CHAPTER 5 SHAREHOLDER INFORMATIONAL RIGHTS AND PROXY VOTING

A. Shareholder Informational Rights Under State Law

Hypothetical: Tryon, a hedge fund, and is run by Nelson Petlz. He thinks Du Pont is badly
managed and that it could be more profitable broken up. He arrives at this conclusion from
publicly available information; but it wants to see more information. So it hears that
McKinsey was commissioned to do a study for Du Pont, which was presented to the Du Pont
BOD, and Peltz would like to see it. CEO says no.
o What are t he options to get the internal information? Du Pont is a shareholder.
Under DGCL 220(b): Any stockholder . . . have the right during the usual
hours for business to inspect for any proper purpose, and to make copies and
extracts from: books and records
o Theres the question of whether books and records captures the study conducted
by McKinsey.
o Saito v. McKesson (Del. 2002): The source of the documents and the manner in
which they are obtained by the corporation have little or no bearing on a
stockholders inspection rights. The issue is whether the documents are necessary
and essential to satisfy the stockholders proper purpose.
1. Statutory Basis
a. Delaware
DGCL 219(a) Shareholder Lists
(1) At least 10 days before every stockholder meeting, complete list of names
and addresses of stockholders entitled to vote must be compiled. Must
include number of shares of each stockholder.
(2) Shareholder has right to examine the list FOR ANY PURPOSE
GERMANE TO THE MEETING at least 10 days prior. Can look at list
during normal business hours or on reasonably accessible network
(3) List must also be kept at meeting.
(4) If board members do not produce list, cannot be elected to office at that
meeting.
DGCL 220 Inspection of Books
(1) 220(b) Right to Inspect Records
- Every stockholder has right to inspect . . . for any proper purpose:
o Stock ledger
o List of stockholders
o Other books and records
- A proper purpose shall mean a purpose reasonably related to such
persons interest as a stockholder.
DGCL 220(c) Suits to Compel Disclosure
(1) Stockholder can bring suit to Court of Chancery to compel disclosure.

(2) If trying to look at books and records: Burden on shareholder to find proper
purpose and that formalities of request has been complied with.
(3) If trying to look at SHr list or ledger: Burden on corporation to show
inspection is for improper purpose.
b. Other Statutory Considerations
RMBCA 7.20, 16.01-16.04: as DE, except some records must be disclosed
regardless of purpose.
2. Obtaining Corporate Records
Saito v McKesson HBOC, Inc (Del. 2002): SH's proper purpose for inspection was to
ferret out possible wrongdoing in connection with merger. Holding below: (1) proper
purpose only extended to potential wrongdoing after the date on which SH acquired
his stock, (2) SH did not have a proper purpose to inspect documents relating to
potential claims against third party advisors who counseled BODs in connection
with merger, and (3) SH was not entitled to pre-merger documents of target because
he was not stockholder of pre-merger target, and, with respect to post-merger target,
he did not establish basis on which to disregard separate existence of wholly-owned
subsidiary
Held: allowed inspection of records reasonably related to proper purpose (1)
before date shareholder acquired his shares, (2) irrespective of source of
records, and (3) given to corporation by target before or after merger, and
otherwise affirmed decision. Broad view of what information can be obtained.
Albee v. Lamson (General Rule for inspection) Stockholder acting in good faith for
purpose of advancing interests of corporation and protecting his own interest as
stockholder has right to examine corporate books and records at reasonable times.
Shareholder has burden of proving good faith and proper purpose.
3. 220 Actions (Tools at hand) Steps (also see Saito)
File Case
Show Proper Purposepreponderance of evidence that you have credible basis for
believing there is mismanagement.
The scope of production -- a 220 proceeding should result in an order
circumscribed with rifled precision.
a. NOTE: 220 actions generally precursor to derivative suits. But you need to have
previously required the documents from the corporation (i.e., exhaustion).
b. Other proper purposes
o Determining financial condition of the corporation
o Ascertaining the value of a stockholders shares
c. NOTE: Mixed purpose (one proper/one improper) are OK.
4. Record Ownership and the Ownership-Identification Problem
a. Dematerialization of Stockholding

o Proxy solicitations are a result of the previously tedious process for conducting
shareholder votes. The current process, while complicated, facilitates
decisionmaking through shareholder votesbut it neutralizes it for small
investors, though useful for institutional investors.
o The process begins with determining who has the right to receive proxy
materials and vote on matters presented to shareholders for a vote at shareholder
meetings.
o Record holders are the ones listed on the issuers of shares, and their ownership
is listed on records maintained by the issuer or its transfer agent. And state laws
vest voting rights with the record holder/registered owner. The beneficial
owners are the ones who own the shares traded on exchanges.
o Issuing corporations notify DTCsholding positions in its securitiesof the
impending vote. The Issuer must send a search card to each DTC participant to
determine whether they are holding shares for a beneficial owner and if so the
number of sets of proxy packages needed to be forwarded to those beneficial
owners.
o Once the registered owners and beneficial owners have received the proxy
materials, the voting begins. But the voting process proceeds in this manner: the
beneficial owner received a voting instruction form (VIF) from a securities
intermediary, which permits the beneficial owner to instruct the securities
intermediary how to vote the beneficially owner shares.
b. NOBO (Non-objecting beneficial owner) (SEC Law): Brokers must report to issuer
companies the name, address and security position of clients holding the companys
shares in broker name, as long as client doesnt object. Shareholder doesnt have a
right to require a company to produce a NOBO list when it doesnt have one in its
possession.
c. Consent Solicitations
o Unless otherwise provided in the [COI], any action required . . . to [or may] be
taken at any annual or special meeting of stockholders of a corporation . . . may
be taken without a meeting, without prior notice and without a vote, if a consent
or consents in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action . . . . DGCL 228(a).
B. Shareholder Informational Rights Under Federal Law and Stock Exchange Rules
(Structured Disclosure)
1. Statutory Overview
a. The Securities Act of 1933governs issuance of securities
b. The Securities and Exchange Act of 1934governs trading of securities (all public
but not closed corps covered)
SEA 12(a) General Requirement of Registration--It shall be unlawful for
any member, broker, or dealer to effect any transaction in any security (other
3

than exempted security) on national securities exchange (NYSE & NASDAQ)

unless registration is effective as to such security for such exchange
(unlawful to trade securities unless securities are registered)
SEA 12(b) Procedure for Registration; information
SEA 12(g) Registration of securities by issuer; exemptions
o Broad coverage stock has to be registered if:
a. Stock is traded on the national securities exchange OR
b. The company has at least $10m of assets AND the stock is held by at
least 500 owners of record
Rule 12g-1 Exemptions from 12(g)
o Registration is exempt if on the most recent fiscal year, the issuer had total
assets not exceeding $10m.
SEA 15 -- Regulations of broker-dealers
2. Periodic Disclosures
SEA 13(a) Reports by Issuer of Security, Contents
o Every issuer of a security under 12, must file periodic disclosures.
o Disclosures include:
(1) such information and documents . . . as the Commission shall require to
keep reasonably current the information and documents file with an
application or registration.
(2) such annual reports . . . and such quarterly reports as the Commission
may prescribe.
SEA Rule 13a-1 Requirements of Annual Reports
o Must issue annual report if you registered securities under 12.
o Form = 10K
a. Audited and certified Financial Statements
b. Managements discussion of corporations financial condition and
results of operations
c. Legal proceedings
d. Executive Compensation
e. Conflict of Interest Transactions
SEA Rule 13a-11 Current Reports on Form 8-K
o Upon occurrence of specified events, must file an 8-KTriggering
Events:
a. Change in control of corporation
b. Acquisition or Disposition of significant amount of assets
c. Change of accountants.
d. Termination of a material definitive agreement
e. Departure of a director or principal officer

f. Amendments to the articles or bylaws

g. Amendments to the corporations code of ethics
h. Waivers of a provision of the corporations code of ethics
SEA Rule 13a-13 Quarterly Reports on Form 10-Q
o If required to file annual reports, must issue quarterly reports for first 3
quarters.
o Form 10-Q: Quarterly financial date prepared in accordance w/ GAAP
(certified) AND Management report
* SEC does not grade how well corporations disclose, but under SOX, there are more
regulations..
3. Acquisition of Large Amounts of Stock
a. SEA 13(d)(1)(C) Reports by Persons Acquiring More Than 5% of Certain
Classes of Securities
If you buy 5% of stock, you are required to file w/ SEC purpose of purchase if
purpose is to acquire control of business.
b. SEA 13(d)(3) -- Report requirement for any coordination
Such syndicate or group shall be deemed a person for the purpose of this
subsection.
Thus, if a partnership buys 3% and an uncle of a partner buys 2% and if there
was an agreement, their holdings are calculated in aggregate.
4. Stock Exchange Rules
a. NYSE Manual 202.1-202.06
202.05 Timely Disclosure of Material News Developments
o A listed company is expected to release quickly to the public any news or
information which might reasonably be expected to materially affect
market for its securities.
o A listed company should also act promptly to dispel unfounded rumors,
which result in unusual market activity or price variations.
202.06 Procedure For Public Release of Information
o Items that must be immediately released
a. Annual and quarterly earnings
b. Dividend announcements
c. Combinations
C. Introduction to Proxy Rules
1. Purpose of Proxy Rules
a. Overview
o Proxy voting is the dominant mode of shareholder decisionmaking for two
reasons: (1) shareholders are often geographically dispersed; and (2) a given

2.

3.

(1)
(2)
(3)

(1)

shareholding will normally represent only a small fraction of a shareholders

total wealth.
o One purpose for the Proxy Rules is to regulate the form or presentation of the
ballot.
b. Require full disclosure in connection with transactions that shareholders are asked to
approve (e.g., mergers, certificate amendments, election of directors, etc). SEA 14
overlaps with state corporate law. 1213 only deal with reporting requirements.
(Election of closed corporations are NOT covered by SEA 14.)
c. Definition of Proxy: SEA Rule 14a-1(f) Proxy The term proxy includes
every proxy, consent or authorization within the meaning of section 14(a) of the Act.
The consent or authorization may take the form of failure to object or to dissent.
Registration Requirements (So as to be covered by 14(a)): Stock must be registered
under 12 IF: (1) Stock is traded on a national securities exchange [ 12(a)] OR (2)
Company has at least $10 million of assets and stock is held by at least 500 record
owners [12(c)]
Transactional Disclosures
a. SEA 14(a) Solicitation of Proxies in Violation of Rules and Regulations
o It shall be unlawful for any person, by the use of the mails or by any means or
instrumentality of interstate commerce or of any facility of a national securities
exchange or otherwise, in contravention of such rules and regulations as the
Commission may prescribe as necessary or appropriate in the public interest or
for the protection of investors, to solicit or to permit the use of his name to solicit
any proxy or consent or authorization in respect of any securityregistered
pursuant to 12 of this title
b. Determining What is Subject to Disclosure Three Prong Test
Is the communication a solicitation? See Rule 14a1(l)(1), especially
subdivision (iii), which provides that a solicitation includes any communication
reasonably calculated to result in getting a proxy.
1. Solicitation, Rule 14a1(l)
a. The terms solicit and solicitation include:
Any request for a proxy
Any request to execute or not to execute, or to revoke, a proxy; or
Furnishing of a form of proxy or other communication to security holders under
circumstances reasonably calculated to result in the procurement, withholding or
revocation of a proxy, Rule 14a1(l)(1)(iii). (This can include newspaper
advertisements) * Solicitation can be oral.
2. Is it Exempt Solicitation? See Rule 14a1(l)(2)
a. The terms do not apply to:
Furnishing of form of proxy to security holder upon unsolicited request of such security
holder;

(2) The performance by the registrant of acts required by Rule 14a-7

(3) The performance by any person of ministerial acts on behalf of a person soliciting a
proxy; or
(4) A communication by a security holder who does not otherwise engage in a proxy
solicitation . . . stating how security holder intends to vote and the reasons therefore,
provided that the communication, Rule 14a1(l)(2)(iv):
1. Is made by means of speeches in public forums, press releases, published or broadcast
opinions, statements, or advertisements appearing in a broadcast media, or newspaper,
magazine or other bona fide publication disseminated on a regular basis,
* Thus, some opinion statement is not solicitation, provided they are done
through the right media.
2. Is directed to persons to whom security holder owes fiduciary duty in connection w/ voting
of securities of a registrant held by the security holder, or is made in response to unsolicited
requests for additional information w/ respect to prior communication by security holder.
Is solicitation subject to the proxy rules? See 14a 2 for solicitations to
which 14a-3 and 14a-4 do not apply:
1. Rule 14a2 Solicitations to Which Rule 14a-3 to Rule 14a-15 Apply
a. Exceptions under 14a2(a)14a3 to 14a14 do not apply (Anti Fraud
Provision Does not Apply)
(1) 14a2(a)(1) Soliciting stocks held in your own name or in your custody, provided that
you didnt receive commission for your solicitation. If you are acting as intermediary,
youre not covered.
(2) 14a2(a)(2) by person re securities of which he is beneficial owner
(3) 14a2(a)(6) Solicitation in newspaper ads that only serve to inform security holders of a
source from which they can obtain copies of proxy statement. Must only name registrant,
state reason for ad and identify proposal or proposals to be acted upon by security
holders.
b. Exceptions under Rule 14a2(b) Rules 14a3 to 14a6, 14a8 and 14a
10 to 14a14 dont apply [effectively, only 14a6(g), 14a7 and 14a9
apply]
(a)
14a6(g) - applies to solicitation of a class with MV > $5m
(b)
14a7 - registrant must provide a shareholder list if requested
(c)
14a9 - false/misleading statements are prohibited (Anti Fraud
Provision Still Applies)
i. 14a2(b)(1) (safe harbor rule) - solicitation does not include
communications between shareholders that does not solicit proxy voting
authority that is sent out by persons without a material economic interest
in the solicitation (other than their interest as a shareholder).
ii. 14a2(b)(2) fewer than 10 non-management exemption solicitation of fewer than 10 persons by non-management falls outside

the rules. Note: if management is soliciting even on person, it falls

within rules.
iii. 14a2(b)(3)Advisor in a business relationship exemption Giving
proxy advice by any person to any other with whom the advisor has a
business relationship.
iv. 14a2(b)(4) preliminary roll-up communications
If exempt, are there still filing requirements? (for analysis only look at 14a-6,
14a7, and 14a9)
1. 14a6(g) Solicitations subject to Rule 14a2(b)(1)
a. If you have securities with MV over 5MLN, then you send in a the notice
of exempt solicitation.
b. Exemption to 14a-6(g)(1)--(g)(2): No need to file if your solicitation was
oral or in public media.
2. 14a-7 Obligations of Registrants to Provide a List of, or Mail Soliciting
Material to, Security Holders governs the process of mailing proxy statements
to shareholders - if the registrant intends to solicit proxies by mail, it must
perform certain actions upon written request of any shareholder entitled to
vote: (1) provide the number of SH of record; (2) provide the number of
beneficial SH; (3) provide an estimate of the solicitation cost; and (4) provide
copies of any proxy statement. note: this section doesnt preempt state laws
such as Del. 220, which has a proper purpose requirement for SH to gain
access to certain information. (SHs EXPENSE)
3. 14a-8 - Shareholder Proposals (CORPS EXPENSE)- Any beneficial owner
of 1% or $2,000 of outstanding market value of securities, who has held such
securities for at least one year, may present a proposal for action at the
upcoming shareholder meeting. As long as he submits the proposal at least
120 days before the proxy statement is usually mailed, the registrant must
include the proposal in its proxy statement so long as (the following are
satisfied): 14a-8(d) submits supporting statement of >500 words. 14a-8(i) certain exclusionary rules
4. 14a-9 False/Misleading Statements prohibited (anti-fraud provision) any
statements that are false or misleading with respect to any material fact, or
any omissions of any material fact necessary in order to make statements not
false or misleading may not be made. NOTE: SHs have implied private right
of action (J.I. Case v. Borak)

Three Step Approach to Proxy Evaluation: what is subject to disclosure

(see detailed rules above)
1. IS IT A SOLICITATION? See 14a-1(l)(1), especially (iii), which provides that
solicitation includes any communication reasonably calculated to result in getting
proxy. See 14a-1(l)(2), which notes things that arent solicitations:
(1) any request for a proxy;
(2) any request to an executive or not to an executive or revoke a proxy;
(3) furnishing of the form of proxy or other communication which under
circumstances reasonably calculated to result in the procurement, withholding
or revoking of proxy.
2. IS IT EXEMPT? See 14a-2 for solicitations to which 14a-3 and 14a-4 dont apply:
(1) 14a-2(a) -- rules 14a-3 to 14a-14 dont apply
(2) 14a-2(b) -- rules 14a-3 to 14a-6, 14a-8 and 14a-10 to 14a-14 dont apply
[effectively, only 14a-6(g), 14a-7 and 14a-9 apply]
(a)
14a-6(g) - applies to solicitation of a class with MV > $5 mm
(b)
14a-7 - registrant must provide a shareholder list if requested
(c)
14a-9 - false/misleading statements are prohibited
3. IF EXEMPT, ARE THERE STILL FILING REQUIREMENTS? See 14a-6(g), 14a-7 and
14a-9.
c. Disclosure Requirements
14a-3 Information To Be Furnished To Security Holders: No solicitation
subject to this regulation shall be made unless each person solicited is
concurrently furnished or has previously been furnished with a publicly filed
preliminary or definitive written proxy statement containing information
specified in Schedule 14A.
14a-3(f) - a party who has filed a definitive proxy statement with the SEC may
broadcast or publish its communications in advertisements, speeches, or
columns without preceding such broadcasting with a proxy statement, as long as
the party doesnt provide a form of proxy to any security holders and at the time
that the communication is made, a definitive proxy statement is filed with the
SEC under 14a-6(b).
Schedule 14A: lists information that must be furnished when specified types of
transactions are to be acted upon by shareholders. Schedule 14A has to be sent
out contemporaneously if the Board runs a newspaper ad. It contains: date, time
and place information; what the vote is going to be about; revocability of proxy;
dissenters right of appraisal; persons making the solicitation; etc.
4. Periodic Disclosures Under Proxy Rules
a. Introduction: Annual report must be sent out with proxy to elect officers as per Rule
14a-3. This report must include statement that corporation will distribute Form 10-K
on request. This report is not solicitation within proxy rules.

b. SEA 14(c) Information to Holders of Record Prior To Annual or Other Meeting:

Unless proxiesare solicited by or on behalf of the management of the issuer from
the holders of record of such security in accordance w/ the rules and regulations
prescribed by the Commission, prior to any annual or other meeting of the holders of
such security, such issuer shall.file with the Commission and transmit to all holders
of record of such security information substantially equivalent to the information
which would be required to be transmitted if a solicitation were made
c. SEC Rule 14a-3: Proxy statement for an annual meeting where directors are to be
elected must be accompanied by annual report that includes
1. Audited balance sheets for each of corporations 2 most recent fiscal years.
2. Audited income statements for 3 most recent fiscal years.
3. Compensation of 5 most highly paid executives and the executive officers as a
group.
4. Significant conflict of interest transactions during last fiscal year
5. Federal Private Actions under the Proxy Rules
1. Statutory Basis
a. SEA Rule 14a-9 False or Misleading Statements: No solicitation subject to this
regulation shall be made by means of any proxy statement, form of proxy, notice
of meeting or other communication, written or oral, containing any statement
which, at the time and in the light of the circumstances under which it is made, is
false or misleading with respect to any material fact, or which omits to state
any material fact necessary in order to make the statements therein not false
or misleading or necessary to correct any statement in any earlier
communication with respect to the solicitation of a proxy for the same meeting
or subject matter which has become false or misleading. The commission does
not guarantee the merits of the proxy statements submitted.
2. Case Law
a. The Implied Private C/A
i. J.I. Case Co. v. Borak (Implied federal private C/A for rescission or for
damages): SH can bring a private action for violation of the Proxy rules,
even though the rules dont explicitly provide for such an act
ii. Cowin v. Bresler (Shareholder who did not grant a proxy in reliance on a
Proxy Statement has standing under Rule 14a-9): Court allows derivative suit
based on injury done to corporation b/c of action in violation of 14a-9.
b. First element: The Materiality Requirement
i. TSC Industries v. Northway (Material if reasonable SH would consider it
important in deciding how to vote)
1. An omitted fact is material if there is a substantial likelihood that a
reasonable shareholder would consider it important in deciding how
to vote.

10

2. Factors: (1) Defect has significant propensity to affect voting process

and (2) Substantial likelihood that omitted fact would have assumed
actual significance in deliberations of reasonable shareholder (not
required substantial likelihood that disclosure of omitted fact would have
caused investor to change vote.)
ii. Virginia Bankshares, Inc. v. Sandberg (Statements of reasons, opinions or
beliefs may be material facts): First American Bankshares, Inc. owned
85% of Bank. FABI wanted to get rid of the 15% SHs in Bank. BOD of
each company entered into a merger agreement, whereby Bank would be
merged into a wholly-owned subsidiary of FABO. FABI hired investment
bank, which said that offer price of $49/share was fair. Banks BOD sent
proxy solicitation to minority shareholders, saying that they had approved
merger because price was fair. P brought a claim saying that the shares were
worth at least $60/share.
1. Court says statements of reasons, opinions or beliefs can be material.
Proof of mere disbelief should not suffice to impose liability under
14(a). Must show: (1) statement misstates the speakers true reasons
AND (2) statement misleads shareholder about the stated subject matter
(i.e., value of shares)
2. If facts that show reasons are false are included in proxy statement, are
reasons still misleading? Misleading fact can be neutralized, but only if
facts are such that a reasonable shareholder can understand them.
3. Causation: Court says even though it is misleading, the woman here
did not have enough votes to change the result of the transaction.
Dissent argues that theres no authority for limiting 14a to protecting
those minority SHs whose numerical strength could permit them to vote
down a proposal.
a. doesnt have a federal private C/A b/c state remedy is available.
i. Brake on federalization of corporate law.
ii. The Court worries about frivolous actions by shareholders under
SEA.
c. Second element: The Causation Requirement
i. Virginia(above)(Causation cant be demonstrated by a member of a class of
minority shareholders whose votes are not required by law or corporate
bylaw to authorize transaction giving rise to claim)
ii. Mills v. Electric Auto-Lite Co. (Test for Causal relationship = proxy
solicitation itself, not particular defect in solicitation materials, is essential
link in accomplishment of the transaction): P was a SH in EAL. Mills owned
50+% of EALs shares, was in control of EALs operations, and named all of
EALs 11 directors. EALs sent its SHs proxy materials about potential

11

(1)

(2)

(3)

merger into M. Materials expressed BOD approval of the merger, but didnt
disclose that M had named all of the directors. The state laws required
minority SH approval
1. There is an implied private cause of action under Borak.
2. What is materially misleading? Anything that a reasonable shareholders
would think is important in making a decision on the vote (TSC). What
else do you need to prove? Reliance on misrepresentation -not required
3. Court says this is misleading, looks to what type of causal relationship
must be shown
a. Cir. Ct: Is there harm? If not, the existence of defect doesnt matter.
The price was fair even though the process was bad (no monetary
harm, no foul).
b. SCOTUS: Use of solicitation that is materially misleading is itself
violation of law.
c. Test: If there has been a finding of materiality (of the misleading
statement), a shareholder has made a sufficient showing of causal
relationship between the violation and the injury for which he
seeks redress if he proves the proxy solicitation (rather than the
particular defect in the solicitation materials) was an essential
link in the accomplishment. Note no mention of intent to deceive.
d. Thus, if you can prove that there was defect (i.e., suffrage was
harmed by defect), you have established a common benefit to ALL
shareholders. Thus, you can get the attorneys fee.
e. Rationale: Unless there is an award for the attorneys fee, there isnt
going to be private enforcement of 1934 SEA (rational apathy). SEC
may not be enough for its gate-keeping role.
d. Notes:
What incentive does a single shareholder have to bring an action? The individual SH
bears all of the cost and must share the potential gain, so there are times when no
rational shareholder would sue - its a version of the traditional tragedy of the commons
(prisoners dilemma), because even of they all agree to pay, the individual shareholder
has the incentive to free ride.
SC response in Mills left the individual shareholder with no better incentives, because if
the disclosure was found not to be material, the shareholder will bear all of the costs.
However, by awarding attorneys fees, lawyers have an incentive to find cases of material
nondisclosure and bring them to court - the corporation bears the cost of the lawsuit (i.e.,
each individual shareholder is forced to pay his share of the corporations attorneys fees).
The fourth section of the courts opinion in Mills is the most important, because its
where the court tries to solve the prisoners dilemma (by providing an interest to a third
party - lawyers - in order to induce behavior that will benefit the collective

12

shareholders). This is a different role for lawyers than the Rules of Professional
Responsibility implicate, but its the only way that the laws will get enforced.
e. The [Lack of] Scienter Requirement: Gerstle v. Gambel-Skogmo, Inc.
(Negligence suffices to establish liability under Rule 14a-9)
3. Requirements For Action: Misrepresentation (no Scienter), Materiality; Reliance to
Detriment (Causation); Damages
6. Shareholder Proposals
Hypothetical: Parent owns $10,000 in stock, after the stock price drops he wants to introduce a
shareholder proposalno future re-pricing. Is there any basis under 14a-8 to exclude this
proposal? What if he wants to elect Dean Fitts to BOD? (14a-8(i)(8)yes, this can be excluded
under the rule)
Hypothetical: Mr. G wants to lobby the shareholders, he has prepared material on this proposal
that he wants to send out to the 100 largest shareholders. He is planning on doing it on his own,
and pick up the cost of mailing. Does he have a right to have the company do this? See 14a-7.
1. Shareholder Comment on Management Proposal Rule 14a-7 Obligations of Registrants to
Provide a List of, or Mail Soliciting Materials to, Security Holders (also see 219
shareholder lists above)
a. If shareholder is willing to bear costs of printing and postage, 14a-7(a) requires
corporation to either mail SHs solicitation OR give shareholder a shareholder list so
that he can mail it himself. Decision is up to BOD
b. Requirements:
i. Shareholder proxy materials must relate to a meeting in which corporation will be
making its own solicitation 14a-7(d): Prevents dissident shareholder from using the
rule to require that his communications get mailed when no meeting has been called.
ii. Shareholders must be entitled to vote on the matter.
iii. SH must defray expenses the corporation will incur in mailing the materials. Mainly
postage and printing costs
c. Corporation cannot impose lengthy limitations or censor the materials in any way.
d. Timing
i. Materials must be mailed with Reasonable promptness so that management cant
gain any advantage by delaying the mailing.
ii. Management can only delay the mailing until either:
1. A day corresponding to the first date on which managements proxy materials
were mailed in connection with the prior annual meeting OR
2. The first day on which management makes its solicitations this year
2. Shareholder Proposal Rule 14a-8: provides an opportunity for a shareholder owning
relatively small amount of a companys securities to have his proposal placed alongside
managements proposals. If management believes a shareholder proposal can be excluded

13

from the proxy statement under rule 14a-8(i)(7), it must submit to the SEC staff a statement
of reasons for omission. If the staff agrees, they will send a no action letter
a. Corporation Bears Expense
b. When this rule applies, shareholder has access to the Boards actual proxy statement.
Proposal doesnt have to be related to anything that the Board intends to raise at the
meeting.
c. Eligibilityshareholder MUST:
i. Own at least 1% or $2000 in market value of securities AND
ii. Have held the share for at least one year prior to the submission
d. Lengthshareholder may submit only one proposal for inclusion in managements proxy
materials.
i. The proposal and supporting statement together may not exceed 500 words.
ii. Thus, Rule 14a-7 enables a shareholder to send out a longer and more extensive
statement.
e. Excluding Proposals Rule 14a-8(i)
Exclusions Related to Proposal Itself
i. (1) The proposal is not a proper subject for shareholder action under state law.
Rephrasing proposal from demand for action to request or recommendation for action
would make proposal proper.
ii. (2) The proposal would violate state or federal law.
iii. (5) Relevance to companys business: Less than 5% of total asset and of net
earnings and gross sales and is NOT otherwise significantly related to corporations
business (most compensation proposals are not covered by this provision, b/c they
relate to corps business).
iv. (6) The company would lack the power or authority to implement the proposal.
v. (7) Management functions: proposal deals with a matter relating to the companys
ordinary course of business operations (debate about proposals that focus on equity
compensation plans that may be used to compensate senor executive officers,
directors, and the general workforce) (See DuPont case)
vi. (8) The proposal relates to election of the Board or analogous government body.
vii. (10) The company has already substantially implemented the proposal.
viii. (13) The proposal relates to specific dividends. (Declaration of dividends is for
BOD to decide, shareholders have no right to dictate this). Also see DGCL 170
Dividends Asset
Exclusions Relating To Procedure
i. (3) The proposal is in violation of the proxy rules (especially 14a-9)
ii. (4) The proposal is related to a personal claim or grievance, or is designed to further
a personal interest. (similar to 14a-2(b)(9))
iii. (9) The proposal conflicts with companys proposal that is to be submitted to
shareholders at same meeting.

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iv. (11) Proposal substantially duplicates another proposal previously submitted to

company by another proponent that is included in companys proxy materials for
same meeting.
v. (12) Deals with Resubmissions
f. Roosevelt v. E.I. DuPont (Example of an ordinary course of business exception):
wanted to include two proposals in proxy statement: (1) that company would increase its
phase out efforts so that CFC production would cease by 1995 [companys plan prior to
lawsuit was to phase it out by 2000, but after suit was brought, the company changed it to
1995]. (2) That DuPont be required to prepare a report on their research and development
efforts towards finding alternatives. District court held that these proposals were
excludable under 14a-8(c)(7) as ordinary business operations.
i. Held: Exclusion proper, both proposals fall within 14a-8(c)(7) ordinary course
of business exception. The first proposal deals with NOT whether CFC production
will occur, but when the phase out will be complete, AND because the proposal
suggests a six month time difference, the court held it to be an issue (timetable for
implementation of corporate policy) regarding ordinary business operations and
therefore excludable. The second proposal was just a request to supply information
on implementation arrangements, not a matter of policy issues, so it was also
excluded.
g. Amalgamated Clothing and Textile Workers v. Wal-Mart Stores (Attorneys fees in suit
determining what is excludable): SHs of Wal-Mart take wanted to include proposal to
request WM to prepare a report about its EEO and affirmative action policies, programs,
and raw data and a description of its policies and efforts to purchase from women and
minorities. Proposal was eventually included in proxy and defeated.
i. Common Benefit Rule, says SHs who prevail in court may recover their
attorneys fees, since there is a substantial benefit in a proposal even if proposal
is defeated
i. The litigation has conferred a substantial benefit on the members of an ascertainable
class.
1. If it is possible to spread the costs proportionately among the members of the
class. Under Rule 14a-8(i)(4), the benefit has to be pro-rata among all
shareholders.
2. Here, benefit is communication between SHs, even if proposal was defeated.
ii. If the union is a shareholder and proposes the real wage raise, the corporation can
exclude the proposal under Rule 14a-(8)(i)(4).
7. Proxy Contests
1. Introduction
a. Definition: election context on who can secure more shares to get them to vote for a
particular proposal. Four types: battle over whether the proposal gets enacted, stock plan,
approval of a merger agreement, and election of directors (e.g., (1) contest for control

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tender offer + proxy fight, (2) just say no campaign, where SHs will withhold authority
from nominees for directors to signal displeasure, (3) SHs are not trying to replace current
slate entirely, they, instead, nominate one respectable person to be director)
b. Built in Advantages For Management
i. Shareholders tend to vote for management
ii. Management can use corporate funds to pay for its arguments.
iii. Management knows who the SH are and how much each owns so that they can plan
accordingly. Insurgents have to litigate to get those lists.
2. SEC RegulationsRule 14a-7: Requires management to tell insurgents how many
shareholders of record exist, how many beneficial owners exist and how much it will cost to
mail insurgents proxy materials.
3. Right To Inspect Shareholder Lists
a. Insurgents dont have right to inspect lists under SEC Rules, but under most state laws,
they have that right:
i. DGCL 220(b): Any SH has right to inspect list if he has a purpose reasonably
related to his interest as a shareholder.
ii. RMBCA 16.02: Allows inspection if it is requested in good faith and for a proper
purpose.
4. Disclosure Requirements
a. A written proxy statement must precede any solicitation.
b. Additional disclosures are required for proxy contests involving election of directors.
Insurgent must file special information about each participant in solicitation. Participant
= Anyone contributing more than $500 to the contest.
c. Schedule 14B must be filed by each participant in the contest, at least 5 days before the
group starts its solicitation. Gives management a warning of the impending action.
5. Costs
a. Rosenfeld v. Fairchild Engine & Airplane (Reimbursement For Proxy Fights): During
proxy fight, board uses $106,000 to defend itself and insurgents spend $124,000. When
insurgents win, new board pays old board unreimbursed costs and pays itself its costs.
Payments approved by shareholders 16 to 1, but attorney-shareholder challenges it. Under
14A-8(i)(8), dissidents have to send out their own proxy materials in proxy battle b/c it
relates to election of the Boardno right to reimbursement under proxy rules, BUT
i. Rule: In proxy contests, corporate funds may be used to pay reasonable and necessary
expenses incurred in proxy fight: (1) in contest over policy (cannot use corporate funds
for proxy fights resulting from personal differences), corporate directors acting in good
faith have right to make reasonable and proper expenditures from corporate treasury
for purpose of persuading stockholders and soliciting support (2) SHs have right to
ratify reimbursement for such expenses incurred by non-directorsno right to get
money upfront, but if he wins, SHs may decide to reimburse. The reason for
submission to SH vote is concern regarding self-dealing. One way to justify it is
through SH vote. Here, transaction would be still conflicted b/c dissidents are now
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running corporate machinery and are voting to finance their own campaign, but SH
ratification renders transaction rightful.
b. Proposed rule 14a-11in order for a rule to become effective SEC has to approve it. If
this rule in its current form becomes law, how does it change current state of affairs?
Hypothetical: Under current law if you put in proposal to put Dean Fitts onto ballot, it can be
excluded by the company under 14a-8. If 14a-11 is passed, can we then put Fitts on the ballot?
14a-11(a)(1)applicable state law does not prohibit the registrants security holders from
nominating a candidate for election as director. The rule does not purport to provide openended right in security holders to put nominations onto the corporations ballot.
i. One of the following events has occurred (triggers)(1) just vote no campaign and
more than 35% votes cast at the annual meeting has been withheld 14a-11(a)(2)(i) and
(2) under (a)(2)(ii) a shareholder proposal submitted pursuant to 14-a8 by a security
holder who held more than 1% of the securities entitled to vote on this proposal for a
year as of the date the proposal was submittedit is a proposal to opt into the
nomination right by the shareholders who receive more than 50% of the votes cast on
that proposal at the annual meeting. What are some other triggers for nomination
right? A precatory proposal that was approved but not implemented by BOD.
ii. Nominating security holder eligibility: Suppose one of these triggers is satisfied, what
then is the right? 14a-11(b)(1) nominating holder must be 5% holder of registrants
securities or must be a member of a 5% group.
iii. Procedure for nomination: 14a-11(c) requires nominating shareholder to provide
notice of its intent to require that the registrant include that security holders nominee
on registrants proxy card no later than 80 days before the registrant mailed its materials
for the prior years annual meeting. This notice must include some 14a-11(c)(1)
representation (you cannot nominate yourself or somebody who works for your group
(c)(3)ii) that the nominees candidacy or board membership would not violate
controlling state or fed law.
iv. Number of security holder nominees (depends on the size of the BOD): 14a-11(d)(1)(i)
registrant is not required to include more than one security holder nominee where the
total number of members of BOD is 8 or fewer, (ii) two if BOD is 20 or fewer (iii) and
three if BOD is more than 20
v. Liability for false or misleading statements: registrant is not responsible for any
information in the notice of the nominating security holder

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