USA

Minority Shareholder Rights

IBA Corporate and M&A Law Committee 2016

Contact
Steven Cohen

Wachtell, Lipton, Rosen & Katz

SACohen@WLRK.com
Contents Page

SOURCES OF PROTECTION AND ENFORCEMENT 5

PROTECTION AGAINST DILUTION 6

PROTECTION AGAINST TAKEOVER BIDS FOR THE COMPANY 8

ACTIONS AND SEEK REMEDIES ON BEHALF OF THE COMPANY 10

RIGHTS TO PARTICIPATE IN DECISION-MAKING 11

RIGHTS WHEN A COMPANY IS EXPERIENCING FINANCIAL DIFFICULTIES 12

RIGHTS ENFORCEABLE AGAINST OTHER SHAREHOLDERS 12

SUMMARY OF RIGHTS 13
SOURCES OF PROTECTION AND ENFORCEMENT
Please provide an overview of the sources of protection for minority shareholders in your
jurisdiction. Who enforces these rights?

Minority shareholders of companies incorporated in the United States derive their rights from (i) the
statutory and common law of the state in which the company is incorporated (often the state of
Delaware 1) and the organisational documents of the company (e.g., certificate of incorporation, also
knowns as a “charter,” and bylaws), (ii) the U.S. federal securities laws, including various federal statutes
and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”), and (iii) for
companies with equity securities listed on a U.S. stock exchange (such as the New York Stock Exchange
(“NYSE”) or Nasdaq), the rules of that exchange.

A key principle of the corporate law of many states in the United States is that the internal affairs of a
company are governed by the laws of the state in which it is incorporated, irrespective of whether it does
business in that state or any other jurisdiction. State statutes, such as the Delaware General Corporation
Law (“DGCL”), and court decisions, are the primary sources of law regarding protection of minority
shareholders and more broadly governing the relative powers, rights and responsibilities of directors,
officers and shareholders. The DGCL is in many respects an enabling statute, in that it establishes
default governance rules that may be modified in a company’s organisational documents, subject to
certain limits.

The U.S. federal securities laws establish rules governing issuances, sales and purchases of securities
by issuers and investors, disclosure and governance requirements for companies with securities that are
listed on an exchange or are widely held, disclosure requirements for certain of their shareholders and a
variety of other securities-related matters. The principal U.S. federal securities statutes are the Securities
Act of 1933 and the Securities and Exchange Act of 1934 (the “Exchange Act”), as amended over the
years, notably by the Williams Act, the Sarbanes-Oxley Act and the Dodd-Frank Act. The SEC has
promulgated rules and regulations under these statutes, and there is a body of judicial decisions and SEC
guidance interpreting both statutory provisions and SEC rules.

Companies with securities listed on a national securities exchange have to comply with the listing
requirements of that exchange, which also establish disclosure and governance requirements for public
companies, as well as rules regarding shareholder approval of certain share issuances. Some stock
exchange listing requirements were adopted pursuant to mandates of the federal securities laws.

The nature of ownership of public companies in the United States differs from that in many other
jurisdictions. There are few companies with controlling shareholders or significant ownership by founders
or families, with some notable exceptions. Institutions (which invest on behalf of underlying investors,
pension funds, etc.) collectively own a significant portion of the shares of most publicly traded companies,
and while these institutions are increasingly active in the governance of U.S. public companies, they
typically do not seek to exercise direct influence over a company’s governance to the same extent as a
controlling shareholder. Because of this backdrop, U.S. federal and state laws and the listing rules of the
U.S. stock exchanges are generally more focused on protecting “public” shareholders by regulating
disclosure and the relationship between the board and the shareholders rather than establishing a
framework for companies with controlling and minority shareholders.

The various rules described above can be enforced in a variety of ways. Shareholders and other private
parties can bring litigation under state corporate laws and federal securities laws; in the case of some
state corporate law claims, the company itself has the first opportunity to bring the claim, and
shareholders can bring the claim on behalf of the company only if the requirements for asserting such a

1This summary will generally focus on the corporate law of the state of Delaware because a majority of U.S. public
companies are incorporated there and many other states tend to follow Delaware corporate law.
“derivative” claim are met, as discussed in the response to question 5 below. The SEC can investigate
and bring enforcement proceedings regarding violations of federal securities laws and, in rare cases,
stock exchange listing rules. Stock exchanges can enforce their listing rules.

PROTECTION AGAINST DILUTION

Are there any mechanisms in your jurisdiction to protect against dilution of shareholdings? For
example, are existing shareholders granted any rights on the issue of new shares in a company?

Preemptive rights, which are the classic mechanism to protect minority shareholders against dilution,
have undergone substantial transformation in U.S. corporate law due to the growth of public companies
with large and diverse shareholder bases as described above. Today, a majority of U.S. states, including
Delaware and New York, have adopted “opt-in” statutes, pursuant to which the default rule is that, absent
an express provision in a company’s charter establishing preemptive rights, shareholders do not have
preemptive rights. A minority of U.S. states have “opt out” statutes, granting shareholders preemptive
rights, subject to limitation or denial in the charter. U.S. investors generally do not consider preemptive
rights to be a significant protection for a number of reasons, including, among others: in the absence of a
controlling shareholder (which most U.S. public companies do not have), there usually is little cause for
concern that a share issuance will significantly dilute the value of an investor’s stake; shareholders have
other means to block or challenge share issuances, such as the opportunity to vote on certain issuances
under stock exchange rules, and the ability to challenge an issuance as a breach of fiduciary duty if the
circumstances warrant; holding a small percentage of shares typically does not entitle a shareholder to
any particular rights; and shareholders that desire to maintain a specific percentage ownership of a
company’s shares can simply purchase additional shares in the market, which for most U.S. public
companies is very liquid. In fact, many investors consider preemptive rights to be undesirable, as they
generally want companies to be able to access the capital markets quickly and efficiently, which
preemptive rights can impede or make more costly. Preemptive rights at public U.S. companies are very
rare; fewer than 20 companies in the S&P 500 afford shareholders preemptive rights. However, a
company can agree to grant preemptive rights to shareholders by contract. These contractual preemptive
rights are more common for private companies, especially for early-stage companies going through
venture capital financing rounds. Typically, however, these rights expire once the company has reached
a certain size, and in substantially all cases no later than the time of an initial public offering of the
company’s common stock.

When preemptive rights are not applicable, shareholders theoretically could challenge the board’s
decision to issue new shares by bringing a lawsuit alleging breach of fiduciary duty on the grounds that
fair consideration was not paid for the new shares, the board did not have sufficient information to make
an informed business decision or there was no valid business reason for the issuance. Courts will
generally defer to the board’s business judgment in approving share issuances, absent circumstances
suggesting that directors have a conflict of interest, e.g., if there is a controlling shareholder involved, in
which case courts may scrutinize the board’s process and the price paid for the shares more closely
under the “entire fairness” doctrine described below in the response to question 3.

NYSE and Nasdaq listing rules require a shareholder vote for certain share issuances. Subject to
specified exceptions, these rules require a shareholder vote in connection with certain equity issuances
involving 20% or more of the common stock or voting power of an issuer; issuances to related parties
(including substantial shareholders); and issuances that will result in a change of control. Consistent with
the general view in the United States that public companies should be able to access capital markets in a
timely and cost-efficient manner, NYSE and Nasdaq rules have exceptions from the shareholder approval
requirement for certain transactions involving a public offering (which, in the case of the NYSE, must be
for cash). In addition, both NYSE and Nasdaq rules generally prohibit share issuances (and other
corporate transactions) that result in a restriction or reduction of the voting rights of an existing class of
securities, such as an issuance of a new class of super-voting stock.
Shareholders are also protected against excessive share issuances that exceed the authorized share
capital specified in a company’s charter, which in many states, including Delaware, requires a
shareholder vote to be amended.

RIGHTS TO APPOINT DIRECTORS

Do minority shareholders have any special rights to appoint directors to safeguard their
interests? Are other protections available to minority shareholders in this context (such as
general duties of directors)?

Generally, directors are nominated by the existing board and all shareholders have the right to vote on
such nominees at the annual meeting of shareholders. If shareholders wish to propose their own director
nominees for a vote at the annual meeting, they can do so, in what is referred to as a “proxy contest,”
subject to compliance with “advance notice” provisions in the company’s bylaws, discussed in the
response to question 6 below. There has been much debate in recent years as to the circumstances, if
any, under which shareholders should be able to nominate directors using the company’s proxy materials
as opposed to using their own proxy materials, which is discussed in greater detail below in the response
to question 6. In addition, a shareholder that makes a significant investment in a company may negotiate
with the company for the contractual right to designate directors to its board.

Although minority shareholders of U.S. companies usually do not have any specific rights to appoint
directors, a company’s organisational documents may provide for “cumulative voting,” which strengthens
the ability of minority shareholders to elect a director by allowing shareholders to cast for a single
nominee a number of votes equal to the number of shares that they hold. Very few public companies
allow cumulative voting.

Shareholders also can “withhold” their votes from a board nominee, which may result in such nominee not
being elected, if the company has adopted a requirement that directors be elected by a majority of votes.
Majority voting can be contrasted with plurality voting, under which the nominees who get the most votes
are elected until the board is filled, so even a single vote in favor of a nominee will result in that person
being elected in an uncontested election. In addition, shareholders generally have the power to remove
directors with or without cause, unless the board is classified, in which case directors may only be
removed for cause unless the company’s charter provides otherwise.

State corporate laws impose fiduciary duties on directors as a means to ensure that the board is acting in
the best interests of the company and its shareholders. Under Delaware law, which is similar to most
other states in this regard, directors owe two fundamental fiduciary duties: the duty of care and the duty of
loyalty. A director satisfies his duty of care if he has sufficient knowledge and information to make a well-
informed decision. A director satisfies his duty of loyalty if he acts in good faith and in the best interests
of the shareholders and the company (rather than in his own personal interest).

Whether a court determines that a director breached his fiduciary duties depends heavily on the
applicable standard of review that the court determines is applicable in a given case. The “business
judgment rule” is the default standard of review applicable to board decisions and operates as a
presumption that directors have made a decision on an informed basis, in good faith and in the honest
belief that the action is in the best interests of the company and its shareholders. In cases where the
business judgment rule applies, directors’ decisions are protected, unless a plaintiff is able to plead facts
showing that the board acted disloyally, in bad faith or with gross negligence. If a plaintiff is able to rebut
the presumptive protections of the business judgment rule, the court will review the board’s actions for
“entire fairness.” In particular, a court will review a board’s actions under the entire fairness standard in
the following situations: when a majority of the board has an interest in the decision or transaction that
differs from the shareholders in general; when a majority of the board lacks independence from or is
dominated by an interested party; or when the transaction at issue is one where the directors or a
controlling shareholder “stands on both sides” of a transaction. Even when a controlling shareholder is
involved, however, such as in a “squeeze-out” merger in which a controlling shareholder buys out the
public minority shareholders, certain procedural protections (e.g., the use of a special committee of
disinterested, independent directors and a nonwaivable majority-of-the-minority shareholder approval
condition) may help avoid entire fairness review or at least shift the burden of disproving entire fairness to
the plaintiff. The above-described fiduciary framework is one of the most important protections for
minority shareholders, as it provides them with an avenue of potential judicial redress in the event that a
controlling shareholder abuses its power in its dealings with the company.2

Under SEC rules, public companies in the U.S. are required to publicly disclose the material terms of any
related party transactions—including transactions with a controlling shareholder and its affiliates—with a
value of greater than $120,000. In addition, NYSE rules require listed companies to have related party
transactions reviewed and evaluated by an appropriate group within the company, such as the audit
committee or another comparable body (Nasdaq has a similar rule), and SEC rules require public
companies to disclose their policies and procedures for the review, approval or ratification of related party
transactions.

PROTECTION AGAINST TAKEOVER BIDS FOR THE COMPANY

Do minority shareholders have any protection in your jurisdiction where the company is the
subject of a takeover bid?

Unlike many other jurisdictions, the corporate law of most U.S. states allows a board of directors to adopt
measures that interfere with a takeover bid without shareholder approval, subject to the directors’
fiduciary duties. For example, a board may adopt a shareholder rights plan (“poison pill”) without a
shareholder vote in response to a takeover bid, even if a majority of the shareholders desire to tender into
the takeover bid. If a board adopts defensive measures in response to an alleged threat to corporate
control or policy (such as a hostile takeover attempt), the board’s actions will be subject to judicial review
under an “enhanced” or “intermediate scrutiny” standard, which examines the substantive
reasonableness of both the board’s process and its action. Enhanced judicial scrutiny also applies if a
board approves a merger agreement that includes deal protection measures that make it more difficult for
a third party to compete with the original buyer (such as termination fees), or approves a transaction
involving a sale of control (such as a sale of the company for cash).

As discussed above in the response to question 3, a controlling shareholder’s attempt to acquire the
company, like transactions involving controlling shareholders generally, is potentially subject to “entire
fairness” review, though the use of certain procedural protections may help avoid entire fairness review or
at least shift the burden of proof to the plaintiff challenging the transaction.

A number of U.S. states have adopted various statutes to combat unsolicited takeover attempts. One
kind of antitakeover statute is known as a “business combination statute,” such as Section 203 of the
Delaware General Corporation Law (“Section 203”). Section 203 prohibits any “interested stockholder”
(i.e., a person that acquires 15% or more of a company’s voting stock) from engaging in a “business
combination” (which is broadly defined to include mergers, sales and leases of assets, issuances of
securities and similar transactions, as well as any receipt by the interested stockholder of financial
benefits provided by the company) with the target company for three years after the person became an
interested stockholder. The main exceptions to Section 203 are (i) approval by the board of the business
combination or the transaction which resulted in the person becoming an interested stockholder, prior to
the time the person became an interested stockholder, (ii) acquisition of at least 85% of the company’s
voting stock in the initial transaction or (iii) approval of the proposed business combination by the board
and the vote of at least 66-2/3% of the outstanding voting stock not owned by the acquiror. A company
can opt out of these restrictions through a provision in its certificate of incorporation. A majority of U.S.

2 As discussed below in the response to question 4, directors’ conduct is, under certain circumstances, subject to
review under an “enhanced” or “intermediate” standard, which is less deferential than the business judgment rule but
not as searching as entire fairness review.
states, including New York, have statutes that are similar to Section 203. Other takeover statutes, which
Delaware does not have, include “control share” and “fair price” statutes. Control share statutes limit the
ability of a hostile acquiror to vote acquired shares beyond certain thresholds. Fair price statutes
generally restrict a target from consummating a “business combination” with a hostile acquirer without the
approval of the target’s board and unaffiliated shareholders, unless the unaffiliated shareholders receive a
“fair price” in the transaction. In addition, the organisational documents of some companies include
provisions that can impede hostile takeover attempts.

If a company is acquired in a merger, shareholders that did not vote for the merger may have state law
appraisal rights. Appraisal rights are a statutorily defined remedy that allows a dissenting shareholder to
petition a court for an independent determination of the “fair value” of his shares. Appraisal typically is not
available in some cases, e.g., in stock-for-stock mergers where the shareholder receives one liquid
security in exchange for another. Appraisal statutes also contain strict procedural requirements and can
involve a lengthy and expensive process. The judge’s determination of “fair value” could be more or less
than, or the same as, the consideration initially offered to the shareholders in the transaction, although
Delaware courts increasingly are determining fair value in an arm’s-length merger to be the price paid by
the third-party acquiror.

In addition to state laws, the U.S. federal securities laws provide important protections for public
shareholders in the tender or exchange offer context. The Williams Act, which amended the Exchange
Act, and the rules and regulations of the SEC promulgated thereunder, require, among other things, that
tender or exchange offers for the shares of a public company be open for at least 20 business days; that
such offers be open to all holders of the subject class of security (known as the “all-holders” rule); and
that the consideration paid to any security holder be the highest consideration paid to any other security
holder for securities tendered in the offer (known as the “best price” rule).

The federal securities laws also include a variety of disclosure obligations that benefit public
shareholders. For example, under Section 13(d) of the Exchange Act (which also was enacted as part of
the Williams Act) and the rules and regulations of the SEC promulgated thereunder, any person (or
“group” of persons) who becomes the beneficial owner of 5% or more of an issuer’s class of voting equity
securities is required to file a Schedule 13D with the SEC within ten calendar days of the acquisition, and
to promptly amend the filing in the event of any material change in the facts disclosed in the filing.3 The
Schedule 13D must include, among other things, the purpose of the transaction and plans that the
acquiror may have for the subject company or for accumulating additional subject company securities.
The Schedule 13D regime therefore serves as an early warning system that notifies the market of
significant share accumulations that may affect corporate control.

Furthermore, in addition to general disclosure requirements that apply under federal securities laws and
state corporate law in connection with the acquisition of a public company, a “going private transaction”
with a controlling shareholder or other affiliate is subject to Rule 13e-3 under the Exchange Act, which
requires, among other things, the target company and each affiliate engaged in the transaction to publicly
disclose detailed information regarding the substantive and procedural fairness of the transaction to
unaffiliated shareholders and to file copies of each report or opinion received from a third party that is
materially related to the transaction.

Unlike the laws of some other countries, U.S. federal and state laws do not provide for mandatory offer
requirements that would force a purchaser of a significant stake in a company to offer to buy the
remaining shares from the minority shareholders. There is also no requirement for an acquiror to tender
for a minimum amount of the target’s shares.

3 These rules also allow certain passive investors to instead file a shorter disclosure form on Schedule 13G.
ACTIONS AND SEEK REMEDIES ON BEHALF OF THE COMPANY
Are shareholders in your jurisdiction able to bring actions and seek remedies on behalf of the
company? For example, is there any mechanism for a judicial or other official representative to
oversee or intervene in the management of the company?

Although there typically is not a mechanism for a judicial or other official representative to oversee or
intervene in the management of the company, shareholders can pursue several kinds of legal remedies
when they believe there has been wrongdoing. A shareholder can utilize rights under state law right to
inspect corporate books and records relating to the alleged wrongdoing. Delaware law grants
shareholders the right to inspect corporate books and records for a “proper purpose,” which is broadly
defined as any purpose that is reasonably related to such person’s interest as a shareholder.
Investigating corporate mismanagement, for example, is a proper purpose. Laws of many other states,
including New York, provide for generally similar inspection rights.

A shareholder is allowed to bring a direct suit against a company for claims that involve a specific right
granted to the shareholder, such as the right to receive a declared or expressly required dividend, or for
violations of disclosure obligations, either through an individual lawsuit or a class action lawsuit against
the company. A class action lawsuit may be brought by one shareholder on behalf of a class of similarly
situated shareholders. If shareholders are successful in these direct lawsuits, they recover damages
themselves.

If the alleged wrongdoing involves injury to the company and only indirectly to the shareholders, such as
a typical fiduciary duty claim, the right to bring an action belongs to the company. A shareholder must
either demand that the company bring an action or bring a derivative lawsuit on behalf of the company if
certain “standing” requirements are satisfied, including that such person was a shareholder at the time of
the alleged wrongdoing. In a derivative lawsuit, any recovery belongs to the company and not to the
shareholders. A shareholder who wants a company to pursue litigation to remedy a wrongdoing has to
either (a) make a demand on the board requesting that the board investigate the alleged wrongdoing and
bring the requested litigation, or (b) show that the demand on the board would be futile by presenting
particularized facts creating a reasonable doubt that (i) the board would be able to exercise independent
and disinterested business judgment and properly consider the allegations or (ii) the challenged
transaction was the product of a valid business judgment. If a court agrees that making a demand on the
board would be futile, the court will waive the demand requirement and allow the shareholder to pursue
the claim in respect of the alleged wrongdoing derivatively on behalf of the company. If a shareholder
does make a demand on the board and the board decides not to pursue the requested claim, a court can
still allow a shareholder to proceed with a derivative claim if the shareholder establishes that the board’s
refusal was in bad faith. In that case, the court will not analyze the underlying allegation of wrongdoing or
the outcome of the board’s investigation, but rather will analyze only the process the board undertook to
investigate the shareholder’s demand and make its decision.

Courts can award a variety of remedies for fiduciary breaches, including monetary damages and
injunctive relief. However, many companies include in their certificates of incorporation a provision
authorized by Section 102(b)(7) of the Delaware General Corporate Law, which exculpates directors (but
not officers) from monetary liability for breaches of the duty of care. Section 102(b)(7) provisions cannot,
however, exculpate breaches of the duty of loyalty (including breaches arising from bad faith conduct),
and they do not prevent a court from ordering equitable relief against violations of any duty.
RIGHTS TO PARTICIPATE IN DECISION-MAKING
To what extent do minority shareholders have rights to participate in the decision-making of
companies in your jurisdiction?

Under Delaware corporate law (and that of many other states), a company is managed by or under the
direction of a board of directors; officers of the company are appointed by the board, and manage the
business of the company on a day-to-day basis. The principle that all corporate decisions are made, or at
least initiated, by the board (subject to the directors’ fiduciary duties) is a central and well-settled principle
of U.S. corporate law. Furthermore, as discussed in more detail below, relatively few matters require
shareholder approval. As a result, shareholders have little direct influence over the operation and
management of the company, and instead generally can influence corporate action only indirectly by
shaping the composition of the board through the election and removal process summarized above in
response to question 3.

Certain matters require formal shareholder approval. Under Delaware and New York law, a shareholder
vote is required to amend a company’s charter or approve a merger or consolidation of the company or a
sale of all or substantially all its assets. However, the first step in any such transaction is the approval by
the board, and as a result, shareholders cannot initiate action on such fundamental matters. In addition,
a company’s bylaws typically can be amended either by the board or the shareholders. NYSE and
Nasdaq listing rules require a shareholder vote for certain share issuances, as described above in the
response to question 2. Federal securities laws also require public companies to submit executive
compensation to an advisory (i.e., non-binding) shareholder vote (so-called “say-on-pay”). Matters that a
board typically could undertake without shareholder approval include acquisitions for cash and/or stock or
any other issuance of stock or other securities (as long as any such issuance does not require a
shareholder vote under stock exchange listing rules and does not exceed the maximum amount
authorized in the charter), including issuance of fractional preferred shares with liquidation preferences of
any arbitrarily high amount regardless of the stock’s par value; dispositions of less than substantially all
assets; dividends and share repurchases; and incurrence of debt.

Although shareholders generally may not initiate action on business decisions, shareholders are
permitted to nominate directors for election, to call for the removal of directors and to propose, on a non-
binding basis, that a company take certain actions. Shareholders generally may pursue these actions at
an annual meeting, at a shareholder-called special meeting, provided shareholders are authorized by the
company’s charter or bylaws to call special meetings, or through action by written consent of
shareholders unless action by written consent is prohibited by the company’s charter. Where a
company’s organisational documents permit shareholders to call special meetings, the requisite threshold
for doing so typically ranges from 10% to as high as 50% of the outstanding shares. Furthermore, if a
Delaware corporation does not hold an annual meeting to elect directors for a period of 13 months after
its last annual meeting, a Delaware court has statutory authority to order a meeting to be held upon the
application of any shareholder or director.

Most public companies include in their organisational documents, typically in the bylaws, “advance notice”
provisions that require a shareholder who wishes to nominate a director or propose any other business to
provide prior notice to the company with detailed information concerning the proposal and the proposing
shareholder. These advance notice provisions are designed to facilitate an orderly shareholder meeting.
These provisions do not, however, apply to proposals made under Rule 14a-8, described below.

With certain exceptions described below, shareholders generally do not have the right to include their
proposals or nominees in the official proxy statement and proxy card that the company files with the SEC
and uses to solicit votes for the shareholder meeting; rather, the proposing shareholder must prepare and
file with the SEC a separate proxy statement and proxy card and comply with federal proxy rules, state
law and the company’s organisational documents in running a proxy contest.

Rule 14a-8 under the Exchange Act provides shareholders who meet certain criteria with the right to
compel a public company to include shareholder proposals in the company’s official proxy statement and
proxy card. Under Rule 14a-8, a shareholder proposal must be submitted by an eligible shareholder (who
has owned at least $2,000 or 1% of securities entitled to vote on the proposal for at least one year by the
date the proposal is submitted and continues to own such securities through the date of the meeting),
generally at least 120 days before the date the company’s last proxy statement for the previous year’s
annual meeting was released to shareholders. If a proposal is timely submitted by an eligible
shareholder, a company must include that proposal in its proxy materials unless it falls within the rule’s
substantive bases for exclusion.

Although Rule 14a-8 is not available for director nominations, the rule does allow shareholders to include
in the company’s proxy materials shareholder proposals to establish company-specific “proxy access”
regimes. Proxy access permits shareholders to use the company’s own proxy statement and proxy card
to nominate directors in certain circumstances, which allows shareholders to avoid the cost and effort of
preparing and mailing their own proxy materials, which can be significant. Under a typical proxy access
formulation, a nominating shareholder or group of shareholders may nominate up to a specified number
of qualifying director candidates for inclusion in the company’s proxy materials if the nominating
shareholder or group has held a specified percentage of stock continuously for a specified period of time.
In the last several years there has been a substantial increase in shareholder proposals for companies to
adopt mandatory proxy access regimes. During the 2015 proxy season, over 100 companies, including
some with very large market capitalizations, received proxy access shareholder proposals. A significant
majority of those proposals passed; in addition, a number of companies have adopted proxy access
provisions in their bylaws on their own.

RIGHTS WHEN A COMPANY IS EXPERIENCING FINANCIAL

DIFFICULTIES
Do minority shareholders have any particular rights or protections when a company is
experiencing financial difficulties? For example, are they able to demand that the company be
wound up?

Absent specifically negotiated provisions in a company’s organisational documents or contracts, minority

shareholders usually do not have particular rights or protections when a company is experiencing
financial difficulties. There are some exceptions to this general rule in extreme circumstances. For
example, if a Delaware corporation is insolvent, a creditor or shareholder may demand that a Delaware
court appoint one or more persons to be receivers for the corporation, to take charge of its assets and
collect outstanding debts. Insolvency in this context means that liabilities exceed assets with no
reasonable prospect that the business can be successfully continued or an inability to meet maturing
obligations as they fall due in the usual course of business. Appointment of a receiver does not dissolve
the corporation.

RIGHTS ENFORCEABLE AGAINST OTHER SHAREHOLDERS

Do minority shareholders have any rights or protections which are enforceable against other
shareholders, for example, where the majority of shareholders act in contravention of the
company’s articles of association?

Non-controlling shareholders do not owe fiduciary duties to one another and also generally do not have
any rights that could be enforced against other shareholders. However, for companies that have a
controlling shareholder, statutory provisions and/or common law provide protection for minority
shareholders. Many states, including New York, but not (as discussed below) Delaware, have statutory
provisions and common law rules that give minority shareholders rights when they are being “oppressed”
by controlling shareholders. Under New York law for example, holders of 20% or more of a closely held
corporation the shares of which are not listed on a stock exchange, may petition for dissolution if the
directors or shareholders in control of the corporation engage in illegal, fraudulent or oppressive conduct.
In such case, New York law gives the controlling shareholder the option to avoid dissolution by
purchasing the petitioning shareholder’s shares for “fair value” and sometimes even requires the
controlling shareholder to buy-out the minority shareholder.

Although Delaware law does not expressly recognize the right of minority shareholders to dissolve a
corporation or require a buy-out as remedies against shareholder oppression, Delaware law provides
minority shareholders with remedies against controlling shareholders for breaches of fiduciary duty.
Controlling shareholders of a Delaware corporation owe fiduciary duties to minority shareholders, similar
to the duties of directors. Therefore, conduct that may give rise to an oppression claim in other
jurisdictions may give rise to a breach of fiduciary duty claim in Delaware.

While organisational documents typically are effectively treated as enforceable contracts between the
company in its shareholders, the provisions of such documents typically do not restrain shareholders
themselves or give shareholders rights as against each other. Accordingly it would be unusual for
shareholders to bring claims asserting that other shareholders were acting in contravention of the
organisational documents.

SUMMARY OF RIGHTS
Below is a table providing a brief summary of the rights of minority shareholders in the United
States, organised according to the percentage threshold at which the various protections become
available.4

Shareholding (%) Description Reference

Majority of the The affirmative vote of a majority of the outstanding shares DGCL §§ 242(b),
shares outstanding entitled to vote is the default standard required to approve 251(c) and 271(a)
amendments to the corporation’s certificate of incorporation,
mergers and sales of all or substantially all of a corporation’s
assets. 5

However, if an entity owns 90% or more of the stock of DGCL § 253

another corporation, a merger between those entities will not
require approval by the subsidiary’s shareholders.

The default standard for removal of directors is a majority of DGCL § 141(k)

the shares entitled to vote at an election of directors.

The default standard for a quorum at a shareholder meeting

is a majority of the shares entitled to vote, present in person DGCL § 216
or represented by proxy.

4 This table describes only the default thresholds provided by law or stock exchange rules. Companies can modify
certain of these thresholds in their organizational documents, and also can provide shareholders with additional rights
in their organizational documents (such as the right to call special meetings, proxy access provisions, supermajority
approval requirements for certain matters, etc.). Companies also can create multiple classes of stock in their
organizational documents, which may have different rights (different voting rights, class approval rights, etc.).

5 Some states, like New York and Maryland, provide for a higher threshold (two-thirds) for shareholders to approve
fundamental transactions. In addition, a Delaware corporation’s organizational documents may provide for a higher
voting standard than is required by the statute.
 Shareholding (%) Description Reference

Majority of the Excluding the election of directors and matters that require a DGCL § 216(2)
shares voting vote of a majority of the outstanding shares by law, the
default rule for approving matters submitted to a shareholder
vote (including amendments to bylaws) is the affirmative vote
of the majority of shares present in person or represented by
proxy at the shareholder meeting and entitled to vote on the
subject matter.

Subject to certain exceptions, New York Stock Exchange and NYSE and Nasdaq
Nasdaq listing rules require a shareholder vote in connection Listing Rules
with certain equity issuances involving 20% or more of the
common stock or voting power of an issuer, issuances to
related parties (including substantial shareholders), and
issuances that will result in a change of control. The voting
standard for these approvals is a majority of the votes cast at
the shareholder meeting.

Plurality The default standard for election of directors is a plurality of DGCL § 216(3)
the votes of the shares present in person or represented by
proxy at the shareholder meeting and entitled to vote on the
election of directors. Under this standard, nominees who get
the most votes are elected until the board is filled. Therefore,
even a single vote in favor of a nominee will result in that
person being elected in an uncontested election.

However, most public companies have switched to a majority

voting standard in uncontested director elections.

1% or $2,000 A company is required to include in its proxy statement an Rule 14a-8 under the
eligible shareholder proposal submitted by an eligible Securities Exchange
shareholder (who has owned at least $2,000 or 1% of Act of 1934
securities entitled to vote on the proposal for at least one
year by the date the proposal is submitted and continues to
own such securities through the date of the meeting) at least
120 days before the date the company’s last proxy statement
for the previous year’s annual meeting was released to
shareholders (or a reasonable time before the company
begins to print and mail its proxy materials if the company did
not have an annual meeting during the previous year, or if the
date of the annual meeting has been changed by more than
30 days from the date of the previous year’s annual meeting).

One share Shareholders have the right to inspect corporate books and DGCL §§ 219 and 220
records for a “proper purpose,” which is defined as any
purpose that is reasonably related to such person’s interest
as a shareholder.

In addition, prior to any meeting of shareholders, any

shareholder has the right to examine a complete list of the
company’s shareholders who are entitled to vote at the
upcoming meeting for any purpose germane to the meeting.

Any shareholder that has been directly damaged by Common law; DGCL §
corporate action can seek recovery through an individual 327
lawsuit or a class action lawsuit against the company. If the
alleged wrongdoing involves injury to the company and only
Shareholding (%) Description Reference

indirectly to the shareholders, the right to bring an action

belongs to the company and a shareholder must either
demand that the company bring an action, or bring a
derivative lawsuit on behalf of the company if certain
“standing” requirements are satisfied, including that such
person was a shareholder at the time of the alleged
wrongdoing.

If a corporation fails to hold its annual meeting for a period of DGCL § 211(c)
13 months after its last annual meeting, the Court of
Chancery may summarily order a meeting to be held upon
the application of any shareholder or director.

Shareholders of a corporation that is acquired in a merger DGCL § 262

(subject to certain exceptions, including stock-for-stock
mergers, and procedural requirements) have a statutory right
to a judicially determined appraisal of the value of their
shares if they do not vote for or consent to the merger.

Shareholders may petition the Court of Chancery to DGCL § 225

determine the validity of any election, appointment, removal
or resignation of any director or officer of a corporation, and
the right of such person to hold or continue to hold such
office. In addition, shareholders may petition the Court of
Chancery to determine the result of any stockholder vote
other than for the election of directors or officers.

The acquiror in a tender or exchange offer for U.S. registered Rule 14d-10(a) under
equity securities must make the offer available to all of the the Securities
target’s shareholders and must pay to each shareholder for Exchange Act of 1934
shares tendered in the offer the highest consideration that it
pays to any other shareholder for shares tendered in the
offer.

If a corporation is insolvent, a creditor or shareholder may DGCL § 291

demand that a Delaware court appoint one or more persons
to be receivers for the corporation, to take charge of its
assets and collect outstanding debts.