpose acquisition companies (SPACs) have emerged as a popular alternative to an initial public offering for some private companies. They aren’t new, but the volume of deals involving SPACs is. By March 2021, the volume of SPAC transactions had already surpassed 2020’s total. 
Shareholder activists have tapped into this trend. They’re using SPACs as a way to raise capital for M&A. Many of the most active hedge fund activists have launched SPACs recently. Early 2021 saw the emergence of what could be a new frontier in shareholder activism. Retail investors used social media and stock-trading apps to coordinate the buying of a handful of consumer brands’ shares. Within a month, they had pushed prices of the stocks to dizzying heights. And even more quickly, the shares collapsed as the investors moved on. Is this risk here to stay? Or simply an internet-enabled fad?
It’s too soon to say. But there may be good reason for boards to consider the risks that this kind of investor behavior poses to their companies. One key difference between the shareholders behind this phenomenon and traditional activists is that these investors didn’t seek any changes in strategy, disclosure, or capital allocation from the companies they targeted. That may change in the future. It’s a risk that may be worth monitoring.
Activists: Who they are and what they want
An asset manager overseeing trillions of dollars in securities pledges to vote against the boards of companies that fall short on ESG matters. A hedge fund a fraction of that size threatens a proxy fight at a company it feels has too much cash on the balance sheet. Both fall under the umbrella of shareholder activism: seeking change because they think management isn’t maximizing their targets’ potential. But while they may share an ultimate goal, their tactics can differ greatly.
Pension funds, insurance companies, and firms that manage mutual funds and exchange traded funds are all examples of institutional investors. Not only do institutional investors own a larger proportion of publicly traded companies’ shares than retail investors do, but they also vote their shares at a much higher rate. This makes them influential stakeholders for many public companies.
Institutional investors are normally long-term shareholders. Many benchmark their holdings to broad stock market indexes like the S&P 500. Others offer index funds to retail investors, who are attracted by their low fees. Passive funds can’t just sell a position if they think a stock is underperforming, or if they believe the company’s governance practices hinder its longterm value. Activism is one of the only levers they have to address these concerns. Through activism, they can bring attention to their concerns and drive the change that they believe will create long-term value—including through changes in corporate governance practices. The largest asset managers are vocal about their belief that companies with strong corporate governance practices can deliver better value in the long run.
Hedge funds attract big dollars from investors seeking above-average returns. So they are always looking for untapped value. Hedge fund activists often see that untapped value in the way a company is run or the strategy it pursues. They see ineffective management, a stale board, or a company missing out on new opportunities. They see the potential for a new capital allocation strategy or changes in operations that will increase share value. And when their efforts to engage with executives or directors about these ideas fail, they often try to get board representation to help achieve their goals.
Hedge fund activists traditionally focused on capital allocation issues, such as dividends and share buybacks. Many then began looking for company combinations and break-ups— mergers, carve outs, and spin-offs. Now there is a greater focus on operational activism, which has more of a long-term focus. Activists join the board (or appoint independent directors), replace members of management, and help execute a new strategy. While many hedge funds had been thought of as being too focused on short-term gains, the longer-term operational activism has helped to shift that perception somewhat.
Traditional asset managers and hedge funds account for most activist activity. And because they manage the most money—and vote the most shares—they have the greatest ability to make a serious push for change. But they aren’t the only shareholder activists.
Religious groups, nonprofits, and other advocacy organizations also use the tools of shareholder activism, most notably shareholder proposals, to encourage companies to change.
There are also a small handful of individuals who have made a name for themselves as activist shareholders through retail investing. In fact, these shareholders are responsible for a majority of all shareholder proposals that go to a vote each proxy season. Historically, they have tended to focus on “good governance” matters—majority-vote director elections, declassified boards, and so on. Recently they have broadened their strategy to include ESG and other matters as well.
Tactics: How activists pursue their goals
Some shareholders turn to activism because they feel it’s an effective way to increase the value of the companies whose stock they own. Others do so to address governance practices they believe are hurting long-term value. Or they take issue with the company’s products or business practices. Activism can take many forms. But the goal is the same: to motivate management and boards to make changes in the way their companies are run.
The tactics that shareholders use will depend on their objectives. What makes sense for an institutional investor with a long time horizon may not work for a hedge fund looking for a quicker return. You might even think about activist tactics as a continuum that begins with routine shareholder engagement. Not every request to meet with management is a prelude to more drastic forms of activism. But many shareholders who seek change will start by attempting to persuade. Others are more likely to start at the more aggressive end of the activist spectrum.
In some cases, investors view a shareholder proposal as a way to begin the conversation with a company. Other times, institutional and retail investors submit—or threaten to submit—a shareholder proposal if direct engagement with the company and its directors doesn’t produce changes.
Top proponents of shareholder proposals in 2020
Source: Gibson Dunn, Shareholder Proposal Developments During the 2020 Proxy Season, August 2020.
These proposals often focus on governance practices or policies, executive compensation, or the company’s behavior as a corporate citizen. Proponents watch how the major institutional investors are voting on issues and have a sense of which shareholders may be likely to support their proposal going in. They also often reach out to other shareholders to encourage support for the measure. By the time the company receives the shareholder proposal, its sponsor may already know whether it will pass. A company may receive the same proposal over multiple years with increasing support until it finally achieves a majority.
Vote no campaigns
“Vote no” campaigns urge shareholders to vote against (or withhold their votes from) director candidates or other matters such as say on pay. Vote no campaigns can send a strong signal about shifting shareholder priorities.
The vote doesn’t actually have to fail for a vote no campaign to achieve results. Overall shareholder support both for directors and for say on pay is typically above 90%. So if support levels fall to the 60s or 70s, it sends a stark message about shareholder dissatisfaction. It also generates media scrutiny, and can affect a director’s reputation. Directors often serve on multiple boards, and low support levels at one company can affect how that director is viewed at his or her other companies as well.
Shareholder activists may conclude that the best way to achieve their goals is to replace some or all of a company’s board. In that case, they advance their own slate of director candidates and try to persuade other shareholders to vote for them. Proxy contests can be expensive and controversial. Historically, they’ve been most closely associated with activist hedge funds.
The precise activism playbook may vary from investor to investor, but there are several steps hedge funds commonly take to make the threat of a proxy fight more credible. They may try to win the support of a company’s other shareholders by circulating a lengthy white paper that lays out the case for the changes they’d like to see. Or they may publish an open letter to the company’s management or board listing their concerns. It’s a virtual certainty that documents like these will end up in the hands of the media, further ratcheting up the pressure.
Proxy fights are long, expensive, and draining for a company. Success isn’t assured for the hedge fund, either. That’s why activists and the companies they target sometimes reach a settlement that heads off a full-blown proxy contest. As a result, the activist may receive seats on the company’s board or assurances from management that some of the changes it seeks will be enacted. From 2016 to 2020, 83% of the board seats won by activists came via settlements. 
Some institutional investors have grown concerned in recent years that companies are settling too easily. Before rushing to settle, they urge companies to at least reach out to their significant shareholders to solicit their views. Sometimes these investors agree with the activist—and sometimes they want the company to hold their ground against the activist.
Risk factors: The red flags that can lure activists
Every shareholder activist has a unique agenda. But history shows that companies that attract activist engagement tend to have some issues in common. Poor performance in the stock market, weak earnings compared to peers, governance missteps, and lack of attention to ESG matters can all trigger shareholder activism.
Poor financial or share performance
Shareholders are rarely happy to see a company underperforming its peers, hanging on to divisions that don’t fit with the rest of its business, or hoarding too much cash on a balance sheet. Whether they turn to activism as a result often depends on their investment strategy. The chances also tick up if there are other governance concerns.
Hedge fund activists are typically looking to unlock value they believe is going unrealized. Companies with a low ratio of market value to book value, excessive cash on hand, or lots of monetizable assets like real estate may fall into their crosshairs. Institutional investors are commonly less likely to support activism at a company unless it also suffers from one or more of the governance weaknesses discussed on the next page.
Governance problems can both indicate other weaknesses at a company, and can have a detrimental effect on its value. Issues that may prompt investors to engage with a company, to submit a shareholder proposal, or take even more drastic measures may include:
- – Classified boards
- – Election of directors by plurality vote
- – “Zombie directors” who remain on the board after failing to receive majority support
Even absent these structural issues, some shareholders will engage with companies around board tenure and refreshment.
- Executive compensation . Companies with problematic pay practices, pay that is out of alignment with company performance, or that don’t respond after a low say-on-pay vote can all become targets of shareholder activism.
- Material weakness . Less frequently, disclosure of a material weakness can sometimes prompt shareholders to vote against audit committee members. It’s especially likely if the company is not seen to be taking appropriate action to remediate the issue.
Perceived poor practices in the ESG realm can also make a company an activist target. Sometimes this relates to the environment, such as lack of disclosure around risks related to climate change. It could crop up with respect to corporate social responsibility, including inadequate labor, health, or safety practices. The extent of political spending and lobbying can also increase a company’s risk for becoming a target of shareholder activism.
Many of the largest asset managers have called for more disclosure in this area. They want companies to discuss how issues such as climate change and D&I factor into their strategies. And they want to know companies’ plans for confronting those challenges.
Hedge funds are increasingly focused on ESG as a catalyst for their activist campaigns. They see a connection between ESG performance and shareholder value. Several funds that have launched recently put the connection between sustainable practices and value creation at the center of their missions.
Ignoring shareholder concerns
Lack of responsiveness to investors can bring unwelcome attention. Sometimes an issue that has come up during shareholder engagement may evolve into a shareholder proposal. Other times, if the company hasn’t taken action in response to a concern, the consequences can be more severe. For example, if a company’s say-on-pay vote garners low support levels, shareholders expect to see changes in the company’s incentive plans. If those changes don’t come, shareholders may launch a campaign to vote against the directors on the compensation committee. The bottom line: It rarely hurts to hear a shareholder out, determine whether their arguments have merit, and, if so, consider acting in response.
Heading off an activist
Shareholder activism can come as a surprise. When a hedge fund presses a company to divest an underperforming asset or put itself up for sale, it can leave the management team and board scrambling. They may ask themselves why they didn’t see it coming. Even being on the receiving end of a shareholder proposal can feel like an unwelcome intrusion.
Directors have a key role to play in being prepared. They can anticipate which activists may engage with the company, the issues they may raise, and how other shareholders might respond. They can push management to address issues that may attract activist attention. Not only can these actions help ward off an activist, but they may also help improve the company’s performance and its relationship with key stakeholders.
Take a candid look at your company
Directors should always make it their business to stay informed about their company’s strategy and how effectively it’s being executed. This requires looking at the company’s performance with a critical eye. However, the data directors get can sometimes be so granular that it’s hard to see the big picture. Other times, it might be so high level that important details are easily overlooked.
Focusing on common triggers for activist engagement may help boards cut through the noise. Asking how the company’s ESG disclosures compare to best practices, for example, or how the dividend stacks up against peers that have been targeted by activists may help bring clarity. Ask to hear from outside experts, industry analysts, investment bankers, or others from outside the company to get a better understanding of how the company is seen by investors and potential activists. Make sure to ask for outsiders’ “unvarnished” views—ones that haven’t been toned down (or whitewashed by management).
If there are issues, take proactive steps to address them. This can reduce the chance of becoming an activist target. It can also strengthen your credibility with the company’s shareholders. Even if the company chooses not to make any changes, going through the critical process will help company executives and directors reaffirm and articulate why they believe the company is on the right course.
Know your shareholders
Ensure that the board is informed when an activist takes a significant position in the company or in an industry competitor. And make sure the board hears about broader activism trends that could affect the company in the future. Understanding what these shareholders may seek will help the company assess its risk of becoming a target and help it know what tactics to expect.
And of course, directors should keep up to date on the views of the company’s largest shareholders. This includes carefully watching any changes to their public engagement priorities or proxy voting agendas.
Create an engagement plan
Once a company identifies areas that may attract activist attention, engaging with other shareholders around these topics can help prepare for—and in some cases may help to avoid—an activist campaign. Being transparent about the company’s vulnerabilities and its strategic choices can help change a shareholder’s view of the issue, and demonstrate that the board is fulfilling its oversight responsibilities. Even before the company receives an activist overture, some companies may find it helpful to start getting directors involved in discussions with major investors. If shareholder activists do target the company, directors will already have credibility with other investors. That may make them more effective spokespeople for the company’s position.
How to respond to an activist
When an activist comes calling, the company response is critical. An ineffective response may make things worse by giving the impression that the company’s management and board are not attuned to shareholder concerns. While the activist’s scrutiny may be unwelcome, that doesn’t mean their concerns are without merit. An encounter with a shareholder activist may make the company stronger in the long run— if it’s handled effectively.
Objectively consider the issues on the table
Hedge fund activists usually do extensive homework before they approach a company. Based on that research, they develop specific proposals for unlocking value—at least in the short term. And they have often discussed these ideas with other shareholders. Assume the company’s institutional investors have already spent time evaluating the activist’s suggestions. Investors will expect the company’s executives and board to do the same—even when it’s uncomfortable. And it often is. They might be looking for changes in the boardroom, which may feel like a personal affront to the directors around the table. Or they may be looking for a change in management, which will almost certainly feel like an attack on the CEO. But none of these ideas should be dismissed out of hand.
It’s also important to take a shareholder proposal or vote no campaign seriously. Take a step back. Few companies are perfect when it comes to corporate governance. Perhaps the company’s practices are justified. But are there areas that could be improved? Changes that have been avoided as a result of status quo bias? If that’s the case, shareholder pressure could be a valuable wakeup call—as long as it isn’t ignored.
Determine how best to respond to the investor
When it comes to hedge fund activists, the strategy may differ. If the fund approaches with a private request, it may make sense to respond. This gives the company a chance to hear about the activist’s criticisms. It may also lay the groundwork for future private conversations— which can be helpful if the company later wants to negotiate a settlement with the activist. When hedge fund activists take their campaigns public, however, the smartest move may be to say very little. There’s very little potential benefit for a company in trading blows with a hedge fund activist in the media.
For companies that have received a shareholder proposal or been targeted for a vote no campaign, their best bet is to reach out to the investor. Discuss their specific concerns. When dealing with a shareholder proposal, the company and the shareholder may be able to agree on some action at the company in exchange for withdrawing the proposal. Shareholders don’t always insist on immediate action. They know change can take time, and often they are satisfied if the company demonstrates that it has a plan in place to address the issue. Communication might not put an end to a vote no campaign, but understanding the shareholder’s perspective will help the company respond.
Reach out to other shareholders
When activists are contemplating vote no campaigns or proxy fights, they will need support from other shareholders to be effective. It’s safe to assume they’re already engaging with the company’s other investors, so it’s important that management and the board make themselves heard as well. An approach from an activist can present an opportunity to discuss the issues they raise with other shareholders. Take the chance to articulate the company’s view about why its current course is in the best long-term interests of the company and all of its investors (if it is).
Ideally, the company already has an established relationship with those shareholders to build upon. If the company doesn’t believe the activist’s proposed changes are in its best longterm interests, investors will want to know why—and just as importantly, how the company reached this conclusion. On the other hand, if the company has decided to make some changes, be open about what those are. And consider disclosing the breadth of the company’s shareholder engagement efforts in the proxy statement to give yourself credit for your outreach. Often we hear that the suggestions activists make are ones that the company had already been considering.
Look for ways to build consensus
More companies than ever are finding ways to work with activists. Proxy contests are costly and time consuming. It may make sense to find common ground with shareholder activists to take these risks off the table.
Reaching an agreement with a shareholder activist may require the company to increase disclosure of certain information, change its capital allocation, or even add new directors to the board. These moves may not have been in the company’s plans before the activist encounter, but they may make sense if the alternatives include even more drastic changes—such as a proxy fight that could give the activist control of the board.
Activists are also motivated to reach agreement. Even though target companies typically spend many times as much on proxy solicitation efforts, the cost to an activist is also significant. If given the option, most activists would prefer to spend less time and money to achieve their goals. Once they agree, the activist and the company enter into a standstill agreement that sets the terms of their relationship going forward.
Even non-binding shareholder proposals can cause embarrassment if they pass—or even just receive unwanted media attention. It may make sense to see there’s middle ground between the company and the proponent that both can live with.
Source: Activist Insight, Proxy Fights 2020, October 2020.
Even as activism—by institutional investors, hedge funds, and others—continues at a healthy pace, many think the number of campaigns still could be on the upswing. For companies, listening and being prepared are crucial. Boards have an important role to play in helping to navigate the changing landscape of shareholder activism.
1 Lazard’s Shareholder Advisory Group, 2020 Review of Shareholder Activism , January 2021. (go back)
2 Lazard’s Shareholder Advisory Group, Q1 2021 Review of Shareholder Activism , April 2021. (go back)
3 Lazard’s Shareholder Advisory Group, Q1 2021 Review of Shareholder Activism , April 2021. (go back)
4 Lazard’s Shareholder Advisory Group, 2020 Review of Shareholder Activism , January 2021. (go back)
5 “Hedge Fund Activists Pivot to ESG,” Institutional Investor , January 23, 2020. (go back)
6 “Global SPAC deal volumes this year surpass total for 2020,” Reuters, March 9, 2021. (go back)
7 Lazard’s Shareholder Advisory Group, 2020 Review of Shareholder Activism , January 2021. (go back)
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Also called stockowner . a holder or owner of stock in a corporation.
Australian . an owner of livestock, as a rancher.
Origin of stockholder
Words nearby stockholder.
- stock footage
- stock guard
- stockholder of record
- stockholders' equity
- Stockholm syndrome
Dictionary.com Unabridged Based on the Random House Unabridged Dictionary, © Random House, Inc. 2023
How to use stockholder in a sentence
So although people who own little or nothing in the way of stocks or houses haven’t seen their wealth increase the way stockholders and homeowners have, some of them have gotten jobs that they otherwise might not have gotten.
Models differ, but they generally assume big stockholders shoulder the lion’s share.
What prompted me to write about this deal, which has been covered extensively, is that AT&T is planning to trash the income of its retail stockholders by sharply cutting its annual cash dividend.
“Trust, But Verify,” Boice titled a spring 2019 Medium post advertising the company, which at that point was facing lawsuits in five jurisdictions over unpaid rent, wages and bills and his own lack of response to questions from stockholders.
That means stockholders will have to wait quite a while to evaluate the company’s real-world performance.
This was about the time a Texas lumbering company was becoming a major stockholder in Time Inc.
The largest single stockholder at Exxon, CEO and chairman Rex Tillerson, controls .04 percent of its stock.
Those corporations aren't losing in this process, so there's no loss corresponding to a stockholder 's capital gain on stocks.
Suppose a stockholder buys all the stock of the other members, does the corporation still exist?
Lastly a stockholder who was present cannot complain that notice was not given to others; the objection is personal.
Under this system, each stockholder bought a certain number of shares.
If the company succeeded, each stockholder earned a profit based upon the number of shares he owned.
It is of a necessity that the stockholder should remain tranquil.
British Dictionary definitions for stockholder
/ ( ˈstɒkˌhəʊldə ) /
an owner of corporate capital stock
Australian a person who keeps livestock
Derived forms of stockholder
- stockholding , noun
Collins English Dictionary - Complete & Unabridged 2012 Digital Edition © William Collins Sons & Co. Ltd. 1979, 1986 © HarperCollins Publishers 1998, 2000, 2003, 2005, 2006, 2007, 2009, 2012
Controller Confusion: Realigning Controlling Stockholders and Controlled Boards
- See full issue
Corporate law has long been concerned with issues of control. In few matters is this concern as salient as Delaware’s 1 heightened standards of judicial review for matters involving two related concepts: a board of directors that is not independent (a “controlled board”) and a stockholder with substantial stock and control (a “controlling stockholder”). While control pervades both circumstances, the analytical processes, implications, and outcomes remain distinct.
Regarding the first matter, directors owe a duty of loyalty to the corporation and its stockholders, which requires that a director act in good faith and in the best interest of the corporation and stockholders, rather than in the director’s own interests or the interests of someone who the director is beholden to, controlled by, or otherwise dependent on. 2 Because certain contexts may incentivize a director to breach this duty — for example, a change in corporate control or policy that threatens the director’s position, or a transaction involving a conflict of interest — a court may apply heightened scrutiny, including the exacting “entire fairness review.” 3 One rationale for heightened review that Delaware courts can, and do, rely on is whether there is a controlled board — either by a third party or the directors’ self-interest.
Another factor that can lead courts to apply enhanced judicial review is the presence of controlling stockholders — stockholders who hold the majority of a company’s vote 4 or exercise effective control over the company while holding a sufficient and often substantial nonmajority vote. 5 Such substantial voting power may render the other stockholder votes “mere formalities.” 6 Because stockholder approval is required for “many of the most fundamental corporate changes” — including election of directors, amendments to certificates of incorporation, mergers, consolidations, sales of all or substantially all of a corporation’s assets, and dissolutions — a stockholder with substantial voting power has tremendous influence. 7 Largely because of this influence, a controlling stockholder owes fiduciary duties much like a director, and courts often apply heightened scrutiny to transactions involving a controlling stockholder. 8
Controller confusion — conflating minority controlling stockholders with controlled boards — underlies an ongoing doctrinal shift in Delaware law. While there is no bright-line rule for determining whether a minority stockholder is a controlling stockholder, the courts have historically emphasized the importance of significant voting power in evaluating controlling stockholder status. Yet, in recent years, a proliferation of Delaware cases has muddled the inquiry, de-emphasizing substantiality of share ownership and holding that stockholders with as little as 15% ownership and no effective voting power are controlling stockholders despite the presence of a controlled board. 9 This Note grapples with the doctrinal implications of conflating control doctrines, arguing that the courts should require control by virtue of stock ownership for controlling stockholder status and rely on the dependent board analysis when stock ownership is divorced from control.
This Note will proceed in three parts. Part I provides an overview of the controlling stockholder doctrine, including the rationale, fiduciary duties, and standards of review. Part II details the underlying case law, noting the court’s recent inconsistent application of the controlling stockholder inquiry and conflation of controlling stockholder status with controlled boards. This Part discusses the implications of the doctrinal shift, emphasizing the resulting uncertainty and inefficiency, and noting the increased likelihood of entire fairness review. Part III advances a doctrinal proposal, arguing that by redefining controlling stockholders to require control by virtue of stock ownership and modifying the board independence analysis to fill any enforcement gaps, courts can clarify a murky field, more logically align stockholder protections with controlled boards, and more adequately protect the company and its stockholders.
I. An Overview of Controlling Stockholder Doctrine
A. defining and justifying controlling stockholder status.
Under Delaware law, a controlling stockholder is a stockholder who either (1) controls a majority of the company’s voting power 10 or (2) exercises “a combination of potent voting power and management control such that the stockholder could be deemed to have effective control of the board without actually owning a majority of stock.” 11 Typically the stockholder must have “actual domination and control” over the company, either generally or regarding the transaction at issue. 12 While the control element of this test is a fact-intensive inquiry that cannot be established by voting power alone, the courts are less clear on the requisite threshold — or indeed if there is a requisite threshold — of voting power. 13 Nevertheless, courts frequently indicate that some substantial degree of voting power is necessary. 14
Courts distinguish controlling stockholders from noncontrolling stockholders primarily because controlling stockholders may have idiosyncratic goals beyond maximizing company returns and the ability to act in self-interest to achieve these goals, often to the detriment of noncontrolling stockholders. 15 Three categories of conflicted behavior may be particularly noteworthy: (1) a transfer-pricing scheme in which the controlling stockholder uses artificially inflated or deflated prices to shift value from one company to another while capturing the difference; (2) a company issuance of new shares to the controlling stockholder or to an entity owned by the controlling stockholder at low prices; and (3) asset stripping, wherein the controlling stockholder sells the company’s assets to another company owned by the controlling stockholder at a low price, or the opposite, in which the controlling stockholder forces the company to buy from another company owned by the stockholder at an inflated price. 16 Because a controlling stockholder’s “power is difficult to check,” 17 directors may fear the loss of their board seats or other benefits if they do not comply with the controlling stockholder’s wishes. 18 Thus, the controlling stockholder’s substantial voting power, and the ability that power brings to influence company and board actions, is a primary rationale underlying the controlling stockholder doctrine.
B. Implications of Controlling Stockholder Status
When a controlling stockholder is involved in a transaction, there are two primary consequences: imposition of fiduciary duties and enhanced transaction scrutiny. Under Delaware law, stockholders typically do not owe fiduciary duties. 19 However, because a controlling stockholder effectively controls the company, 20 a controlling stockholder assumes fiduciary duties similar to those of a director on the board. 21 The most notable of the fiduciary duties imposed on controlling stockholders is the duty of loyalty. A duty of loyalty requires a controlling stockholder act in the best interests of the company and its stockholders, not in the controlling stockholder’s self-interest to the detriment of the company or other stockholders. 22 A controlling stockholder may also owe fiduciary duties of disclosure and care. 23 Lynch v. Vickers Energy Corp. 24 is the primary duty of disclosure case, wherein the court found that a controlling stockholder violated the duty to disclose material facts by not revealing asset value estimates despite initiating a tender offer for a price that undervalued the assets. 25 In general, the duty of care is the duty to make informed business decisions, 26 although this duty may be tenuous at best when compared to the duty of loyalty. 27
Additionally, transactions involving controlling stockholders are generally subject to entire fairness, Delaware’s most onerous standard of review, rather than the default business judgment rule. When the business judgment rule applies, courts generally presume that directors act in the best interest of the corporation and will not second-guess the judgment of the board. 28 Because of this deference, “dismissal is typically the result.” 29 In contrast, entire fairness review is an exacting standard, requiring fair price (economic and financial considerations) and fair dealing (timing, structure, negotiations, disclosures, processes, and consents). 30 Under entire fairness review, a court that would otherwise defer to the business judgment of the board could instead find a transaction lacking in fair price or fair dealing, and thus void the transaction entirely. 31 Granted, it is possible to shift the burden of proving entire fairness from the defendant to the plaintiff if a transaction is subject to the approval of an effective special committee of independent directors or the approval of the noncontrolling stockholders in a fully informed, uncoerced vote. 32 Furthermore, when a transaction is subject to both conditions ab initio the court may review the transaction under the business judgment rule. 33 Nevertheless, absent such protections a conflicted controlling stockholder brings heightened transaction scrutiny that can be outcome determinative. 34
A controlling stockholder’s existence also implicates the company’s ability to cleanse a director’s breach of fiduciary duty. While ordinarily courts review interested transactions under entire fairness, corporations may avoid this onerous review if a board properly cleanses the transaction. 35 In Corwin v. KKR Financial Holdings , 36 the Delaware Supreme Court held that, unless a controlling stockholder is involved, the disinterested stockholders can “cleanse” a director’s breach of fiduciary duty, which generally results in a more deferential standard of review. 37 As scholars note, such deference “potentially insulates a great variety of . . . transactions that would otherwise merit closer judicial scrutiny.” 38 Accordingly, Corwin , in conjunction with other Delaware case law, “has widened the gulf between transactions that involve a controlling shareholder and those that do not.” 39 Thus, controlling stockholder status remains significant, both for the individual in acquiring fiduciary duties and for the board that may find its decisions subject to heightened scrutiny and difficult to cleanse.
II. Evaluating Controlling Stockholder Status
As Delaware has developed its controlling stockholder doctrine, it has produced pronounced analytical inconsistencies and varied treatment of the significance of substantial stock ownership. The courts have traditionally referred to the amount of stock required for controlling stockholder status as substantial. Yet, in a line of recent decisions, the courts have de-emphasized the substantiality requirement or declined to engage in an analysis of substantiality at all, without explicitly acknowledging an intent to alter the controlling stockholder doctrine. The result is an increasing state of uncertainty with far-reaching implications.
A. Cysive and Its Progeny
Guidance for controlling stockholder doctrine can largely be traced back to In re Cysive, Inc. Shareholders Litigation , 40 in which the Court of Chancery held that a 35% stockholder was a controlling stockholder, and emphasized that “[i]n practical terms, [the stockholder held] a large enough block of stock to be the dominant force in any contested . . . election.” 41 The court noted that “a 100% turn-out is unlikely,” 42 and that the controlling stockholder’s voting power must be significant enough to make that stockholder dominant even “without having to attract much, if any, support from public stockholders.” 43 Over the next decade, the court would repeatedly recognize this decision as perhaps “its most aggressive finding” of a minority controlling stockholder. 44
Following Cysive , the Delaware courts have continued to emphasize that substantial voting power is necessary for controlling stockholder status. Over the following years, the Delaware Court of Chancery frequently underscored the importance of the controlling stockholder’s voting power, describing the necessary amount as “significant” in nature. 45 On multiple occasions the court stressed the need for minority stockholders to “have such formidable voting and managerial power that they, as a practical matter, are no differently situated than if they had majority voting control.” 46 The Delaware Supreme Court has also addressed minority controlling stockholders’ voting power, most recently holding that “the Court of Chancery, consistent with the instructions of this Court, looked for a combination of potent voting power and management control such that the stockholder could be deemed to have effective control of the board without actually owning a majority of stock.” 47 Given this backdrop, it is reasonable to infer that courts, practitioners, and transaction planners relied on the necessity of some substantial degree of stock ownership to qualify a stockholder as a controlling stockholder.
B. Recent Developments Shifting the Focus
Yet, particularly in the past few years, the Delaware Court of Chancery has eroded the importance it once placed on the individual having a “formidable” or “significant” voting power. 48 This series of recent cases conflates controlling stockholder status with controlled boards or declines to engage in the controlling stockholder analysis at all. In these decisions ownership seems merely incidental, and the ability to control or dominate the board is not by virtue of the shares one holds, but rather through external factors independent from stockholder status. While there may be a valid inquiry into whether ownership as low as 15% is substantial enough to trigger controlling stockholder status, in these cases the court failed to engage in a meaningful analysis and may have unnecessarily relied on controlling stockholder status when other less controversial circumstances warranted entire fairness review. The recent case In re Tesla Motors, Inc. Stockholder Litigation 49 provides one illustrative example of the difficulty of navigating the line between controlling-stockholder transactions and control-related transactions more generally.
In 2018, Tesla stockholders challenged Tesla’s acquisition of SolarCity. 50 Elon Musk served as the head of both companies, and several Tesla directors had relationships with SolarCity. 51 Because the transaction was conditioned on the affirmative vote of the majority of Tesla’s disinterested stockholders, Corwin , which applies only absent a controlling stockholder, would ordinarily “cleanse” the transaction and result in the deferential business judgment rule. 52 Perhaps in an effort to circumvent such deferential review, the court ultimately held that, despite CEO Musk holding only 22% of Tesla’s outstanding voting power, “it is reasonably conceivable that Musk, as a controlling stockholder , controlled the Tesla Board in connection with the [a]cquisition.” 53 Musk’s status as a controlling stockholder precluded Corwin , and because the transaction was not conditioned on the additional protection of an independent special committee, the transaction was thus subject to entire fairness review. 54
While the court acknowledged that Musk’s ownership stake was “relatively low,” it rejected the defendants’ argument that the difference between Musk’s 22% stake and actual voting control was too great for Musk to constitute a controlling stockholder. 55 Instead, the court held that the focus is “on the de facto power of a significant (but less than majority) shareholder, which, when coupled with other factors, gives that shareholder the ability to dominate the corporate decision-making process.” 56 The court chose to focus on control elements that are divorced from voting power, including Musk’s influence within the company, which could enable him to dominate the board’s decisionmaking and gather stockholder support, and the lack of independence of the other directors. 57 As examples, the court noted Musk’s role in designing all Tesla products, and his significant and active recruiting of executives and engineers, raising capital for Tesla, and bringing investors to the company. 58 The court also found noteworthy Tesla’s SEC filing, which stated that Tesla is “highly dependent on the services of Elon Musk.” 59 Yet these are elements that are separable from stock ownership. If Musk were to sell all his stock, he would still hold the same de facto control as an executive and the face of the company. Accordingly, the key issue in Tesla seems to be a board that is not truly independent — a controlled board — not necessarily a controlling stockholder . But Tesla is only one of several recent examples of the court disregarding substantiality of shares, de-emphasizing the importance of a causal relationship between stock and control, and conflating controlling stockholder doctrine with problematic behavior.
In another 2018 case, this time involving Oracle’s acquisition of NetSuite, the court appeared to assume — without explicitly stating — that Larry Ellison, a 28% stockholder, was a controlling stockholder of Oracle due substantially to his influence and the deference shown to him. 60 The facts of In re Oracle Corp. Derivative Litigation 61 are similar to those of Tesla . Ellison was a cofounder and executive of Oracle, and cofounder and 45% owner of NetSuite. 62 The court focused on elements divorced from stock ownership such as directors’ business affiliations, “lucrative” director fees that would be at risk if directors sued Ellison, statements from directors about Ellison’s control of the directors and organization, and other factors that indicated a lack of director independence. 63 Even though the court based its decision on the lack of impartiality of the majority of the Oracle’s board, 64 the court’s passing assumption that Ellison was a controlling stockholder — without any analysis of controlling stockholder status — remains problematic. Oracle would not be the last decision to state that a minority stockholder is a controlling stockholder without considering substantiality of voting power. 65
Most recently, in FrontFour Capital Group LLC v. Taube 66 the Delaware Court of Chancery held that two brothers were controlling stockholders despite jointly owning less than 15% of the company. 67 Even more noteworthy, the alleged controlling stockholders were subject to “echo voting” requirements, which mandated that they vote their shares proportionately with the other stockholders. 68 Yet the court did not address whether the stockholders held substantial stock, or discuss the impact of echo voting restrictions, despite existing precedent emphasizing that restrictions on stockholder power are noteworthy factors in determining controlling stockholder status. 69
These cases, culminating with FrontFour , take the court to the precarious edge of what constitutes a “significant” but nonmajority stockholder or whether significance even matters in the inquiry. By conflating control-related behavior with controlling stockholder status and assuming controlling stockholder status without engaging in substantive analysis, the court has unnecessarily expanded the definition of controlling stockholder. 70 If the court is concerned about problematic behavior, it often has other vehicles, including lack of board independence, inadequate disclosures, or insufficient ratification, to achieve a more stringent review. 71
III. Ramifications of the Doctrinal Shift
This doctrinal ambiguity lends itself to problematic overapplication of entire fairness review that falls short of protecting stockholders from control-ridden transactions. As a result of this shifting doctrine, transaction planners and investors face heightened uncertainty that discourages substantial investment, skews bargaining power, and obfuscates changes in control. Stockholders and transaction planners can mitigate these harms, but the ability to bring a derailed doctrine back on track ultimately lies with the courts.
A. Entire Fairness Review and Stockholder Protections
Doctrinal ambiguity in conjunction with the diminishing importance of stockholder voting power may problematically enable control alone to carry the burden in warranting entire fairness review in controlling stockholder transactions. As one scholar notes, “if control were sufficient to invoke the fairness test, courts would be extremely busy reviewing the fairness of a multitude of transactions” and “basic business decisions.” 72 Expansion of entire fairness review is contrary to recognition of the democratic process by which stockholders elect the board to run the company, makes it more difficult to attract qualified company directors, and discourages beneficial risk-taking in corporate management. Given the onerous nature of entire fairness, it is both inefficient and costly. 73 Additionally, courts and scholars have long recognized that boards are better equipped to analyze business transactions. 74 The courts have repeatedly noted that this policy rationale underlies the business judgment rule and the courts’ reluctance to second-guess the judgment of the board. 75 And the decision to apply entire fairness rather than the business judgment rule can also be outcome determinative. 76
Additionally, some scholars have argued that reliance on controlling stockholder status (rather than director status) may actually impose slightly different fiduciary duties, which is problematic because not all fiduciary duties are created equal. In part because the threat that controlling stockholders pose is distinct from that posed by directors, “Delaware courts have long acknowledged that the duty of loyalty imposed on controlling shareholders is a very different constraint from the duty of loyalty imposed on corporate directors.” 77 For example, courts impose “more stringent” requirements on transactions involving controlling stockholders than those involving only corporate directors, 78 requiring that the transaction be conditioned on approval by an independent, special committee and a majority of the minority stockholders to receive the business judgment rule. 79 To the extent that the fiduciary duties differ between controlling stockholders and directors, reliance on controlling stockholder status rather than director status may result in differing obligations owed to the stockholders.
Furthermore, by relying on controlling stockholder doctrine in lieu of developing other control-related doctrine, the court may fall short in protecting stockholders by leaving open the risk that an individual exerting control over the stockholders, board, or transaction (a “controller”) with little or no stock will nevertheless exercise problematic behavior that a court may be unable to adequately scrutinize. Practically speaking, unless the court reaches a determination that an individual is a controlling stockholder or that the board was dependent, a controller is largely free to exert control. 80 This gap in protection from controllers means that companies and stockholders may be at risk from precisely those who lack strong financial incentives to behave in their interests. 81
B. Investor and Transaction Planner Uncertainty
With heightened uncertainty and the risk of ownership as low as 15% constituting controlling stockholder status, a reasonable investor may be incentivized to invest at a lower level. Breaching a fiduciary duty can result in serious consequences, including heightened standards of review, altered transaction outcomes, and monetary liability. 82 Given the severity of these consequences, it is reasonable for strategic investors to carefully consider the risk of acquiring controlling stockholder status. But with these latest rulings, investors previously relying on stock ownership to provide a guideline for controlling stockholder status will need to rethink their prior investments and exercise greater caution in investing going forward to minimize the risk of obtaining such status.
The uncertainty also skews bargaining power by pressuring transaction planners to unnecessarily include conditions that benefit one side. Companies have long since illustrated their reluctance to seek minority stockholder approvals absent the incentive of a more deferential standard of review, given “the leverage such a vote bestows.” 83 Originally, under Kahn v. Lynch Communication Systems, Inc ., 84 the Delaware Supreme Court permitted shifting the burden of proof for controlling stockholder transactions if the transaction was approved by either “an independent committee of directors or an informed majority of minority shareholders.” 85 When left with this choice, companies remained reluctant to seek minority stockholder approval, 86 and thus the court would later add the incentive of a more deferential standard of review when both conditions were included. 87 If a transaction does not involve a controlling stockholder, then transaction planners are unlikely to condition the transaction on minority approval, while when a transaction does involve a controlling stockholder, planners often include such approval conditions to receive more deferential review. Thus, when faced with heightened uncertainty on whether a transaction involves a controlling stockholder, risk-averse transaction planners seeking business judgment review will likely be incentivized to include both conditions, 88 despite the resulting leverage inequities, even when the transaction may be subject to business judgment review absent the approvals.
Transaction planners also face greater uncertainty in assessing whether a transaction results in a change of control, an event that both is priced into a transaction and influences whether transaction planners continue to pursue a transaction at all. A controlling stockholder’s involvement in a company, such as when a merger results in a corporation having a controlling stockholder, can constitute a “change of control” or “sale of control.” 89 In this context, directors are “charged with getting the best price for the stockholders at a sale of the company.” 90 Furthermore, many contractual agreements, such as employment contracts for executives, may also include a change-of-control provision granting third parties the right to receive payments or terminate the agreement in the event of a change in control. 91 Debt instruments may also contain “poison puts” that allow debtholders to sell their bonds back to the issuing corporation at a predetermined price in the event of a change of control. 92 Even if these contracts and instruments define change of control, the gulf between contractual definitions and the courts’ interpretation more broadly may widen. These consequences — from director obligations to potential loss of lucrative contracts — are just a few of the reasons why uncertainty in controlling stockholder doctrine is problematic for transaction planners.
Until the courts revise the doctrinal inquiry for controlling stockholders, transaction planners should carefully evaluate whether a minority stockholder with even an insubstantial voting stake could be at risk for controlling stockholder status. Stockholders can take several actions to reduce the risk of being designated a controlling stockholder: (1) minimize share ownership and exercise great caution if holding over 15%; (2) avoid involvement with the company’s board, management, or day-to-day operations; 93 and (3) limit ability to control the company or transaction, such as by self-disabling through a stockholder agreement 94 and not leveraging contractual rights to coerce the board. 95 Despite these suggestions, the burden of bringing clarity to this muddled doctrine lies with the Delaware courts, not the stockholders and transaction planners.
IV. A Doctrinal Proposal
It would defy rationality to argue that Elon Musk did not control Tesla, or that Larry Ellison did not control Oracle. Yet such control need not equate to controlling stockholder status. There is a key linguistic and substantive inquiry in the controlling stockholder doctrine: the importance of the stockholder. The Delaware Supreme Court should clarify its analysis to hold that a controlling stockholder must, substantially due to their stock ownership, exercise sufficient control over the board or company either in general or regarding the contested transaction. 96 While this inquiry is a fact-intensive one, the courts may find guidance in assessing substantiality under existing case law and using rebuttable presumptions. Voting power of over 40%, assuming such power is the largest of any holder or group of holders, would invoke a presumption of control by virtue of substantial stock and thus controlling stockholder status, while voting power below 25% would invoke a presumption of insufficient stock to provide control. 97
This proposal’s focus on substantiality of stock and a degree of causality between stock and control harkens back to the central justification underlying control-related doctrines — the importance of protecting the stockholders — by emphasizing the difference between a controlling stockholder and a controller more broadly. Prior Delaware case law has highlighted the necessity of control by virtue of stock for controlling stockholder status, noting that “when a shareholder, who achieves power through the ownership of stock , exercises that power by directing the actions of the corporation, he assumes the duties of care and loyalty of a director of the corporation.” 98 Yet, when control is divorced from ownership, the role of the stockholder is divorced from the problematic conduct, weakening the connection to the control-by-stock justification underlying the controlling stockholder doctrine and blurring the distinction between a controlling stockholder and a controlled board.
This proposal does more than simply bring the controlling stockholder inquiry in line with the doctrinal justifications and the substantiality of stock emphasized in Cysive . By focusing on a connection between significant stock ownership and control, and relying on other doctrines to address control separable from stock ownership, the proposal also better protects stockholders from controllers; if the courts wish to regulate transactions involving an individual exercising control (a “controller”), then a controlling stockholder analysis will fall short. Generally, the more equity an individual owns, the greater the incentive that individual has to preserve company value. Conversely, the lower the equity stake one has, the less the incentive to protect company value and the greater the incentive to advance private interests to the detriment of the company. 99 By focusing on controlling stockholder status rather than the controlled board, the courts may be impeding their ability to protect companies and stockholders from control by bad actors who would not fall within the controlling stockholder doctrine because of insufficient stock ownership. This could leave open the risk that individuals with little incentive to benefit the company — precisely those the court should be most concerned with regulating — will act in self-interest and still benefit from the deferential business judgment rule. If Elon Musk sold all of his stock prior to the transaction in Tesla , he would no longer be a stockholder, let alone a controlling stockholder. While one can make a good-faith argument that, even under Corwin , the transaction warranted heightened scrutiny, 100 the court’s willingness to rely on such reasoning is far from settled. Until the court establishes a pathway to heightened review absent a controlling stockholder’s presence, the court may find itself unable to scrutinize even the most control-ridden transactions.
Perhaps the most compelling justification for broadly imposing controlling stockholder duties without requiring control by virtue of substantial stock is the inability of the courts to otherwise review problematic transactions. However, such an argument conflates problematic behavior with a stockholder’s ability to control; the prime threat is not the controlling stockholder so much as the controller, irrespective of stock ownership, that interferes with the independence of the board. 101 Given transactions fraught with control over the board, the court has looked to controlling stockholder doctrine as a means of increasing scrutiny, despite the existence of a better alternative for more stringent review irrespective of stock ownership: board dependence.
Courts generally review a transaction under entire fairness when a majority of directors are personally interested in a board’s decision, not independent from an interested individual, or otherwise dominated by someone who is interested. 102 A director’s duty of loyalty also includes within it a duty of good faith, which a director violates when intentionally acting “with a purpose other than that of advancing the best interests of the corporation” or when “demonstrating a conscious disregard for [the director’s] duties.” 103 One could challenge Tesla , Oracle , and the like as falling within these types of breaches of director fiduciary duties.
Furthermore, there are safeguards in place to limit the business judgment rule under Corwin even absent a controlling stockholder. Under Corwin , the vote of the disinterested stockholders cannot be coerced. 104 Applying this principle, Sciabacucchi v. Liberty Broadband Corp. 105 held that, despite the lack of a controlling stockholder, Corwin did not apply because the disinterested stockholders’ vote was coerced. 106 In finding coercion, the court emphasized that two substantially unrelated items — a favorable acquisition and a dilutive share issuance to a 26% stockholder — were bundled into a single resolution submitted for stockholder vote. 107 The Delaware Court of Chancery would later expand on several ways in which a stockholder vote may be coerced. 108 Cases such as these illustrate that a controlling stockholder’s involvement is not necessary to decline to apply deferential review under Corwin .
Additionally, even if the courts find the board independence inquiry lacking, the proper remedy is not an expansion of controlling stockholder doctrine, but rather a revision to the board independence inquiry 109 or a shift to a controller inquiry that applies regardless of stock ownership. Thus, through redefining controlling stockholder status to require control by virtue of stock ownership and adapting alternative doctrines to fill any enforcement gaps, the courts can both clarify a murky field and better align stockholder protections with the fact-specific and control-related threat: often that of the controlled board rather than the controlling stockholder.
B. An Application to Recent Cases
Recall that in Tesla , despite other stockholders owning 78% of the company, the court held that Musk was a controlling stockholder. 110 Even more noteworthy, Musk’s control, including his senior positions, extensive recruiting, and status as the face of Tesla, was independent of stock ownership. 111 Under the proposed doctrinal inquiry, it is unlikely that Musk, as a holder of less than 25% of the company’s stock, had sufficient control by virtue of that stock to receive a controlling stockholder designation. 112 Does Musk’s failure to meet the elements necessary for controlling stockholder status mean that the court is unable to review Tesla’s acquisition of SolarCity under entire fairness? Certainly not.
The court itself concluded that “it is reasonably conceivable that a majority of the five Board members who voted to approve the Offer and Acquisition (Musk and Gracias recused themselves) were interested in the Acquisition or not independent of Musk.” 113 While ordinarily a dependent board warrants entire fairness review, under Corwin the approval by a majority of the other stockholders could enable review under the business judgment rule absent a controlling stockholder. 114 One could argue that the court would have been compelled to apply Corwin and defer to the business judgment of the board even in a control-filled transaction unless it found that Musk was a controlling stockholder. Yet there are two primary challenges to this argument: that Corwin is inadequate and that coercion precludes its application. While the adequacy of Corwin is a debated issue beyond the scope of this Note, 115 even when relying on Corwin in its current form, the Tesla court could both decline to find a controlling stockholder and refuse to apply Corwin . Indeed, the court did just that in Sciabacucchi , noting that “despite the lack of a controller . . . it [is] reasonably conceivable that the vote of the disinterested stockholders in this matter was structurally coerced . . . [and therefore] fails to cleanse the transactions here under Corwin .” 116 Existing precedent, including Sciabacucchi , “make[s] clear that a coerced vote is one in which the stockholders conceivably vote for a [transaction] for reasons other than [its] underlying merits.” 117 While the coercion element of Corwin remains largely untested in the Delaware courts, 118 Musk’s tremendous influence and the facts surrounding Tesla — including that Tesla’s own co-underwriter Goldman Sachs “publicly stated that SolarCity was the ‘worst positioned’ company in the solar energy sector for capitalizing on future growth in the industry” 119 — seem to suggest that votes in favor may have been coerced. 120
Oracle represents a simpler case. Ellison’s stock ownership of 28% falls below the presumptive controlling stockholder threshold but above the presumptive noncontrolling stockholder threshold. 121 Because the facts of the case seem to indicate that his control was not by virtue of stock ownership but rather due to other factors such as his roles as cofounder and CEO, under the doctrinal proposal he would likely not be a controlling stockholder. 122 However, while the Oracle court appears to have assumed that Ellison was a controlling stockholder, it did not explicitly reach that holding. Instead, the court relied on lack of board independence as a vehicle for combatting the controlled board, noting that “a majority of Oracle’s twelve-person board could not impartially consider a demand.” 123 Accordingly, the substantive outcome of the case — demand excuse — would remain unchanged while Ellison’s underlying status as a controlling stockholder would be altered.
Applying the doctrinal proposal to FrontFour is likewise relatively straightforward: at less than 15% ownership, the alleged controlling stockholders were well below the presumptive 25% threshold. 124 Furthermore, given that they were subject to echo voting requirements, their effective independent voting power was 0%. 125 Perhaps obviously given the low percentage ownership and contractual restrictions, the alleged controlling stockholders’ control was divorced from their stock ownership. 126 Much like Tesla , the transaction in FrontFour was approved by the stockholders, and while one could raise similar coercion arguments, there is another, simpler rationale for declining to apply Corwin . Corwin applies only where there is a fully informed vote of disinterested stockholders, and in FrontFour the court expressly held that the defendants failed to adequately disclose material information to the stockholders. 127 Thus, the court did not need to reach a decision on controlling stockholder status to review the transaction under entire fairness because Corwin would not apply regardless.
When it comes to control-related transactions, it is the analysis and not simply the standard of review that matters. Controlling stockholder status may bring fiduciary duties and outcome-determinative implications. Such a status should not be imputed to a stockholder merely in passing, particularly when such a stockholder possesses mere fractions of the full voting power and holds control independently from stock ownership. A desire to protect vulnerable stockholders from control-ridden transactions need not rely on muddling the controlling stockholder inquiry. While recent Delaware case law has further obscured controlling stockholder doctrine, courts can return to their roots from Cysive while also considering what distinguishes controlling stockholders from controllers: control substantially by virtue of the stock itself.
^ Because Delaware is a leading domicile for corporations and “generally considered to have the most well-developed body of [corporate] law,” this Note will focus on controlling stockholders under Delaware law. Scott V. Simpson & Katherine Brody, The Evolving Role of Special Committees in M&A Transactions: Seeking Business Judgment Rule Protection in the Context of Controlling Shareholder Transactions and Other Corporate Transactions Involving Conflicts of Interest , 69 Bus. Law. 1117, 1118 n.2 (2014); see also About the Division of Corporations , Del. Division Corps ., http://www.corp.delaware.gov/aboutagency [ https://perma.cc/GUH2-CXJ5 ] (stating that over 1,000,000 business entities and 66% of the Fortune 500 “have chosen Delaware as their legal home”).
^ See Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1345 (Del. 1987) (“[D]irectors must eschew any conflict between duty and self-interest.”); Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939); see also Del. Code Ann . tit. 8, § 102(b)(7) (West 2019).
^ See, e.g. , Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983) (“The requirement of fairness is unflinching in its demand that where one stands on both sides of a transaction, he has the burden of establishing its entire fairness, sufficient to pass the test of careful scrutiny by the courts.”); N.J. Carpenters Pension Fund v. infoGROUP, Inc., No. Civ.A 5334, 2011 WL 4825888, at *8, *11 (Del. Ch. Oct. 6, 2011) (applying entire fairness review to a transaction when a majority of the board lacked independence from an interested party); In re Tyson Foods, Inc. Consol. S’holder Litig., 919 A.2d 563, 596 (Del. Ch. 2007) (“As the majority of the Tyson board can be considered interested at all relevant times, transactions not sterilized by independent review receive no protection from the business judgment rule, and plaintiffs must only allege that the transactions were in some way unfair to shift the burden upon the defendants to prove their entire fairness.”).
^ E.g. , Weinstein Enters., Inc. v. Orloff, 870 A.2d 499, 507 (Del. 2005) (“[C]ontrol exists when a stockholder owns, directly or indirectly, more than half of a corporation’s voting power.”). While courts typically frame majority holders as controlling stockholders, it is possible for even a majority holder not to be a controlling stockholder if that individual does not exercise control over a particular matter or the board. See, e.g. , Williams v. Geier, 671 A.2d 1368, 1378 & n.22 (Del. 1996) (holding that a majority stockholder was not in control).
^ See , e.g. , Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 307 (Del. 2015) (en banc). Controlling stockholders dominate the modern corporate landscape. See Holger Spamann, Corporations § 2, https://opencasebook.org/casebooks/79342-corporations [ https://perma.cc/4JJ7-PXYY ] (noting that most corporations have a controlling stockholder); Jens Dammann, The Controlling Shareholder’s General Duty of Care: A Dogma that Should Be Abandoned , 2015 U. Ill. L. Rev. 479, 483; Ronald J. Gilson, Controlling Shareholders and Corporate Governance: Complicating the Comparative Taxonomy , 119 Harv. L. Rev. 1641, 1645–50 (2006).
^ Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 42 (Del. 1994).
^ Id. ; see Del. Code Ann . tit. 8, §§ 211, 242, 251–258, 263, 271, 275 (West 2020); Weinstein Enters ., 870 A.2d at 507.
^ See Pepper v. Litton, 308 U.S. 295, 306 (1939).
^ See FrontFour Capital Grp. LLC v. Taube, C.A. No. 2019-0100, 2019 WL 1313408, at *21 (Del. Ch. Mar. 22, 2019).
^ E.g. , Weinstein Enters ., 870 A.2d at 507.
^ Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 307 (Del. 2015) (en banc) (footnote omitted). Unaffiliated stockholders may constitute a controlling stockholder group, regardless of whether or not they would individually constitute a controlling stockholder, if the stockholders execute an agreement that gives them voting power, demonstrate a history of cooperation and coordination, or are connected in another “legally significant way.” E.g. , Dubroff v. Wren Holdings, LLC, C.A. Nos. 3940, 6017, 2011 WL 5137175, at *7 (Del. Ch. Oct. 28, 2011) (quoting Dubroff v. Wren Holdings, LLC, C.A. No. 3940, 2009 WL 1478697, at *3 (Del. Ch. May 22, 2009)); see also Thorpe ex rel . Castleman v. CERBCO, Inc., 676 A.2d 436, 438 (Del. 1996); In re Hansen Med., Inc. Stockholder Litig., C.A. No. 12316, 2018 WL 3025525, at *8 (Del. Ch. June 18, 2018); eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 25–26 (Del. Ch. 2010).
^ In re Sea-Land Corp. S’holders Litig., Civ. A. No. 8453, 1988 WL 49126, at *3 (Del. Ch. May 13, 1988); see also, e.g. , Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1113–14 (Del. 1994); Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1344 (Del. 1987); In re Tesla Motors, Inc. Stockholder Litig., C.A. No. 12711, 2018 WL 1560293, at *13 (Del. Ch. Mar. 28, 2018) (stating that a controlling stockholder’s domination and control may be “with respect to the challenged transaction” or “the board generally”); In re Rouse Props., Inc., C.A. No. 12194, 2018 WL 1226015, at *12 (Del. Ch. Mar. 9, 2018) (noting that control may be inferred); Superior Vision Servs., Inc. v. ReliaStar Life Ins. Co., No. Civ.A. 1668-N, 2006 WL 2521426, at *4 (Del. Ch. Aug. 25, 2006).
^ See, e.g. , Kahn , 638 A.2d at 1114–15; Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 70 (Del. 1989); see also Grant M. Hayden & Matthew T. Bodie, One Share, One Vote and the False Promise of Shareholder Homogeneity , 30 Cardozo L. Rev. 445, 474 n.128 (2008).
^ See, e.g. , In re Crimson Expl. Inc. Stockholder Litig., Civil Action No 8541, 2014 WL 5449419, at *10 (Del. Ch. Oct. 24, 2014).
^ See Yu-Hsin Lin, Controlling Controlling-Minority Shareholders: Corporate Governance and Leveraged Corporate Control , 2017 Colum. Bus. L. Rev. 453, 483; Ann M. Lipton, After Corwin : Down the Controlling Shareholder Rabbit Hole , 72 Vand. L. Rev. 1977, 1979 (2019).
^ See Spamann, supra note 5, § 2.2.1. See generally Ronald J. Gilson & Jeffrey N. Gordon, Controlling Controlling Shareholders , 152 U. Pa. L. Rev. 785, 786–87 (2003) (noting the primary ways a controlling stockholder may extract private benefits).
^ Daniel Wilson, Desirable Resistance: Kahn v. M&F Worldwide and the Fight for the Business Judgment Rule in Going-Private Mergers , 17 U. Pa. J. Bus. L. 643, 643 (2015).
^ Lipton, supra note 15, at 1981–82; see Lucian A. Bebchuk & Assaf Hamdani, Independent Directors and Controlling Shareholders , 165 U. Pa. L. Rev. 1271, 1274 (2017); see also Leo E. Strine, Jr., The Inescapably Empirical Foundation of the Common Law of Corporations , 27 Del. J. Corp. L. 499, 509 (2002) (analogizing controlling stockholders to “an 8oo-pound gorilla [that] wants the rest of the bananas” and independent directors to “little chimpanzees” who “cannot be expected to stand in the way”); cf. In re Pure Res., Inc., S’holders Litig., 808 A.2d 421, 436 (Del. Ch. 2002) (similar).
^ See Lipton, supra note 15, at 2004–05; see also S. Pac. Co. v. Bogert, 250 U.S. 483, 487–88 (1919) (noting that the majority occupies a fiduciary relation when it exercises control).
^ See supra notes 4–8 and accompanying text.
^ Dammann, supra note 5, at 481–82; see also Zahn v. Transamerica Corp., 162 F.2d 36, 42–43 (3d Cir. 1947) (finding a controlling stockholder’s fiduciary status “unmistakable,” id. at 42); Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 70 (Del. 1989); Aronson v. Lewis, 473 A.2d 805, 815 (Del. 1984) (“There must be coupled with the allegation of control such facts as would demonstrate that through personal or other relationships the directors are beholden to the controlling person.”); Sinclair Oil Corp. v. Levien, 280 A.2d 717, 719–23 (Del. 1971).
^ See Spamann, supra note 5, at § 2.2.1.
^ Cinerama, Inc. v. Technicolor, Inc., Civ. A. No. 8358, 1991 WL 111134 (Del. Ch. June 24, 1991), aff’d in part, rev’d in part on other grounds sub nom . Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993); Dammann, supra note 5, at 480.
^ 383 A.2d 278 (Del. 1977).
^ Id. at 279, 282.
^ See Smith v. Van Gorkom, 488 A.2d 858, 873 (Del. 1985).
^ See Dammann, supra note 5, at 496 (noting that while courts “have explicitly recognized a general duty of care,” there has not been “a single case in which a controlling [stock]holder was actually found liable for a mere violation of his general duty of care”); see also Abraham v. Emerson Radio Corp., 901 A.2d 751, 759 (Del. Ch. 2006) (“I am dubious that our common law of corporations should recognize a duty of care-based claim against a controlling stockholder . . . .”). Some scholars argue that this duty of care is a mere “doctrinal misstep.” Dammann, supra note 5, at 481 (arguing that courts should reject a general duty of care because controlling stockholders have “strong financial incentives to make informed decisions in the best interest of their corporations”).
^ See Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984); Zapata Corp. v. Maldonado, 430 A.2d 779, 782 (Del. 1981); Stephen M. Bainbridge, The Business Judgment Rule as Abstention Doctrine , 57 Vand. L. Rev. 83, 88–89 (2004); cf. Del. Code Ann . tit. 8, § 141(a) (West 2020) (“The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors . . . .”).
^ Singh v. Attenborough, 137 A.3d 151, 152 (Del. 2016).
^ Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983).
^ See Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1279–80 (Del. 1988).
^ Kahn v. M & F Worldwide Corp., 88 A.3d 635, 642 (Del. 2014).
^ Id. at 644; see also Flood v. Synutra Int’l, Inc., 195 A.3d 754, 762 (Del. 2018) (en banc) (finding that ab initio means “before any substantive economic negotiations”); Recent Case, Flood v. Synutra International, Inc. , 195 A.3d 754 (Del. 2018) , 132 Harv. L. Rev. 2386 (2019) (critiquing the court’s threshold in Synutra as vague and contrary to the holding of the case).
^ See AC Acquisitions v. Anderson, Clayton & Co., 519 A.2d 103, 111 (Del. Ch. 1986) (“Because the effect of the proper invocation of the business judgment rule is so powerful and the standard of entire fairness so exacting, the determination of the appropriate standard of judicial review frequently is determinative of the outcome . . . .”).
^ Lipton, supra note 15, at 1981.
^ 125 A.3d 304 (Del. 2015) (en banc).
^ See id. at 311–13.
^ Lipton, supra note 15, at 1984.
^ Id. at 1986–87 (discussing C&J Energy Servs., Inc. v. City of Miami Gen. Emps.’ and Sanitation Emps.’ Ret. Trust, 107 A.3d 1049 (Del. 2014) and Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014)).
^ 836 A.2d 531 (Del. Ch. 2003).
^ Id. at 551–52; see id. at 535, 551–52.
^ Id. at 552 n.30. In part because not all stockholders will engage in each vote, majority ownership is not necessary to control a company through electing the board, particularly when one group holds a large block of stock and the remaining stock is “widely scattered.” Gottesman v. Gen. Motors Corp., 279 F. Supp. 361, 368 (S.D.N.Y. 1967) (“This is called practical or working control.”); see Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1114–15 (Del. 1994). Furthermore, employees who receive stock as part of their compensation may be particularly inclined to support a controlling stockholder as a familiar party, favoring stability and consistency in governance.
^ In re Cysive , 836 A.2d at 552 .
^ In re Morton’s Rest. Grp., Inc. S’holders Litig., 74 A.3d 656, 665 (Del. Ch. 2013); see Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 307 & n.8 (Del. 2015) (en banc).
^ Superior Vision Servs., Inc. v. ReliaStar Life Ins. Co., No. Civ.A. 1668-N, 2006 WL 2521426, at *4 (Del. Ch. Aug. 25, 2006).
^ In re PNB Holding Co. S’holders Litig., No. Civ.A. 28-N, 2006 WL 2403999, at *9 (Del. Ch. Aug. 18, 2006); see, e.g. , In re Rouse Props., Inc., C.A. No. 12194, 2018 WL 1226015, at *11 (Del. Ch. Mar. 9, 2018); Morton’s , 74 A.3d at 664–65.
^ Corwin , 125 A.3d at 307 (footnote omitted).
^ While the court has not explicitly indicated an intent to change the controlling stockholder doctrine and depart from Cysive as an “aggressive” finding, the increasing complexity of transactions may be partly to blame. See Lipton, supra note 15, at 1980.
^ C.A. No. 12711, 2018 WL 1560293 (Del. Ch. Mar. 28, 2018).
^ See id. at *1.
^ See id. at *2–4, *17.
^ See id. at *1 & n.1. For a discussion of structural coercion and whether Corwin would indeed apply in such cases, see infra notes 115–20 and accompanying text.
^ In re Tesla , 2018 WL 1560293, at *1 (emphasis added); see id. at *2. This case would not be the first to consider controlling stockholder status at a low percentage of stock ownership. See, e.g. , In re Zhongpin Inc. Stockholders Litig., C.A. No. 7393, 2014 WL 6735457, at *7–9 (Del. Ch. Nov. 26, 2014), rev’d on other grounds sub nom. In re Cornerstone Therapeutics Inc., Stockholder Litig., 115 A.3d 1173 (Del. 2015).
^ In re Tesla , 2018 WL 1560293, at *12. In controlling stockholder transactions, generally the transaction must be conditioned on both the affirmative vote of the disinterested stockholders and an independent special committee to shift the standard of review to the business judgment rule. See Kahn v. M & F Worldwide Corp., 88 A.3d 635, 645 (Del. 2014).
^ In re Tesla , 2018 WL 1560293, at *14 (quoting Defendants’ Opening Brief in Support of Motion to Dismiss the Second Amended Complaint at 15, In re Tesla , C.A. No. 12711); see also id. at *19–20 (denying the defendants’ motion to dismiss on this reasoning).
^ Id. at *14 (emphasis omitted) (quoting Superior Vision Servs., Inc. v. ReliaStar Life Ins. Co., No. Civ.A. 1668-N, 2006 WL 2521426, at *4 (Del. Ch. Aug. 25, 2006)).
^ See id. at *15–19.
^ Id. at *2, *5.
^ Id. at *2 (quoting Second Amended Verified Class Action and Derivative Complaint at 7, In re Tesla , C.A. No. 12711).
^ See In re Oracle Corp. Derivative Litig., C.A. No. 2017-0337, 2018 WL 1381331, at *16 (Del. Ch. Mar. 19, 2018).
^ C.A. No. 2017-0337, 2018 WL 1381331.
^ Id. at *2, *4.
^ Id. at *17; see id. at *17–19.
^ Id. at *16.
^ See, e.g. , Basho Techs. Holdco B, LLC v. Georgetown Basho Inv’rs, LLC, C.A. No. 11802, 2018 WL 3326693, at *25–35 (Del. Ch. July 6, 2018) (assuming controlling stockholder status without stating the voting power of the alleged controlling stockholder). Like its predecessors, Basho reflects the court conflating other elements, such as unfair wielding of contractual rights, with controlling stockholder status. See id. at *29–31.
^ C.A. No. 2019–0100, 2019 WL 1313408 (Del. Ch. Mar. 22, 2019).
^ Id. at *5 & n.31, *21–22. One could argue that the corporate structures, which included management corporations, were so closely related that practically speaking the alleged controlling stockholders “owned” more than 15% of the company, see id. at *5 n.30. However, the court did not explicitly rely on such reasoning. Id. at *21–22.
^ See id. at *21 (mentioning echo voting, for the first and only time, merely in passing). Echo voting, also known as shadow voting or mirror voting, is when certain votes are cast proportionately to reflect the other votes. Mirror Voting , Farlex Fin. Dictionary , https://financial-dictionary.thefreedictionary.com/Mirror+voting [ https://perma.cc/ZZJ2-SHY2 ].
^ See, e.g. , Sciabacucchi v. Liberty Broadband Corp., C.A. No. 11418, 2017 WL 2352152, at *17–18 (Del. Ch. May 31, 2017) (discussing an agreement preventing the 26% stockholder from acquiring over 35%, designating more than 40% of the directors, or soliciting proxies or contests).
^ This conflation of bad behavior with controlling stockholder status is not universal, however. See, e.g. , id. at *3–4, *7, *17, *20–23 (distinguishing controlling stockholder status from board independence). It is possible that recent decisions like Tesla and Oracle are simply exceptional cases, involving highly entangled founders and CEOs, and particularly deferential boards.
^ See Del. Code Ann . tit. 8, § 144( a ) (West 2020); Williams v. Geier, 671 A.2d 1368, 1382–83 (Del. 1996) (noting that approval can be structurally coerced); infra section IV.B, pp. 1725–27.
^ Mary Siegel, The Erosion of the Law of Controlling Shareholders , 24 Del. J. Corp. L. 27, 30 (1999); see id. at 31 n.18 (noting “the extremely vague and open-ended nature of the fairness standard” (quoting Michael P. Dooley, Fundamentals of Corporation Law 610 (1995))).
^ Id. at 72.
^ See Beard v. Elster, 160 A.2d 731, 738 (Del. 1960) (“[W]e are precluded from substituting our uninformed opinion for that of experienced business managers of a corporation . . . .”); Reading Co. v. Trailer Train Co., No. 7422, 1984 WL 8212, at *4 (Del. Ch. Mar. 15, 1984) (“[C]ourts should be loathe to interfere with the internal management of corporations or to interfere with their business decisions unless statutory or case law indicates they have overstepped their bounds.”).
^ See, e.g. , Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 306 (Del. 2015) (en banc) (“For sound policy reasons, Delaware corporate law has long been reluctant to second-guess the judgment of a disinterested stockholder majority . . . .”); Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (“The business judgment rule is an acknowledgment of the managerial prerogatives of Delaware directors under Section 141(a).”); id. at 811 (“A cardinal precept of the General Corporation Law of the State of Delaware is that directors . . . manage the business and affairs of the corporation.”); Gries Sports Enters., Inc. v. Cleveland Browns Football Co., 496 N.E.2d 959, 963 (Ohio 1986) (explaining the presumption that the board is “better equipped than the courts to make business judgments”); id. at 964 (noting that the directors’ judgment “will be respected by the courts”). The General Corporation Law of Delaware states that “[t]he business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided.” Del. Code Ann . tit. 8, § 141(a).
^ See supra p. 1712; see also Nixon v. Blackwell, 626 A.2d 1366, 1376 (Del. 1993).
^ Dammann, supra note 5, at 504 (citing Cinerama, Inc. v. Technicolor, Inc., Civ. A. No. 8358, 1991 WL 111134, at *19 (Del. Ch. June 24, 1991), aff’d in part , rev’d in part on other grounds sub nom . Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993)).
^ Id. at 505 (noting that, absent a controlling stockholder, “independent director approval and shareholder approval are alternative ways of shielding the transactions”).
^ Kahn v. M & F Worldwide Corp., 88 A.3d 635, 644 (Del. 2014).
^ Colloquially, “controller” is sometimes used as shorthand for “controlling stockholder.” Other times, a “controller” is simply an individual exercising control over another or over the board. Generally, the courts impose duties and heightened scrutiny on the former but not the latter. This linguistic ambiguity may contribute to doctrinal uncertainty under existing law. For the purposes of this Note, “controller” refers more broadly to an individual (stockholder or nonstockholder) exerting control over the company, board, or challenged transaction.
^ See Dammann, supra note 5, at 504–05 (relying on the assumption that, largely because of the economic interests given substantial stock ownership, controlling stockholders have financial incentives that reduce the need for a general duty of care).
^ See, e.g. , Del. Code Ann . tit. 8, § 102(b)(7) (West 2020); Basho Techs. Holdco B, LLC v. Georgetown Basho Inv’rs, LLC, C.A. No. 11802, 2018 WL 3326693, at *22 (Del. Ch. July 6, 2018) (“A claim for breach of fiduciary duty is an equitable tort.”).
^ Robert S. Reder, Chancery Court Again Grants Early Dismissal of Litigation Challenging Control Stockholder-Led Buyout , 72 Vand. L. Rev. En Banc 11, 12 (2018); see also Guhan Subramanian, Fixing Freezeouts , 115 Yale L.J. 2, 11, 16–17 (2005).
^ 638 A.2d 1110 (Del. 1994).
^ Id. at 1117 (emphasis added); see Wilson, supra note 17, at 655–56.
^ Subramanian, supra note 83, at 16–17 (noting that, because of the option, “controllers have no further incentive to provide a [majority-of-the-minority] condition”).
^ See In re MFW S’holders Litig., 67 A.3d 496, 535 (Del. Ch. 2013); Lyman Johnson, Unsettledness in Delaware Corporate Law: Business Judgment Rule, Corporate Purpose , 38 Del. J. Corp. L. 405, 410–23 (2013). Shortly after, the court would affirm these conditions as part of a multifactor test. See Kahn v. M & F Worldwide Corp., 88 A.3d 635, 645 (Del. 2014).
^ However, Delaware law encourages protection of minority stockholders, and courts could view such actions as simply new best practices. See Kahn , 88 A.3d at 643 (“[T]he common law equitable rule that best protects minority investors is one that encourages controlling stockholders to accord the minority both procedural protections.”); cf. Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd, 177 A.3d 1, 37 (Del. 2017) (endorsing certain techniques partly because they encourage best practices). One could argue, though, that if the court is concerned with protecting minority stockholders, it should not rely on a murky doctrine that provides enhanced protections only to transactions involving risk-averse transaction planners and stockholders exerting control.
^ See, e.g. , Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 46 (Del. 1994) (finding a change in control when a corporation had no controlling stockholder pre-merger but would have a controlling stockholder post-merger); Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182–85 (Del. 1986) (noting that a merger resulting in a corporation having a controlling stockholder could constitute a change of control subject to enhanced judicial review); James D. Cox & Randall S. Thomas, Delaware’s Retreat: Exploring Developing Fissures and Tectonic Shifts in Delaware Corporate Law , 42 Del. J. Corp. L. 323, 331–33 (2018).
^ Revlon , 506 A.2d at 182.
^ Courts have nearly universally held that such agreements are both enforceable and consistent with directors’ fiduciary duties absent a conflict of interest, and thus usually view change-of-control provisions under the business judgment rule. See, e.g. , In re Walt Disney Co. Derivative Litig., 731 A.2d 342, 366–69 (Del. Ch. 1998), aff’d in part, rev’d in part sub nom . Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
^ See, e.g. , San Antonio Fire & Police Pension Fund v. Amylin Pharm., Inc., 983 A.2d 304, 310, 319 (Del. Ch.), aff’d , 981 A.2d 1173 (Del. 2009).
^ See Lipton, supra note 15, at 1991 (“[P]ersons who control the day-to-day functioning of the corporation are in a position to retaliate against the company should their desires be thwarted, and if directors believe they must bow to their wishes to avoid that result, those persons, too, could be deemed controlling stockholders.”). For example, stockholders should avoid explicitly or implicitly threatening the independent directors, such as with the loss of a board seat. See id. ; see also Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1114–15 (Del. 1994); In re Tesla Motors, Inc. Stockholder Litig., C.A. No. 12711, 2018 WL 1560293, at *16 & n.242 (Del. Ch. Mar. 28, 2018); In re Zhongpin Inc. Stockholders Litig., C.A. No. 7393, 2014 WL 6735457, at *9 (Del. Ch. Nov. 26), rev’d on other grounds sub nom . In re Cornerstone Therapeutics Inc., Stockholder Litig., 115 A.3d 1173 (Del. 2014); In re Pure Res., Inc., S’holders Litig., 808 A.2d 421, 436 (Del. Ch. 2002). The absence of control over day-to-day management may weigh against controlling stockholder status. See, e.g. , In re Rouse Props., Inc., C.A. No. 12194, 2018 WL 1226015, at *19–20 (Del. Ch. Mar. 9, 2018); In re W. Nat’l Corp. S’holders Litig., No. 15927, 2000 WL 710192, at *6 (Del. Ch. May 22, 2000). Stockholders should also avoid threatening the corporation’s well-being in a manner that forces directors to acquiesce to protect the corporation. See Basho Techs. Holdco B, LLC v. Georgetown Basho Inv’rs, LLC, C.A. No. 11802, 2018 WL 3326693, at *29–30 (Del. Ch. July 6, 2018) (threatening to limit financing access); Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 465 (Del. Ch. 2011) (threatening to block dividends to minority stockholders). See generally Lipton, supra note 15, at 1992 (critiquing tests that look to the likelihood of retaliation against the company as having “the ironic effect of designating those shareholders with the least amount of voting power as controllers”).
^ See, e.g. , In re Rouse , 2018 WL 1226015, at *18–20; In re W. Nat’l Corp ., 2000 WL 710192, at *6; Lipton, supra note 15, at 1990 n.73.
^ Superior Vision Servs., Inc. v. ReliaStar Life Ins. Co., No. Civ.A. 1668-N, 2006 WL 2521426, at *5 (Del. Ch. Aug. 25, 2006); Lipton, supra note 15, at 1991.
^ See Siegel, supra note 72, at 72 (“[A] majority shareholder might well cede control over a particular transaction in order to avoid the burdens that attend to being a controlling shareholder.”).
^ Indeed, despite the indeterminacy of the meaning of controlling stockholder , existing guidelines leverage similar presumptions when defining control . See, e.g. , Del. Code Ann . tit. 8, § 203(c)(4) (West 2020). Alternatively, courts and transaction planners may wish to explore whether there is an average percentage ownership necessary to win a proxy fight or other similar measures the courts could assess for whether nonmajority voting power is sufficient. This proposal’s use of rebuttable presumption percentages is not meant to create a dispositive numerical cut-off. Rather, these numbers are meant to provide a helpful rule of thumb and ensure courts are carefully considering stock ownership in a controlling stockholder inquiry. Whether the doctrinal proposal framed here is advanced as a rule or a standard, the underlying conceptual emphasis on control by virtue of stock remains unchanged. While the discussion of rules versus standards is beyond the scope of this Note, it is a robust area of debate in scholarship more broadly. See, e.g. , Louis Kaplow, Rules Versus Standards: An Economic Analysis , 42 Duke L.J. 557, 560, 622 (1992).
^ Cinerama, Inc. v. Technicolor, Inc., Civ. A. No. 8358, 1991 WL 111134, at *19 (Del. Ch. June 24, 1991) (emphasis added), aff’d in part , rev’d in part on other grounds sub nom . Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993). The courts would continue to rely on this language in subsequent decisions. See, e.g. , Pfeffer v. Redstone, 965 A.2d 676, 691 n.52 (Del. 2009); Ford v. VMware, Inc., C.A. No. 11714, 2017 WL 1684089, at *21 (Del. Ch. May 2, 2017); HITE Hedge LP v. El Paso Corp., C.A. No. 7117, 2012 WL 4788658, at *3 n.28 (Del. Ch. Oct. 9, 2012).
^ See Lucian A. Bebchuk & Kobi Kastiel, The Perils of Small-Minority Controllers , 107 Geo. L.J. 1453, 1465 (2019) (noting that a “large equity stake in the controlled company provides powerful financial incentives to maximize company value”); cf. id. at 1465–66.
^ See infra notes 113–20 and accompanying text.
^ In some decisions the Delaware courts do distinguish between controlling stockholders and controlled boards. See, e.g. , In re KKR Fin. Holdings LLC S’holder Litig., 101 A.3d 980, 995–96 (Del. Ch. 2014) (considering the inquiries separately).
^ See, e.g. , Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1341 (Del. 1987); In re PNB Holding Co. S’holders Litig., No. Civ.A. 28-N, 2006 WL 2403999, at *12 (Del. Ch. Aug. 18, 2006); AC Acquisitions Corp. v. Anderson, Clayton & Co., 519 A.2d 103, 111 (Del. Ch. 1986); see also Del. Code Ann . tit. 8, § 144(a) (West 2020). Some scholars argue that even independent directors may have incentives to follow a controlling stockholder’s wishes or otherwise lack adequate incentives to protect other investors. See Bebchuk & Hamdani, supra note 18, at 1284.
^ In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 67 (Del. 2006) (quoting In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 755 (Del. Ch. 2005)).
^ See Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 311–13 (Del. 2015) (en banc); Cox & Thomas, supra note 89, at 339–40.
^ C.A. No. 11418, 2017 WL 2352152 (Del. Ch. May 31, 2017).
^ See id. at *4 (“The result of this determination — that there is no controller but that Corwin does not apply due to structural coercion — simply means that the business judgment rule is not imposed via ratification under Corwin .”).
^ See id. ; Cox & Thomas, supra note 89, at 340 & n.98.
^ See In re Rouse Props., Inc., C.A. No. 12194, 2018 WL 1226015, at *21 (Del. Ch. Mar. 9, 2018) (discussing inherent, structural, and situational coercion).
^ While historically Delaware’s analysis of lack of independence was narrow — focusing on familial or financial ties with a director — recently the courts have indicated an increased willingness to consider social and business ties as part of the director independence inquiry. See, e.g. , Marchand v. Barnhill, 212 A.3d 805, 820 (Del. 2019); Sandys v. Pincus, 152 A.3d 124, 126 (Del. 2016); Del. Cty. Emps. Ret. Fund v. Sanchez, 124 A.3d 1017, 1022–24 (Del. 2015); In re Oracle Corp. Derivative Litig., No. 2017-0337, 2018 WL 1381331, at *15 (Del. Ch. Mar. 19, 2018) (emphasizing that directors can be sufficiently affected by professional or personal friendships that exceed familial closeness and loyalty). This shift may better reflect the relationships that influence behavior and give an individual control over the board of a company.
^ See In re Tesla Motors Stockholder Litig., C.A. No. 12711, 2018 WL 1560293, at *2 (Del. Ch. Mar. 28, 2018).
^ See id. at *16.
^ As mentioned, the 25% guideline is, however, a rebuttable presumption. One could argue that, given the composition of Tesla’s stockholders at that point in time, 25% was sufficient ownership to control the board. If that were the case, then the court could hold that Musk was a controlling stockholder. While the outcome would then be similar to the actual holding of Tesla , the court would need to explicitly engage with the relationship between ownership and control to rebut the presumptive threshold.
^ In re Tesla , 2018 WL 1560293, at *17. The court found it noteworthy that several Tesla directors had relationships with SolarCity and that Musk had numerous opportunities to influence the board’s consideration of the transaction. See id. at *2, *5–7, *17–22. SolarCity’s board may have also been conflicted. Nancy Pfund, a member of the SolarCity board and one of two members on the SolarCity special committee that negotiated and approved the transaction, “is a close friend of Musk’s and has said that ‘[h]e’s always been a master of the universe in my mind.’” Id. at *3 (alteration in original) (quoting Second Amended Verified Class Action and Derivative Complaint, supra note 59, at 13).
^ See Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 308 (Del. 2015) (en banc).
^ Given the discussion in this Note, one challenge to Corwin that may be particularly obvious is that if controlling stockholders are so problematic, then so too are controllers, and thus Corwin should be narrowed to apply only to transactions that do not involve a controller or controlling stockholder. The disparate treatment of controlling stockholders and controllers generally is an active area of legal scholarship. See, e.g. , Lipton, supra note 15, at 2007 (arguing that courts should focus on mechanisms of self-help available to noncontrolling stockholders).
^ C.A. No. 11418, 2017 WL 2352152, at *20 (Del. Ch. May 31, 2017).
^ Brandon Mordue, The Revlon Divergence: Evolution of Judicial Review of Merger Litigation , 12 Va. L. & Bus. Rev. 531, 572 (2018).
^ See id. at 586.
^ In re Tesla Motors, Inc. Stockholder Litig., C.A. No. 12711, 2018 WL 1560293, at *7 (Del. Ch. Mar. 28, 2018).
^ See id. at *2, *6–7.
^ See id. at *3–4.
^ Id. at *16. The court noted that a key inquiry in the independence analysis is whether “a director’s decision is based on the corporate merits . . . rather than extraneous considerations or influences.” Id. at *15 (quoting Aronson v. Lewis, 473 A.2d 805, 816 (Del. 1984)). Indeed, the court emphasized that a lack of director independence may be established by alleging that a director is influenced by another party in a manner that undermines that director’s ability to evaluate based on the merits. Id. The court explained that “professional or personal friendships, which may border on or even exceed familial loyalty and closeness,” may be sufficient. Id. (quoting Beam v. Stewart, 845 A.2d 1040, 1050 (Del. 2004)).
^ Id. at *5 n.31, *21.
^ Id. at *21–24 (emphasizing extensive phone contact and “personal adoration,” id. at 24, of the alleged controlling stockholders).
^ Id. at *29. The court noted that the proxy filing created the misleading impression that the special committee process was effective, and emphasized that the defendants failed to disclose certain expressions of interest, standstill agreements, and third-party proposals to stockholders. Id. at *28–30. In other cases, the Delaware courts have referred to mistaken beliefs or ignorance surrounding a stockholder vote as “situational coercion.” In re Rouse Props., Inc., C.A. No. 12194, 2018 WL 1226015, at *21 (Del. Ch. Mar. 9, 2018).
- Corporate Law
March 10, 2020
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What are the board of directors’ responsibilities to their shareholders?
The structure of publicly listed corporations and the marketplace is strategically designed to benefit all parties and society in general. Board directors, managers, shareholders and stakeholders all play a specific role in the marketplace. Boards of directors have specific responsibilities to their shareholders. Each group has specific duties and responsibilities that correspond to their role. Occasionally, there is a slight overlap in roles. For example, shareholders are demanding more say in issues that have traditionally been board matters. As their title suggests, board directors have many duties related to directing the operation, so it seems fitting that they have many responsibilities to their shareholders. As a rule, when everyone stays in their own lane, everyone stands to profit in one or more ways. Private and public corporations offer shares of their companies to investors, which provides their companies with operating revenue. The relationship between private companies and their shareholders is most notably outlined in the corporate charter, shareholder agreements and other shareholder provisions. In public and privately owned corporations, most shareholders have common rights and an established relationship with the company and its board related to their shareholder ownership.>> Learn More On Our "Modern Governance: The How-To Guide" Whitepaper
Clarifying Roles and Ownership Perspectives Between Board Directors and Shareholders
To clarify roles in corporate partnerships in the most simplistic of terms, the board of directors is responsible for overseeing the affairs of the company and protecting the interests of the shareholders. Senior managers of the company are responsible for managing the day-to-day operations of the corporation. Shareholders are most interested in making a financial return on their investment. Shareholders are often described as being 'owners' of the corporations in which they invest. That is partially true, and perhaps wholly true, depending on how one defines 'owner.' In the strictest sense of the word, shareholders are only partial owners of a company because they don't solely retain full rights and responsibilities. Shareholder rights have been increasing as a way of ensuring good governance. For example, shareholder meetings provide a venue for shareholders to get in on the loop of pertinent issues and vote on them. Shareholders of private companies are even less entitled to information because private companies aren't bound by the same rigid federal regulations that apply to publicly held companies. While boards of directors maintain the bulk of control over corporations, shareholders of private and public companies can often vote out directors if they garner a majority and make a strong enough push for it. While shareholders lack director control over the corporations they invest in, their degree of ownership gives them some degree of power over board director nominees and compensation issues.
Board of Directors' Responsibilities to Shareholders
The primary responsibilities of board directors to shareholders relate to their fiduciary duties, including the duty of care, duty of loyalty and duty of obedience. These duties require board directors to place the best interests of the company ahead of their own. They must make decisions for the company and act in a manner that an ordinary, prudent person would. The duty of obedience requires boards to ensure that the company remains in compliance with all laws and regulations. Another responsibility that board directors have to shareholders is to compose and maintain a diverse, independent and highly competent board. Sound decision-making only comes from a wide variety of perspectives. Shareholders are entitled to know that the board overseeing the company's operations is well-qualified and up to the task. Boards are required to take minutes of their meetings to detail the issues that they're working on. Shareholders may request copies of board meeting minutes if they're looking for assurance that the board is actively fulfilling their duties of oversight and strategic planning. This doesn't mean that shareholders have any say in directing the issues the board chooses to tackle or the way they prioritize issues. Shareholders look for assurance that companies are financially strong currently and will continue to grow and prosper. The board of directors has an explicit responsibility to form a short-term plan of one to two years to ensure sustainability. In addition, shareholders are interested in long-term growth for continued security and prosperity. Board directors also have a responsibility to oversee all departments and aspects of the corporation. The responsibility includes making sure operations are running efficiently, company operations are in alignment with the organization's purpose, there are no incidences of fraud, they communicate the corporate culture throughout the organization, and they conduct oversight over all departments and operations of the company. The annual audit gives the shareholders a clear picture of the company's financial status and outlook. Boards of directors are accountable to shareholders to conduct an annual audit by independent directors that is accurate, complete and timely. In today's climate, shareholders also expect financial records that are concise, readable and easily understandable. The board of directors is responsible for hiring, monitoring and firing the CEO and other senior management executives. Shareholders expect C-suite-level managers to be competent, knowledgeable and capable of carrying out the board's strategic plans. Boards owe it to their shareholders to provide the necessary oversight of senior management. The company's reputation is an important concern for shareholders. They rely on the board of directors to protect the company from fraudulent practices, bad press and other issues that can harm a company's reputation. Boards must work to identify reputational risks that could result in lost revenue, increased operating expense, capital or regulatory costs, and destruction of shareholder value. In addition to shareholders having more say in board decisions, another place where roles become slightly blurred is that major shareholders are often also part of upper management. Shared roles can become problematic in the boardroom when boards and shareholders don't share the same perspectives on short-term strategies, long-term strategies or both. A board portal system by Diligent Corporation is the best way for boards to manage their many responsibilities to their shareholders. Governance Cloud is a suite of governance software tools that assist boards in governance activities and responsibilities with tools like board self-assessments, entity management tools, secure messaging, agenda and minutes software, D&O questionnaires and more. As governance best practices, laws and regulations continue to evolve, Diligent software designers are staying ahead of the curve with new features and products to fully support good governance at every stage.
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Why Investors Need to Take Advantage of These 2 Consumer Discretionary Stocks Now
Earnings are arguably the most important single number on a company's quarterly financial report. Wall Street clearly dives into all of the other metrics and management's input, but the EPS figure helps cut through all the noise.
We know earnings results are vital, but how a company performs compared to bottom line expectations can be even more important when it comes to stock prices, especially in the near-term. This means that investors might want to take advantage of these earnings surprises.
The ability to identify stocks that are likely to top quarterly earnings expectations can be profitable, but it's no simple task. Here at Zacks, our Earnings ESP filter helps make things easier.
The Zacks Earnings ESP, Explained
The Zacks Earnings ESP, or Expected Surprise Prediction, aims to find earnings surprises by focusing on the most recent analyst revisions. The basic premise is that if an analyst reevaluates their earnings estimate ahead of an earnings release, it means they likely have new information that could possibly be more accurate.
With this in mind, the Expected Surprise Prediction compares the Most Accurate Estimate (being the most recent) against the overall Zacks Consensus Estimate. The percentage difference provides the ESP figure. The system also utilizes our core Zacks Rank to provide a stronger system for identifying stocks that might beat their next quarterly earnings estimate and possibly see the stock price climb.
In fact, when we combined a Zacks Rank #3 (Hold) or better and a positive Earnings ESP, stocks produced a positive surprise 70% of the time. Perhaps most importantly, using these parameters has helped produce 28.3% annual returns on average, according to our 10 year backtest.
Stocks with a ranking of #3 (Hold), or 60% of all stocks covered by the Zacks Rank, are expected to perform in-line with the broader market. Stocks with rankings of #2 (Buy) and #1 (Strong Buy), or the top 15% and top 5% of stocks, respectively, should outperform the market; Strong Buy stocks should outperform more than any other rank.
Should You Consider Lululemon?
Now that we understand what the ESP is and how beneficial it can be, let's dive into a stock that currently fits the bill. Lululemon ( LULU Quick Quote LULU - Free Report ) earns a #3 (Hold) right now and its Most Accurate Estimate sits at $2.58 a share, just three days from its upcoming earnings release on August 31, 2023.
LULU has an Earnings ESP figure of +2.1%, which, as explained above, is calculated by taking the percentage difference between the $2.58 Most Accurate Estimate and the Zacks Consensus Estimate of $2.53. Lululemon is one of a large database of stocks with positive ESPs. Make sure to utilize our Earnings ESP Filter to uncover the best stocks to buy or sell before they've reported.
LULU is just one of a large group of Consumer Discretionary stocks with a positive ESP figure. Netflix ( NFLX Quick Quote NFLX - Free Report ) is another qualifying stock you may want to consider.
Slated to report earnings on October 17, 2023, Netflix holds a #3 (Hold) ranking on the Zacks Rank, and it's Most Accurate Estimate is $3.51 a share 50 days from its next quarterly update.
The Zacks Consensus Estimate for Netflix is $3.48, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +1.01%.
LULU and NFLX's positive ESP figures tell us that both stocks have a good chance at beating analyst expectations in their next earnings report.
Find Stocks to Buy or Sell Before They're Reported
Use the Zacks Earnings ESP Filter to turn up stocks with the highest probability of positively, or negatively, surprising to buy or sell before they're reported for profitable earnings season trading. Check it out here >>
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Goldman, JPMorgan, Morgan Stanley, UBS in $499 million stock lending settlement
Goldman Sachs, JPMorgan Chase, Morgan Stanley and UBS have agreed to pay $499 million to settle an antitrust lawsuit by investors who accused them of conspiring to stifle competition in the stock lending market.
The settlement was disclosed on Wednesday in a filing in Manhattan federal court, and requires a judge’s approval. It also covers EquiLend, a joint venture among the defendants.
Investors have reached $580 million of settlements with five banks, including an $81 million accord in Feb. 2022 with Credit Suisse, which UBS bought in June.
As part of the settlement, they agreed to cooperate in the investors’ case against the final defendant, Bank of America.
Spokespeople for Bank of America and UBS declined to comment. The other banks did not immediately respond to requests for comment.
Investors accused the banks of having conspired since 2009 to relegate the stock lending market to “the stone age” by boycotting startup platforms.
They said the banks did this by using their positions on EquiLend’s board to maintain monopoly control over the market, and charge excessive fees to investors.
The lawsuit began in Aug. 2017.