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American Bar Association

ABA Section of Business Law

ABA Section of Business Law
Business Law Today
January/February 1999

Conduct unbecoming a stockholder?

Only a few cases guide the governance of directors' and stockholders' meetings

By ERIC G. ORLINSKY Don't Miss . . .

Orlinsky practices corporate and securities law with the Baltimore office of Saul, Ewing, Remick & Saul, LLP and is the chair of a subcommittee of the Corporate Governance Committee of the Business Law Section that deals with issues surrounding the conduct of directors' and stockholders' meetings. The views expressed in this article are those of the author and do not necessarily reflect the views of his firm, the ABA or the BLS subcommittee mentioned above.

In the early '90s, as a publicly held Baltimore bank (Bank) prepared for its annual stockholders' meeting, a well-organized group of dissidents led by a prominent Baltimore businessman appeared poised to gain control of the Bank from existing management.

With the economy in recession and the Bank losing money, the Bank's president, who was also responsible for chairing its stockholders' meetings, was expected to bear the brunt of stockholder discontent. As the meeting progressed, the president, on the defensive and fighting for his professional life, used the powers of the chair unfairly to silence the voices of the dissident stockholders and thwart the will of the majority in order to keep existing management in control. Only after a lengthy and expensive court battle did the dissidents prevail.

In Pennsylvania, in the mid '90s, family discord at a public, but mostly family held, food company (Food Co.) boiled over at its directors' and stockholders' meetings. The "stockholder" family members attempted to have the president and chairman of the board, another family member, contractually agree in advance as to how he would vote on certain issues at directors' meetings. Directors opposed corporate decisions only because they were proposed by the "management" side of the family and not the "stockholder" side or vice versa. One "stockholder" family member attempted to usurp control over the conduct of the directors' meetings from his brother, the chairman of the board.

"Stockholder"-elected directors openly chastised Food Co. executives at a directors' meeting. Heated exchanges often occurred and valuable company time was often wasted arguing over procedural matters, such as whether the corporation's lawyer should be permitted to be present at the board meetings and whether a director needed a second to a motion before the board could vote on or discuss a matter. Often nothing was accomplished.

Ultimately, the "management" family members removed the "stockholder" family members from the board at a particularly bitter and contentious stockholders' meeting.

Recently, a large public railroad (Railroad) had difficulty controlling a stockholder who was intent on disrupting the conduct of the Railroad's stockholders meetings and forcing the Railroad to spend a disproportionate amount of meeting time discussing his own agenda. By doing so, that stockholder unfairly monopolized the Railroad's time and delayed the consideration of more pressing issues. The stockholder even created a Web site to spread rumors about the Railroad and gossip about its management.

These difficult or hostile corporate meeting situations, and many others like them across the country, frequently raise questions with few answers in corporate governance practice. Although occasional cases deal with the conduct of directors' and stockholders' meetings, there are rarely statutes addressing procedural aspects of corporate meetings.

So what are some frequently asked corporate-governance questions?


The absence of a workable set of guidelines or principles by which to conduct stockholders' meetings is currently the subject of a Business Law Section project. This project might help to settle many of the issues raised in this article. The Subcommittee on the Conduct of Directors' and Stockholders' Meetings was formed in April of 1997 as a subcommittee of the Corporate Governance Committee of the Business Law Section.

The principal mission of the subcommittee is to draft guidelines for the conduct of stockholders' meetings that are specifically tailored to deal with the unique nature of stockholders' meetings, yet are simple enough that they could be universally understood by stockholders, two things Roberts' Rules do not accomplish.

This subcommittee hopes to provide the collective wisdom of lawyers who frequently deal with issues surrounding the conduct of directors' and stockholders' meetings to answer many frequently asked corporate governance questions.

The subcommittee envisions that the proposed guidelines will fill an existing void in corporate governance and serve as a useful tool for corporations and lawyers in conducting stockholders' meetings. It is the subcommittee's hope that the guidelines will ultimately serve to prevent litigation over the conduct of such meetings, particularly meetings at which there are two or more hostile factions.

The subcommittee has completed a draft of the Guidelines, which has been delivered to the Corporate Governance Committee for review and comment. It is anticipated, if approved by the committee and the Section, that these Guidelines will be published by the Section.

Members of the Business Law Section who are interested in seeing copies of the draft guidelines can obtain them by writing to Eric Orlinsky c/o Saul, Ewing, Remick & Saul, LLP, 100 South Charles Street, Baltimore, MD, 21201. The subcommittee welcomes additional members or comments on the draft guidelines. Any membership interest or comments should also be directed to the above address.

— Eric G. Orlinsky

1. What rules or guidelines should govern the conduct of directors at directors' meetings or stockholders at stockholders' meetings?

In the Bank situation, having a standard set of rules to govern the conduct of stockholders meetings, which were adopted in advance and were uniformly applied from meeting to meeting, might have helped to ensure a fair meeting and may have avoided litigation. No set of uniform rules, however, exists today.

Commentators uniformly explain that rules of parliamentary procedure, such as Roberts' Rules of Order, should not govern the conduct of stockholders' and directors' meetings. These commentators, however, suggest no alternative. Instead, the only direction they give is that the chair is obligated to conduct stockholders' meetings in a manner that is fair to the stockholders. See, for example, Young v. Jebbett, 211 N.Y.S. 61 (N.Y. Sup. Ct. 1925).

Roberts' Rules are viewed as inappropriate for several reasons. First, Roberts' and other rules of parliamentary procedure are so complicated that a typical stockholder is unlikely to understand, or become well versed in, their operation. Second, in order to run stockholders' meetings properly with parliamentary rules, corporations would be required to hire parliamentarians.

Finally, and most important, Roberts' Rules were designed for deliberative assemblies in which each member has an equal vote. As a consequence, Roberts' Rules are not well suited to stockholders' meetings where each person's opinion or vote has a different weight depending on the number of shares that person owns. Moreover, Roberts' Rules are especially not well suited to situations in which management has already solicited proxies sufficient to control the outcome of all decisions being made at the meeting.

2. Can directors contractually agree in advance of a board meeting how to vote on a particular matter?

Although the family members in the Food Co. situation believed that a contractual arrangement on board voting would solve many family issues, lawyers and commentators generally conclude that it is a breach of a director's fiduciary duty to agree in advance of a meeting how that director will vote on a certain issue. There appear to be no cases on this issue.

There is, however, ample support for the proposition that each director owes a fiduciary duty to the corporation, and that that duty includes the obligation to make a fully informed decision. Thus, each director must vote on corporate decisions based on the facts and circumstances as they exist at the time the decision is made. While a director may believe that a particular decision is in the best interests of the corporation at the time he or she enters into an agreement, the facts or circumstances on which that director's judgment is based may change between the time of the agreement and the time the director is called on to vote on the matter.

3. Can directors vote by proxy?

Like contractual ageements on voting, there appears to be no case law on this issue. This question is, however, one of the few on which there appears to be a consensus. Commentators and lawyers generally agree that directors should not be permitted to vote by proxy. See 1 R. Franklin Balotti and Jesse A. Finkelstein, The Delaware Law of Corporations and Business Organizations, 4.2 E (1997 Supp.); James J. Hanks Jr., Maryland Corporation Law, 6.12 (1994-1 Supp.). Directors' proxies are presumed to be invalid and should not be accepted.

Again, each director has an obligation to make a fully informed decision. Consequently, a director cannot delegate his or her voting power, even to another director, and adequately fulfill that duty. Each director must be present at the meeting to hear and consider management presentations and the views of the other directors.

4. Does a director have a right to have his or her lawyer or the corporation's lawyer present at a directors' meeting?

Another issue hotly fought over in the Food Co. situation was the attendance of lawyers at directors' meetings. This is among the few propositions for which there is some, albeit scant, case law. At least one court has stated that the general rule is that directors are entitled, absent unique or extreme circumstances, to have counsel present at board meetings. See Salama - Dindings Plantations Ltd. v. Durham, 216 F. Supp. 104, 115 (S.D. Ohio 1963). Ironically, under the somewhat unique circumstances of Salama - Dindings, a bylaw provision restricting lawyers from attending was upheld. At least one commentator, however, has suggested that the chair or the directors as a group may exclude others from attending, and that this extends to the personal lawyers of the directors. R. Franklin Balotti and Jesse A. Finkelstein, The Delaware Law of Corporations and Business Organizations, 4.2 (1997 Supp.).

5. Does a stockholder have the right to have his or her lawyer present at a stockholders' meeting? Does the chair of the stockholders' meeting have the right to have corporate counsel present at the stockholders' meeting?

Contrary to the Salama - Dindings case, it is generally accepted by lawyers and commentators that only stockholders and their proxies are permitted to attend stockholders' meetings. It is also generally accepted that this rule may be altered by the establishment of a different rule, in each case, in advance of the meeting by the board of directors or the chair, or by a vote of the stockholders at the meeting. Unlike directors' meetings, this question rarely presents practical problems because the stockholder can give his or her lawyer a proxy for one or more shares. Thus, the lawyer, by virtue of being a proxy holder, is assured of being permitted to attend the meeting.

Interestingly, the general practice is for corporations to have corporate counsel present at stockholders' meetings to advise the chair as to the legality of certain issues raised and the conduct of the meeting. While there is no theoretical distinction between counsel to the corporation and counsel to a particular stockholder, counsel to the corporation is not typically given a proxy to assure his or her attendance or otherwise required to qualify as a permitted attendee. Rather, it seems blindly accepted that corporate counsel be permitted to attend. There are apparently no cases in which this practice has ever been challenged.

6. Is a second required to a motion at a directors' meeting or at a stockholders' meeting? Is a second required at a stockholders' meeting if the stockholder making the motion has the right to vote 51 percent of the shares?

Two more issues raised in the Food Co. situation were (i) whether seconds were required at a directors' meeting and (ii) whether the president and chairman of the board, who controlled 51 percent of the voting common stock was required to obtain a second for the motions he proposed at the stockholders' meetings (in many cases he was the only one who supported these motions).

The second is a mechanism developed by parliamentarians to ensure that more than one member of a large group is interested in considering a matter before the entire group is required to consider it. The second is, therefore, an efficiency or time-saving mechanism. Parliamentary procedure is, however, not applicable to and should not be used for directors' and stockholders' meetings. Nonetheless, many lawyers and participants in stockholders' meetings continue to require and obtain seconds to motions. This practice, which has carried over from our common experience with attending other types of meetings at which parliamentary procedure may have been applicable, is, however, not appropriate for directors' or stockholders' meetings.

Even assuming, for argument's sake, that seconds were required at a particular stockholders' meeting, perhaps because they are specifically required by a rule adopted by the stockholders, a 51 percent stockholder should not be required to obtain a second. In this case, the purpose of the second is not served and requiring a second might prevent a matter that is certain to be approved from being considered. Lawyers have circumvented the requirement of obtaining a second by having a significant stockholder who desires to propose action give a proxy for one or more shares to another individual for the purpose of ensuring that a second will be obtained.

7. What is proper decorum at a directors' or stockholders' meeting? How can it be enforced? Can an unruly director or stockholder ever be removed from a meeting? If a director is removed, what is the effect of corporate action taken after his or her removal?

Decorum at directors' meetings, an issue also raised by the Food Co. scenario, is rarely the subject of discussion. Directors should, however, act professionally and civilly; demonstrate respect for one another, even if they disagree; permit differing views to be heard without interruption; and strive to create an atmosphere of logical discussion as opposed to emotional shouting.

Decorum at stockholders' meetings, on the other hand, an issue raised by the situation that Railroad has experienced in recent years, is often the subject of commentary and specific rules are regularly adopted for stockholders' meetings. Like directors, stockholders should treat each other with respect and should permit others to express differing views without interruption. Rules adopted for stockholders' meetings typically foster these goals by providing, for example, how a stockholder is recognized by the chair, that only one stockholder may speak at a time, and the length of time stockholders are permitted to speak.

There appear to be no cases or commentary dealing with the removal of an unruly director from a directors' meeting. The removal of a director by the other board members is probably not permissible because it is more important to provide even an unruly director with an opportunity to exercise his or her fiduciary duty. Actions taken by the directors after the removal of a director, even assuming a quorum is still present, are therefore invalid.

Directors faced with an unruly fellow board member have only one remedy: to have the unruly director removed from the board by the stockholders. Corporations have, on the other hand, developed fairly uniform procedures for removing unruly or disruptive stockholders from stockholders' meetings. Nearly all stockholders' meeting scripts provide elaborate procedures for the chair to remove an unruly or disruptive stockholder should it become necessary.

The absence of a workable set of guidelines or principles by which to conduct stockholders' meetings is currently the subject of a Business Law Section project being undertaken by the Subcommittee on the Conduct of Directors' and Stockholders'. (See sidebar regarding the Business Law Section subcommittee.) Interestingly, the research performed by the subcommittee in connection with the preparation of these guidelines revealed several cases scattered across the country with holdings on corporate governance issues contrary to generally established stockholder meeting practice.

For example, several cases have held, in the absence of a contrary charter or bylaw provision, that the chair of a stockholders meeting has "merely ministerial powers." See American Aberdeen-Angus Breeders' Ass'n v. Fullerton, 156 N.E. 314 (Ill. 1927); Commonwealth v. Vandegrift, 81 A. 153, 156 (Pa. 1911). Modern practice, on the other hand, accords much more than "ministerial" authority to the chair. See Model Business Corporations Act § 7.08; Sitka v. Firestone Tire & Rubber Co., 746 F.2d 1479 (6th Cir. 1984); London v. Archer-Daniels-Midland Co., No. 14638, 1996 Del. Ch. LEXIS 12 (Del. Ch. 1996).

Other courts have upheld actions by a chair constituting the exercise of greater than "ministerial" authority. Alliance Co-op. Ins. Co. v. Gatschke, 142 P. 882 (Kan. 1914) (Chair has right to determine legality of motion); Sitka v. Firestone Tire & Rubber Co., 746 F.2d 1479 (6th Cir. 1984) (Chair has power to eject stockholder who refused to conform to rules established by the chair).

Likewise, contrary to generally perceived practice, the decisional authority is that the chair, except in an emergency, is without the power to adjourn a stockholders' meeting. Instead, this power belongs to the stockholders. See Chicago Macaroni Mfg. Co. v. Boggiano, 67 N.E. 17 (Ill. 1903); State ex. rel. Ryan v. Cronan, 49 P. 41 (Nev. 1897); Penn-Texas Corp. v. Niles-Bement-Pond Co., 112 A.2d 302, 307 (N.J. 1955); In re Petition of Dollinger Corp., 274 N.Y.S.2d 285, 288 (N.Y. Sup. Ct. 1966); State ex rel. Price v. DuBrul, 126 N.E. 87, 90 (Ohio 1919); Sagness v. Farmers Co-op Creamery Co., 293 N.W. 365 (S.D. 1940).

There are also differences among states on many issues relating to the conduct of stockholders' meetings. For example, in Illinois and Pennsylvania, the decisional law is generally to the effect that in the absence of a charter or bylaw provision designating the chair, the stockholders have the right to elect the chair. See American Aberdeen-Angus Breeders' Ass'n v. Fullerton, 156 N.E. 314 (Ill. 1927); Commonwealth v. Vandegrift, 81 A. 153 (Pa. 1911). In Nevada and Texas, stockholders may elect a chair if the person designated in the bylaws refuses or fails to act. See State ex rel. Ryan v. Cronan, 49 P. 41 (Nev. 1897); ITC Cellular Inc. v. Morris, 909 S.W.2d 182 (Tex. Ct. App. 1995).

In Delaware, on the other hand, the stockholders' ability to elect a chair may depend on the exact wording of the provisions of the bylaws, if any exist, and stockholders may only have the ability to replace the chair if the bylaws recognize some residual authority of the stockholders to do so. See Duffy v. Loft Inc., 152 A. 849 (Del. 1930).

In New York, there is some authority for the proposition that the directors have the right to elect the chair. See Jordan v. Allegany Co-op. Ins. Co., 558 N.Y.S.2d 806 (N.Y. Sup. Ct. 1990). Likewise, there is a difference of opinion as to whether the stockholders have the right to overrule a decision of the chair. Compare Duffy v. Loft, 152 A. 849, 851 (Del. 1930) with Model Business Corporations Act § 7.08.

As previously discussed, the presence of persons other than directors, stockholders or their proxies at corporate meetings is in some dispute. Compare Armstrong v. Marathon Oil Co., 513 N.E.2d 776, 792 (Ohio 1987) (only stockholders or their agents permitted at stockholders' meetings) with Salama-Dindings Plantations Ltd. v. Durham, 216 F. Supp. 104, 115 (S.D. Ohio 1963) (directors permitted to have counsel present at board meetings); see also Miranda v. President & Directors of Georgetown College, 818 F. Supp. 16, 18 (D.D.C. 1993).

Whether or not stockholders can break a quorum by withdrawing from the meeting varies from state to state. Compare Berlin v. Emerald Partners, 552 A.2d 482, 493 (Del. 1989); Potter v. Pattee, 493 S.W.2d 58 (Mo. Ct. App. 1973); In re Argus Printing Co., 48 N.W. 347 (N.D. 1991); Commonwealth v. Vandegrift, 81 A. 153, 155 (Pa. 1911); ITC Cellular Inc. v. Morris, 909 S.W.2d 182 (Tex. Ct. App. 1995) with Levisa Oil v. Quigley, 234 S.E.2d 257 (Va. 1977). This issue is also addressed by statute in several states. Compare ALA. CODE § 10-2B-7.25(c) (1997) with CAL. CORP. CODE § 602(b) (Deering 1997).

Finally, whether a stockholder may change a vote after the polls close in a contested election is the subject of differences from state to state. Compare Magill v. North American Refractories Co., 128 A.2d 233, 237 (Del. 1956) (stockholder may change his vote until the polls close) with Young v. Jebbett 211 N.Y.S. 61 (N.Y. Sup. Ct. 1925) (proxies accepted after polls had closed but before announcement of vote).

These cases and their holdings may come as a surprise to many corporate lawyers because they assume that existing case law supports modern corporate practices and because this area of the law is perceived to be consistent from state to state. The BLS subcommittee research, on the other hand, demonstrates that lawyers should carefully examine the case law regarding stockholders meetings in states where their corporations are incorporated. This closer examination may reveal default law (default meaning in the absence of charter or bylaw provisions) that should be altered by charter or bylaw provision or by use of the Guidelines to reflect more modern (or desirable) stockholder meeting practices.

The existence of so many unanswered questions in corporate governance practice and the absence of a workable set of rules for the conduct of stockholders' meetings represent a vacuum in this narrow area of corporate law. The creation of guidelines for the conduct of stockholders' meetings by the Subcommittee on the Conduct of Directors' and Stockholders' Meetings is expected to help fill this void. Moreover, these guidelines are expected to help educate lawyers as to what the default law is on many of these issues from state to state.

Pennsylvania corporations — a bad investment?

On Nov. 19, 1996, Judge Donald W. Vanartsdalen, sitting in the U.S. District Court for the Eastern District of Pennsylvania, handed down what may be one of the most significant corporate governance decisions of the '90s in Norfolk Southern Corp. v. Conrail Inc., C.A. No. 96-CV-7167 (E.D. Pa. Nov. 19, 1996). This case, interpreting Pennsylvania's constituency statute, represented the first legitimate, high-profile test of that landmark, controversial legislation.

Traditional corporate statutes and case law provide that the directors of a corporation owe a fiduciary duty to the corporation and its stockholders and by implication provide that the directors' primary responsibility when making a corporate decision is to determine whether that decision is in the best interests of the stockholders. That is because directors are responsible for generating profits or returns for the stockholders who are the owners of the corporate entity. Dodge v. Ford Motor Co., 170 N.W. 668, 684 (Mich. 1919).

Constituency statutes, on the other hand, provide that the board of directors may, and in Connecticut in certain circumstances must, consider the impact of corporate decisions on corporate constituencies other than stockholders. The Pennsylvania statute, for example, provides that "the board of directors . . . may, in considering the best interests of the corporation, consider to the extent they deem appropriate . . . [t]he effects of any action upon any or all groups affected by such action, including shareholders, employees, suppliers, customers and creditors of the corporation, and upon communities in which offices or other establishments of the corporation are located." 15 Pa. C.S.A. ' 1715(a) (Purdon's 1995 Pamphlet).

Constituency statutes, if drafted and interpreted simply to mean that directors may or must consider the impact on corporate decisions on other constituencies, but must ultimately consider the impact on stockholders as paramount, are not controversial. In fact, the ALI Principles of Corporate Governance, which generally represent a mainstream view, take the position that interests of other constituencies may be considered as long as the decision does not have a significant adverse effect on long-term stockholder interests.

Likewise, courts in "traditional" (nonconstituency) states, such as Delaware, have concluded that directors may consider the interests of other constituencies. See, for example, Paramount Communications v. Time Inc. 571 A.2d 1140, 1153 (Del. 1989). Those courts, however, maintain the primacy of the stockholders by explaining that while other interests may be considered, the effect on stockholders must remain the primary consideration. See, for example, Revlon Inc. v. MacAndrews & Forbes Holdings Inc., 506 A.2d 173 (Del. 1986).

On the other hand, drafting and interpreting a constituency statute to mean that directors may consider the impact of corporate decisions on all constituencies and may consider the interests of any constituency to be paramount to all others is controversial. Pennsylvania drafted and adopted such a statute in 1990. That statute, in addition to the more common constituency provisions previously quoted, specifically provides that: "[t]he board of directors . . . shall not be required, in considering the best interests of the corporation or the effects of any action, to regard any corporate interest or the interest of any particular group affected by such action as a dominant or controlling interest or factor." 15 Pa. C.S.A. ' 1715(b) (Purdon's 1995 Pamphlet).

Norfolk Southern Corp. v. Conrail Inc. presented the first major opportunity for a court to interpret that provision of the constituency statute. Until Conrail, there remained some thought that courts might interpret that provision only to apply to nonstockholder constituencies in a manner more consistent with the law in other states so that stockholders would nonetheless be given some favored status over other constituencies. The decision in Conrail proved otherwise.

The Conrail case involved the proposed merger of Conrail Inc. with CSX. On Oct. 15, 1996, after weeks of negotiation, Conrail's directors accepted CSX's proposed acquisition and publicly announced the merger. A competing and allegedly higher priced bid from Norfolk Southern Corp. materialized on Oct. 24, 1996. Two weeks later, CSX followed Norfolk Southern's bid with an increase of its own, which was, in turn, followed by a successively higher Norfolk Southern bid two days later. Although each CSX bid was followed by a successively higher Norfolk Southern bid, the Conrail directors never wavered from their preference for the CSX merger.

The Conrail directors invoked the Pennsylvania constituency statute to support their decision that the CSX opportunity was better for Conrail because it was better for Conrail's employees, and in particular its CEO, than the Norfolk Southern opportunity. Norfolk Southern, also a Conrail stockholder, sued Conrail and its directors alleging that the Conrail directors had breached their fiduciary duties to the stockholders by not accepting the higher Norfolk Southern bid.

The U.S. District Court for the Eastern District of Pennsylvania interpreted § 1715(b) to include stockholders, concluding that the statute "provides that in considering the best interests of the corporation or the effects of any action, the directors are not required to consider the interests of any group, obviously including shareholders, as a dominant or controlling factor . . ." Norfolk Southern Corporation, et al. v. Conrail Inc., et al., C.A. No. 96-CV-7167 at 643 (E.D. Pa. November 19, 1996) (emphasis supplied).

Although not expressly stated in the opinion, the implicit holding in Conrail is that directors may place the interests of any of these other constituencies ahead of those of the stockholders in making corporation decisions. Id. at 647 ("the Pennsylvania statutes . . . were enacted . . . in order to exclude . . . decisions that seem to mandate or suggest that the primary or perhaps only consideration in a situation where there is an attempted takeover or a rival competition for a takeover merger between corporations is what is the best financial deal for the stockholders . . .").

The Pennsylvania statute and the Conrail decision have been variously applauded and criticized by commentators. Compare Wai Shun Wilson Leung, "The Inadequacy of Shareholder Primacy: A Proposed Corporate Regime that Recognizes Non-Shareholder Interests," 30 Column. J. L. & Soc. Probs., 587, 615-18 (Summer 1997), with Dale Arthur Oesterle, "Mergers and Acquisitions: Revisiting the Anti-Takeover Fervor of the '80s through the Letters of Warren Buffett: Current Acquisition Practice is Clogged by Legal Flotsam from the Decade," 19 Cardozo L. Rev. 565 (September/November 1997); David N. Hecht, "The Little Train That Couldn't: Did the Pennsylvania Anti-takeover Statute Fail to Protect Conrail from a Hostile Suitor?," 66 Fordham L. Rev. 931 (1997). Essentially the Conrail decision permits corporate directors to dispose of the corporation that they manage for significantly less value to the stockholders in order to gain benefits for other corporate constituencies.

State of incorporation, as an investment issue, has long been ignored by investment professionals. One of the more notable features of the debate over the Pennsylvania constituency statute and the Conrail case is that the mainstream financial media has recognized, and continues to recognize, this as a significant investment difference between the corporate law of Pennsylvania and most other states.

A May, 1998 "Nightly Business Report" television program, for example, highlighted the disadvantages of being a stockholder in a Pennsylvania corporation because of, among other things, its constituency statute. That report concluded that although there is no clear evidence yet that investors are discounting stocks of corporations incorporated in Pennsylvania, experts believe that companies avoid making tender offers for Pennsylvania incorporated corporations. If, in fact, fewer tender offers are made for Pennsylvania incorporated corporations, it seems a matter of basic economics that they should be worth less than if they were incorporated elsewhere.

An Oct. 25, 1998 Baltimore Sun article on T. Rowe Price's investment in Pennsylvania's AMP Inc. echoed that conclusion and provides an excellent example as to how Pennsylvania's laws are beginning to change the way investment bankers and money managers view Pennsylvania corporations. That article quoted Stephen Jansen, a T. Rowe Price analyst, as saying, "any time you make an investment in a Pennsylvania corporation, you probably have to take . . . into account [Pennsylvania's legal setup] . . . [a]nd that probably means you're not going to pay as much for companies that are based there."

Many of these same issues were raised by legislators in debates over the adoption of the 1990 Pennsylvania anti-takeover legislation. Sen. Brightbill noted that fiduciary duties historically were based on the principle that the managers of a business owe their primary responsibility to its owners. He strongly opposed diminishing the stockholders' place in the corporate hierarchy to a level equal to or lesser than other constituencies. He worried that raising the level of these other constituencies might open up directors to suits from unions, suppliers and even communities if they felt the directors did not properly consider them in corporate decisions.

Sen. Fumo criticized the other constituencies statute as socialist and characterized the statute as the beginning of the end of the capitalist order. He noted that stockholders expect their investment to be protected by the directors and that, by adopting the constituency statute, investors would find Pennsylvania-incorporated companies less attractive.

The net result of Pennsylvania's constituency statute, as interpreted and applied by the court in Conrail, is that directors of Pennsylvania corporations have extraordinary discretion in making corporate decisions. So much discretion, that nearly any action the directors may wish to take can be supported by asserting that it is in the best interest of one constituency or another. Supporting such a decision is not difficult, given that what is adverse to any constituency recognized in the Pennsylvania statute is certain to be beneficial to another. As Richard Booth noted in the February 1998 edition of The Business Lawyer, "management may be able to avoid accountability altogether, conveniently justifying any decision which one group may protest by pointing to its duty to another group."

Lawyers advising the directors of a Pennsylvania corporation are, therefore, easily able to find legal support for any proposed board decision. In board discussions and resolutions, lawyers should carefully document which of the many constituencies a particular decision benefits and how. Beyond that, counseling directors of Pennsylvania corporations is now significantly easier.

Advising minority stockholders or investors in Pennsylvania corporations, on the other hand, has become significantly more difficult as a result of Pennsylvania's constituency statute. If the minority stockholder has enough negotiating leverage or input into the investment vehicle from the outset, even if the business is physically located in Pennsylvania, a lawyer representing a minority stockholder or investor would serve his or her client well to require the entity formed to operate the business be incorporated in Delaware, or another nearby state. If the business already exists as a Pennsylvania corporation, counsel to the investor should require that it be reincorporated in Delaware, or another nearby state, through a reincorporation merger.

If that minority stockholder or investor does not have sufficient leverage to influence the state of domicile of the corporation, a lawyer advising a minority investor should carefully advise his or her client of the potential strategic and financial disadvantages that may accompany stock ownership or investment in a Pennsylvania corporation. In particular, investors should be advised of the broad latitude that the board may have in implementing decisions that are not in their best interests. Beyond making certain that the client understands these disadvantages, however, if the investor does not have enough leverage to get out of Pennsylvania, there may be little a lawyer can do to protect his or her client from Pennsylvania's constituency statute.

The debate over Conrail, the Pennsylvania constituency statute and the balance of power between stockholders and other constituencies raises a critical question in corporate governance first asked in the 1930s, hotly fought over in the takeover battles of the '80s, and finally incorporated into constituency statutes in the '90s. Namely, whose corporation is it and for whose benefit do corporations exist?

The debate over whose corporation it is will continue to evolve over the next decade, and, as it does, many of the following questions may be answered: Will the traditional concept that it is the stockholders who "own" the corporation and to whom the directors are primarily responsible prevail? Will more states follow the Pennsylvania lead and adopt the theory, inherent in Pennsylvania's statute, that corporations now exist, in a pseudo-socialist way, for the benefit of their management, employees or other constituencies as much, if not more so, than for stockholders? Will investment professionals finally recognize state of incorporation as an investment issue and discount stock values of corporations formed in states following the Pennsylvania lead? If they do, will it ultimately be market, instead of legal forces, that swing the pendulum back in favor of the stockholders?

— Eric G. Orlinsky

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