Stock Lawyer Corporate Governance and Shareholder Rights

Question 1

What is a 'derivative lawsuit' in the context of corporate and securities law?

Accepted Answer

A lawsuit brought by a shareholder on behalf of the corporation to remedy harm done to the corporation

Answer

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?

Accepted Answer

A presumption that directors act on an informed basis in good faith and in the best interests of the corporation

Answer

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?

Accepted Answer

Proxy solicitation that contains materially false or misleading statements

Answer

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?

Accepted Answer

A shareholder's right to demand a judicial determination of the fair value of their shares in a merger

Answer

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?

Accepted Answer

A defensive mechanism that dilutes the acquirer's ownership if they exceed a threshold, making hostile takeovers prohibitively expensive

Answer

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.

Stock Lawyer Practice Test

Stock Lawyer Practice Test

Stock Lawyer Corporate Governance and Shareholder Rights