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Only a few cases guide the governance of directors' and stockholders' meetings By ERIC G. ORLINSKY Don't Miss...
A Section subcommittee works on the issues Pennsylvania corporations -- a bad investment?
Orlinsky practices corporate and securities law with the Baltimore office of Saul, Ewing, Remick & Saul, LLP and is the chair of a subcommittee of the Corporate Governance Committee of the Business Law Section that deals with issues surrounding the conduct of directors' and stockholders' meetings. The views expressed in this article are those of the author and do not necessarily reflect the views of his firm, the ABA or the BLS subcommittee mentioned above.
In the early '90s, as a publicly held Baltimore bank (Bank) prepared for its annual stockholders' meeting, a well-organized group of dissidents led by a prominent Baltimore businessman appeared poised to gain control of the Bank from existing management.
With the economy in recession and the Bank losing money, the Bank's president, who was also responsible for chairing its stockholders' meetings, was expected to bear the brunt of stockholder discontent. As the meeting progressed, the president, on the defensive and fighting for his professional life, used the powers of the chair unfairly to silence the voices of the dissident stockholders and thwart the will of the majority in order to keep existing management in control. Only after a lengthy and expensive court battle did the dissidents prevail.
In Pennsylvania, in the mid '90s, family discord at a public, but mostly family held, food company (Food Co.) boiled over at its directors' and stockholders' meetings. The "stockholder" family members attempted to have the president and chairman of the board, another family member, contractually agree in advance as to how he would vote on certain issues at directors' meetings. Directors opposed corporate decisions only because they were proposed by the "management" side of the family and not the "stockholder" side or vice versa. One "stockholder" family member attempted to usurp control over the conduct of the directors' meetings from his brother, the chairman of the board.
"Stockholder"-elected directors openly chastised Food Co. executives at a directors' meeting. Heated exchanges often occurred and valuable company time was often wasted arguing over procedural matters, such as whether the corporation's lawyer should be permitted to be present at the board meetings and whether a director needed a second to a motion before the board could vote on or discuss a matter. Often nothing was accomplished.
Ultimately, the "management" family members removed the "stockholder" family members from the board at a particularly bitter and contentious stockholders' meeting.
Recently, a large public railroad (Railroad) had difficulty controlling a stockholder who was intent on disrupting the conduct of the Railroad's stockholders meetings and forcing the Railroad to spend a disproportionate amount of meeting time discussing his own agenda. By doing so, that stockholder unfairly monopolized the Railroad's time and delayed the consideration of more pressing issues. The stockholder even created a Web site to spread rumors about the Railroad and gossip about its management.
These difficult or hostile corporate meeting situations, and many others like them across the country, frequently raise questions with few answers in corporate governance practice. Although occasional cases deal with the conduct of directors' and stockholders' meetings, there are rarely statutes addressing procedural aspects of corporate meetings.
So what are some frequently asked corporate-governance questions?
A SECTION SUBCOMMITTEE WORKS ON THE ISSUESThe absence of a workable set of guidelines or principles by which to conduct stockholders' meetings is currently the subject of a Business Law Section project. This project might help to settle many of the issues raised in this article. The Subcommittee on the Conduct of Directors' and Stockholders' Meetings was formed in April of 1997 as a subcommittee of the Corporate Governance Committee of the Business Law Section.
The principal mission of the subcommittee is to draft guidelines for the conduct of stockholders' meetings that are specifically tailored to deal with the unique nature of stockholders' meetings, yet are simple enough that they could be universally understood by stockholders, two things Roberts' Rules do not accomplish.
This subcommittee hopes to provide the collective wisdom of lawyers who frequently deal with issues surrounding the conduct of directors' and stockholders' meetings to answer many frequently asked corporate governance questions.
The subcommittee envisions that the proposed guidelines will fill an existing void in corporate governance and serve as a useful tool for corporations and lawyers in conducting stockholders' meetings. It is the subcommittee's hope that the guidelines will ultimately serve to prevent litigation over the conduct of such meetings, particularly meetings at which there are two or more hostile factions.
The subcommittee has completed a draft of the Guidelines, which has been delivered to the Corporate Governance Committee for review and comment. It is anticipated, if approved by the committee and the Section, that these Guidelines will be published by the Section.
Members of the Business Law Section who are interested in seeing copies of the draft guidelines can obtain them by writing to Eric Orlinsky c/o Saul, Ewing, Remick & Saul, LLP, 100 South Charles Street, Baltimore, MD,
21201. The subcommittee welcomes additional members or comments on the draft guidelines. Any membership interest or comments should also be directed to the above address.
� Eric G. Orlinsky
1. What rules or guidelines should govern the conduct of directors at directors' meetings or stockholders at stockholders' meetings?
In the Bank situation, having a standard set of rules to govern the conduct of stockholders meetings, which were adopted in advance and were uniformly applied from meeting to meeting, might have helped to ensure a fair meeting and may have avoided litigation. No set of uniform rules, however, exists today.
Commentators uniformly explain that rules of parliamentary procedure, such as Roberts' Rules of Order, should not govern the conduct of stockholders' and directors' meetings. These commentators, however, suggest no alternative. Instead, the only direction they give is that the chair is obligated to conduct stockholders' meetings in a manner that is fair to the stockholders. See, for example, Young v. Jebbett, 211 N.Y.S. 61 (N.Y. Sup. Ct.
Roberts' Rules are viewed as inappropriate for several reasons. First, Roberts' and other rules of parliamentary procedure are so complicated that a typical stockholder is unlikely to understand, or become well versed in, their operation. Second, in order to run stockholders' meetings properly with parliamentary rules, corporations would be required to hire parliamentarians.
Finally, and most important, Roberts' Rules were designed for deliberative assemblies in which each member has an equal vote. As a consequence, Roberts' Rules are not well suited to stockholders' meetings where each person's opinion or vote has a different weight depending on the number of shares that person owns.
Moreover, Roberts' Rules are especially not well suited to situations in which management has already solicited proxies sufficient to control the outcome of all decisions being made at the meeting.
2. Can directors contractually agree in advance of a board meeting how to vote on a particular matter?
Although the family members in the Food Co. situation believed that a contractual arrangement on board voting would solve many family issues, lawyers and commentators generally conclude that it is a breach of a director's fiduciary duty to agree in advance of a meeting how that director will vote on a certain issue. There appear to be no cases on this issue.
There is, however, ample support for the proposition that each director owes a fiduciary duty to the corporation, and that that duty includes the obligation to make a fully informed decision. Thus, each director must vote on corporate decisions based on the facts and circumstances as they exist at the time the decision is made. While a director may believe that a particular decision is in the best interests of the corporation at the time he or she enters into an agreement, the facts or circumstances on which that director's judgment is based may change between the time of the agreement and the time the director is called on to vote on the matter.
3. Can directors vote by proxy?
Like contractual ageements on voting, there appears to be no case law on this issue. This question is, however, one of the few on which there appears to be a consensus. Commentators and lawyers generally agree that directors should not be permitted to vote by proxy. See 1 R. Franklin Balotti and Jesse A. Finkelstein, The Delaware Law of Corporations and Business Organizations,�4.2 E (1997 Supp.); James J. Hanks Jr., Maryland Corporation Law,�6.12 (1994-1 Supp.). Directors' proxies are presumed to be invalid and should not be accepted.
Again, each director has an obligation to make a fully informed decision. Consequently, a director cannot delegate his or her voting power, even to another director, and adequately fulfill that duty. Each director must be present at the meeting to hear and consider management presentations and the views of the other directors.
4. Does a director have a right to have his or her lawyer or the corporation's lawyer present at a directors' meeting?
Another issue hotly fought over in the Food Co. situation was the attendance of lawyers at directors' meetings.
This is among the few propositions for which there is some, albeit scant, case law. At least one court has stated that the general rule is that directors are entitled, absent unique or extreme circumstances, to have counsel present at board meetings. See Salama - Dindings Plantations Ltd. v. Durham, 216 F. Supp. 104, 115 (S.D.
Ohio 1963). Ironically, under the somewhat unique circumstances of Salama - Dindings, a bylaw provision restricting lawyers from attending was upheld. At least one commentator, however, has suggested that the chair or the directors as a group may exclude others from attending, and that this extends to the personal lawyers of the directors. R. Franklin Balotti and Jesse A. Finkelstein, The Delaware Law of Corporations and Business Organizations, 4.2 (1997 Supp.).
5. Does a stockholder have the right to have his or her lawyer present at a stockholders' meeting?
Does the chair of the stockholders' meeting have the right to have corporate counsel present at the stockholders' meeting?
Contrary to the Salama - Dindings case, it is generally accepted by lawyers and commentators that only stockholders and their proxies are permitted to attend stockholders' meetings. It is also generally accepted that this rule may be altered by the establishment of a different rule, in each case, in advance of the meeting by the board of directors or the chair, or by a vote of the stockholders at the meeting. Unlike directors' meetings, this question rarely presents practical problems because the stockholder can give his or her lawyer a proxy for one or more shares. Thus, the lawyer, by virtue of being a proxy holder, is assured of being permitted to attend the meeting.
Interestingly, the general practice is for corporations to have corporate counsel present at stockholders' meetings to advise the chair as to the legality of certain issues raised and the conduct of the meeting. While there is no theoretical distinction between counsel to the corporation and counsel to a particular stockholder, counsel to the corporation is not typically given a proxy to assure his or her attendance or otherwise required to qualify as a permitted attendee. Rather, it seems blindly accepted that corporate counsel be permitted to attend. There are apparently no cases in which this practice has ever been challenged.
6. Is a second required to a motion at a directors' meeting or at a stockholders' meeting? Is a second required at a stockholders' meeting if the stockholder making the motion has the right to vote 51 percent of the shares?
Two more issues raised in the Food Co. situation were (i) whether seconds were required at a directors' meeting and (ii) whether the president and chairman of the board, who controlled 51 percent of the voting common stock was required to obtain a second for the motions he proposed at the stockholders' meetings (in many cases he was the only one who supported these motions).
The second is a mechanism developed by parliamentarians to ensure that more than one member of a large group is interested in considering a matter before the entire group is required to consider it. The second is, therefore, an efficiency or time-saving mechanism. Parliamentary procedure is, however, not applicable to and should not be used for directors' and stockholders' meetings. Nonetheless, many lawyers and participants in stockholders' meetings continue to require and obtain seconds to motions. This practice, which has carried over from our common experience with attending other types of meetings at which parliamentary procedure may have been applicable, is, however, not appropriate for directors' or stockholders' meetings.