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The Importance of Shareholder’s Meetings

We recently wrote about the board of directors and corporate directors of San Diego corporations. In this article, we discuss the importance of shareholder meetings. Although these kinds of meetings may be less frequent, they are often more important.

San Diego Corporations: Typical Structure and Organization

In general, most California corporations have a typical structure and organization that can be shown as a hierarchy and described as a flow chart. The corporation has a certain number of shareholders who meet, at least once a year, to elect a board of directors and approve other corporate acts requiring shareholder approval. In turn, the board of directors meets, as often as once a quarter (but generally once per year for small and medium business corporations), to make high-level corporate decisions among which is the hiring or appointing of the following managing employees:

President or Chief Executive Officer (“CEO”);
a Secretary; and
a Treasurer or Chief Financial Officer (“CFO”)

In turn, the CEO manages the day-by-day activities of the corporation with the help of the CFO and Secretary. The CEO also hires other subordinate staff and employees.

These roles can overlap, and often do in small and medium business corporations. A director may be appointed as the CEO. Likewise, if he or she does a good job, a third-party, independent CEO might be elected by the shareholders as a director. Similarly, in small and medium business corporations, directors are almost always shareholders. That independent CEO might be given shares of the company or stock options as part of his or her compensation. Salaries for officers, including the President, CEO, Secretary, treasurer, and CFO are set by the board of directors.

The key takeaway is that the shareholders are in the ultimate position of control. The shareholders elect the board and management control flows down from the board. Since the shareholders exercise the ultimate power, shareholder meetings are of the utmost importance, as shareholders elect the board of directors that appoints the officers.

San Diego Corporations: Majority Vote Rules

For California corporations, in general, majority vote rules. Thus, if a corporation has issued 100 voting shares, whoever controls 51% of those shares controls the corporation. This is because, as discussed above, the 51% majority shareholder can elect the board of directors. If you control the composition of the board, you can have yourself hired as the CEO or any other officer position with the California corporation. This is perfectly legal and commonly done (as long as the salary paid and bonuses given are not grossly excessive, courts will not intervene to enforce the rights of minority shareholders).

San Diego Corporations: Who Can Vote at Shareholder Meetings?

The legal rule is that who can vote at shareholder meetings depends on who owns or controls shares that are “entitled to vote.” Some corporation create different types of shares; some of which may be non-voting shares — a pure investment type of share. Owners and holders of non-voting shares are NOT entitled to vote.

As for voting shares, there are some important exceptions, but as a general rule, each share is entitled to one vote on each issue brought to the shareholders to vote. In addition, only “issued and outstanding” shares are entitled to vote. As an example, a corporation might, at formation, authorize the issuance of 10,000 shares. However, at the start of the company, only 1,000 shares are issued and, subsequently, the corporation repurchases 500 of the issued shares. The 9,000 non-issued shares are not entitled to vote, and the 500 shares repurchased by the corporation are no longer outstanding and, as such, also not entitled to vote. These repurchased shares are generally called “treasury shares.” Finally, “control” or “holding” of a share is the key as long as the owner of the share has legitimately given voting power to the “holder.” Examples of this are where shares are technically “owned” by another corporation. The voting of such shares is done by the authorized agent of that corporation. Lawfully given proxies are another example where voting power is granted to a person who may not be an “owner.”

If there is a dispute or ongoing disagreements among the shareholders, questions of who is a “shareholder” and which shares are entitled to vote become very contentious and very important.

Contact San Diego Corporation Law Today

Under the California Corporations Code, the typical voting rules and the types of voting and non-voting shares can be delineated in the articles of incorporation and in the corporate bylaws. This highlights the need for custom-drafted and well-considered articles and bylaws. Legal advice is needed for these types of issues and your corporation will need a good corporate attorney, especially if the shareholders meeting is expected to be contentious. Every corporation needs experienced and trusted legal counsel like attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard proudly serves the San Diego area, offering a full range of legal services to his business clients and can provide advice and assistance with corporate meetings. Mr. Leonard can be reached at (858) 483-9200 or via email.