Generally, there must be at least one class of shares with voting rights. The norm for most publicly traded corporations is to have one class of common shares with each share having one vote.
The articles of incorporation may provide for more than one class of shares with voting rights and those rights may vary among classes. By creating different classes, a corporation may provide representation on the board of directors for different shareholder groups. This may be important in a closely or publicly held corporation in which a family or large shareholder group is involved.
The articles of incorporation or state statute may also provide certain limited voting rights for specific purposes. For instance, preferred shares could be given the right to vote for directors if they fail to receive dividends. Under some state statutes, preferred shares may also be allowed to vote on issues that adversely affect preferred shareholder rights.
The shares held by the corporation in itself or held in a subsidiary cannot usually be voted otherwise it would undermine the voting rights of the shareholders.
Whenver there is shareholder voting, it should be fair, without coercion adn with full disclosure, otherwise the vote is inpoerative.
Annual shareholder meetings are required by statute, at which the directors are elected and other issues may be voted upon. Special meetings prior to the annual meeting can also be called if action needs to be taken before the next annual meeeting. Procedural issues of notice, record dates to vote, and quorum are usually found in the bylaws of tehe corporation. The statutes usually provide default rules to be used when the bylaws do not specify a rule.
In publicly traded corporations the voting occurs prior to the sharehodler meeting because the shareholder generally do not wish to incur the costs of attending the meetings. To faciliate voting in this situation, the state statutes permit the use of proxies.
In some cases (required voting cases), a shareholder vote is not optional, but a statutory requirement, such as voting on amendments to the article of incorporation or to effectuate a merger or fundamental transaction. In these cases, the vote is not a ratification or to validate it; instead, the vote is needed because the action could not be taken without the vote.
In Williams v. Geier, a plan was proposed by the control group to recapitalize the shares that could have the effect of keeping the control gorup in power. In Williams, a shareholder vote was required by the statue for the recapitalization through amendments to the articles of incorporation. As long as there was compliance iwth the statutory requriemetns, and absent fraud, waste, manipulative or inequitable conduct, or breach of fiduciary duty, a controlling sharehodler had broad powers to vote its shares. Sharehodlers could vote as they please, even if they voted their own self-interest. There was no general requirement that called for the votes of a majority of the minority (non-controlling shares) to implement the changes. The court indicated that the shareholder vote, which included the votes of the contorlling shareholder, was dispositive.
In other cases, the shareholder vote is not required but is sought for other reasons (i.e., optional voting).
- For example, a shareholder vote may take place under a particular statute that allows for voting but is optional, such as under the interested director statutues.
- Other times, there is no statutory provision but the optional shareholder vote is sought for other reasons such as to minimze the level of judical scrutiny.
Ratification is a form of option voting.
- Reasons for using it - to try to change the judicial scrutiny of the transaction. Thus, shareholder ratification is not a satutory requirement, but tends to occur when the shareholder vote is sought to affect how the law will treat the transaction and what amount of judicial scrutiny will be involved. The shareholders' vote may be sought to sanitize the transaction by trying to limit judicial scrutiny.
- Requirements - in order for shareholder ratification to have en effect, it must involve full disclosure and approval of the disinterested shareholders. Generally, the party relying on ratification must prove full disclosure and no coercion in the voting.
The idea of sharehodler ratificaition derives from agency priciples. Unauthorized acts of an agent may be ratified and validated by the principal so long as the principal has knowledge of all material facts.
Shareholder ratification, however, may be different from this traditional ratification. In a publicly traded corporation, no single individual is acting as principal, but rather a collective body of shareholders (in which some of the shareholders may have conflicts of interests) is acting as principal. Often, the shareholder ratification will not be direct at a lack of authority in the agency but as a result of some conflict of interest by a fiduciary. In that case, the interested director statutes may have a bearing on the effect of the shareholder vote.
For example, a freezeout merger with a controlling shareholder required a majority vote and the controlling shareholder have the requisitine majority, but opt to condition the merger on the affirmative vote of a majority of the minority shareholders.
Courts somtimes distinguish between acts that are void (for example fraudulent illegal, ultra vires or wasteful transactions) with those that are voidable (for example, unfair conflicts of interests). The former generally cannot be ratified unless there is unanimous shareholder approval. The latter, which can involve a transaction being challenged as a breach of fiduciary duty, may be affected by the shareholder vote, depending on the circumstances.
If a transaction or decision was subject to ratification, an important issue is what the effect of the shareholder vote is on any challenge to it.
- One possibility is that ratification precludes all judicial scrutiny of the disputed acts and extinguishes all claims.
- A second possibility is that ratification replaces the tradtional fairness test for conflicts of interest transactions (judicial scrutiny of the process and substance of the trasnaction, with the burden of proof on the defendants) with the busienss judgment rule (i.e., burden of proof on the plaintiff and judicial scrutiny of the process) or a waste test (i.e., a gift of corporate property).
- A third possibilty is that shareholder ratification only shifts the burden of proof to the plaintiff but retains a fiarnes test which allows greater judicial scrutiny of the substance of the act.
- A fourth possibility is that shareholder ratification has no effect on judifical scrutiny perhpas because in publicly traded coropration, the voting process has problems. There is a collective action probelm and rational sharehodler apapthy when widlye dispred public shareholders are voting.
In the caes of In Re Wheelabrator Technologies Litigation, the Delaware Chancery Court indicated its view of Delaware law on sharehodler ratification. In Wheelabrator, Waste Management wanted to buy control of Wheelabrator. Waste already owned 22% of the sahres. Waste's pruchase was to be accomplished by a stock for stock merger in which Wheelabroatro would end up owning 55% of Waste. While the merger statue requried a majority vote of teh sharehodlers, the parties agreed that approval of the merger woudl requried a majority vote of the disinterested shareholders of Wheelabrator. Plaintiffs challenged the merger, claiming breaches of the duty of care adn loaytly. Since the merger was approved with full disclosure by the majority of disitnerested sharehodlers, the court had to decide the effeect of the shoarelder ratification on these issues.
In terms of hte duty of care claim, teh court found that a fully informed, disinterested shareholder vote extingsuiehd that claim. The failre of the baord to act in a n infromed and non-neglignet manner was a voidable act that could be cured by a shareholder vote.
In duty of loyalty claims, the court made a distinction between interested director transactions where ther was no controllign sharehodler and trasctions with a controlling sharehodler. In the form case, sharehodler ratificatino turned the loyalty case into an issue under the business judgment rule nad the plaintiff had the burden to show that the transactino was wasteful and unprotected by the rule. But acconrding to the court, when the trascations invovled a cotnrollign shareholder, more judicial scrutiny was requried. THe approval of the majroty of the minority ahd the effect of shifting the burden of proof to the plaintiff to prove unfairness. This allowed some scrutiny of the susbtance of the transaction under a fairness standard. The rationale used to distinguish these two situations was that, with controlling shareholders, there was the possibility of process manipulating in the voting and the prsence of the controllign sharehodler in the transaction might influence the vote.
In Wheelabrator, Waste Mangagement was not a controlling shareholder since it has neither de facto nor de jure control. Thus, the shareholder voting meant the duty of care claims was extinguished and the duty of loyalty claims was viewed udner the business judgment rule.
Right of expression.Edit
As discussed, the statutes genearlly indicate those issues on which teh shareholders can vote. But significant case law has provided shareholders with additional voting rights. In Auer v. Dressel , the court found that the shareholders should have the right to express themselves even on issues that under the statutes they have no right to vote on. Such advisory votes will put direcotrs on notice of their desires befroe the next election. This right of expression, which is not contained in the stautes but is based upon principels of shareholder democracy, is an important right.