Shareholders' Rights & Shareholder Activism 2024 Comparisons

Each type of entity is governed by a separate statute – ie, the New York Business Corporation Law (NYBCL §§ 101 et seq.), the New York Limited Liability Company Law (NY LLCL) (NY LLCL §§ 101 et seq.), the New York Partnership Law (N.Y. P’ship Law §§ 1 et seq.) and the Revised Limited Partnership Act (Revised Act) (N.Y. P’ship Law §§ 121-101 et seq.).

To do business in New York, a foreign corporation must file an Application for Authority with the New York State Department of State, pursuant to Section 1304 of the NYBCL. A foreign corporation that is qualified to do business in New York may engage in any lawful business activity if it is authorised to conduct that business in its jurisdiction of incorporation (NYBCL § 1301(a)).

The application states the following.

• The name of the foreign corporation.
• The fictitious name the corporation agrees to use in New York (if any).
• The jurisdiction and date of its incorporation.
• The purpose or purposes for which it is formed.
• The county within New York where its office will be located (although the corporation is not required to have an actual physical office in New York).
• A designation of the New York secretary of state as its agent for service of process and the post office address within or without New York, which the secretary of state can use to forward any service of process to the corporation. If desired, the corporation can also include an email address that the secretary of state can use to notify the corporation that process has been electronically served against it.
• The name and address of the registered agent (if any) in New York and a statement that the registered agent is to be its agent for service of process.
• A statement that the foreign corporation has not engaged in any unauthorised activity in this state.

The corporation must attach a certificate signed by an authorised officer of the jurisdiction of its incorporation certifying that the foreign corporation is an existing corporation.

Foreign business corporations must file a biennial statement, using a form provided by the New York State Department of State (NYDOS), every two years with the NYDOS during the calendar month that it filed its original application for authority (NYBCL § 408(1)).

The NYBCL does not limit the classes or series of stock that can be issued, but the certificate of incorporation may impose limitations on classes or series of stock.

The certificate of incorporation must set out the designation of each class or series (as the case may be), and a statement of the relative rights, preferences and limitations of the shares of each class or series (NYBCL § 402(a)(5)–(6)).

The NYBCL expressly permits the certificate of incorporation to limit or abrogate the voting rights of a particular class or series of shares.

With few exceptions, New York law permits corporations to vary shareholders’ rights through shareholder agreements, as well as the corporation’s by-laws.

In the case of limited liability companies (LLCs), equity holder rights are varied through the LLC operating agreement, which is a matter of contractual agreement among the equity holders.

Likewise, in partnerships, the rights of the limited partner(s) are generally governed by the partnership agreement.

New York does not mandate minimum share capital requirements for any of the company types listed in 1.1 Types of Company.

C corporations may be owned by one or more shareholders; there is no requirement that shareholders be resident in New York.

S corporations may be owned by one to 100 shareholders; generally, only US individuals (citizens or residents) and certain trusts and tax-exempt organisations can be shareholders.

LLCs may be owned by one or more members; there is no requirement that shareholders be resident in New York. To be taxed as a partnership, however, two or more members are required.

General Partnerships can be owned by two or more partners; there is no requirement that shareholders be resident in New York.

Limited Partnerships require at least one general partner and at least one limited partner; there is no requirement that shareholders be resident in New York.

Shareholders’ agreements, LLC operating agreements and limited partnership agreements are commonly used for privately held companies.

Common provisions in shareholders’ agreements include:

• board composition and shareholder representation on the board (including the right to designate directors);
• special voting rights;
• pre-emptive rights if the company issues additional equity securities;
• rights to or restrictions on the transfer of shares (such as rights of first refusal, tag-along rights and drag-along rights); and
• information rights.

As a general matter, New York law treats shareholder agreements like any other contract, and thus enforces them according to their terms per the bedrock principle of “freedom of contract”. There are, however, numerous legal considerations that can affect the enforceability and effectiveness of shareholder agreements.

Shareholder agreements are generally not made publicly available. However, in the case of a public company, the federal securities laws may require the disclosure of shareholders’ agreements if the parties thereto exceed certain ownership thresholds or if the agreement is considered a material agreement of the public company itself.

Section 602(c) of the NYBCL requires that a shareholder meeting “for the election of directors and the transaction of other business” be held annually, “on a date fixed by or under the by-laws”.

Special meetings of the shareholders may be called by the board and by such person(s) so authorised by the certificate of incorporation or the by-laws. At any such special meeting, only such business may be transacted that is related to the purpose or purposes set forth in the notice required by section 605.

The corporation must provide the notice at least ten days and not more than 60 days before the date of the annual meeting. However, if the corporation gives notice by third-class mail, it must give the notice at least 24 and not more than 60 days before the date of the meeting.

If mailed, the corporation is deemed to give notice when the notice is deposited in the US mail, postage prepaid, directed to the shareholder at the shareholder’s address as it appears on the record of shareholders (or, if requested by the shareholder, at another address). If transmitted electronically, the corporation is deemed to give notice when directed to the shareholder’s email address as supplied by the shareholder to the secretary of the corporation (or as otherwise directed per the shareholder’s instructions).

LLCs do not have such requirements, and any requirement to conduct an annual meeting will be set forth under the LLC operating agreement.

Section 605(a) of the NYBCL requires that a corporation provide written or electronic notice of the annual shareholders’ meeting. The notice must state the place, date, time and, if available, the means of electronic communications by which shareholders may participate in the proceedings and vote or grant proxies at the meeting.

The corporation must provide the notice at least ten days and not more than 60 days before the date of the annual meeting. However, if the corporation gives notice by third-class mail, it must give the notice at least 24 and not more than 60 days before the date of the meeting.

If mailed, the corporation is deemed to give notice when the notice is deposited in the US mail, postage prepaid, directed to the shareholder at the shareholder’s address as it appears on the record of shareholders or, if requested by the shareholder, at another address.

If transmitted electronically, the corporation is deemed to give notice when directed to the shareholder’s email address as supplied by the shareholder to the secretary of the corporation, or as otherwise directed per the shareholder’s instructions.

Under the NYBCL, special meetings of the shareholders may be called by the board of directors, or by other person(s) authorised by the certificate of incorporation or the by-laws to call special meetings (NYBCL 602(d)). Thus, shareholders do not have the right to call for a shareholder meeting unless it is granted to them in the certificate of incorporation or by-laws.

All shareholders are entitled to receive notice of a general meeting, and that notice must state the place, date and hour of the meeting, indicate that it is being issued by or at the direction of the person or persons calling the meeting, and state the purpose or purposes for which the meeting is called. Notice of any meeting of shareholders may be written or electronic (NYBCL 605(a)).

Under Section 624 of the NYBCL, shareholders have the right to inspect the corporations “minutes of the proceedings of its shareholders and record of shareholders and to make extracts therefrom for any purpose reasonably related to such person’s interest as a shareholder”.

Shareholders meetings may be held virtually. In November 2021, New York state passed legislation permanently amending provisions of the NYBCL to allow companies to use electronic means to document action by written consent by boards, and to hold virtual shareholder meetings, unless such action is prohibited by the entity’s articles of organisation or by-laws.

A quorum consists of a majority of the votes of shares entitled to vote at a meeting of shareholders for the transaction of any business. If, however, a specified item of business is required to be voted on by a particular class or series of shares, voting as a class, the holders of a majority of the votes of shares of such class or series shall constitute a quorum for the transaction of such specified item of business (NYBCL 608).

The corporation’s certificate of incorporation or by-laws may provide for a greater or lesser quorum, provided that the quorum specified cannot be less than one-third of the votes of shares entitled to vote (NYBCL 608).

Unless otherwise required under the NYBCL or the by-laws or certificate of incorporation, a plurality of shareholder votes is required to elect directors, and a majority is required for all other corporate actions (NYBCL § 614).

New York law requires shareholder approval of the following corporate actions.

• Issuance of rights or options to acquire shares to officers, directors and employees (NYBCL § 505(d)).
• Election of directors (NYBCL § 602(c)).
• Amendment to the certificate of incorporation and by-laws. When specifically provided for in the certificate of incorporation or a by-law adopted by the shareholders, by-laws may also be adopted, amended or repealed by the directors. Any by-law adopted by the directors may be amended or repealed by the shareholders entitled to vote on the issue (NYBCL §§ 601(a) and 803).
• Certain mergers and consolidations (NYBCL § 903).
• The sale of all or substantially all the assets of a corporation, if not made in the usual or regular course of the business actually conducted by the corporation (NYBCL § 909).
• Share exchanges (NYBCL § 913).
• Non-judicial dissolution (NYBCL § 1001).
• Guarantees of the corporation not in furtherance of its corporate purposes (NYBCL § 908).

The certificate of incorporation or by-laws may also require shareholder consent for additional specific actions.

Unless otherwise required under the NYBCL or the by-laws or certificate of incorporation, a plurality of shareholder votes is required to elect directors, while a majority of shareholder votes is required for all other corporate actions (NYBCL § 614).

Class Voting Rights

If any proposed amendment would adversely affect the rights of holders of shares of one series of a class, but not the entire class, then only the holders of the affected series will be entitled to vote as a separate class. Approval by a particular class of shareholders is required to authorise an amendment that would:

• exclude or limit the class’s right to vote on any matter, except as such right may be limited by voting rights given to new shares then being authorised for any existing or new class or series;
• change the shares of the class:
• reduce their par value;
• divide into a different number of shares of the same class or into the same or a different number of shares of any one or more classes or series;
• alter the designation of the class or any of the relative rights, preferences or limitations of the class;
• provide that the shares may be converted into shares of any other class or another series of the same class;
• alter the terms or conditions on which the shares are convertible or the shares issuable on conversion of the shares, if the action would adversely affect the holders; or
• subordinate the class’s rights by authorising shares with preferences superior to those rights (NYBCL § 804(b)).

Shareholder Approval of Mergers

New York law requires shareholder approval of mergers. In particular, following board approval of the merger agreement, the board must submit the merger agreement to a vote of shareholders, a majority of which must approve the merger (NYBCL § 903(a)(2)).

Shareholder approval of a merger can be done through action by written consent without a meeting (NYBCL § 615).

In advance of the shareholder vote, the board must provide every shareholder of record with (i) notice of the shareholder meeting to vote on the merger agreement and (ii) a copy or outline of the merger agreement (NYBCL § 903(a)).

If the corporation’s by-laws do not provide the record date for voting purposes, the board of directors may fix the record date, which may not be less than ten days or more than 60 days before the date of the meeting, or more than 60 days before any other action (NYBCL § 604).

The NYBCL also grants appraisal rights to dissenting shareholders who are entitled to vote on the proposed merger. A dissenting shareholder of the subsidiary corporation has appraisal rights in a parent-subsidiary merger; shareholders to the parent corporation do not have appraisal rights (NYBCL § 910).

A shareholder may vote at the meeting in person or by electronic communication if authorised by the board of directors. The board is also permitted to hold the meeting solely by electronic communication (NYBCL § 602(a), (b)).

Section 609 of the NYBCL permits shareholders to vote by proxy. A proxy expires 11 months after its execution, unless otherwise stated in the proxy. There is no prescribed form or language for granting a valid proxy.

Section 620 of the NYBCL expressly permits voting agreements, provided that the agreement is in writing and signed by the parties thereto.

Shareholders do not have a statutory right in New York to bring a resolution forward, or otherwise have a specific issue considered, at a shareholders’ meeting. Such rights may exist in the corporation’s foundational documents.

A shareholder who wishes to challenge a resolution passed at a shareholders’ meeting may bring a lawsuit against the company and/or its board (typically in the jurisdiction in which the company was incorporated).

Common bases for legal challenges include:

• a failure to comply with the meeting or voting procedures set forth under law or the company’s governing documents (ie, certificate of incorporation or by-laws);
• the validity of shareholder votes, including whether a purported shareholder was entitled to vote at the meeting, or the timeliness of a vote; and
• the board of directors failed to fulfil its fiduciary duties with respect to the resolution, including because directors breached the duty of loyalty.

SEC changes to the ownership disclosure requirements took effect in February 2024, requiring investors to notify the market sooner if their ownership level crosses 5%. For Schedule 13D filers – that is, investors that seek to influence strategy – the deadline is now five days (decreased from ten days), while the timing to make material is now two days (changed from “promptly”). The new rules also clarify the scope of derivatives that should be disclosed.

Under the NYBCL, shares are voted by shareholders of record rather than beneficial owners. Every shareholder of record shall be entitled at every meeting of shareholders to one vote for every share standing in his name on the record of shareholders, unless otherwise provided in the certificate of incorporation (NYBCL § 612).

Shareholders may pass a resolution without holding a meeting, provided that the resolution is in a writing that contains the action to be taken and is signed by the holders of all outstanding shares entitled to vote.

If the certificate of incorporation permits, however, the holders of outstanding shares of at least the minimum number of votes necessary to authorise or take action at a meeting at which all shares entitled to vote are present and voting may pass a resolution (NYBCL § 615).

For corporations incorporated after 22 February 1998, shareholders have no pre-emptive rights, except as expressly provided in the certificate of incorporation (NYBCL § 622(b), (c)).

For corporations formed before 22 February 1998, shareholders do have pre-emptive rights, unless the certificate of incorporation provides otherwise (NYBCL § 622(b), (c)).

New York does not impose any statutory restrictions on the transfer or disposal of shares, such as a right of first refusal or right of first offer. However, New York courts have invalidated stock transfer restrictions and buy-sell agreements on public policy grounds where the effect of the agreement is to cause “forfeiture” of the shareholder’s interest for little or no consideration.

Unless prohibited by the company’s foundational documents, shareholders are permitted to grant securities interests over their shares.

In general, the granting a of security interest in shares is a private matter between the shareholder and the lender. Exceptions may exist where the grant of a security interest is considered to be a share transfer under the constituent organisational documents and may require a consent or waiver of such restriction thereunder. In addition, public companies typically have publicly disclosed policies that prohibit insiders from pledging shares. Waivers of or other deviations from those policies may require disclosure in SEC filings.

SEC rules also require persons who beneficially own more than 5% of a public company’s issued equity securities to file ownership reports (Schedules 13D and 13G) with the SEC, which may require the disclosure of borrowing arrangements with respect to the shares owned by the reporting person. Material changes in the facts contained in such reports are required to be reported via amended filings. The SEC recently adopted final rules that, among other things, have accelerated the reporting timelines that had been in effect for years. These changes are intended to increase the speed and transparency of reports to the market by investors who have accumulated significant positions in a company’s shares, detailing the shareholder’s intention with respect to such ownership, for example to influence or change corporate policy or control.

Shares may be cancelled after issuance only if reacquired by the issuer, pursuant to contractual or charter-based redemption rights, open market purchase programmes, a merger or other plan of recapitalisation that is approved by the shareholders, or through a direct agreement with a shareholder. Reacquired shares may return to the status of “authorised but unissued shares” or be held as “treasury shares” (issued but not outstanding), in either case being subject to reissuance or sale by the issuer, or to being retired so as not to be issuable or sold again.

Companies may generally repurchase issued shares, either in voluntary transactions or, in the case of redeemable shares, pursuant to such redemption rights. Share repurchases are limited by state law requirements similar to those that limit dividends or other distributions upon equity. Generally, shares may only be repurchased if, after giving effect to such purchase, the fair value of the company’s assets will exceed the fair value of its liabilities and the company will still be able to pay its obligations as they come due. In addition, the board of directors must determine, in the fulfilment of their fiduciary duties, that the share repurchase is in the best interest of the company and its shareholders.

In the case of public companies, newly adopted SEC rules now require enhanced quarterly disclosures setting forth on a daily basis share repurchases during the most recently completed fiscal quarter and the reasons and policies under which such repurchases were effected, among other things. In addition, share repurchases may be limited under a company’s negative covenants with its lenders or other investors.

The board of directors may declare and pay dividends on the shares of its capital stock, subject to any restrictions in the certificate of incorporation or restrictions due to insolvency.

A corporation may declare or pay dividends out of surplus (such that that the net assets remaining after distribution will at least equal the amount of the corporation’s stated capital). In the absence of a surplus, a dividend can be paid out of corporation’s net profits for the fiscal year in which the dividend is declared or the preceding fiscal year.

Directors may not declare or pay a dividend if the capital of the corporation was diminished by depreciation in the value of its property, or by losses or an amount less than the aggregate amount of the stated capital represented by the issued and outstanding shares of all classes having a preference on the distribution of assets (NYBCL § 510).

Shareholders have the right to elect directors at the annual shareholders’ meeting.

Directors may be removed for cause by shareholders owning a majority of the outstanding shares entitled to vote at an election of directors.

A shareholder may file a derivative action to challenge a decision taken by the board of directors, or to require the board to take an action. A derivative action is a lawsuit brought on behalf of a corporation in the shareholders’ representative capacity in which the corporation itself is the nominal plaintiff. Ultimately, the claim and any recovery obtained in the action belong to the corporation.

New York law applies the “business judgment rule”, pursuant to which a court will uphold a board’s decision in deference to the board’s “business judgment”, provided that the board’s decision:

• is made for a legitimate corporate purpose;
• is made in good faith; and
• is within a board’s authority.

A court should uphold a board’s decision that is challenged, regardless of whether it was a good decision or a bad decision.

New York law does not give shareholders any right to appoint or remove auditors. Instead, the appointment and removal of the corporation’s auditor is at the discretion of the board of directors’ directors (or its audit committee, if one has been appointed).

The certificate of incorporation or by-laws may include provisions regulating the appointment/removal of the auditor.

In private companies, there is generally no requirement that the board of directors report to shareholders on corporate governance arrangement.

Public companies are required by the SEC and stock exchange rules, or by investor expectations, to provide detailed information regarding their governance arrangements, policies and practices, including:

• the number of board and committee meetings;
• director meeting attendance;
• compensation policies;
• risk management oversight;
• management stock ownership requirements;
• related party transactions;
• director diversity; and
• qualifications and business credentials, among other matters.

The NYBCL defines “control” as “the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting stock, by contract, or otherwise”.

In addition, a person’s beneficial ownership of 10% or more of a corporation’s outstanding voting stock shall create a presumption that such person has control of such corporation.

Shareholder rights do not generally change simply because a company becomes insolvent (NYBCL § 513(a)).

No information has been provided in this jurisdiction.

Directors of New York corporations have a duty of care and a duty of loyalty, expressed in the NYBCL as a duty to act “in good faith and with the degree of care that an ordinarily prudent person in a like position would use under similar circumstances in fulfilling their responsibilities as a member of the corporation’s board of directors” (NYBCL § 717(a)).

The fiduciary duty of due care requires directors to act in an informed and reasonably diligent basis in considering material information. The fiduciary duty of loyalty requires directors not to engage in the promotion of personal interests that are incompatible with the superior interests of the corporation. Accordingly, directors cannot profit personally at the expense of the corporation and must not allow their private interests to conflict with those of the corporation.

New York courts review the exercise of these duties by the directors under the business judgment rule, pursuant to which courts will not interfere with the decisions and actions of directors in managing a corporation’s affairs if the directors made the decisions and acted in good faith, in the exercise of honest judgment, and in the lawful and legitimate furtherance of corporate purposes.

The corporation’s certificate of incorporation can eliminate or limit directors’ personal liability to the corporation or its shareholders for breaches of their duty of care. However, a corporation may not limit directors’ liability for acts or omissions that are in bad faith, involve intentional misconduct or a knowing violation of the law, or where the director personally gained any advantage to which the director was not legally entitled (NYBCL § 402(b)).

Directors of a corporation who vote for or concur in the declaration of an unlawful dividend are jointly and severally liable to the corporation, including potential criminal liability (NYBCL § 719(a)(1)).

Acts that adversely affect the company or the shareholders may be challenged through derivative actions, in which the company itself is the nominal plaintiff and the defendants are members of the company’s board of directors or officers. Derivative actions must be preceded by a demand on the board of directors to institute a cause of action against the applicable defendants, or by a showing that such pre-suit demand would be futile because the directors would have a conflict of interest in evaluating such demand.

New York’s statutory and common law regulates corporate governance. The legal and regulatory tools available to activist shareholders include:

• information and inspection rights;
• the right of shareholders to elect and remove directors;
• the right of shareholders under SEC rules to require certain proposals to be included in a company’s proxy statement;
• the newly effective universal proxy rules that require a company to include an insurgent’s director nominees on the company’s proxy card, which makes it easier for shareholders to vote for the insurgent’s candidates;
• advisory votes on senior management compensation;
• the ability to conduct proxy contests under SEC rules seeking shareholders to vote against actions recommended by the board of directors;
• shareholders’ legal remedies against improper or oppressive conduct of the company or its directors/officers; and
• the ability to leverage voting recommendations of proxy advisory services that have policies that often seek to promote shareholder rights and governance policies.

Activist shareholders are typically institutional investors who build up a position in a target company’s stock and employ a variety of strategies with the aim of increasing the share price of the target by unlocking value, such as improving underperforming management teams, inefficient capital structures or underperforming assets.

Historically, the focus of activist campaigns has been on promoting or resisting M&A transactions, but activists have also been increasingly focused on board change. There has also been an increased focus by some activists on environmental, social and governance (ESG)-driven proxy contests, such as this year’s ESG-driven activist proxy contest with Starbucks, which was launched by a coalition of labour unions known as the Strategic Organizing Center.

Activists typically build their stake through open-market share acquisitions. Sometimes, this strategy is supplemented with the use of options, swaps and other derivatives. Activist engagement strategies include meeting with company management to propose specific changes, proxy contests seeking board representation and public pressure campaigns to force change.

Shareholder activism remains on the rise in the USA. In the first half of 2024, shareholder activists launched a record 147 campaigns – a 29% increase compared to the historical five-year average, per Lazard.

Shareholder activists and companies have now completed their second season of proxy contests using the universal proxy card (UPC). The SEC’s UPC rules were put into effect in August 2022, and they require companies and dissident shareholders to use a UPC that lists all candidates nominated for election and clearly distinguishes between the company’s nominees and dissident’s nominees.

Hedge funds tend to be more activist than other groups of shareholders. Less often, an institutional investor or a family office may deploy an activist approach for a particular investment. In recent years, however, a greater share of first-time activists have been participating in proxy contents, including ESG-driven shareholders.

In the US, activists won 11% of the seats they sought in proxy fights (compared to 65% in the first half of 2023).

No information has been provided in this jurisdiction.