Stock Lawyer Corporate Governance and Shareholder Rights 1 — Questions and Answers
Question 1: What is a 'derivative lawsuit' in the context of corporate and securities law?
- A lawsuit involving derivative financial instruments
- A lawsuit brought by a shareholder on behalf of the corporation to remedy harm done to the corporation (Correct answer)
- A lawsuit to recover losses from options contracts
- A class action brought by all shareholders simultaneously
Correct answer: A lawsuit brought by a shareholder on behalf of the corporation to remedy harm done to the corporation
A derivative lawsuit is brought by a shareholder on behalf of the corporation when the corporation itself fails to pursue a legal claim against wrongdoers such as directors or officers.
Question 2: What is the 'business judgment rule' and how does it protect corporate directors?
- A rule that directors must maximize shareholder profits in every decision
- A presumption that directors act on an informed basis in good faith and in the best interests of the corporation (Correct answer)
- A rule requiring directors to seek shareholder approval for all business decisions
- An SEC rule requiring directors to disclose all business decisions
Correct answer: A presumption that directors act on an informed basis in good faith and in the best interests of the corporation
The business judgment rule is a presumption that courts apply in favor of directors, protecting them from liability for business decisions made on an informed basis, in good faith, and in the honest belief that the action was in the company's best interests.
Question 3: Under Section 14(a) of the Securities Exchange Act of 1934, what is prohibited?
- Proxy solicitation that contains materially false or misleading statements (Correct answer)
- Paying dividends to shareholders without board approval
- Issuing new shares without shareholder vote
- Directors buying company stock on the open market
Correct answer: Proxy solicitation that contains materially false or misleading statements
Section 14(a) prohibits solicitation of shareholder proxies through materially false or misleading proxy statements and gives the SEC authority to regulate the proxy solicitation process.
Question 4: What are 'appraisal rights' in the context of corporate mergers?
- The right of the board to appraise executive compensation
- A shareholder's right to demand a judicial determination of the fair value of their shares in a merger (Correct answer)
- The SEC's right to appraise the fairness of a merger price
- An underwriter's right to appraise IPO pricing
Correct answer: A shareholder's right to demand a judicial determination of the fair value of their shares in a merger
Appraisal rights allow dissenting shareholders who vote against a merger to petition a court to determine the fair value of their shares instead of accepting the merger consideration.
Question 5: What is a 'poison pill' (shareholder rights plan) and why do companies adopt them?
- A compensation clawback provision for executives
- A defensive mechanism that dilutes the acquirer's ownership if they exceed a threshold, making hostile takeovers prohibitively expensive (Correct answer)
- An SEC rule requiring shareholder approval for all acquisitions
- A contractual provision voiding stock options upon a change of control
Correct answer: A defensive mechanism that dilutes the acquirer's ownership if they exceed a threshold, making hostile takeovers prohibitively expensive
A poison pill gives existing shareholders the right to purchase additional shares at a discount if any acquirer exceeds a set ownership threshold, diluting the acquirer and making hostile takeovers extremely costly.
Question 6: What must a board of directors consider under the 'Revlon duties' doctrine when a company is being sold?
- Maximizing long-term shareholder value
- Maximizing the short-term value for shareholders when a sale of the company is inevitable (Correct answer)
- Protecting employee jobs and community interests
- Securing the best transaction for the acquiring company
Correct answer: Maximizing the short-term value for shareholders when a sale of the company is inevitable
Under Revlon, Inc. v. MacAndrews & Forbes Holdings, when a sale or breakup of the company becomes inevitable, directors must act as auctioneers to maximize immediate shareholder value rather than protect the company's independence.
Stock Lawyer Corporate Governance and Shareholder Rights 1
What is a 'derivative lawsuit' in the context of corporate and securities law?