Corporate voting

Vanderbilt Law Review

Volumn 62, Issue 1, 2009, Pages 129-175

  Thompson, Robert B ^a   Edelman, Paul H ^a  

^a VANDERBILT UNIVERSITY   (United States)

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EID: 62549143130     PISSN: 00422533     EISSN: None     Source Type: Journal    
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References (238)

1. Blasius Indus, v. Atlas Corp., 564 A.2d 651, 659 (Del. Ch. 1988) ("The shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests.");
2. see also MM Cos. v. Liquid Audio, Inc., 813 A.2d 1118, 1127 (Del. 2003) (noting that Delaware courts "have remained assiduous in carefully reviewing any board actions designed to interfere with or impede the effective exercise of corporate democracy by shareholders, especially in the election of directors").
3. Scholars differ on where a framework of representative democracy might lead. Compare Lucian Arye Bebchuk, The Case for Increasing Shareholder Power, 118 HARV. L. REV. 833, 837 (2005) (arguing for shareholder power not only to elect and replace directors but also to initiate and adopt rules-of-the-game decisions),
4. with Martin Lipton & Paul K. Rowe, Pills, Polls and Professors: A Reply to Professor Gilson, 27 DEL. J. CORP. L. 1, 28 (2002) (arguing that representative democracy is part of the "deep design" of Delaware corporate form and that the shareholder choice provided is "the right to choose representatives periodically, not the right of perpetual self-governance through instant polls or plebiscites").
5. This is discussed in more detail in Part V. See generally Henry T. C. Hu & Bernard Black, The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership, 79 S. CAL. L. REV. 811 (2006) (analyzing the incentives created when companies own disproportionate shares of voting rights to economic interests and proposing a mandatory disclosure requirement to correct the negative effects);
6. Marcel Kahan & Edward B. Rock, Hedge Funds in Corporate Governance and Control, 155 U. PA. L. REV. 1021 (2007) (discussing the possibility that hedge funds owning corporate shares and voting rights may maximize short-term profits at the expense of the corporation's long-term vitality).
7. See KENNETH J. ARROW, THE LIMITS OF ORGANIZATION 63-79 (1974) (discussing consensus and authority as decision-making models and the conditions for each).
8. More formally, the Condorcet Jury Theorem can be stated as follows: Suppose that there are n voters who must decide between two alternatives, one of which is correct and the other incorrect. Assume that the probability that any given voter will vote for the correct alternative is greater than one-half. Then the probability that a majority vote will select the correct alternative approaches one as the number of voters gets larger. MARQUIS DE CONDORCET, Essay on the Application of Mathematics to the Theory of Decision-Making, in SELECTED WRITINGS 33, 33-71 (Keith Michael Baker ed., 1976) (1785).
9. See generally Paul H. Edelman, On Legal Interpretations of the Condorcet Jury Theorem, 31 J. LEGAL STUD. 327 (2002) (analyzing the assumptions of the Jury Theorem and discussing the mechanics of aggregating individual choices into probabilities).
10. The conclusion of the Condorcet Jury Theorem, that majority vote leads to more certainty about the correct outcome than do separate individual judgments, holds under a broad range of assumptions. In particular, one only needs to assume that on average, the voters are more likely correct than not. One can also relax the independence of the votes to allow for some level of correlation. Kishna K. Ladha, The Condorcet Jury Theorem, Free Speech, and Correlated Votes, 36 AM. J. POL. SCI. 617, 617-34 (1992). It applies in weighted voting situations as well.
11. For descriptions of thirteen mathematical theorems premised on the implications of the Condorcet Jury Theorem, see Bernard Grofman, Guillermo Owen & Scott L. Feld, Thirteen Theorems in Search of the Truth, 15 THEORY & DECISION 261, 261-78 (1983).
12. Of course, this is only an example if one believes that there is a "correct" answer to the matter under dispute.
13. Samuel Issacharoff, Gerrymandering and Political Cartels, 116 HARV. L. REV. 593, 605 (2002).
14. Richard H. Pildes, Response, What Kind of Right is the "The Right to Vote"?, 93 VA. L. REV. IN BRIEF 45, 46-47 (2007) (noting that although "the right to vote protects several distinct interests," aggregate interests should be emphasized "in well-established, mature democracies, [where] most actual conflicts will arise").
15. See, e.g., DEL. CODE ANN. tit. 8, § 144 (2008) (providing the remedy of ratification through voter approval to absolve directors of any liability for certain suspect transactions).
16. Pildes, supra note 8, at 46.
17. See U.S. CONST. amend. XV (right of citizens to vote cannot be denied on the basis of race, color, or previous condition of servitude);
18. id. amend. XIX (right of citizen to vote cannot be denied on the basis of sex);
19. id. amend. XXVI (right of citizen over eighteen to vote cannot be denied on the basis of age).
20. See generally Chilton Williamson, AMERICAN SUFFRAGE FROM PROPERTY TO DEMOCRACY 1760-1860 (1960) (describing the expansion of voting rights in the United States and analyzing whether the expansion corresponded with changing notions of property rights).
21. Special purpose bodies still sometimes use property ownership as a requirement for voting. See Ball v. James, 451 U.S. 355, 371 (1981) (holding that the state could rationally limit the vote to landowners in election for directors of water reclamation districts).
22. See, e.g., Cabell v. Chavez-Salido, 454 U.S. 432, 439 (1982) ("The exclusion of aliens from basic governmental process is not a deficiency in the democratic system but a necessary consequence of the community's process of political self-definition."). In some jurisdictions, resident aliens are permitted to vote in local elections.
23. See Jamin B. Raskin, Legal Aliens, Local Citizens: The Historical, Constitutional, and Theoretical Meanings of Alien Suffrage, 141 U. PA. L. REV. 1391, 1397-1417, 1460-67 (1993) (describing the prevalence of resident alien voting from the beginning of the American Republic until the beginning of the twentieth century and analyzing the reemergence of the practice in small localities in the state of Maryland).
24. For a general description and criticism of the practice of denying convicted felons the right to vote in this country, see JEFF MANZA & CHRISTOPHER UGGEN, LOCKED OUT: FELON DISENFRANCHISEMENT AND AMERICAN DEMOCRACY (2006).
25. Scholars have noted that the United States is an outlier compared to other countries with regard to felony disenfranchisement practices. SAMUEL ISSACHAROFF, PAMELA S. KARLEN & RICHARD H. PILDES, THE LAW OF DEMOCRACY: LEGAL STRUCTURE OF THE POLITICAL PROCESS 30-31 (2007).
26. Despite the academic criticism, the courts have upheld statutory and constitutional measures prohibiting convicted felons from voting. See, e.g., Richardson v. Ramirez, 418 U.S. 24, 56 (1974) (upholding California constitutional provision banning felons from voting).
27. See 42 U.S.C. § 1973aa-l(d)-(e) (2000) (requiring states to provide for registration of "all duly qualified residents" of the states to vote in general elections and restricting a voter's eligibility either to her current state of residence or her previous one).
28. For a table listing residency and registration requirements for each state, see Residency Requirements for Voting, http://www.infoplease.com/ipa/ A0781452.html (last visited Jan. 5, 2009).
29. The Supreme Court has strengthened the connection between a person's current place of residence and her right to vote in that jurisdiction by declaring lengthy durational residency requirements for potential voters to be unconstitutional. Dunn v. Blumstein, 405 U.S. 330, 360 (1972);
30. cf. Glisson v. Mayor of Savannah Beach, 346 F.2d 135, 136-37 (5th Cir. 1965) (upholding non-resident voting);
31. Saphos v. Mayor of Savannah Beach, 207 F. Supp. 688, 692 (S.D. Ga. 1962) (same), aff'd, 371 U.S. 206 (1962).
32. It is a separate question and not a concern in this discussion as to whether residents should be divided into single member districts in voting and the configuration of those districts. See ISSACHAROFF, KARLEN & PILDES, supra note 14, at 540-41.
33. See Jerry Frug, Decentering Decentralization, 60 U. CHI. L. REV. 253, 329-30 (1993) (proposing that voters be given the power to choose to vote in the local elections that most affect their individual interests). Americans abroad can vote in their home states.
34. See U.S. Dep't of State, 2008 Absentee Voting Information for Americans Abroad, http://travel.state.gov/law/info/info-2964.html (last visited Jan. 5, 2009) (providing instructions to U.S. citizens living abroad regarding the process of how they can vote in the 2008 election).
35. The National Voter Registration Act, 42 U.S.C. §§ 1973gg to 1973gg-10 (2000), established requirements for state programs to use when removing persons from voting rolls, beginning with use of postal change of address forms and followed by certain required confirmation. In contrast, some countries, such as Mexico and Iraq, let expatriates vote.
36. See generally Peter J. Spiro, Perfecting Political Diaspora, 81 N.Y.U. L. REV. 207, 211-17 (2006) (surveying the countries that allow nonresident citizens to vote and analyzing some of the methods used).
37. For information about each state's Republican and Democratic primaries and whether they are open or closed, see CQ Politics, 2008 Primary Guide, http://innovation.cq.com/primaries?tab=2 (last visited Jan. 5, 2009).
38. The Supreme Court has upheld the right of the political parties in each state to hold closed primaries under the First Amendment's guarantee of freedom of association. Cal. Democratic Party v. Jones, 530 U.S. 567, 586 (2000).
39. See generally Richard L. Hasen, 1Vote Buying, 88 CAL. L. REV. 1323, 1323-38 (2000) (analyzing the various rationales offered for banning vote buying in the political arena).
40. Given the remote likelihood that one person's vote will make a difference in any particular election, there often seems insufficient incentive for incurring any costs to exercise the franchise. Voting, in this sense, may be best explained by the participation of those who have a taste for voting or who view it as something like a spectator sport in which participating provides an additional and intense connection to the proceedings.
41. See MODEL BUS. CORP. ACT § 8.03(c) (2008) (requiring directors to be elected at each annual meeting of shareholders).
42. FARANK BASTERBROOK & DANIEL FISCHEL, THE ECONOMIC STRUCTURE OF LAW 68 (1991). Theories of shareholder voting are discussed in more detail in Part IV infra.
43. David Ratner, The Government of Business Corporations: Critical Reflections on the Rule of 'One Share, One Vote,' 56 CORNELL L. REV. 1, 3-11 (1970) (outlining the development of the one share, one vote rule).
44. See infra Part IV.
45. Joel Seligman, Equal Protection in Shareholder Voting Rights: The One Common Share, One Vote Controversy, 54 GEO. WASH. L. REV. 687, 693 (1986).
46. There will be a discount reflecting the chance of obtaining control, but this discount will not eliminate the absolute value of opting for a positive proposal.
47. See Saul Levmore, Voting with Intensity, 53 STAN. L. REV. 111, 137 (2000) (describing situations where buying corporate votes may be "useful and desirable").
48. See DEL. CODE ANN. tit. 8, § 141(a) (2008) ('The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors . . . .");
49. MODEL BUS. CORP. ACT § 8.01(b) (2008) ("All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed by or under the direction of, its board of directors . . . .").
50. See DEL. CODE ANN. tit. 8, § 211(b) (requiring that an annual meeting of shareholders be held for the election of directors).
51. Plurality voting is a default rule under state statutes and, in the face of sustained pressure from institutional shareholders in the last few years, many corporations have added provisions to their bylaws or articles requiring a board member who fails to receive a majority of votes to resign. Delaware law permits a director to make an irrevocable resignation conditioned on failing to receive a specified vote. Id. § 141(b). Efforts to mandate majority rule either by changes to state or federal law have been made during this decade but have not succeeded.
52. See ROBERT CHARLES CLARK, CORPORATE LAW 398 (1986) (discussing solutions to collective action problem of shareholder voting including takeovers and arguing that value "does not depend ... on whether the voting rights are ever exercised by the shareholders in ordinary times").
53. Exit is possible in the public sector but at substantially higher costs, such as the cost of moving. See Kirk Semple, Rise of Chavez Sends Venezuelans to Florida, N.Y. TIMES, Jan. 23, 2008, at A1 (describing surge in immigrants to the United States escaping the political market of Venezuela).
54. DEL. CODE ANN. tit. 8, § 141(d) (allowing directors to be divided into one, two, or three classes). Such a provision, like the constitutional structure provided for the U.S. Senate, slows change and provides continuity.
55. See U.S. CONST. art. I, § 3, cl. 2 (providing tenure classifications for U.S. Senators). Yet a change of control is harder in most boards than in the public body. Unlike the Senate, most corporate insurgents start from a zero to one hundred percent split on the board and, even if they were to win a landslide in the first election, they would only control one-third of the board, which operates by majority rule.
56. See DEL. CODE ANN. tit 8, § 141(b) ("The vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors . . . .");
57. MODEL BUS. CORP. ACT §8.24(c) ("If a quorum is present when a vote is taken, the affirmative vote of a majority of directors present is the act of the board of directors . . . .").
58. The number of large, publicly held corporations with staggered boards has been declining since 2003 and is now less than a majority of the largest American public corporations. Mira Ganor, Why Do Managers Dismantle Staggered Boards?, 33 DEL. J. CORP. L. 149, 150 (2008).
59. DEL. CODE ANN. tit. 8, § 211(d) (providing that a special meeting may be called by the board or any person authorized by the certificate of incorporation or bylaws). It is uncommon in Delaware public corporations for the certificate to authorize shareholders to call a special meeting. In contrast, the Model Business Corporation Act specifies that ten percent of shareholders can call a special meeting, a number that can be raised no higher than twenty-five percent by the articles of incorporation.
60. MODEL BUS. CORP. ACT § 7.02(a)(2).
61. DEL. CODE ANN. tit. 8, § 228 (authorizing shareholder action to take place through written consent unless otherwise provided in the certificate). It is common among publicly held corporations to include a provision to limit such action by written consent.
62. Id. § 251(c) (mandating that a merger be approved by the vote of a majority of shareholders entitled to vote).
63. NORMAN LATTIN, LATTIN ON CORPORATIONS 571 (1971).
64. DEL. CODE ANN. tit. 8, § 251(c);
65. MODEL BUS. CORP. ACT § 11.04.
66. See Robert B. Thompson, Exit, Liquidity and Majority Rule: Appraisal's Role in Corporate Law, 84 GEO L.J. 1, 3-4 (1995) (describing the move by the states from unanimity requirement for merger to requirement for supermajority vote and appraisal rights for dissenting shareholders).
67. DEL. CODE ANN. tit. 8, § 251(f) (providing that, notwithstanding section 251(c), no vote is necessary if the certificate of incorporation is not changed and if the number of shares does not increase more than twenty percent).
68. See id. § 271 (requiring approval of the shareholders for the sale of substantially all the corporation's assets without mentioning the purchasing corporation).
69. A triangular merger is not specifically identified by statute but is the result of the addition of a third party to the plan of merger. This third corporation, a wholly owned subsidiary of the buyer, becomes one of the two parties to what is otherwise an ordinary merger. The directors and shareholders of the subsidiary must approve the merger, but this is a mere formality because the subsidiary has only one shareholder, the acquiring corporation. The result is that the shareholders of the acquiring company are excluded from voting on the transaction.
70. See, e.g., NYSE LISTED COMPANY MANUAL § 312.03(c) (2007) (requiring shareholder vote prior to issuance of stock in excess of twenty percent in any transaction or series of related transactions).
71. Paramount Commc'ns, Inc. v. Time Inc., 571 A.2d 1140, 1147-49 (Del. 1990).
72. After Time negotiated a merger with Warner, Time stock was trading in the $120 range, reflecting the benefits of that merger. Subsequently, Paramount proposed an acquisition of Time first at $175 per Time share and then at $200, making it unlikely that Time shareholders would approve the lower-valued deal with Warner. Because the directors of Time favored a merger with Warner despite Paramount's higher bid, they restructured the Warner deal into a tender offer to avoid a shareholder vote. Id. The requirement that Time shareholders vote on the merger deal actually came from the stock exchange listing standards, not state law, illustrating the point in the text. Id. at 1146.
73. See DEL. CODE ANN. tit. 8., § 271 (requiring shareholder approval for the sale of substantially all the corporation's assets).
74. While target shareholders have a vote, they are denied appraisal rights in Delaware. Id. § 262.
75. RONALD J. GILSON & BERNARD S. BLACK, THE LAW AND FINANCE OF CORPORATE ACQUISITIONS 721 (2d ed. 1995). When market constraints fail, legal constraints play a crucial role; when target shareholders are subject to a final period problem and cannot rely on their management for protection, they require instead "the barrier of a shareholder vote as protection against management." Id.
76. Delaware courts developed an intermediate standard of review to address director action. For example, in Unocal Corp. v. Mesa Petroleum Co., the Delaware Supreme Court found that defensive tactics, including poison pills, should be judged by a two step process, determining first whether there was a threat and second whether the defensive tactic was a proportional response to that threat. 493 A.2d 946, 955 (Del. 1985).
77. In Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., the same court required that directors get the best price reasonably available for shareholders when the company is up for sale. 506 A.2d 173, 182 (Del. 1986).
78. City Capital Assocs. L.P. v. Interco, Inc., 551 A.2d 787, 798 (Del. Ch. 1988).
79. Paramount, 571 A.2d at 1152-54.
80. Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1387-91 (Del. 1995).
81. DEL. CODE ANN. tit. 8, § 109(a) (2008).
82. Id.
83. See id. § 109(b) ("The bylaws may contain provisions not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers, or employees.").
84. See CA, Inc. v. AFSCME Employees Pension Plan, 953 A.2d 227, 231-33 (Del. 2008) (answering two questions certified by the Securities and Exchange Commission).
85. DEL. CODE ANN. tit. 8, § 144. The Delaware statute is written narrowly so as to block only the old common law rule deeming such conflicted transactions void or voidable because of the conflict, but the broader practical impact has been narrower judicial review of such transactions.
86. Delaware reached this result by a somewhat circuitous path. Its statute does not specify which shareholders may vote in a cleansing action, but the parallel and immediately preceding subsection does specify that directors seeking to cleanse must be disinterested. Id. Nevertheless, the Delaware court has in effect read "disinterested shareholder" into the statute. See Marciano v. Naksah, 535 A.2d 400, 404-05 (Del. 1987) (stating that "interested director transactions were deemed voidable only after ... a determination of whether the disputed conduct received the approval of a noninterested majority of directors or shareholders").
87. See, e.g., Fliegler v. Lawrence, 361 A.2d 218, 221 (Del. 1976) (holding that shareholder ratification is ineffectual when a majority of votes were cast by interested managers of the company).
88. I.R.C. § 162(m)(4)(C)(ii) (2000).
89. NYSE LISTED COMPANY MANUAL § 303A.08 (2007).
90. See I LOUIS LOSS ET AL., SECURITIES rEGULATION 178 (3d ed. 1989).
91. A key initial focus was shareholder voting, reflecting the premise that inadequate disclosure permitted managers to gain shareholder approval without sufficient monitoring. See H.R. REP. NO. 73-1383, at 14 (1934) ("[Section 14(a) is intended to] control the conditions under which proxies may be solicited with a view to preventing the recurrence of abuses which . . .[have] frustrated the free exercise of the voting rights of stockholders.").
92. Patrick J. Eyan, Rule 14a-8, Institutional Shareholder Proposals, and Corporate Democracy, 23 GA. L. REV. 97, 109-12 (1988).
93. 17 C.F.R. § 240.14a-8(i)(1) (2008) (providing that a company may exclude a proposal if it is not a proper subject of action by shareholders under the laws of the jurisdiction of the company's organization).
94. Id. § 240.14a-8(i) note to ¶ (i)(1).
95. See, e.g., Lovenheim v. Iroquois Brands, Ltd., 618 F. Supp. 554, 556 (D.D.C. 1985) (considering a shareholder proposal relating to the procedure used to force-feed geese for production in France of pate de foie gras imported by the company).
96. See also EASTERBROOK & FISCHEL, supra note 23, at 70 (asserting that from the survival of voting one may infer that voting is beneficial).
97. See, e.g., Council Directive 2007/36, The Exercise of Certain Rights of Shareholders in Listed Companies, 2007 O.J. (L 184/17) 1, available at http://www.eurosif.org/eu-eurosifflobbying/shareholders-rights/eu- directive-on-shareholders-rights (follow "Directive 2007/36/EC" hyperlink) ("[Effective shareholder control is a prerequisite to sound corporate governance and should, therefore, be facilitated and encouraged.").
98. ADOLF A. BERLE & GARDNER MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY 119-25 (1933);
99. see, e.g., Bebchuk, supra note 2, at 913 (2005) (asserting that absent shareholder power to initiate, the evolution of governance arrangements designed in part to constrain and regulate management have been left to a process controlled by management).
100. Lucian A. Bebchuk, The Myth of the Shareholder Franchise, 93 VA. L. REV. 675, 677, 732 (2007).
101. Bebchuk, supra note 2, at 842-43;
102. Bebchuk, supra note 70, at 678.
103. Jonathan Macey, Too Many Notes and Not Enough Votes: Lucian Bebchuk and Emperor Joseph II Kvetch About Contested Director Elections and Mozart's Seraglio, 93 VA. L. REV. 759, 769 (2007) (criticizing the lack of a baseline empirical measure specifying how many contested elections are enough to establish a board's legitimacy);
104. Lynn A. Stout, The Mythical Benefits of Shareholder Control, 93 VA. L. REV. 789, 798-99 (2007) (discussing the weak evidence favoring shareholder governance).
105. EASTERBROOK & FISCHEL, supra note 23, at 68.
106. Id. at 67 (noting that shareholder voting is expensive and generates collective action problems and that managers serve as a "collective information-generating agency").
107. The development of options theory has challenged the position of shareholders as sole residual owners and has created the argument that, once a firm has issued debt, the debt holders can be said to own the right to the corporation's cash flow and to have sold a call option to the shareholders. "Put differently, options theory demonstrates that bondholders and equity holders each share contingent control and bear residual risk in firms." Lynn A. Stout, Lecture and Commentary on the Social Responsibility of Corporate Entities: Bad and Not-So-Bad Arguments for Shareholder Primacy, 75 S. CAL. L. REV. 1189, 1192 (2002).
108. EASTERBROOK & FISCHEL, supra note 23, at 68 (explaining that, for decisions like new products and new plants, all of the actors except shareholders lack the appropriate incentives).
109. Their theory is consistent with the widely noted but unadopted principle that directors should be passive in response to hostile takeovers. Frank H. Easterbrook & Daniel R. Fischel, The Proper Role of a Target's Management in Responding to a Tender Offer, 94 HARV. L. REV. 1161, 1164 (1981);
110. Frank H. Easterbrook & Daniel R. Fischel, Takeover Bids, Defensive Tactics, and Shareholders' Welfare, 36 BUS. LAW. 1733, 1750 (1981). The Delaware Supreme Court rejected any such notion. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 n.10 (observing that even Easterbrook and Fischel conceded that no court or legislature had adopted their theory).
111. Arnold v. Soc'y for Sav. Bancorp, Inc., 678 A.2d 533, 539 (Del. 1996) (holding that directors acting in the "ordinary course of their service as directors" are not agents of the corporation);
112. RESTATEMENT (THIRD) OF AGENCY § 1.01 cmt. (f)(2) (2006) ("Although a corporation's shareholders elect its directors . . ., the directors are neither the shareholders' nor the corporation's agents as defined in this section.")
113. See, e.g., DEL. CODE ANN. tit. 8, § 141(a) (2008) ("The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors . . . .").
114. Ronald Coase, The Nature of the Firm, 4 ECONOMICA 386, 386-405 (1937).
115. ARROW, supra note 4, at 15-29.
116. Stephen M. Bainbridge, The Case for Limited Shareholder Voting Rights, 53 UCLA L. REV. 601, 621-22 (2006) [hereinafter Bainbridge, Limited Shareholder Rights];
117. Stephen M. Bainbridge, Investor Activism: Reshaping the Playing Field? 5 (UCLA Sch. of Law, Law-Econ Research Paper No. 08-12, 2008), available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=1130969.
118. Bainbridge, Limited Shareholder Rights, supra note 82, at 610.
119. Id. at 613.
120. Id. at 625.
121. Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 NW. U. L. Rev. 547, 569 (2003);
122. see also Stephen M. Bainbridge, Unocal at 20: Director Primacy in Corporate Takeovers, 31 DEL. J. CORP. L. 769, 812 (2006) ("Shareholder voting rights are properly seen as simply one of many accountability tools available, not as part of the firm's decision-making system."). In light of the limitations to which these rights are subject, shareholder voting rights are not a very important accountability tool.
123. See, e.g., Martin Lipton, Takeover Bids in the Target's Boardroom, 35 BUS. LAW. 101, 104 (1979) (questioning "whether the long-term interests of the nation's corporate system and economy should be jeopardized in order to benefit speculators interested not in the vitality and continued existence of the business enterprises in which they have bought shares, but only in a quick profit on the sale of those shares").
124. Iman Anabtawi, Some Skepticism About Increasing Shareholder Power, 53 UCLA L. Rev. 561, 561 (2006) ("[I]t is more plausible that shareholders will use any incremental power conferred on them to benefit their private interests at the expense of the firm . . . .").
125. See, e.g., Theodore N. Mirvis et al., Bebchuk's Case for Increasing Shareholder Power: An Opposition 8 (Harvard Law & Econ. Discussion Paper No. 586, 2007), available at http://ssrn.com/abstract= 990057 ("Empowering shareholders under these circumstances . . . risks destroying corporate value and compromising the interests of non-hedged shareholders, and is socially inefficient as well.").
126. Margaret Blair and Lynn Stout suggest another variation of director primacy that emphasizes the ability of a board to act as a mediating hierarch, thereby allowing various constituents to contribute form-specific capital to the enterprise by minimizing their fear of being taken advantage of by other stakeholders. This variation gives a more positive view of what directors do but says very little about the role for the shareholder vote. See Margaret N. Blair & Lynn A. Stout, A Team Production Theory of Corporate Law, 85 VA. L. REV. 247, 310 (1999) (asserting that "the nominal existence of shareholder voting rights . . . does not pose a serious challenge to the mediating hierarchy model").
127. Stout has argued that stock price is the best available measure, albeit in a context in which she is generally skeptical of shareholder primacy and frames her positive statements from the perspective of judicial enforcement of directors' duties toward shareholders rather than shareholder self-help via voting. She observes: "[A] shareholder primacy rule leaves directors with far less leeway to claim that they are doing a good job for the firm when, in fact, they are doing well mostly for themselves." Stout, supra note 75, at 1200.
128. See supra note 5 (explaining the Condorcet Jury Theorem).
129. The success of RiskMetrics's Institutional Shareholder Services ("ISS") and Governance Metrics International indicates the amount of resources institutional investors commit to obtaining securities information.
130. Bainbridge, Limited Shareholder Rights, supra note 82, at 628.
131. See F. HODGE O'NEAL & ROBERT B. THOMPSON, CLOSE CORPORATIONS AND LLCs: LAW AND PRACTICE § 1.16 (rev. 3d ed. 2004) (describing how close corporations avoid core corporate characteristics).
132. See EASTERBROOK & FISCHEL, supra note 23, at 67 ("Voting serves its principal role in permitting those who have gathered up equity claims to exercise control.").
133. Yet the Revlon rule requiring the directors to get the best price for shareholders in an acquisition effectively has been made an option, avoidable by the planners' choosing a share-for-share merger, except in the unusual situation in which the target is being sold to an acquirer with a controlling shareholder. See, e.g., Paramount Commc'ns, Inc. v. QVC Network, Inc., 637 A.2d 34, 43 (Del. 1994) (holding that in light of the change of control to be effected by the Paramount-Viacom combination, the Paramount directors were obligated to secure the best price for shareholders).
134. EASTERBROOK & FISCHEL, supra note 23, at 74.
135. A recent survey put the balance of outstanding stock loans as of mid-year 2005 at $1.5 trillion. John Hintze, Automation Has Greater Impact as Securities Lending Increases, SEC. INDUSTRY NEWS, May 8, 2006, at 33.
136. Henry T.C. Hu & Bernard Black, Equity and Debt Decoupling and Empty Voting II: Importance and Extensions, 156 U. PA. L. REV. 625, 661-81 (2008).
137. See supra note 39 and accompanying text (explaining the threshold of votes necessary to approve a merger).
138. See ROBERT F. BRUNER, APPLIED MERGERS AND ACQUISITIONS 568-70 (University ed. 2004) (providing a summary table of acquirer and target returns upon acquisition).
139. See Kahan & Rock, supra note 3, at 1072-77 (2007) (explaining that hedge funds are set up to profit their investors, not shareholders generally);
140. Kara Scannell, How Borrowed Shares Swing Company Votes, WALL ST. J., Jan. 26, 2007, at A1 (discussing a study by Henry Hu and Bernard Black that finds a rise of "empty voting" by which
141. Henry G. Manne, Some Theoretical Aspects of Share Voting: An Essay in Honor of Adolf A. Berle, 64 COLUM. L. REV. 1427, 1428 (1964).
142. Bruce H. Kobayayshi & Larry E. Ribstein, Outsider Trading as an Incentive Device, 40 U.C. DAVIS L. REV. 21, 42-44 (2006).
143. Kahan & Rock, supra note 3, at 1077.
144. Hu & Black, supra note 3, at 819.
145. Hu & Black, supra note 100, at 682-84.
146. Id. at 684.
147. Cassell Bryan-Low, European Hedge Funds Issue Disclosure Guidelines, WALL ST. J., Jan. 23, 2008, at C6.
148. Louis D. BRANDEIS, OTHER PEOPLE'S MONEY AND HOW THE BANKERS USE IT 92 (Nat'l Home Library Found. 1933) (1913).
149. The deal ended for other reasons when King reported unexpected earnings changes. For an overview of the Perry-Mylan Laboratories transaction, see Hu & Black, supra note 3, at 828-29,
150. and Kahan & Rock, supra note 3, at 1075-76.
151. J. FRED WESTON ET AL., TAKEOVERS, RESTRUCTURING, AND CORPORATE GOVERNANCE 596 (4th ed. 2004) (explaining that after the announcement of a merger, the stock price of the target typically trades at a small discount of one to two percent relative to the consideration offered by the acquirer).
152. There could be a loss to the extent that the current market price will reflect the expected financial impact of the transaction on the acquirer, multiplied by the likelihood of the deal going through. To the extent that the probability is less than one hundred percent, the current price will only reflect a percentage of that decline. As the takeover moves toward successful completion, the gap between the entire change and the market price will narrow, and to that extent the counterparty on the acquirer side could face an additional loss.
153. Shaun Martin & Frank Partnoy, Encumbered Shares, 2005 U. ILL. L. REV. 775, 787-804 (2005).
154. Hu & Black, supra note 100, at 694-721.
155. In addition, there are other legal rules that reflect similar concerns. See, e.g., DEL. CODE ANN. tit. 8, § 160(c) (2008) (prohibiting voting shares owned by the corporation);
156. id. § 144 (excluding votes by shareholders who are conflicted);
157. In re Cox Commc'ns Sec. Litig., 879 A.2d 604, 614-18 (Del. Ch. 2005) (discussing provisions requiring a majority of the minority vote for approval of a merger with a controlling shareholder).
158. See, e.g., DEL. CODE ANN. tit. 8, § 212(a) (providing a rule of one vote per share "unless otherwise provided" in the certificate).
159. See supra note 44 and accompanying text (describing stock exchange listing standards).
160. See Seligman, supra note 26, at 693-99 (summarizing William Ripley's criticism of nonvoting common stock and its connection to the NYSE's initial refusal to list such stock).
161. See JOSEPH A. LIVINGSTON, THE AMERICAN STOCKHOLDER 166-77 (1958) (explaining that when the Ford Motor Company went public, the shareholders were given Class A shares with circumscribed voting power, making it extremely difficult to rally enough votes to oust the Ford family).
162. 17 C.F.R. § 240.19c-4 (2008).
163. Bus. Roundtable v. SEC, 905 F.2d 406, 407 (D.C. Cir. 1990) (holding that Rule 19c-4 directly controls the substantive allocation of power among shareholders in excess of commission's authority).
164. Current NYSE Listing Standard 313A prohibits corporate actions or issuance of shares that disparately reduce or restrict voting rights of existing shareholders of publicly traded companies registered under Section 12 of the Exchange Act, including the adoption of time phased voting plans or the issuance of super voting stock or similar actions. NYSE LISTED COMPANY MANUAL § 313A (2007). The actions by the stock exchanges, semi-private "self regulatory organizations" under the 1934 Act, have not been held to be state action.
165. See, e.g., Desiderio v. Nat'l Ass'n of Sec. Dealers, Inc., 191 F.3d 198, 206 (2d Cir. 1999) (reiterating its prior ruling "that the New York Stock Exchange-a self-regulatory private organization like the NASD-is not a state actor" (citing United States v. Solomon, 509 F.2d 863, 867-71 (2d Cir. 1975))).
166. Paul A. Gompers, Joy L. Ishii & Andrew Metrick, Extreme Governance: An Analysis of Dual-Class Companies in the United States 3 (Rodney L. White Ctr. for Fin. Research, Paper No. 12-04, 2008), available at http://ssrn.com/abstract=562511.
167. Richard Perez-Pena, New Challenges to Times Board: Dissidents with Large Stakes, N.Y. TIMES, Mar. 10, 2008, at C1;
168. Emily Steel, Investor Puts Pressure on New York Times-Nicely, WALL ST. J., Feb. 1, 2008, at C3 (describing efforts of marketing professor who runs an investment firm to pressure the company).
169. Mogul's Dream: News Corp.'s Success Follows Delicate Dance Between Suitor, Target, WALL ST. J., Aug. 1, 2007, at Al.
170. See 1 EDWARD P. WELCH ET AL., FOLK ON THE DELAWARE GENERAL CORPORATION LAW § 218.2 (Aspen Publishers 5th ed. 2006 & Supp. 2008-1) (explaining that the legality of voting trusts at common law was not clearly determined by the Delaware courts until enactment of the first voting trusts statutes.)
171. See, e.g., Lehrman v. Cohen, 222 A.2d 800, 807 (Del. 1966) (explaining that the main purpose of the statute to legalize voting trusts was to avoid secret combination of shareholders formed to acquire voting control to the possible detriment of non-participating shareholders).
172. E.g., Cone v. Russell, 21 A. 847, 848-50 (N.J. Ch. 1891).
173. E.g., Smith v. Atlantic Properties, Inc., 422 N.E.2d 798, 801 (Mass. App. Ct. 1981) (citing Donahue v. Rodd Electrotype Co., 328 N.E.2d 505 (Mass. 1975)).
174. E.g., Atlantic Properties, 422 N.E.2d at 801-04.
175. DEL. CODE ANN. tit. 8, § 212(e) (2008).
176. See, e.g., MODEL BUS. CORP. ACT § 7.30 (2008) (providing for a ten-year limit on voting trusts with a provision for renewal).
177. See, e.g., id. § 7.31 (permitting an agreement amongst shareholders as to how to vote their shares);
178. id. § 7.32 (permitting agreements covering a variety of governance issues including management, distributions, share transfers and dissolution, all valid for ten years unless the agreement provides otherwise).
179. See, e.g., id. § 7.32 (authorizing a variety of shareholder control agreements). Similar provisions exist in a majority of American states.
180. See, e.g., N.Y. BUS. CORP. LAW § 609(e) (McKinney 2003) (prohibiting shareholders from selling their votes or proxies to vote).
181. See, e.g., Macht v. Merchs. Mortgage & Credit Co., 194 A. 19, 22 (Del. Ch. 1937) (holding that allowing purchased voting rights to be exercised violates public policy and defrauds other shareholders).
182. EASTERBROOK & FISCHEL, supra note 23, at 74 (arguing that attaching the votes firmly to the residual equity interests ensures that unnecessary agency costs will not occur).
183. Thomas J. Andre, Jr., A Preliminary Inquiry into the Utility of Vote Buying in the Market for Corporate Control, 63 S. CAL. L. REV. 533, 587 (1990).
184. Levmore, supra note 28, at 137-38 (suggesting that states have begun to allow vote buying as "a useful safety valve where defensive tactics go too far in blocking desirable takeovers").
185. Andre, supra note 140, at 587 ("Additionally, the permanent separation of ownership and control is unlikely to occur because the purchaser has every incentive to purchase the residual interests.");
186. Richard L. Hasen, Vote Buying, 88 CAL. L. REV. 1323, 1354 (2000) ("Thus, we need not worry, to paraphrase Sunstein, that shareholders will forget what voting in corporate elections is for; voting in corporate elections is for maximizing profit, and vote buying is fully consistent with this purpose.").
187. Another instance in which the shareholders of the acquirer had an incentive to vote in a way contrary to the financial interest of the company was a transaction involving AXA and MONY. In re MONY Group Inc. S'holders Litig., 853 A.2d 661, 667-70 (Del. Ch. 2004);
188. see also Kahan & Rock, supra note 3, at 1073-74 (using the MONY and AXA merger to illustrate how the interests of hedge funds diverge from those of their fellow shareholders).
189. See supra note 44 and accompanying text (describing stock exchange listing standards).
190. See supra note 91 and accompanying text (describing the importance of the stock price as a measure of board performance).
191. Hasen, supra note 142, at 1327-38 (describing equality, efficiency, and inalienability reasons to ban vote buying).
192. Cass Sunstein, Incommensurability and Valuation in Law, 92 MICH. L. REV. 779, 785-90 (1994).
193. Issacharoff, supra note 7, at 616.
194. Schreiber v. Carney, 447 A.2d 17, 25 (Del. Ch. 1982) ("[T]he potential injury or prejudicial impact that might flow to other stockholders as a result of such an agreement forms the heart of the rationale underlying the breach of public policy doctrine.").
195. Id.
196. Id. at 26.
197. Hasen, supra note 142, at 1348-49;
198. Levmore, supra note 28, at 138 (adopting "the current wisdom that vote buying in corporate law is now more acceptable than it once was and that we are soon likely to see more explicit legislative and judicial approval of trading in shareholder voting rights");
199. see also Robert Charles Clark, Vote Buying and Corporate Law, 29 CASE W. RES. L. REV. 776, 806-07 (1979) (arguing that vote buying should be permitted if the purchaser has a substantial equity interest and seeks to profit solely by the change in the value of that holding).
200. See IXC Commc'ns, Inc. v. Cincinnati Bell, Inc., No. C.A. 17324, C.A. 17334, 1999 WL 1009174, at *8-9 (Del. Ch. Oct. 27, 1999) (allowing vote buying agreement in which shareholders agreed to support merger in exchange for cash because the deal was adequately disclosed and an independent majority of shareholders (owning nearly sixty percent of all IXC shares) could determine the outcome of the merger);
201. see also Kass v. E. Air Lines, 1986 WL 13008, at *2-5 (Del. Ch. Nov. 14, 1986) (mem. opinion) (restructuring required vote of debenture holders and the company offered cash/vouchers if they would agree to the amendments; vote buying allowed because each holder had an economic incentive to evaluate whether any threat to the value of bonds posed by the amendment was more or less valuable than the consideration offered for his consent, and he could accept or reject in accordance with this decision).
202. Weinberger v. Bankston, 1987 WL 20182, at *1, *4-5 (Del. Ch. Nov. 19, 1987) (mem. opinion) (settling a failed proxy contest; insurgents took fees and agreed to dispose of stock within a year, giving management irrevocable proxy in the meantime).
203. The closest example among recent cases of a situation involving potential conflict of incentive between the holders of the votes and economic interest is Wincorp Realty Invs., Inc. v. Goodtab, Inc., No. 7314, 1983 WL 8948, at *3 (Del. Ch. Oct. 13, 1983) (involving an insurgent that bought option for $20,000 with $17,000 kicker if buyer was successfully elected).
204. The application for a preliminary injunction of the voting of the shares was denied because the plaintiff failed to show an irreparable injury if the shares were voted and, under Schreiber, such vote buying was not illegal per se. Id. at *5-6.
205. Moreover, the plaintiff failed to put on the record any evidence of a breach of good faith in the transaction. Id. at *5. It is also worth noting that the court distinguished Schreiber from the case at hand in two ways: Schreiber "was an agreement between the corporation. . . and a shareholder, the propriety of which was submitted to the other shareholders for approval," and it was "an agreement whereby one shareholder agreed to withdraw its opposition to a plan of management in return for a consideration given by the corporation." Id.
206. See, e.g., Haft v. Haft, 671 A.2d 413, 415-16, 421-23 (Del. Ch. 1995) (holding that, where a family controlled a majority of shares of a public corporation and entered into an agreement, the father could give shares to his son and receive in return an irrevocable proxy, as this would not affect any decision by public shareholders).
207. Crawford v. Marion County Election Bd., 128 S. Ct. 1610 (2008) (upholding the constitutionality of an Indiana law requiring citizens voting in person to present a government-issued photo identification).
208. Hewlett v. Hewlett-Packard Co., No. CIV.A. 19513-NC, 2002 WL 818091, at *12-15 (Del. Ch. Apr. 30, 2002) (finding in favor of Hewlett-Packard on vote buying claims brought as a challenge to the vote by Hewlett-Packard shareholders to approve a merger with Compaq).
209. DEL. CODE ANN. tit. 8, § 103 (2008).
210. See id. § 253 (providing that for short form mergers, planners are able to skip the shareholder voting step as part of the merger process).
211. See, e.g., Aprahamian v. HBO & Co., 531 A.2d 1207, 1208-09 (Del. Ch. 1987) (blocking board's postponement of the annual meeting on the eve of the scheduled meeting when dissidents appeared to have a majority of proxies in hand);
212. Condec Corp. v. Lunkenheimer Co., 230 A.2d 769, 777 (Del. Ch. 1967) (blocking corporation's issuance of additional fifteen percent of its shares immediately after a hostile bidder had acquired fifty-one percent of shares in a tender offer).
213. See, e.g., Stahl v. Apple Bancorp, Inc., 579 A.2d 1115, 1124 (Del. Ch. 1990) (permitting board delay in calling an annual meeting whose date had not yet been set).
214. Recall that the board has a gatekeeper position to block an amendment to the corporation's articles of incorporation and that courts have permitted it to effectively refuse to redeem a poison pill. See supra notes 48-51 and accompanying text.
215. William J. Carney & Leonard A. Silverstein, The Illusory Protections of the Poison Pill, 79 NOTRE DAME L. REV. 179, 186-97 (2003) (providing a numerical example of the dilution of a poison pill).
216. See SharkRepellant.net, www.sharkrepellant.net (last visited Jan. 5, 2009) (reporting that 803 of the S&P 1500 had a classified board as of year-end, down from 902 at year-end 1998).
217. See generally Mira Ganor, Why Do Managers Dismantle Staggered Boards?, 33 DEL. J. CORP. L. 149 (2008) (stating that the majority of U.S. publicly traded companies have charter-based staggered boards).
218. See Moran v. Household Int'l, Inc., 500 A.2d 1346, 1354 (Del. 1985) (discussing board's obligation to consider redemption and effectively insuring that all poison pills would include the redemption feature included in the initial pill that secured judicial approval).
219. This assumes that shareholders are unable to call a special meeting or act by written consent as is true in most public corporations. See supra note 36 and accompanying text.
220. Shareholders cannot get a court to order a shareholders' meeting unless no meeting date has been designated and thirteen months have passed since the last annual meeting. DEL. CODE ANN. tit. 8, § 211 (2008);
221. see also MODEL BUS. CORP. ACT § 7.03(a)(1) (2008) (requiring that fifteen months have passed since the last annual meeting).
222. Cf. City Capital Assocs. v. Interco, Inc., 551 A.2d 787, 798 (Del. Ch. 1988) (explaining that "an active negotiator with power, in effect, to refuse the proposal may be able to extract a higher or otherwise more valuable proposal, or may be able to arrange an alternative transaction or a modified business plan that will present a more valuable option to shareholders").
223. Data on shareholder voting for 2007 from SharkRepellent.net shows ninety-seven shareholder votes on removing classified boards. Almost two-thirds (fifty-two plus six additional that were pending as of the reporting date) were management proposals such that they would be binding actions to amend the corporation's articles, and many of these followed shareholder proposals at prior meetings that had acquired a majority or substantial minority of precatory votes from shareholders. About two dozen of the proposals were shareholder precatory proposals that received more than fifty percent of the vote but had not lead to any management action to amend the articles. In another dozen the precatory shareholder proposal received less than a fifty percent shareholder vote. There were five other votes in which the results remained uncertain. This is a much higher number of binding classified board amendments than in any prior year and reflects director response to prior shareholder precatory proposals receiving a majority vote. See Bebchuk, supra note 2, at 854 (reporting a high of eleven repeals of staggered boards after a majority vote on a precatory shareholder proposal in the years through 2003);
224. Randall S. Thomas & James F. Cotter, Shareholder Proposals in the New Millennium: Shareholder Support, Board Response and Market Reaction, 13 J. CORP. FIN. 368, 377 (2007) (reporting that the percentage of times that directors took action in response to corporate governance proposals that received a majority of the shareholder vote increased from 15.49% in 2002 to 50.42% in 2004).
225. See supra note 44 and accompanying text (noting the disagreement between stock exchange listing standards and state law standards requiring shareholder voting).
226. See supra note 43 and accompanying text (describing triangular mergers).
227. See Bayless Manning, The Shareholder's Appraisal Remedy: An Essay for Frank Coker, 72 YALE L.J. 223, 244-50 (1962) (explaining the development of the corporation as an independent legal entity and the effects of this status on mergers).
228. 188 A.2d 123, 124 (Del. 1963) (involving a shareholder vote in which eighty percent of the target company shareholders approved the plan and the voluntary dissolution).
229. Id.
230. See Terry v. Perm Cent. Corp., 668 F.2d 188, 189-92 (3d Cir. 1981) (involving a triangular merger in which shareholders of the parent of the acquiring corporation voted but were denied appraisal rights because only the subsidiary was a participant in the merger).
231. See Robert B. Thompson, Corporate Federalism and the Administrative State: The SEC's Discretion to Move the Line Between the State and Federal Realms of Corporate Governance, 82 NOTRE DAME L. REV. 1143, 1174-85 (2007) (describing the changing economic structure of stock markets and the likelihood of reduced governance listing standards from the exchanges).
232. See supra note 42 and accompanying text. Current corporations statutes distinguish between the sale of substantially all of a corporation's assets and the purchase of large amounts of assets.
233. See MODEL BUS. CORP. ACT § 11.04 (2008) (providing that the vote of shareholders of the acquiring corporation is not required for issuance of shares unless required by id. § 6.21(f), which requires a shareholder vote only if new shares to be issued total more than the existing number of outstanding shares).
234. Security Holder Director Nominations, Exchange Act Release No. 34-48626, 68 Fed. Reg. 60,784 (Oct. 14, 2003) (to be codified at 17 C.F.R. pts. 240, 249, 274).
235. Id. (proposing a rule that would require public companies to provide a mechanism for nominees of long-term security holders with significant holdings to be included in company proxy materials where evidence suggested companies had been unresponsive to shareholder opinions in the 14a-8 process);
236. see also INSTITUTIONAL S'HOLDER SERVS., 2006 POSTSEASON REPORT 16 (2006).
237. For another reason to think that access to the nomination process is of secondary importance, see Jeffrey N. Gordon, Proxy Contests in an Era of Increasing Shareholder Power: Forget Issuer Proxy Access and Focus on E-Proxy, 61 VAND. L. REV. 475, 475 (2008).
238. See supra notes 62-66 and accompanying text.