Business 1

Problems of Control

Professor:

Name:

Date:

Introduction

In the running of organizations, there are a number of problems that emanate from the war for control over the affairs of an organization. Some of these include proxy fights, shareholder voting rights and control in closely held corporations. These wars of control could lead to serous lack of development in the companies that are being targeted. Whenever there are wars, there are very few people who are willing to work, and a lot more attention is given towards the fights instead of working. There is need to research about the wars that surround control over organization and clearly assess what these wars imply to organizations.

I- Proxy wars

A. Strategic use of Proxies:

Sometimes, shareholders may not find it worthwhile to attend annual general meetings since the amount of shares that they hold are not enough to make any meaningful difference by attending the meeting. As such, the shareholders, under the corporate law, are allowed to appoint proxies who go out to attend the annual general meetings and vote on the shareholder’s behalf. In such meetings, the outcomes is dependent mainly on the number of votes cast. As a result, the shareholder with the largest number of proxies carries the day. Proxy wars, are thus, a result of insurgent groups trying to oust an incumbent manger and replace him or her with one of their own (introduction, pg 528, ¶ 2).

Case:

Levin v. Metro-GoldwynMayer, Inc (1967):

In this case, two groups were fighting for control of the corporation, with each seeking to elect its director by actively soliciting for proxy cards. The plaintiffs complained that the defendants were actively committing the resources of the corporation to the hiring and maintenance of a team specifically meant to help solicit for funds to the buying off of the votes from the proxies. The plaintiffs sought to have the defendant stopped from soliciting proxies and pay a damages fee to the plaintiff. In as much as the plaintiffs seemed to provide evidence of wrong doings, the court found that there was no illegality with the manner in which soliciting was being carried out. As a result, the court did not fine the defendant or stop the process of soliciting (Levin, pg 535, ¶ 1).

Personal opinion

In my personal opinion, this ruling was not at all fair to the plaintiff since there seems to be evidence that the defendant was using the company resources to unfairly compete with the plaintiff. To be fair, the defendant should have been stopped from using the company resources, or be directed to also give the plaintiff access to those resources so that they can also use the same to solicit the proxy votes. This would ave mate the ground level for all.

B. Reimbursement of Costs

Case:

Rosenfeld v. FairChild Engine & Airplane Corp (1955):

In this case, the plaintiff seeks to convince the court to compel the two companies to refund an amount they were holding that they had been paid as compensation for their expenses during a proxy contest. However, the court dismissed this case. In as much as the plaintiff presented evidence to prove that the payment was made in an irregular manner, the court found that the directors hold the right to make reasonable and proper expenditure to solicit for support for policies that the directors think are in good faith of the organization. In addition, in such a case, the losers have the right to be compensated for the expenses incurred during the policy contest. However, some judges made an dissenting order, noting that the directors of the old board had used the money for personal purposes, and, therefore, were not entitled to reimbursement (Rosenfeld, pg 531, ¶ 4).

Personal opinion

In this case, the judgment made was a clear eye opener to help in the resolution of future cases. It is very important for directors to be able to differentiate between expenses made for personal purposes, and those made for the general welfare of the corporation. If a judgment is made for personal welfare, it is not in the best interest of the organization, and as sch, the directors are not liable to issue compensation. However, if the expenses are in line with the spending of the policy contest, the reimbursements can be made.

C. Private Actions for Proxy Rule Violations

Case:

J.I. Case Co. v. Borak (1964):

In this case, the respondent, a stockholder of the J.I. Case Company brought a case to challenge for formation of a merger between Case and the American Tractor Corporation. The respondent argues that the formation of the merger was affected due to the spreading of false information by the parties that were interested in the formation of the merger. The respondent argues that the parties interested in this merger spread false proxy statements that led to misleading decisions while making the merger. Although the initial court case did not issue an injunction against the formation of the merger, an appeal was lodged, seeking to have the proxies answer for allowing their names to be used during a meeting when the decision to make the merger was to be made (J.I. Case Co., pg 538, ¶ 4).

Personal opinion

The use of proxies is one of the the issues surrounded with controversy, and needs to be approached with keen attention. It is quite a relief to have the court agree to support the plaintiff since otherwise, this would encourage the unfair use of proxies to violate the law, and interests of the shareholders.

D. Shareholder Proposals

Case:

Trinity Wall Street v. Wal-Mart Stores, Inc (2015):

In this case, the plaintiff accuses the defendant of unfairness, in that the latter refused to add the shareholders of the former in its proxy materials for shareholder consideration. Previously, Wal-Mart had obtained what was known as a no-action letter from the staff at SEC stating that there would be no enforcement over the company if it choose to leave out the proposal form its proxy materials. However, Trinity Wall Street did not seem very pleased with this arrangement, and sought to ask the court to compel Wal-Mart to enjoin in the proposal (Trinity Wall Street, pg 554 ¶ 1).

Wal-Mart seems to refuse to sell the products that Trinity Wall Street sells, and the latter feels that this policy is unfair and oppressive. Despite refusing to sell the guns from Trinity Wall Street, Wal-Mart was still selling some other guns, and this seemed unfair to Trinity. However, in its ruling, the court found that the case put forward by Trinity was not strong enough to warrant Wal-Mart to be compelled to comply with the proposal brought forward by Trinity, and so the case was passed in favor of Wal-Mart (Trinity Wall Street, pg 565 ¶ 3).

Personal opinion

In my personal opinion, the ruling was fair, since Trinity seemed to be making unfair and selfish demands, aimed at bringing down Wal-Mart, just to promote its own interests. Wal-Mart had all the right to make the decision it made.

E. Shareholder Inspection Rights

Case:

Crane Co. V. Anaconda Co (1976):

In this case, the plaintiff was trying to compel the defendant to provide a list of shareholders for the purpose of soliciting the defendants stockholders. The defendant refused to comply, arguing that there was no basis for the request brought forward by Crane. The plaintiff sought to reach the defendant stockholders to dispel the false information issued by the defendant, but the defendant refused to comply. The defendant offered to issue all the prospectus from Crane to its stockholders at the expense of the plaintiff, but Crane rejected this offer. The court granted Crane permission to access the Anaconda stockholders list (Crane Co., pg 591, ¶ 1).

Personal opinion

In this case, the ruling made was right. It protected the interests of the shareholders against exploitation by managers who would not want their mismanagement to be communicated to all other stockholders.

II- Shareholder voting rights

Case:

Stroh v. Blackhawk Holding Corp (1971):

In this case, there was a complain raised over the denial of rights to managerial powers through control of the corporation involving rights of some shareholders. Here, there is contention over how much control shareholders have in an organization, and as such, how much control they are entitled to within an organization. As seen in this case, the court observed that the right to vote is supposed to be proportionate to the the number of shared owned, not the investment that a person has in a company. The court found that corporations have often come up with a scheme to lure shareholders to buy more shares, even if of lesser value in order to have access to more voting rights. If this does not affect the the working of the corporation and is meant to fulfill a valid purpose in the corporation, it is not a wrongdoing (Stroh, pg 604, ¶ 1).

Personal opinion

In my personal opinion, the ruling made in this case was fair enough. Sometimes, the people who feel the pinch of poor decision made in an organization are the ones who hold more shares in the organization, and not those who hold more expensive shares. As such, it is quite important to balance the equation by giving those who hold more shares, even if of lesser value, to have a right of access and control of the management of the organization.

III- Control in closely held corporations

Case:

Ringling Bros.-Barnum & Bailey Combines Shows v. Ringling (1947):

This case revolved around the election of directors of a corporation, and specifically in regards to the voting rights of two of the three stockholders present for the voting. In this case, two stockholder entered an agreement to regulate their voting rights and control over the corporation. The two stockholders agree than before casting a vote, they would consult among themselves in order to ensure that the vote entered was done in accordance to a mutual agreement between them. In the event that the two parties met for deliberations but failed to agree on a matter, then they would forward the case to a designated arbitrator who would help them to resolve the argument and reach an amicable solution. However, in the event that need arises, the two parties may decide to elect any other arbitrator to guide in the arbitration process. This agreement was to be viable for a period of ten years, unless terminated sooner by the parties involved (Ringling Bros.-Barnum & Bailey Combines Shows, pg 613, ¶ 1).

During voting, the parties seemed to differ with each other, and ended up electing officials who were marred with disputes. Going forward, there was a lot of commotion around the election of one of the members of the board. Upon examination of the case, the court found that indeed, the process of voting was illegal and irrevocable. The court found that Mrs. Haley’s votes were not legal and regular, and that they had to be redone (Ringling Bros.-Barnum & Bailey Combines Shows, pg 620, ¶ 1).

Personal opinion

The ruling made in this case was fair to all the parties. It was not right for Mr. Halley to vote Mrs. Haley’s stock. This was unfair to all other parties. As a result, the only way to correct this was either by postponing the election altogether, or nullifying the votes cast by Ms. Halley for his wife. This case represents one of the fairest rulings meant to draw a line between the use and abuse of stock holding and voting rights.

References:

Levin v. Metro-GoldwynMayer, Inc, 264 F. Supp.797 (S.D.Y.1967).

Rosenfeld v. FairChild Engine & Airplane Corp, 309 N.Y. 168, 128 N.E.2d (1955).

J.I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2D 423 (1964).

Trinity Wall Street v. Wal-Mart Stores, Inc, 792 F.3d 323 (3rd Cir.2015).

Crane Co. V. Anaconda Co, 39 N.Y.2d 14, 382 N.Y.S2d 207, 346 N.E.2d 507 (1976).

Stroh v. Blackhawk Holding Corp, 48 I11.2d 471, 272 N.E.2d 1 (1971).

Ringling Bros.-Barnum & Bailey Combines Shows v. Ringling, 29 Del.ch. 610, 53 A.2d 441 (De1.Sup. Ct. 1947).