Many, and maybe most, memories of Gordon Gekko’s (Best Actor Academy Award-winner Michael Douglas’) classic speech in the 1987 movie, Wall Street, are mistaken.
The corporate raider, prowling the aisles of a hotel ballroom, did not declare, “Greed is good,” but rather, “Greed—for lack of a better word—is good.” (Would it have made a difference, then or today, if he’d instead championed “profit-maximization”?)
He delivered that diatribe at the annual shareholders meeting of the fictional Teldar Paper company, whose management, seated in ranks at the front of the room, Gekko skewered as bloated, wasteful, and self-serving.
Corporate counsel and CEOs certainly shivered not only at Gekko’s complete command of his (and the movie’s) audience, but at the fecklessness of Teldar executive and meeting chair Mr. Cromwell’s (Richard Dysart’s) off-screen outburst, “This is an outrage! You’re out of line, Gekko!”
Perhaps they then focused more attention on the rules governing agendas of, participation in, and the maintaining of order at, their own shareholder meetings.
Such rules are not addressed by the Delaware General Corporation Law (DGCL), although Subsections (b) and (c) of Model Business Corporation Act (MBCA) Section 7.08 (Conduct of Meeting), respectively, authorize the meeting chair “to establish rules for the conduct of the meeting,” so long as those rules are “fair to shareholders.”
Companies often include such rules, or incorporate them by reference, in bylaws. See Abbey Properties Co. v. Presidential Ins. Co., 119 So.2d 74, 77 (District Court of Appeal of Florida, Second District 1960) (rejecting the argument that Robert’s Rules of Order applied by default to every company’s shareholder meetings).
Those provisions typically indicate broadly that the chair of an annual or special meeting of shareholders (possibly the board chair, the president, or a director designated by the board) is entitled to adopt rules and regulations for “the conduct of the meeting.” Some specify further that, “Unless and to the extent determined by the board of directors of the chair of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure.”
Few bylaws even mention the most popular set of parliamentary rules, and at least one (Comcast’s) does so only to indicate that “The conduct of a meeting need not follow Robert’s Rules of Order or any other published rules for the conduct of a meeting.”
Although in 1996 the ABA’s Corporate Laws Committee added to its Official Comment to Section 7.08, “Complicated parliamentary rules (such as Robert’s Rules of Order) ordinarily are not appropriate for shareholder meetings,” that sentence quietly vanished sometime after the publication of the 2013-2014 edition of the model statute.
If referring to Robert’s Rules is questionable in directors’ meetings, why is it even less appropriate for shareholder meetings?
First, according to that manual itself (at Section 45:2), shareholder meetings do not constitute parliamentary proceedings, a “fundamental principle [of which is] that each person who is a member of a deliberative assembly is entitled to one—and only one—vote on a question.” By contrast, shareholders are generally entitled to one vote (or more, in the case of super-voting shares) for each share that they own that carries a voting right with regard to the issue at hand.
Second, many boards have installed in their bylaws advance notice provisions that preclude shareholders from engaging in spontaneous and/or surprising “motion practice” at the meeting.
The DGCL does not explicitly mention such bylaws, but the Official Comment to MBCA Section 7.05 (Notice of Meeting) states that:
“Although the corporation is not required to give notice of the purpose or purposes of an annual meeting unless the Act or the articles of incorporation so provide, a shareholder, in order to raise a matter at an annual meeting (for example, to nominate an individual for election as a director or to propose a resolution for adoption), may have to comply with any advance notice provisions in the corporation’s articles of incorporation or bylaws. Such provisions might include requirements that shareholder nominations for election to the board of directors or resolutions intended to be voted on at the annual meeting be submitted in writing and received by the corporation a prescribed number of days in advance of the meeting.”
Advance notice bylaws, among others, were addressed by the Delaware Court of Chancery in In Re Ebix, Inc. Stockholder Litigation, 2016 WL 208402, at *7, after shareholders claimed that the bylaws had been inappropriately revised by directors seeking primarily to maintain their own positions:
“The ‘Advance Notice Bylaws’ impose certain conditions on a stockholder’s ability to make a proposal or nominate a director.
“Two features of these bylaws are noteworthy: timing requirements and information requirements.
“First, the Advance Notice Bylaws create, in certain circumstances, a 30–day window during which stockholders must give notice of proposals and nominations. That is, if the annual meeting is called to occur on a date within 25 days of the 1–year anniversary of the previous annual meeting, a stockholder’s notice of a proposal or director nomination ‘must be received not fewer than 90 days nor more than 120 days prior to that anniversary.’ Ebix may then postpone or adjourn the meeting.
“Second, a stockholder seeking to make a proposal or nomination must disclose certain information about whether and the extent to which that stockholder, its nominee, and/or certain affiliated parties have (i) entered into any transaction, such as an option or short interest, ‘with respect to’ Ebix stock, or (ii) any other arrangement, such as a short position, made to manage risk or increase or decrease voting power or economic interest. Further, stockholders providing such notice must update and supplement information they provide. The chairman of the meeting may decide to bar presentation of a stockholder proposal or nominee, as well as decide whether the bylaws are satisfied.”
The Court had previously “noted that: ‘Advance notice requirements are “commonplace” and “are often construed and frequently upheld by Delaware courts.”’ Such bylaws are said to be ‘useful in permitting orderly shareholder meetings, but if notice requirements “unduly restrict the stockholder franchise or are applied inequitably, they will be struck down.”’ AB Value Partners, LP v. Kreisler Mfg. Corp., 2014 WL 7150465, at *3, quoting Goggin v. Vermillion, Inc., 2011 WL 2347704, at *4 (Del. Ch.) (itself quoting, in turn, Openwave Sys. Inc. v. Harbinger Capital P’rs Master Fund I, Ltd., 924 A.2d 228, 238–39 (Del. Ch. 2007)) See also JANA Master Fund, Ltd. v. CNET Networks, Inc., 954 A.2d 335, 344 (Del. Ch. 2008) (rejecting the application to self-funded shareholder proposals of an advance notice bylaw that the court construed to apply “only to proposals that shareholders seek to have included in the company’s proxy materials”), aff’d sub nom. CNet Networks, Inc. v. Jana Master Fund, Ltd., 947 A.2d 1120 (Del.2008).
In Ebix, the Court held that under the circumstances, “heightened scrutiny requires Ebix’s board members to show. . . that their adoption of the Bylaw Amendments was ‘within the range of reasonableness,’” a test that the board failed to satisfy: “Although many of the complained-of features. . . only give rise to inconvenience [for shareholders], the reasonableness of a defensive response whose munitions include the ability to foreclose the use of special meetings to hold elections requires an explanation not evident on the face of [the directors’] pleadings.” Thus, the Court denied the board’s motion to dismiss these elements of the shareholders’ complaint.
A final reason for the irrelevance of Robert’s Rules is that, by the time that the meeting is formally called to order, many—and perhaps a decisive number– of the shares will already have been voted, making many motions moot.
Even if Robert’s Rules won’t apply to a shareholder meeting, neither, necessarily, will every set of advance notice provisions. In this context, directors and their counsel can hardly hope to echo Gordon Gekko’s hubris when he smirked to his increasingly-disillusioned dupe, Bud Fox (Charlie Sheen), “We make the rules, pal.”
