Corporate Governance

Limiting the Rights of Preferred Shareholders: Matulich v. Aegis Communications Group, Inc.

By J. Robert Brown

The post below by Mathew Shecter involves a relatively dull issue, whether preferred shares with limited voting rights should be aggregated with common shares in determining the percentage ownership necessary to effectuate a short form merger.   But buried in the opinion is a significant issue.  The Court managed to take what by all appearance were voting rights for preferred shareholders (the "right of approval and consent") in connection with mergers and reduce them entirely to matters of contract. 

In addition to raising questions about the applicability of fiduciary duty standards to the provisions (the court emphasises the contractual nature of the right), the approach essentially throws into question the voting rights of preferred shareholders in a number of instances. 

Because the authority to "approve and consent" is not the same as "entitled to vote," preferred shareholders with the right to approve and consent would not have a right to vote on bylaws, approved interested transactions, or remove directors.  In each instance, the right is limited to those "entitled to vote."  See 8 Del. C. § 109 (2008) ("the power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote"); 8 Del. C. § 141 (2008) ("Any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors,"); 8 Del. C. § 144 (2008) (The material facts as to the director's or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; "). 

No doubt plenty of preferred shareholder provisions provide for the authority to approve and consent.  Those shareholder will discover that, despite the intent to create voting rights, in fact the Delaware Supreme Court has decided otherwise, substantially weakening the governance rights of these shareholders.

Full post as published by The Race to the Bottom on March 20, 2008 (boomark / email).