Archive for the ‘Corporate Governance’ Category

Technological Change and Software for Boards of Directors

Saturday, August 30th, 2008

What is amazing about technological change is how quick it is in today’s world.  It seems as if the rate of change in human history can be compared to a snowball that grows bigger and bigger and rolls faster and faster down a hill as time marches on.

Only 25 years ago, printed material permeated our lives.  Today, electronic data has largely complemented or supplanted the print medium for many routine processes.  New software applications seek out niches to exploit like water seeping through the earth to fill all the cracks in a rock.

One niche in which electronic means are taking hold is in software for Boards of Directors.  New software for corporate governance allows for worldwide, instantaneous, 24/7 access via easy-to-use interfaces.  It means that printed materials don’t have to be dragged around or distributed.  Confidentiality and security are enhanced.

State corporate law statutes regarding Board meetings have evolved to reflect this technological change by allowing for meetings by remote communication and remote participation (See, e.g., Massachusetts Bus. Corp. Law ch. 156D, § 8.20).

Companies that offer software or online applications for Boards of Directors include BoardVantage (Director Suite) and Diligent (Boardbooks).  Collaborative content management software, such as that produced by EMC (Documentum eRoom.net), also could be used, although it is not specifically designed for corporate governance.

The Legal Underpinnings of Annual Meetings

Thursday, July 24th, 2008

A corporation in the United States is a legal entity that typically is formed to conduct business.  Its internal affairs are governed by the law of the state in which it is incorporated.  That means that under state law, a company’s shareholders must annually elect directors and transact other business that may be appropriate at the time.  This may be done at an annual meeting.  However, it is not only state corporate law that governs annual meetings.

The corporation’s organizational documents – the articles of incorporation (AKA certificate of incorporation) and by-laws – also control annual meetings.  For example, they may allow action to be taken without a meeting, upon the written consent of the shareholders.  Organizational documents provide the skeleton of the annual meeting, in that that may provide for the meeting time, date and place (or the way to determine the meeting time, date and place), setting the record date to determine the shareholders who will be eligible to vote and the voting rights of various classes of securities if there is more than one class.

Corporations with securities registered on a national securities exchange also must comply (unless they are exempted securities) with proxy rules, the rules and regulations enacted by the Securities and Exchange Commission (SEC) under Section 14 of the Securities Exchange Act.  Broadly stated, a proxy is a consent or authorization to act for another.  Regarding an annual meeting, the SEC’s proxy rules govern the form of the proxy and the form of the annual report provided to shareholders, regulate the information to be presented in the proxy statement, address the procedures pursuant to which shareholders receive the proxy and annual report before a meeting, and also mandate certain filing requirements.

Finally, national stock exchanges  (e.g., the New York Stock Exchange) have listing requirements which include rules addressing annual meetings.  Corporations with securities listed on a national stock exchange must comply with such rules.

Securities Offerings on the Internet

Wednesday, March 19th, 2008

In the 1990s, my colleague, Lou Turilli,* and I wrote an article for The National Law Journal about how the Internet might shape securities offerings. I followed that up with an article for Wall Street Lawyer, Securities Offerings Online By Small, Nonpublic Businesses. It specifically focused on whether small companies could viably offer and sell securities on their own via the Internet. I concluded that, “Clearly, selling securities online is a viable concept. Yet until fundamental issues such as the problem of gaining visibility, the lack of secondary markets, the arbitrary pricing and the disinterest of established investment bankers each are addressed, the opportunity for small businesses to raise capital in cyberspace will hold great promise as an idea, but be of limited practicality in the real world.”

I don’t think that my conclusion has changed. Distribution and pricing remain key obstacles for companies that want to promote their own online offerings. Marketing the securities is still a serious issue, and there are credibility concerns for the companies as well. Thus, serious companies will continue to pursue the traditional route.

* Lou and I practiced law together at Day, Berry & Howard. She recently was Vice President and General Counsel of Ryerson.

Directors and Officers Liability Insurance

Wednesday, February 6th, 2008

Directors and Officers Liability Insurance, commonly referred to as “D&O insurance,” covers damages and defense costs if a company’s officers and/or directors are sued for wrongful acts that may have occurred while they were performing their corporate duties. It is payable to the corporation or the directors or officers themselves.

Wrongful acts may include errors, omissions, misstatements or misleading statements, breach of duty to the corporation or neglect. Plaintiffs may include just about anyone: shareholders, vendors, creditors, regulators, competitors, and employees.

D&O insurance used to only be available to larger, established corporations. In recent years, however, even small, private companies have been able to purchase D&O insurance. CarpenterMoore, a Nasdaq company, provides D&O liability insurance among its products.

Voting Trust Agreements and Effecting Corporate Action

Saturday, February 2nd, 2008

If you want to cause a corporation do something on the corporate level if a particular event occurs, there are a variety of avenues you can pursue. Here are some options:

* Put a provision in the corporation’s charter (AKA Article of Organization or Articles of Incorporation). However, this is inflexible and costs money. If you want to change the provision, it’s a hassle. Plus, it’s a public document, so all the world knows what you’re doing.

* Create a Shareholders’ Agreement. The agreement among shareholders would recite all the reasons for the behavior, but there’s no guarantee that the behavior will occur, so it’s much riskier. A shareholder agreement gives the right to demand action, but can’t force the action. Only a lawsuit can do that.

* Change the corporation’s Bylaws to require the change. This doesn’t cost anything and it’s not public. That said, it ties the hands of the directors. If the event is conditional, then you also would have a side agreement among the shareholders to require the event to occur if the condition occurred. However, there’s an argument that this restricts the directors’ ability to manage the corporation unless all the directors are parties to the side agreement.

* Create a Voting Trust Agreement. A voting trust transfers the legal title to the stock and its voting rights to a trustee for a certain period of time. It affects only those shareholders who are party to the agreement. It provides flexibility and privacy and is fairly inexpensive.

Like any legal document, a voting trust agreement is a creature of the particular jurisdiction to which it is subject. The voting trust must be acknowledged by the corporation and its shareholders. Further, it’s a good idea for the trustee and alternate trustee to acknowledge it also.

A Conditional Voting Trust Agreement is a voting trust agreement that has no affect unless a particular event occurs. In that case, the trustee will step in with control of all shares to guarantee the results. Essentially, the trustee is an enforcer. It’s a good idea to avoid requiring the trustee to have physical possession of the shares in any voting trust agreement, as that could delay the trustee’s actions.