California Corporations Code 2013
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Generally speaking, and especially under Delaware law, this remains difficult. Shareholders often have no rights to call meetings unless the constitution allows,  and in any case the conduct of meetings is often controlled by directors under a corporation's by-laws.
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However, under SEC Rule 14a-8, shareholders have a right to put forward proposals, but on a limited number of topics and not director elections. On a number of issues that are seen as very significant, or where directors have incurable conflicts of interest, many states and federal legislation give shareholders specific rights to veto or approve business decisions. Generally state laws give the right for shareholders to vote on decision by the corporation to sell off "all or substantially all assets" of the corporation. This provision, however, simply introduced a non-binding vote for shareholders, though better rights can always be introduced in the articles of incorporation.
While some institutional shareholders , particularly pension funds , have been active in using shareholder rights, asset managers regulated by the Investment Advisers Act of have tended to be mute in opposing corporate boards, as they are often themselves disconnected from the people whose money they are voting upon.
Most state corporate laws require shareholders have governance rights against boards of directors , but fewer states guarantee governance rights to the real investors of capital. Currently investment managers control most voting rights in the economy using " other people's money ". Pensions are most important kind, but can be organized through different legal forms. Investment managers, who are subject to the Employee Retirement Income Security Act of , are then often delegated the task of investment management. Over time, investment managers have also vote on corporate shares, assisted by a "proxy advice" firm such as ISS or Glass Lewis.
The largest form of retirement fund has become the k defined contribution scheme.
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By contrast, larger and collective pension funds, many still defined benefit schemes such as CalPERS or TIAA , organize to take voting in house, or to instruct their investment managers. Two main types of pension fund to do this are labor union organized Taft-Hartley plans ,  and state public pension plans. A major example of a mixture is TIAA , established on the initiative of Andrew Carnegie in , which requires participants to have voting rights for the plan trustees. Department of Labor. State public pensions are often larger, and have greater bargaining power to use on their members' behalf.
State pension schemes usually disclose the way trustees are selected. In , on average more than a third of trustees were elected by employees or beneficiaries. However, only pension funds of sufficient size have acted to replace investment manager voting. No federal law requires voting rights for employees in pension funds, despite several proposals. While investment managers tend to exercise most voting rights in corporations, bought with pension, life insurance and mutual fund money, employees also exercise voice through collective bargaining rules in labor law.
A majority of countries in the Organisation for Economic Co-operation and Development have laws requiring direct participation rights. Corporations are chartered under state law, the larger mostly in Delaware , but leave investors free to organize voting rights and board representation as they choose. From the s employees and unions sought representation on company boards. This could happen through collective agreements , as it historically occurred in Germany or other countries, or through employees demanding further representation through employee stock ownership plans , but they aimed for voice independent from capital risks that could not be diversified.
Corporations included where workers attempted to secure board represented included United Airlines , the General Tire and Rubber Company , and the Providence and Worcester Railroad. Workers had been enticed to invest an average of This meant, employees lost a majority of pension savings. Empirical research suggests by there were at least 35 major employee representation plans with worker directors , though often linked to corporate stock.
While corporate constitutions typically set out the balance of power between directors, shareholders, employees and other stakeholders, additional duties are owed by members of the board to the corporation as a whole. First, rules can restrain or empower the directors in whose favor they exercise their discretion. While older corporate law judgments suggested directors had to promote " shareholder value ", most modern state laws empower directors to exercise their own " business judgment " in the way they balance the claims of shareholders, employees, and other stakeholders.
Second, all state laws follow the historical pattern of fiduciary duties to require that directors avoid conflicts of interest between their own pursuit of profit, and the interests of the corporation. The exact standard, however, may be more or less strict. Third, many states require some kind of basic duty of care in performance of a director's tasks, just as minimum standards of care apply in any contract for services.
However, Delaware has increasingly abandoned substantive objective duties, as it reinterpreted the content of the duty of care, allows liability waivers. Most corporate laws empower directors, as part of their management functions, to determine which strategies will promote a corporation's success in the interests of all stakeholders. Directors will periodically decide whether and how much of a corporation's revenue should be shared among directors' own pay, the pay for employees e. Most states have enacted " constituency statutes ",  which state expressly that directors are empowered to balance the interests of all stakeholders in the way that their conscience, or good faith decisions would dictate.
This discretion typically applies when making a decision about the distribution of corporate resources among different groups, or in whether to defend against a takeover bid. For example, in Shlensky v Wrigley  the president of the Chicago Cubs baseball team was sued by stockholders for allegedly failing to pursue the objective of shareholder profit maximization.
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The president had decided the corporation would not install flood lights over the baseball ground that would have allowed games could take place at night, because he wished to ensure baseball games were accessible for families, before children's bed time. The Illinois court held that this decision was sound because even though it could have made more money, the director was entitled to regard the interests of the community as more important.
Following a similar logic in AP Smith Manufacturing Co v Barlow a New Jersey court held that the directors were entitled to make a charitable donation to Princeton University on the basis because there was "no suggestion that it was made indiscriminately or to a pet charity of the corporate directors in furtherance of personal rather than corporate ends.
Delaware's law has also followed the same general logic, even though it has no specific constituency or stakeholder statute.
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Judicial support for this aim is typically found in a case from Michigan in , called Dodge v Ford Motor Company. A group of shareholders sued, and the Michigan Supreme Court said in an obiter dictum that a "business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. In practice, many corporations do operate for the benefit of shareholders, but this is less because of duties, and more because shareholders typically exercise a monopoly on the control rights over electing the board.
This assumes, however, that directors do not merely use their office to further their own personal goals over the interests of shareholders, employees, and other stakeholders. Since the earliest corporations were formed, courts have imposed minimum standards to prevent directors using their office to pursue their own interests over the interests of the corporation. Directors can have no conflict of interest. In trusts law , this core fiduciary duty was formulated after the collapse of the South Sea Company in in the United Kingdom. Keech v Sandford held that people in fiduciary positions had to avoid any possibility of a conflict of interest, and this rule "should be strictly pursued".
The standards applicable to directors, however, began to depart significantly from traditional principles of equity that required "no possibility" of conflict regarding corporate opportunities , and "no inquiry" into the actual terms of transactions if tainted by self-dealing. However, although the duty was breached, the Delaware Supreme Court held that the court will look at the particular circumstances, and will not regard a conflict as existing if the company it lacked finances to take the opportunity, if it is not in the same line of business, or did not have an "interest or reasonable expectancy".
CIS Inc was then taken over, and the new owners pushed for the claim to be brought. The Delaware Supreme Court held that because CIS Inc had not been financially capable at the time to buy licenses, and so there was no actual conflict of interest. Corporate officers and directors may pursue business transactions that benefit themselves as long as they can prove the transaction, although self-interested, was nevertheless intrinsically "fair" to the corporation.
The duty of care that is owed by all people performing services for others is, in principle, also applicable to directors of corporations. Generally speaking, the duty of care requires an objective standard of diligence and skill when people perform services, which could be expected from a reasonable person in a similar position e. In a decision of the English Court of Chancery , The Charitable Corporation v Sutton ,  the directors of the Charitable Corporation , which gave out small loans to the needy, were held liable for failing to keep procedures in place that would have prevented three officers defrauding the corporation of a vast sum of money.
California Corporations Code (Corp. Code) – Page 16 – Epsten Grinnell & Howell
Lord Hardwicke , noting that a director's office was of a "mixed nature", partly "of the nature of a public office" and partly like "agents" employed in "trust", held that the directors were liable. Though they were not to be judged with hindsight , Lord Hardwicke said he could "never determine that frauds of this kind are out of the reach of courts of law or equity, for an intolerable grievance would follow from such a determination. The Court held that to be a protected business judgment, "the directors of a corporation [must have] acted on an informed basis , in good faith and in the honest belief that the action taken was in the best interests of the company.
The decision triggered a panic among corporate boards which believed they would be exposed to massive liability, and insurance firms who feared rising costs of providing directors and officers liability insurance to corporate boards. This allowed corporations to give directors immunity from liability for breach of the duty of care in their charter. However, for those corporations which did not introduce liability waivers, the courts subsequently proceeded to reduce the duty of care outright. Derivative Litigation  required "an utter failure to attempt to assure a reasonable information and reporting system exists", and in In re Walt Disney Derivative Litigation  went further.
Chancellor Chandler held directors could only be liable for showing "reckless indifference to or a deliberate disregard of the whole body of stockholders" through actions that are "without the bounds of reason". Although there had been several indications of the significant risks, and Citigroup's practices along with its competitors were argued to have contributed to crashing the international economy, Chancellor Chandler held that "plaintiffs would ultimately have to prove bad faith conduct by the director defendants".
This suggested that Delaware law had effectively negated any substantive duty of care.
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This suggested that corporate directors were exempt from duties that any other professional performing services would owe. It remained unclear, with a change in the Chief Justice of the Delaware Supreme Court in , whether this position would remain. Because directors owe their duties to the corporation and not, as a general rule, to specific shareholders or stakeholders, the right to sue for breaches of directors duty rests by default with the corporation itself. The corporation is necessarily party to the suit.
Often, cases arise such as in Broz v Cellular Information Systems Inc  where an action is brought against a director because the corporation has been taken over and a new, non-friendly board is in place, or because the board has been replaced after bankruptcy. Otherwise, there is a possibility of a conflict of interest because directors will be reluctant to sue their colleagues, particularly when they develop personal ties.
The law has sought to define further cases where groups other than directors can sue for breaches of duty. First, many jurisdictions outside the US allow a specific percentage of shareholders to bring a claim as of right e. Second, some jurisdictions give standing to sue to non-shareholder groups, particularly creditors, whose collective action problems are less.
The risk of allowing individual shareholders to bring derivative suits is usually thought to be that it could encourage costly, distracting litigation, or " strike suits "  — or simply that litigation even if the director is guilty of a breach of duty could be seen as counterproductive by a majority of shareholders or stakeholders who have no conflicts of interest. Accordingly, it is generally thought that oversight by the court is justified to ensure derivative suits match the corporation's interests as a whole because courts may be more independent.
However, especially from the s some states, and especially Delaware, began also to require that the board have a role. Most common law jurisdictions have abandoned role for the board in derivative claims,  and in most US states before the s, the board's role was no more than a formality. In the procedure to bring a derivative suit, the first step is often that the shareholder had to make a "demand" on the board to bring a claim. For example, in Aronson v Lewis  a shareholder of the Meyers Parking System Inc claimed that the board had improperly wasted corporate assets by giving its year-old director, Mr Fink, a large salary and bonus for consultancy work even though the contract did not require performance of any work.