The Never-Ending Quest for Shareholder Rights: Special Meetings and Written Consent

Emiliano M. Catan is Associate Professor of Law and Marcel Kahan is George T. Lowy Professor of Law at New York University School of Law. This post is based on their recent article, forthcoming in the Boston University Law Review. Related research from the Program on Corporate Governance includes The Case for Increasing Shareholder Power, by Lucian Bebchuk; and What Matters in Corporate Governance? by Lucian Bebchuk, Alma Cohen, and Allen Ferrell.

Almost thirty years ago, Chancellor William Allen famously remarked that “a corporation is not a New England town meeting.” Perhaps so—but efforts are under way to change this. One of the most sought-after shareholder rights is the right of shareholders to take actions not just at annual meetings, the corporate equivalent of regularly scheduled political elections, but in between, at shareholder-convoked special meetings or by written consent, the corporate equivalent of town meetings. Shareholder proposals asking for the right to call a special meeting or to act by written consent, in turn, constitute one of the most common proposal types submitted over the last ten years and companies have increasingly heeded these shareholder requests. At special meetings or by written consent, shareholders unhappy with the present board may be able to elect directors more to their liking. After the near demise of staggered boards among large U.S. companies, the move to permit shareholders to act in between annual meetings may thus be the next logical step towards making the board replaceable by shareholders at will—or as critics may say, at the whim of a shareholder majority.

But not so fast. The usefulness of having the right to call a special meeting or act by written consent depends, to a greater extent than most other shareholder powers, on other provisions of state law and the corporate governance structure. Because different shareholder powers are complements or substitutes, the relevant issue is substantially more complex than whether or not shareholders, can, say, call a special meeting. As a result, shareholder efforts to obtain the power to call a special meeting or act by written consent offer a unique opportunity to examine the shareholder proposal mechanism and companies’ responses.

In our paper The Never-Ending Quest for Shareholder Rights: Special Meetings and Written Consent (forthcoming in the Boston University Law Review, and available on SSRN), we analyze shareholder rights to call to special meeting or act by written consent from a functional and from an empirical perspective. On the functional side, we distinguish between rules of venue, rules of initiation, and rules of passage. Rights to call a special meeting or act by written consent are venue powers; but the significance of these powers depends on the rules of initiation, which govern what proposals shareholders can put up for a vote at these venues, and the rules of passage, which govern the vote required to adopt proposals. To change the board composition between annual meetings, and in particular to obtain a board majority, shareholders thus must be able to either (i) remove incumbent directors and fill the resulting vacancies or (ii) expand the board and fill the resulting vacancies; and for these options to be realistically available, the required votes may not exceed a regular majority of the shares entitled to vote. As a practical matter, this means that the usefulness of venue powers depends on whether shareholders can remove incumbent directors without cause; whether shareholders have the power to expand the board size; whether shareholders have the power to fill vacancies on the board; and whether any of these actions require a supermajority vote.

On the empirical side, we construct a panel that follows firms in the S&P 500 index over 2005-2017 and hand-code for multiple features of their governance structure. We document a sizable increase in the number of firms that allow shareholders to act between annual meetings—but that for a substantial fraction of the firms that allow shareholders to act between annual meetings, shareholders cannot use that power to gain a board majority or change the board composition. In addition, we document that precatory shareholder proposals were key drivers of the evolution of shareholders’ ability to act between annual meetings among sample firms, and study how proponents select which firms to target.

Oddly, while shareholder rights activists have focused on venue powers and on the elimination of supermajority requirements, they have paid virtually no attention to the power to remove directors, to fill vacancies, or to expand the board size. Our empirical analysis indicates that shareholder activists target companies with proposals by following a pecking order which reflects a generic understanding of which rights are more important. As we document, shareholder rights activists first seek the elimination of staggered boards; seek the power to call special meetings mostly at companies that do not have a staggered board; and seek the power to act by written consent mostly at companies where shareholders already have the power to call a special meeting. This rational pecking order indicates that shareholder rights activists have some degree of sophistication regarding the governance impact of proposals. But after accounting for this pecking order, we find no evidence for shareholder activists seeking powers where they are more useful, either on their own or in conjunction with subsequent governance changes.

The evidence of this pecking order raises the question of the implications of acceding to one set of shareholder demands on the next set of shareholder demands. In particular, can boards “buy peace”—e.g., is a company that recently declassified its board rewarded, compared to other companies with annual boards, by a lower likelihood of being targeted with another shareholder rights proposal? When comparing firms that have established annually elected boards or the right to call a shareholder meeting for a longer time to those that did so recently, we find that, rather than buying peace, acceding to a shareholder proposal raises the probability of receiving the next proposal down the pecking order. This result—which does not seem to be purely driven by patterns in share ownership by shareholder rights activists—suggests that the very fact that the company has acceded to an earlier demand may embolden proponents to make further demands—proponents may have “smelled blood.” This further suggests that, from the perspective of a board opposed to granting more shareholder rights, acceding to demand may be more costly than initially apparent: it not only directly increases shareholders’ rights; as a result of the pecking order, it also advances the date at which shareholder proposals seeking even more rights will be filed; and beyond that, it may induce shareholder rights activists to target the company with such proposals earlier and more frequently than companies that did not face the initial shareholder proposal.

Finally, we analyze where shareholder rights activists should focus their future energies. We show that, if activists are mostly concerned with giving shareholders the ability to obtain a board majority in between annual meetings, they should focus on shareholders’ power to fill vacancies in companies where shareholders lack that power. If activists are instead mostly concerned with giving shareholders the ability to change the board composition in between annual meetings even without obtaining a majority, they should focus on getting more companies to grant shareholders the power to call a special meeting. Wherever shareholder rights activists turn next, though, we are confident that their quest for more shareholder rights will continue.

The complete article is available for download here.

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