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Publicly Held Businesses
Washington & Lee University School of Law
Millon, David K.

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.


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.


· 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

14a-8 has limited value for shareholder’s whose goal is to maximize profits as opposed to addressing social concerns b/c does not give shareholders power to effect broad changes in corporate governance

o Rule 14a-11: (vacated by Business Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011))

§ Rule 14a-11 required a company to incorporate shareholder nominees for director in its proxy materials, provided the shareholder met certain eligibility requirements and was not prohibited by state or foreign law or a company’s governing documents from proposing a candidate

§ Under the rule, a shareholder was eligible to nominate a candidate only if the shareholder held, in the aggregate, at least 3 percent of the total voting power of the company’s securities that could be voted on the election of directors at the annual meeting

§ Shareholders would only be allowed to elect 25% of the board

· Takeaway: shareholders who want proxy access must use 14a-8 to propose a bylaw amendment

DGCL 141(a)/MBCA 8.01(b):

· Corporations must have a board of directors, and are to be managed by the board, subject to limitations in the articles/certificate of incorporation

MBCA 8.30(b): Standards of Conduct for Directors

· Directors must discharge their duties (1) in good faith, and (2) with the care that a person in a like position would reasonably believe appropriate under the circumstances

· Applies to directors when: (1) becoming informed in connection with decision-making function, or (2) devoting attention to oversight function

o MBCA 8.42 applies the same standards of conduct to officers

Lovenheim v. Iroquois Brands, Ltd. (1985)

D.C. District Court

Facts: Lovenheim, a shareholder in Iroquois Brands, a food importer, sought to compel the company to include certain information in proxy materials being sent to all shareholders in preparation for an upcoming shareholders meeting. Specifically, Lovenheim intended to offer a resolution at the meeting that would compel the directors of the company to form a committee to study the methods of the company’s French supplier of pâté de foie gras to determine if the supplier used allegedly inhumane methods of production (force-feeding of geese). The corporation refused to allow Lovingheim’s proposal and moved for summary judgment, arguing that the proposal fell within the 14a-8(i)(5) exception to the 14a-8 requirement b/c only a small fraction of the company’s business involved pâté.

Question: Did Lovenheim’s proposal qualify as “otherwise significantly related to the issuer’s business” under 14a-8(i)(5), thus entitling him to include his proposal in proxy materials mailed out ahead of the shareholder meeting?

Holding: Lovingheim avoided summary judgment.

Rule: 14a-8/14a-8(i)(5) (“otherwise significantly related” is not limited to economic relatedness)

Reasoning: Shareholder proposals are includable under 14a-8(i)(5)’s exception, even if they do not meet that section’s 5% economic thresholds, so long as the shareholder demonstrates a significant relationship to the company’s business on the face of the proposed resolution or supporting statement. A “significant relationship” may include a social or political, non-economic relationship, which Lovenheim demonstrated by arguing that the very availability of a market for pate contributed to the furtherance of inhumane treatment of geese. Lovenheim also cited numerous state and federal laws outlawing cruelty to animals. Finally, although Lovenheim did not show that the company’s pate business met the specified economic significance thresholds of 14a-8(i)(5), he was able to show that some portion of the company’s business involved sales of pate.

· Bottom line: company generally can’t exclude shareholder proposal unless ridiculous or bears no relation to the company’s business

· Allows shareholders to communicate w/each other and management to temper corporation’s profit motive with social concerns

· Inconsistent with state law on the issue of corporate purpose (compare to Pillsbury)

· Federalism issue: 14a-8 interferes directly in corporate governance and thus runs counter to the general rule that corporation’s internal affairs are to be regulated by the law of the state of incorporation