Fiduciary Duties for Activist Shareholders

Iman Anabtawi & Lynn Stout

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Power in public corporations is dispersed among three key groups: shareholders; the board of directors; and the company’s executive officers, including its Chief Executive Officer (CEO).  Each group has rights and privileges.  Each also has duties and responsibilities.

Contemporary corporate case law and scholarship, however, pay far more attention to corporate officers’ and directors’ duties than to those of shareholders.  Officers and directors are understood to owe fiduciary duties of loyalty and care that are broad and deep, constraining their every material business decision.  Shareholders, in contrast, are thought to have far more limited obligations.  In fact, outside the narrow contexts of closely-held companies and self-dealing by majority shareholders, many commentators assume shareholders have no duties at all.  Minority stockholders in public companies are often viewed as free agents, at liberty to try to influence corporate policy as they see fit—including trying to influence corporate policy in ways that favor their own interests over those of the corporation and other shareholders.

Why has the possibility that minority shareholders in public firms might use their power in self-serving ways attracted so little attention?  First, until recently minority shareholders have played a largely passive role in public companies, with the result that minority shareholders in public firms have been perceived as having far less power to set corporate policy than directors and officers have.  The second reason why the question of minority shareholders’ duties has been largely overlooked is that, even when minority shareholders do try to take an active role in public companies, it has been generally believed that their primary goal is to improve the firm’s overall economic performance—an interest that is closely aligned with both the interests of the firm and the interests of other shareholders.  Shareholder activism, accordingly, has been assumed to be a beneficial influence.

Both of these assumptions are becoming increasingly inaccurate.  The economic and legal contexts in which American public corporations do business are changing swiftly in ways that create a pressing need to reexamine conventional notions of shareholder duties.  As a result of recent developments in the financial markets, in business practices, and in corporate law, minority shareholders are finding it economically rational to try to influence corporate decisionmaking.  The long-standing assumption that public company shareholders lack the ability or incentive to engage in activism is no longer accurate.

Meanwhile, even as shareholders are becoming more powerful, their interests are becoming more heterogeneous.  Increasingly, the economic interests of one shareholder or shareholder group conflict with the economic interests of others.  The result is that activist shareholders are using their growing influence not to improve overall firm performance, as has generally been assumed, but to profit at other shareholders’ and at the firm’s expense.

We believe fiduciary duty doctrine can and should be interpreted in a new way that takes into account changes in the corporate landscape and reaches such opportunistic behavior.  Indeed, we believe that the law of fiduciary duty is uniquely suited to address the growing problem that opportunistic shareholder activism poses for corporate governance.

 
I.
A Primer on Shareholder Fiduciary Duties

Fiduciary duties are usually applied to officers and directors.  In some cases, however, courts impose fiduciary duties of loyalty on certain types of shareholders as well. When they do, the analysis tends to follow the application of loyalty duties in officer and director cases.

In particular, courts have held that majority shareholders, like corporate officers and directors, owe a fiduciary duty of loyalty to minority shareholders that precludes them from using their positions as controlling shareholders to extract material economic benefits from the firm at the minority’s expense.  As articulated by the California Supreme Court in the famous case of Jones v. H.F. Ahmanson & Co.,1 “Majority shareholders may not use their power to control corporate activities to benefit themselves alone or in a manner detrimental to the minority.  Any use to which they put the corporation or their power to control the corporation must benefit all shareholders proportionately . . . .”2

As in the case of corporate officers and directors, courts deem corporate actions that provide unique benefits to controlling shareholders to be potential violations of controlling shareholders’ duties of loyalty.  As in the case of corporate officers and directors, such actions are not utterly prohibited.  A controlling shareholder can escape liability by proving, to the court’s satisfaction, that while a transaction was tainted by a conflict of interest, it was nevertheless intrinsically fair to the firm and other shareholders. Also as in the case of officers and directors, courts assessing the fairness of controlling shareholders’ transactions initially put the burden on the controlling shareholder to establish the intrinsic fairness of the deal, in terms of both process and price, to the corporation and its minority investors.

Finally, courts have found that some bargaining procedures contribute so substantially to a finding of intrinsic fairness that, if those procedures are followed, the court will shift the burden back to the plaintiff to prove that the transaction, despite the fairness of the procedures surrounding it, involved substantively unfair terms.  This is particularly clear in controlling shareholder cases where a suspect transaction after full disclosure was approved by “a majority of the minority,” meaning a majority of the remaining minority shareholders who did not have a conflict of interest.

 
II.
Theoretical Foundations of Limited Shareholder Duties

It thus appears that, at least in certain cases, courts subject shareholders to loyalty duties similar in nature to the loyalty duties imposed on corporate officers and directors.  Nevertheless, most contemporary discussions of fiduciary duty in public corporations continue to orbit around officers and directors.  This can be explained in part by the fact that shareholders in public corporations historically have been passive investors, not active participants in corporate governance.  This passivity stemmed not only from the “public good” nature of shareholder activism (a minority shareholder who seeks to improve corporate performance must bear all the costs of the activism while sharing any resulting benefits with all the firm’s other shareholders) but also from traditional corporate law rules of proxy voting which made it difficult and expensive for shareholders to attempt to exercise meaningful corporate power.  To the extent that shareholders in public corporations were unable, as a practical matter, to influence corporate policy, one can understand why the question of shareholder fiduciary duties has been neglected.  As one commentator has put it, “There is no need for concern about the oppressive propensities of persons who lack the power of implementation.”3

A second reason why shareholder duties have not attracted much attention is the common belief that, even in the rare case when a minority shareholder tries to take an active role in corporate decision-making, that activism benefits both the corporation and other shareholders.  According to this view, minority shareholders want to make the corporation as profitable as possible in order to maximize the value of their shares.  To the extent they accomplish this objective, they serve not only their own interests but those of the other shareholders as well. This theory of uniform shareholder interest independently renders fiduciary limits on shareholder action unnecessary.

Taken together, the assumptions that shareholders in public firms are mostly passive and that shareholders share common interests have led many observers to conclude that shareholders, unlike corporate officers or directors, are not generally bound by fiduciary duties.  In particular, existing law on shareholder fiduciary duties can be interpreted as limiting shareholder duties in at least two important ways.  First, cases often seem to suggest that only “controlling” shareholders are subject to the duty of loyalty, while “non-controlling” shareholders may vote as they please without objection that their motives are for personal gain. Second, courts have tended to find even controlling shareholders subject to fiduciary duties primarily in two limited business situations: corporate “freezeouts” and close corporations.

 
III.
Shaking Foundations: The Rise of Minority Shareholder Power

Changes in markets, business practice and business institutions, and in corporate and securities law have seriously eroded the realism of the conventional wisdom that minority shareholders are passive and powerless. 

First, recent decades have seen the rise of institutional investors—typically pension funds and mutual funds—that aggregate the savings of millions of individuals into enormous investment portfolios that buy stock in public companies.  A number of prominent institutional investors, including both mutual funds like Fidelity and Vanguard and pension funds like CalPERS, have emerged as activist investors willing to mount public relations campaigns, initiate litigation, and launch proxy battles to pressure corporate officers and directors into following their preferred business strategy.

Second, shareholders’ ability to influence policy in public companies received an important boost in 1992 when the SEC amended its federal proxy regulations for the express purpose of permitting large shareholders to exercise their voting power more effectively. The 1992 amendments exempted from the definition of a regulated “proxy solicitation” most shareholder communications not actually accompanied by a formal proxy solicitation, and also made clear that most shareholders were free to make public statements, including speeches, press releases, and internet communications. The 1992 amendments thus made it much easier for investors—including institutional investors and hedge funds—to coordinate with each other and combine their individual holdings into a single, much larger voting block.  It also became much easier for shareholders to communicate with other shareholders, and with the general public, concerning their views on corporate policy.

Third, another recent development that has magnified shareholders’ collective influence is the creation of commercial “shareholder advisory services.”  Shareholder advisory firms specialize in advising pension funds and mutual funds, for a fee, how to vote the proxies of the shares held in their investment portfolios.  As a result, advisory services coordinate the voting policies of many different institutional investors, effectively aggregating their shares into one large voting bloc controlled, as a practical matter, by the advisory service itself. By far the largest and most influential shareholder advisory service today is Institutional Shareholder Services (ISS).  The emergence of ISS as the dominant advisory service thus has dramatically reduced the collective action problem traditionally thought to plague shareholders in public firms. The widely dispersed individual shareholders who once routinely voted with corporate management have been replaced to a great extent by institutions that follow the advice of a single and far more independent-minded “voter”—ISS.

Fourth, perhaps the most important development in recent years contributing to greater shareholder activism is the rise of new type of institutional shareholder for whom activism is especially economically attractive—the hedge fund.  Hedge funds are lightly-regulated investment pools that cater to wealthy investors, and so are exempt from most of the disclosure requirements and other legal burdens borne by mutual funds that take investment funds from the general public. Many hedge funds typically do not attempt to diversify their portfolios, but instead take large positions in as few as two or three companies, and then demand that those companies pay special dividends, launch massive stock buyback programs, sell assets, or even put themselves on the auction block in order to add “shareholder value.” The popularity of hedge funds has grown enormously in recent years, and by some estimates by 2008 hedge funds controlled as much as $2 trillion in assets.  The result is a new genre of public company shareholder that is aggressive, wealthy, and eager to play a role in setting corporate policy. 

Fifth, yet another factor promoting greater shareholder activism is financial innovation.  Today investors purchase not only stocks and bonds but also various alternative hybrid forms of equity, debt, and derivative instruments. Financial innovation encourages shareholder activism in at least two ways.  First, it creates more incentives for activism, because the more complex a company’s capital structure becomes, the more opportunities are presented for investors who purchase one type of security to push for corporate actions that harm the value of another type of security issued by the same company.  For example, a preferred stockholder in a troubled firm might push for an asset sale to trigger its liquidation preference, while common shareholders demand a risky strategy that could raise the value of the common if it succeeds but harms the value of the preferred.  A second and more widely recognized reason why financial innovation has encouraged shareholder activism is that it has lowered the cost of activist strategies by allowing the separation of voting rights and economic interests.  Thus, a hedge fund can buy a block of common stock and vote the shares while simultaneously entering a derivatives contract that hedges away its economic interest in the stock.  Indeed, the fund can take a negative economic position in the firm by shorting its stock and then seek to profit from using its power as a formal shareholder to push for business policies that drive stock price down.

These are only a few of the recent developments that have worked in tandem to shift power in public corporations away from executives and boards and into the hands of activist shareholders.  Other recent or proposed changes—the possible adoption of a “proxy access” rule by the Securities Exchange Commission, the New York Stock Exchange’s proposal to eliminate “broker voting,” the rapid adoption of “majority voting” rules in director elections at many large public corporations, the institution of electronic “e-proxy” voting—all promise to give activist shareholders even more influence over corporate policy.  Not only have minority shareholders become far more powerful, the trend shows every sign of continuing.

 
IV.
Shaking Foundations More: The Problem of Shareholder Conflicts of Interest

As shareholders are becoming more powerful, they are also becoming more heterogeneous.  Activist shareholders can have serious conflicts of interest with other shareholders arising from (1) their other relationships with the firm; (2) their investments in derivatives or securities issued by other corporations; and (3) their investments in other parts of the firm’s capital structure.

The dangers of shareholder self-interest are perhaps most apparent in the case of self-dealing transactions between the firm and the shareholder.  Corporate law has long viewed with suspicion transactions between the firm and a controlling shareholder.  Yet as minority investors in public companies have acquired more power, it has become clear that an activist minority may also have enough clout to push through interested transactions.  The high-profile proxy battle to remove Steven Burd as Chairman and CEO of Safeway Inc. provides an example of how activist investors can use their shareholder status to push for favorable treatment in their other dealings with the firm.  Burd was taking a hard-line stance in labor negotiations with the United Food & Commercial Workers Union (UFCWU), which represents grocery workers.  The California Public Employees’ Retirement System (CalPERS), a large pension fund representing California employees, organized a proxy campaign to remove Burd from the corner office.  It was soon revealed that the CalPERS campaign had been initiated by CalPERS’ President, Sean Harrigan, who was also a career labor organizer and an official of the UFCWU. 

A second common situation where conflicts of interest between activists and other shareholders in the firm can arise is when activist shareholders take “adverse positions” in derivatives or in securities issued by other companies.  For example, an activist can become a formal shareholder with voting power while simultaneously either “shorting” the company’s shares, or entering a derivatives contract to hedge away its economic interest.  Activists can also take adverse positions in the securities of another company.  They can even combine both types of adverse interest.  A widely-cited example of this involved the potential purchase of King Pharmaceuticals by Mylan Laboratories.  Hedge fund Perry Capital, which had recently purchased nearly ten percent of Mylan’s common stock, supported the acquisition, although industry observers perceived the deal as overpriced.  Perry turned out to have a good reason to want Mylan to overpay for King.  Perry was also a large shareholder in King, and it had used a derivatives contract to hedge away its economic interest in the Mylan shares it had purchased.  Thus Perry stood to make money if the deal went through even if Mylan’s shares declined, as bidding companies’ shares often do in mergers. 

Yet a third source of conflict between shareholders in public firms is the increasingly complex capital structure of American corporations.  Consider the case of DiLillo v. Ustman Technologies, Inc.4  Hedge fund Sagaponack Partners invested $7 million in a small environmental services company called Ustman Technologies.  In exchange, Sagaponack received high-interest notes and 40 percent of the company’s common stock.  According to their terms, the notes were soon converted into preferred stock with a liquidation preference of $17 million that could be triggered by the sale of substantially all the company’s assets. Only two years after making its initial $7 million investment, Sagaponack invested another $750,000 to increase its equity ownership in Ustman to 48.5 percent of common shares.  At this point, Sagaponack used its influence over Ustman’s board to cause the company to sell substantially all its assets to a third party for $17.3 million.5  All the proceeds from the sale went to pay Ustman’s debts and Sagaponack’s liquidation preference, with nothing remaining for the common shareholders.

Although Sagaponack held such a large block of Ustman common stock that it was arguably a controlling shareholder subject to loyalty duties—indeed, this is why a lawsuit was filed and the conflict of interest came to light—DiLillo illustrates how an activist investor can profit from taking a position in one type of security issued by a company and then using the control rights associated with that security to push for corporate action that diminishes the value of that security but increases the value of another type of security issued by the same corporation in which the activist investor has an even large economic interest.  Although for a number of reasons it is very difficult to get hard data on how often minority activist shareholders, especially unregulated hedge funds, face these sorts of conflicts of interest, anecdotal reports suggests that it may be common for activists to take positions in more than one type of security issued by the same company.6

 
V.
Using Fiduciary Duties to Address Activist Shareholder Conflicts of Interest

Taken together, the two trends of shareholders becoming both more powerful and more divided point to a serious rise in the risk of shareholder opportunism.  Corporate law can address this increased risk through the relatively straightforward mechanism of applying corporate fiduciary duties to shareholders more broadly.

In particular, activist shareholder overreaching can be deterred by (1) interpreting loyalty duties to apply not only to controlling shareholders, who can dictate board decisions in all matters, but also to activist minorities who succeed in influencing management with respect to a single transaction or business decision, and (2) applying shareholder fiduciary duties not only in the traditional contexts of freezeouts and close corporations, but in any factual situation where a shareholder reaps a unique personal economic benefit to the detriment or exclusion of other shareholders.

 
VI.
Expanding the Notion of “Control”

Corporate fiduciary duties exist to restrain self-interested behavior by persons in a position to exert control over the corporate entity.  Existing case law already applies this principal not only to corporate officers and directors, but to majority shareholders as well, and in some case to shareholders deemed to exercise “de facto” control over the corporation’s board of directors.

We believe shareholder control should viewed not a binary inquiry (either a shareholder has “control” or it does not), but as a spectrum of power and influence.  At one end of the spectrum lies the sole shareholder who holds 100 percent of a firm’s outstanding voting stock and enjoys complete authority over the firm and its board of directors. At the other end there is the rationally apathetic, atomized individual investor who cannot be bothered to return a proxy by mail.  Between these two extremes lies a vast range of possible allocations of power between individual shareholders and directors.  Indeed, more than one shareholder or shareholder group can be said to “control” the firm in some fashion.

The inquiry into whether or not a shareholder has control for purposes of activating the latent duty of loyalty is accordingly best framed as an inquiry into whether a particular shareholder can, formally or informally, influence corporate behavior with respect to a particular issue.  Any attempt to exercise influence that produces the desired result—put differently, any shareholder act that is a “but for” cause of some corporate transaction or strategy—is an exercise of de facto control.

This formulation goes beyond the scope of the traditional shareholder control test in two important ways.  First, it is context-specific, meaning it determines whether a shareholder is a controlling shareholder by referring to the role that the shareholder played with respect to a particular corporate decision.  If a minority shareholder influences a particular corporate action, such as a decision to declare an extraordinary dividend, in a determinative way, it will have satisfied the control test with regard to that specific action. 

A second distinction between our definition of shareholder control and the existing test is that our formulation does not rely on the sort of arbitrary threshold for voting power that underlies current doctrine.  Our test would treat even a one percent shareholder as a controlling, if that shareholder’s assent was essential in determining the outcome of the vote at issue.  Indeed, our formulation recognizes that minority shareholders can exercise control even when they are not voting.  For example, a shareholder may be able to determine a board’s decision with regard to a particular matter—say, a share repurchase program—by threatening a proxy battle, or by undertaking an aggressive public relations campaign directed at the board. 

Traditional case law offers a basis for this expanded notion of shareholder control.  Smith v. Atlantic Properties, Inc.7 is an oft-cited case involving a corporation with four shareholders and a charter provision that required dividends to be approved by an 80 percent shareholder vote, giving each of the four partners an effective veto. After one shareholder had a falling-out with the other three, he steadfastly refused to approve dividends, either out of spite or a desire to minimize his personal tax liability.  The unfortunate effect was to trigger tax penalties on Atlantic Properties’ accumulated earnings.  The court found that the recalcitrant minority shareholder had violated his duty of loyalty to his fellow shareholders because the 80 percent provision had given the minority shareholder an “ad hoc” controlling interest.”

Although Smith v. Atlantic Properties is a close corporation case, its logic applies equally well to minority shareholders in public companies.  When a single shareholder’s actions determine the outcome—as when an activist successfully extracts greenmail, or a hedge fund with five percent of shares casts the deciding vote in a hotly-contested merger—that minority activist, like the minority shareholder in Smith v. Atlantic Properties, has exercised “ad hoc” control and triggered latent loyalty duties.

 
VII.
Expanding the Notion of When Shareholder Interests Conflict

In addition to expanding the idea of shareholder control, our approach would also expand shareholder fiduciary duties in a second fashion, by applying the duty of loyalty to any corporate transaction or strategy that provides one or more shareholders with a material pecuniary benefit not shared by other shareholders.  This approach rejects any claim that shareholder conflicts of interest arise only in freezeouts and close corporations, or that shareholder fiduciary duties should be limited to those contexts.  Instead, we propose a flexible approach that mirrors that typically taken in duty of loyalty cases involving corporate officers and directors.  Rather than trying to identify isolated instances which shareholder conflicts arise, our approach instead asks the larger question typically asked in director and officer fiduciary duty cases: Does the shareholder have any material economic interest that is different from other shareholders’ interests in the matter?

Despite the common pattern of courts applying shareholder fiduciary duties primarily in the freezeout and close corporation contexts, an open-ended and fact-specific approach to finding potential conflicts is consistent with corporate case law and especially with the seminal case of Sinclair Oil Corp. v. Levien.8  In Sinclair, the controlling parent corporation did not exploit the minority shareholders in its partially-held subsidiary by arranging a freezeout merger.  Rather, it used its control over the subsidiary to cause the subsidiary to sell petroleum products to itself on favorable terms.  Sinclair thus illustrates how, when presented with fact patterns that fall outside the standard freezeout context but nevertheless raise clear conflict of interest issues, courts have responded by imposing loyalty duties on controlling shareholders.

 
VIII.
Incorporating Traditional Loyalty Defenses

On first inspection, the suggestion that all shareholders should be subject to a latent fiduciary duty of loyalty might lead a casual observer to conclude the natural result will be an explosion of litigation.  This is not the case.  The practical scope of loyalty duties can and should be contained, and litigation confined to cases presenting real and serious conflicts of interest, through several restrictive measures.

One of the most important is to allow shareholders accused of breaching their duty of loyalty to use the affirmative legal defenses employed in cases involving officers and directors, defenses that have proven effective at discouraging frivolous litigation in that context.  One such protection is the plaintiff’s burden of alleging facts demonstrating that the shareholder defendant (1) in fact exercised influence that may have determined the outcome and (2) had a material economic interest in the outcome that differed from that of other shareholders.  The number of cases in which a plaintiff can make both showings is likely to be small, and also likely to involve circumstances where judicial scrutiny is appropriate and desirable.

Investors generally can use their formal shareholder status to influence corporations in three ways: (1) by voting; (2) by filing suit against the firm or its managers; and (3) by publicly seeking to embarrass or threaten incumbent management with a proxy fight or public relations campaign.  Very few shareholders engage in the last two activities, and those that do are exactly the activists on whom it is most desirable to impose loyalty duties.  Of course, all shareholders can vote.  However, only in the relatively rare case where a vote is hotly contested and the outcome determined by a small margin can a plaintiff allege the outcome was determined by the vote of a particular minority shareholder.

Even then, litigation cannot be sustained unless the plaintiff can also allege facts establishing that the minority shareholder in question had a material personal economic interest in the outcome.  This means that the plaintiff must allege facts supporting a specific conflict of interest of the sort discussed in earlier.  Only then, and only if the shareholder subject to the conflict exercised de facto control, can a suit can be brought—and it is then that judicial scrutiny is most needed.

Even when a plaintiff can demonstrate both exercise of de facto control and a material conflict of interest, the activist minority shareholder defendant retains an important escape route against liability.  That escape route is the traditional defense, available to officers, directors, and controlling shareholders accused of loyalty breaches, that although the transaction at issue was tainted by self-interest it was nevertheless intrinsically “fair” in terms of both price and process.  It is only if the transaction is unfair—again a situation where liability is appropriate—that the defendant shareholder will be held liable.

Finally, Section 144 of the Delaware General Corporation Law provides some defenses for corporate officers and directors who enter into interested transactions that might be extended to minority shareholders as well.  In particular, Section 144(a)(2) provides a defense to the director whose interested transaction is approved, after full disclosure of the material facts of the transaction and the conflict of interest involved, by a majority of the firm’s disinterested shareholders.  Case law has extended this defense to controlling shareholders, where it is called the “majority of the minority defense”—that is, the interested transaction with the majority shareholder was approved by a majority of the remaining minority shareholders.9  There seems no logical reason not to extend this defense to minority activist shareholders as well.

 
IX.
Conclusion: The Wisdom of Using Fiduciary Duties to Constrain Shareholder Opportunism

There is no reason to believe activist minority shareholders are immune to the same temptations of greed and self-interest that are widely understood to face corporate officers and directors.  Our proposed reinterpretation of shareholder fiduciary duties recognizes this reality.

Our approach has two advantages as a strategy for dealing with self-serving shareholder activists.  First, it brings existing fiduciary duty doctrine into line with the changing reality of how and why shareholders assert power in the corporate governance arena.  As a result, it offers a broad, flexible, and preemptive solution to the problem of shareholder overreaching.  This seems likely to be a far more effective approach than the sorts of ad hoc, after-the-fact responses to particular forms of abusive shareholder behavior that regulators have adopted in the past, and that prominent corporate law scholars continue to propose today. 

Second, we believe our reinterpretation of shareholder fiduciary duty can lend much-needed support to the controversial but increasingly influential normative claim that promoting “shareholder democracy” is a useful way to constrain managerial misbehavior.  In the wake of recent corporate scandals, firms and regulators have urged the adoption of a variety of changes in corporate law and practice designed to increase shareholders’ power to pressure the directors of publicly-held firms into adopting particular business policies, from requiring more independent directors to requiring shareholder votes on CEO pay.  Academics and investor interest groups are calling for even more “shareholder empowerment.”  Whether or not the modern trend of shifting corporate power toward shareholders and away from boards and executives will ultimately serve shareholders’ own interests depends critically on how individual shareholders and shareholder groups actually exercise their growing influence.  By limiting their ability to use it in opportunistic and self-serving ways, we hope to encourage a version of shareholder democracy that promotes, rather than destroys, shareholder welfare.dingbat

 

Acknowledgments:

Copyright © 2009 Stanford Law Review.

Iman Anabtawi is Professor of Law, UCLA School of Law.

Lynn Stout is Paul Hastings Professor of Corporate and Securities Law, UCLA School of Law; Principal Investigator, UCLA-Sloan Research Program on Business Organizations.

This Editorial is based on the full-length Article: Iman Anabtawi & Lynn Stout, Fiduciary Duties for Activist Shareholders, 60 STAN. L. REV. 1255 (2008). Click Here for the Full Article

  1. 460 P.2d 464 (Cal. 1969).
  2. Id. at 471.
  3. J.A.C. Hetherington, The Minority’s Duty of Loyalty in Close Corporations, 1972 DUKE L.J. 921, 946.
  4. No. B148198, Inc., 2001 Cal. App. LEXIS 1527 (Cal. Ct. App. Nov. 19, 2001).
  5. The asset sale also required the approval of a majority of Ustman’s common shares. Sagaponack accomplished this by approaching a few other small Sagaponack shareholders and offering to buy their shares at market price after telling them that if they refused to sell, Sagaponack would simply buy shares on the open market and they would be left with nothing after Sagaponack pushed through the asset sale. Faced with this threat, the shareholders sold, Sagaponack acquired just over 50 percent of Ustman’s common, and the asset sale was approved.
  6. See, e.g., Thomas W. Briggs, Corporate Governance and the New Hedge Fund Activism: An Empirical Analysis, 32 J. CORP. L. (forthcoming 2007) (manuscript at 26) (describing activist campaign by hedge fund Deephaven against MCI in which Deephaven held both MCI bonds and MCI stock); Emily Thornton, Gluttons at the Gate, Bus. Wk., October 20, 2006, at 58, 64 (discussing how activist investor Tennenbaum Capital Partners held both equity and notes of Radnor Holdings and used its positions to influence corporate affairs).
  7. 422 N.E.2d 798 (Mass. App. Ct. 1981).
  8. 280 A.2d 717 (Del. 1971).
  9. See Weinberger v. UOP, Inc., 457 A.2d 701, 703 (Del. 1982) (discussing defenses as applied to controlling shareholder).

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