Ask the Smart Money: Shareholder Votes by a “Majority of the Quality Shareholders”

Lawrence A. Cunningham - The George Washington University Law School
Vol. 55
December 2021
Page 1019

Corporate directors, shareholders, judges, and scholars are on edge. Directors yearn for a certain kind of shareholder, especially one that is patient and focused on the company, as opposed to indexers, who must hold it as part of their basket, or traders, who own fleetingly. Shareholders want a voice, and that patient-focused cohort has the softest one today, crowded out by indexers, like BlackRock, and legions of day traders, like those stalking GameStop. Courts, struggling under the conflicting pull of the business judgment rule and fairness scrutiny, look to shareholder voice as a solution. Yet scholars are troubled by the extensive weight judges give to shareholder voice, particularly to insulate director decisions from review.

While a perfect solution to these multiple conundrums is a pipe dream, there is one that will meet the appetite of many directors and shareholders, while easing the judicial burden and scholarly angst: on corporate matters where stakes run high, directors should submit proposals to a special vote of the patient-focused shareholders, in addition to any other vote required by law or contract. Directors achieve an important goal of cultivating this shareholder cohort; those shareholders appreciate their voice being temporarily amplified, without disenfranchising other shareholders; judges get a reliable datapoint for choosing between deference or scrutiny; and scholars are assured an additional source of investor protection. Not perfect, but inexpensive, useful, and posing scant downside. This Article explains the concept and puts it into historical, jurisprudential, and contemporary context.

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