Business Organizations

21 July

• § § 216, 242, 141: default rules for voting require a majority, but you can make a supermajority requirement in the charter or bylaws. Note that bylaws can be amended by majority (unless specified otherwise). You can make the quorum a supermajority requirement, or directors' votes.
• Mason Capital v. Kaman
  Note that Kaman corp != Kaman family. That's a confusing aspect of the decision.

  We've got the following:

  • B Voting shares: 82% Kaman Family, 8.33% Mason; total is 667,814 shares
  • A non-voting: 22,383,368 shares total; Mason owns 3,000
  The proposed exchanged rate for b-to-a is 1:1.95 or 1:1 + $14.76

  The 5% rule: they don't want to change the total number of outstanding shares by more than 5% lest it be mistaken for a "business combination." If it's a business combination, a 2/3 majority of disinterested voting shareholders is required. Otherwise, it's just a majority of each class.

  They're relinquishing majority control, but they guard against takeover by proposing to stagger the board, require cause for removal, and require a supermajority for amendment of the charter or bylaws. To pass those provisions, a majority of Class B is required.

  There's a provision allowing a third party to block the recapitalization by offering more than $46,62. Mason tries this, by offering $55/share. Kamen re-titles the the thing as a "substitute recapitalization" and offers $55.65. But they don't have that kind of money (b-to-a is now 1:3.58 or 1:1.84 + $27.10), so they'll have to take on debt. Basically, in order to avoid the 5% rule, they'll need to go with the lower ratio plus cash, but they don't have the cash to pay the Kamen family so they need a loan.

  So the vote happens with a simple majority: the Bs pass it, and the As do as well, so the shareholders must have thought it was a good idea.

  The supermajority requirement for business combinations is there to protect the minority interest from a buyer who purchases control at a slight premium and then buys out the minorities at a reduced price; or even refuses to do so (i.e., only the first sellers make a profit).

• Problem 6-3: what did the board of directors do wrong? They didn't amend all of the bylaws.
• Pre-emptive rights. These are no longer the default, but "anti-dilution" protections used to be commonplace.

  Sometimes it's desirable to go find additional shareholders with deeper pockets, and you want to be able to attract them by offering larger shares in the company. Preemptive rights limit a corporation's ability to do this.

  Sometimes just one investor will negotiate for preemptive rights.

• Kimberlin v. Ciena
  So Kimberlin apparently just doesn't read the agreement very carefully, and the court (Sotomayor) holds him to it.

  In the absence of a preemption agreement, the board is free to decide to whom to issue the shares.

• § § 275, 281: dissolution is pretty much how you'd expect-- payment of shareholders.
• Conklin v. Perdue
  A very strange pattern of facts.

  But note that no petition for dissolution was filed, but the court decides it can dissolve it anyway. Retroactively.

• Red Hat case study. Before they go public, the founders are analogous to common shareholders, and the investors have a preferred interest. So they'd get something like dividends, etc., before the others (e.g. a 6% annual ROI). And likewise, at liquidation, they get theirs first. Preferred shareholders sometimes get extra voting rights as well.

  Let's assume that the founders and the investors each have 3 board members, and there are 3 more elected by all the shareholders.

  • Expanding Red Hat's offerings: the board of directors
  • Merging with Microsoft: 2/3 majority of all shareholders
  • Selling shares by the venture capitalists: absent contractual provisions to the contrary, the VCs can do this
  • Converting preferred stock into common stock: shareholders, because it's recapitalization; here it's mandatory if they go public
  • Paying dividends: the board by default, but here they have to be sure to take care of the preferred investors first
  • Expanding the board: depends on whether it's in the bylaws (directors) or charter (shareholders)
  • Replacing a director: the shareholders
  • Replacing an officer: the directors
  • Increasing an officer's salary: the board
  If they want to get rid of the VCs, you'll have to buy out their shares. They don't have the right to force a buyout, unless there's a call provision.

  When do VCs want to redeem their shares? When they lose confidence in the company. The company probably can't buy the shares then, though.

  When would VCs not exercise right of first refusal? When they don't have money. They would exercise if they thought it was a good opportunity and wanted to maintain their ownership interest.

• The Red Hat Case Study is helpful for the exam.