Stock Lawyer Corporate Governance and Shareholder Rights 2 — Questions and Answers
Question 1: What is 'say on pay' under the Dodd-Frank Act?
- SEC authority to set executive compensation limits
- A mandatory shareholder advisory vote on executive compensation at least every three years (Correct answer)
- A rule requiring unanimous board approval for executive pay packages
- A requirement to disclose executive pay in prospectuses
Correct answer: A mandatory shareholder advisory vote on executive compensation at least every three years
The Dodd-Frank Act requires public companies to hold a nonbinding shareholder advisory vote on executive compensation (say on pay) at least once every three years.
Question 2: What duty do corporate directors owe to the corporation under the Caremark standard?
- A duty to ensure the company maximizes profits each quarter
- A duty to implement and monitor compliance and reporting systems to detect legal violations (Correct answer)
- A duty to personally audit all financial statements
- A duty to attend every board meeting without exception
Correct answer: A duty to implement and monitor compliance and reporting systems to detect legal violations
Under the Caremark standard (In re Caremark International Inc. Derivative Litigation), directors have a duty to ensure adequate information and reporting systems exist so the board can be informed of potential legal compliance failures.
Question 3: What is the 'entire fairness' standard in Delaware corporate law, and when does it apply?
- A standard requiring any merger to benefit all stakeholders equally
- The most rigorous standard of review, applied when directors have a conflict of interest, requiring proof of fair dealing and fair price (Correct answer)
- A standard for reviewing executive compensation plans
- An SEC standard for evaluating disclosure completeness
Correct answer: The most rigorous standard of review, applied when directors have a conflict of interest, requiring proof of fair dealing and fair price
The entire fairness standard requires that a conflicted transaction demonstrate both fair dealing (the process) and fair price (the economic terms) — the burden shifts to the defendants to prove both elements.
Question 4: What is 'proxy access' in modern corporate governance?
- The right of the SEC to attend all shareholder meetings
- A shareholder's right to include director nominees in the company's proxy materials at the company's expense (Correct answer)
- The CEO's right to vote shareholder proxies
- A court order granting access to corporate records
Correct answer: A shareholder's right to include director nominees in the company's proxy materials at the company's expense
Proxy access allows qualifying shareholders to include their own director nominees in the company's proxy statement, giving them a low-cost mechanism to challenge board composition without a full proxy fight.
Question 5: Under Section 220 of the Delaware General Corporation Law, what right do shareholders have?
- The right to vote on all major business decisions
- The right to inspect corporate books and records for a proper purpose (Correct answer)
- The right to elect the CEO directly
- The right to receive quarterly dividends
Correct answer: The right to inspect corporate books and records for a proper purpose
Section 220 gives shareholders the right to inspect and copy a corporation's books and records, including stockholder lists and meeting minutes, when they demonstrate a proper purpose such as investigating potential wrongdoing.
Question 6: What is a 'special committee' in the context of a related-party merger, and why is it important?
- A committee of outside regulators reviewing the transaction
- An independent committee of disinterested directors formed to negotiate and evaluate a transaction with a conflicted party on behalf of the corporation (Correct answer)
- A shareholder committee formed to vote on the merger
- An SEC-appointed oversight body for major mergers
Correct answer: An independent committee of disinterested directors formed to negotiate and evaluate a transaction with a conflicted party on behalf of the corporation
A special committee of independent, disinterested directors is formed to negotiate mergers with controlling shareholders or other conflicted parties, helping shift the standard of review from entire fairness to business judgment.
Stock Lawyer Corporate Governance and Shareholder Rights 2
What is 'say on pay' under the Dodd-Frank Act?