Publicly Held Businesses Outline

Professor David Millon

Publicly Held Businesses, Spring 2014

1. Separation of Ownership and Control: Shareholder Primacy and Corporate Social Responsibility

Dodge v. Ford Motor Co. (1919)—Shareholder Primacy

Supreme Court of Michigan

Facts: Henry Ford Refused to pay dividends to his stockholders. Stockholders sued for an injunction requiring a distribution of at least 75% of the corporation’s cash surplus and all future earnings not reasonably required for emergency purposes.

Question: Was Ford required to distribute earnings to shareholders?

Holding: Yes. The court ordered that a dividend equal to ½ the corporation’s current cash surplus be paid to stockholders.

Rule: A corporation is organized and carried on principally for the profit of the stockholders and the powers of the director must be employed to that end (shareholder primacy concept).

Rule: Directors have no discretion to change the end of the corporation (such as by running it for the benefit of the public at large) by reducing profits, refusing to distribute profits among stockholders, or devoting profits to other purposes.

Reasoning: Ford’s apparent philanthropic intentions were irrelevant to the determination of the corporation’s obligations. Corporations exist to benefit stockholders and not the general public. Therefore, directors have no authority to divert a corporation’s funds for purposes unrelated to that core purpose.

VS.

A.P. Smith Mfg. Co. v. Barlow (1953)—Corporate Social Responsibility(CSR) /Charitable Giving

Supreme Court of New Jersey

Facts: New Jersey corporation donated $1,500 to Princeton University during annual charity drive. Shareholders challenged the action as ultra vires, arguing first that the corporation’s charter did not authorize the contribution and that under CL principles, the company did not possess implied or incidental power to make it. Second, the shareholders claimed that NJ statutes expressly authorizing the contribution could not constitutionally be applied because the corporation was created after their enactment.

Question: Can a corporation make a charitable contribution with corporate funds?

Holding: Yes.

Rule: Corporations may make charitable contributions both at common law and under most state statutes, on the theory that these donations tend to promote good-will toward the corporation by supporting the welfare of the communities in which the corporation does business.

· Contributions serve as a kind of investment in good-will, which may reasonably be expected to result in substantial indirect benefits

· Corporations are now expected to contribute to the overall social welfare of their community and the nation

Reasoning: “When the wealth of the nation was primarily in the hands of individuals they discharged their responsibilities as citizens by donating freely for charitable purposes. With the transfer of most of the wealth to corporate hands and the imposition of heavy burdens of individual taxation, they have been unable to keep pace with increased philanthropic needs. They have therefore, with justification, turned to corporations to assume the modern obligations of good citizenship . . . .”

2. Proxy Fights and Shareholder Voting

Levin v. Metro-Goldwyn-Mayer, Inc. (1967)

Southern District of New York

Facts: Six MGM stockholders sued MGM and 5 members of the board of directors, alleging that the defendants had wrongfully used MGM funds, their offices, and the good-will of the business to solicit proxies and secure support for MGM’s present management during an on-going proxy contest. The stockholders sought permanent injunctive relief against this method of proxy solicitation, as well as money damages of $2.5m from MGM and the individual defendants.

Question: May directors use company resources to solicit proxies for an upcoming shareholder vote to elect directors?

Holding: Yes.

Rule: There is no per se rule prohibiting directors from soliciting proxies through use of corporate resources.

Reasoning: No federal law prohibited the director’s actions and the amounts spent on the solicitation were not otherwise excessive, unfair, or illegal.

Rosenfeld v. Fairchild Engine & Airplane Corp. (1955)

NY Court of Appeals

Facts: shareholder sought to compel the return of funds paid out of the corporate treasury to reimburse both sides in a proxy contest for their expenses.

Question: May directors incur reasonable expenses in soliciting proxies for an upcoming shareholder vote?

Holding: Yes.

Rule:

· When the directors act (1) in good faith (2) in a contest over policy (as opposed to personality), they have the right to incur (3) reasonable and proper expenses for solicitation of proxies

· Similarly, stockholders have the right to reimburse successful contestants for the reasonable and bona fide expenses incurred by them in the same context

· The incumbent management team is guaranteed to receive reimbursement from the corporation for reasonable expenses whether they win or lose; insurgents will be reimbursed only if they win

Reasoning: If directors could not incur reasonable expenses in soliciting proxies, the corporate business might be seriously interfered with because of stockholder indifference and the difficulty of procuring a quorum—the reality of giant corporations with large numbers of stockholders simply requires this rule.

3. Shareholder Inspection/Informational Rights (under state law)

Crane Co. v. Anaconda Co.

New York

Facts: Crane proposed to exchange $100m in subordinated debentures for up to 5 million shares of Anaconda’s common stock. Anaconda’s management opposed the offer and sent four letters to shareholders claiming that the deal was not in the company’s best interest. Crane initiated a tender offer and requested a copy of Anaconda’s shareholder list, claiming that Anaconda had a fiduciary duty to its shareholders to present them with all information pertaining to the tender offer (exchange offer b/c Crane was offering a debenture rather than cash). Crane owned no Anaconda stock at the time and Anaconda refused the request but offered to mail Crane’s prospectus itself at Crane’s expense.

Question: Does a shareholder have the right to request a shareholder list in connection with an impending tender offer?

Holding: Yes

Rule: Under the NYBCL section 1315, the stated purpose of the shareholder list request must be related to the corporation’s business.

Reasoning: Whenever the corporation faces a situation having potential substantial effect on its wellbeing or value, the shareholders qua shareholders are necessarily affected and the business of the corporation is involved under NY statute section 1315. The statute must be liberally construed in favor of the stockholders whose welfare may be affected—to say that a pending tender offer involving over 1/5th of the corporation’s common stock was not related to the business of the corporation was myopic.

State ex rel. Pillsbury v. Honeywell, Inc. (1971)

Minnesota—Delaware code

Facts: Pillsbury requested a shareholder list and other corporate records related to weapons production from Honeywell, a weapons manufacturer, in order to stop Honeywell’s production of anti-personnel fragmentation bombs. Pillsbury intended to communicate with other shareholders with the hope of altering Honeywell’s board of directors. The trial court held that Pillsbury had not presented a proper purpose for his request. Pillsbury contended that a stockholder who disagrees with management has an absolute right to inspect corporate records to solicit proxies.

Question: Did Pillsbury present a proper purpose for his request of the corporation’s shareholder list?

Holding: No.

Rule: A shareholder does not have the right to demand a shareholder list solely for the purpose of persuading the company to adopt his social and political concerns, irrespective of any economic benefit to himself or the corporation. (Not a “proper purpose” under the Delaware code b/c does not relate to investment return/the value of shares)

Reasoning: Because the power to inspect may be the power to destroy, it is important that only those with a bona fide interest in the corporation enjoy that power. . .

Sadler v. NCR Corp. (1991)

2nd Circuit Court of Appeals

Facts: Sadler, a 5% stockholder for six months in NCR Corp., demanded a list of record shareholders and a list of “non-objecting beneficial shareholders” (NOBO list)—those who did not object to disclosure of their names. The Sadlers made their request under a contract with AT&T, which desired the shareholder lists in order to solicit proxy votes to replace NCR’s directors. AT&T did not meet the statutory requirements to make the request under NY Business Corporation Law. NCR objected on the grounds that it was incorporated in Maryland, with its PPoB in Ohio, and Maryland law would not have permitted the shareholder demand. Application of NY law therefore violated the Commerce Clause, as well as agency law.

Question: Can shareholders in a state which permits shareholders to demand the list of record stockholders and the “NOBO” list, make that demand where the law of the state of incorporation prohibits it?

Holding: Yes.

Rule: Where the law of the shareholder’s state permits demand of the shareholder list, shareholders may rely on that law even where the law of the state of incorporation prohibits such a demand.

I. MBCA §16.02: Inspection of Records by Shareholders

A. (a) A shareholder is entitled to inspect/copy records during regular business hours after giving signed/written notice at least 5 business days prior

B. (d) A shareholder may inspect/copy records ONLY if:

· Demand made in good faith and for proper purpose

· Shareholder describes w/reasonable particularity the purpose and the records the shareholder desires to inspect

· The records are directly connected with the shareholder’s purpose

C. (e) Right of inspection may not be abolished in articles or bylaws

D. (f)(1) This section does not affect the right of a shareholder to inspect records in litigation with the corporation

II. MBCA §16.20: Financial Statements for Shareholders (limited mandatory routine disclosure)

A. (a) a corporation shall deliver to its shareholders annual financial statements . . . that include a balance sheet as of the end of the fiscal year, an income statement for that year, and a statement of changes in shareholder’s equity for the year . . . .

B. (c) wi