Lynn Stout has been in the forefront of those asking us to reexamine the role of shareowners. For decades, the possibility that minority shareholders in public firms might use their power in self-serving ways attracted little attention. However, she argues that until recently minority shareowners have been largely passive. When minority shareowners have become activists, most believe their primary goal was to improve the overall performance.
Stout has asked the we consider the fiduciary duty shareowners owe to each other. She points to the California Supreme Court case of Jones v. H.F. Ahmanson & Co. , which found:
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 . . . .
Stout advocates changes to the law to address this increased risk more overtly by applying corporate fiduciary duties to shareholders more broadly. (Fiduciary Duties for Activist Shareholders, Iman Anabtawi & Lynn Stout, Stanford Law Review, 4/10/2010)
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.
I haven’t seen much effort to put Stout’s theory to practical application until reading Parsing Corp Fin’s Comment Letters: A Withdrawn “Shareholder Responsibility” Proposal, TheCorporateCounsel.net/Blog, 4/12/2010.
Last year, North American Galvanizing & Coatings filed this preliminary proxy statement with an innovative (and problematic) proposal that would restate the company’s certificate of incorporation with a provision that sought to make large shareholders “liable” for the consequences of voting in favor a shareholder proposal (see Proposal 5 on page D-34). In other words, the restated charter would have essentially saddled 1% or greater shareholders with the same responsibility as directors.
As noted in the company’s response, this proposal was withdrawn from the proxy statement in response to this Corp Fin comment letter. As the comment letter notes, this proposal would have to overcome a heap of state and federal law issues – and likely would be subject to a heated legal challenge from activists.
Great to see Broc Romanek covering this important exchange or I would have missed it. Expect to see more action in this arena over the coming years. I hope this is one of the topics Stout will address in her forthcoming book, Cultivating Conscience: How Good Laws Make Good People.