USA Law and Practice Contributed by: Kai Liekefett, Derek Zaba, Ram Sachs and Evan Grosch, Sidley Austin
6. Shareholders’ Rights as Regards Directors and Auditors 6.1 Rights to Appoint and Remove Directors While shareholders generally elect or remove directors to the board of a company via a shareholder vote at the company’s annual meeting, there are other means by which shareholders can elect or remove directors. For example, the by-laws or certificate of incorpora- tion may provide shareholders with the right to call a special meeting or act by written consent for the purposes of removing directors and electing replace- ments. The company’s governing documents will often set forth the procedure for taking such action. 6.2 Challenging a Decision Taken by Directors As a general proposition, shareholders can challenge decisions of directors in court by citing statute, the company’s governing documents and fiduciary duties under common law, among other reasons. The resolu- tion of such challenges depends on the circumstanc- es at issue, as well as applicable Delaware law and the company’s certificate of incorporation and by-laws. To require directors to take (or not take) action, a shareholder typically seeks injunctive relief, predi- cated on the likelihood of success of the claim that directors breached their obligations or another basis for action (eg, a contractual obligation). Shareholders would likely seek to obtain a preliminary injunction to achieve temporary relief, and then seek to proceed to trial for a permanent injunction. Obtaining an injunc- tion is a three-part test: likelihood of success, irrepa- rable harm and the balancing of equities. Despite having the potential remedy of injunctive relief, there are meaningful hurdles to bringing such claims, including: • the generally high standard for obtaining a manda- tory injunction; and • the deferential standard of review employed by courts in most instances when reviewing the deci- sions of directors (known as the business judgment rule). The business judgment rule is a presumption that directors acted independently, with due care, in good
faith and in the honest belief that their actions were in stockholders’ best interests. A plaintiff bears the burden of rebutting this presumption. Thus, a stock- holder plaintiff generally would need to allege, and later prove, facts sufficient to rebut this presumption. 6.3 Rights to Appoint and Remove Auditors Generally, public companies include a voting item at their annual meeting requesting that shareholders ratify the appointment of a designated auditor. The results of the shareholder vote are typically viewed as advisory.
7. Corporate Governance Arrangements 7.1 Duty to Report
Public companies (and therefore their boards) are required to report certain corporate governance arrangements. While there are a variety of situations where disclosure may become required, the most common vehicles for corporate governance disclo- sures are a public company’s annual report and proxy statement. In these filings, public companies provide detailed information on the board of directors, corpo- rate governance practices and other policies.
8. Controlling Company 8.1 Duties of a Controlling Company
Controlling stockholders owe fiduciary duties. Recent- ly, the definition of a “controlling stockholder” has been in flux. Both the Delaware common law and statutory law provide definitions of a “controlling stockholder”. Under common law, the Delaware Court of Chancery has held that a controlling stockholder does not have the duty to “engage in self-sacrifice for the benefit of minority stockholders” ( In re Synthes, Inc S’holder Litig. ). The court has further developed this idea through later rulings. In 2024, it found that “a controller does not owe any enforceable duties when declining to vote or when voting against a change to the status quo” ( In re Sears Hometown and Outlet Stores, Inc S’holder Litig. ). On the other hand, “a controller owes limited but enforceable duties when voting to change
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