Sunday, May 7, 2017

Our Right to Vote for Public Officials & Access to Material Information

By Guest Blogger Professor Christyne Vachon, UMass Law


I am a professor of business organizations.  I teach students about business law – how businesses are formed, governed and closed down.   Part of that instruction includes, necessarily, an explanation of how owners of a corporation, shareholders, vote to appoint directors to the board to govern the company.  Often have I heard the question, “Is this like how we vote for the president or our congressional representatives?”  For many business law professors, they may cringe to think that the possible answer may be “Kind of” or “In a way.”  But for those students who have never heard of a “shareholder” or “director” before they stepped into my classroom, the analogy may be a helpful starting point.  So, mea culpa, I have said on a rare occasion, “in a limited way, yes”.

In light of our recent presidential election, however, I keep coming back to this premise in my mind.  I wonder if, in fact, the governance processes to ensure proper election of directors to the board (and recourse, if not) may be stronger protection for shareholders than we have in place for voters in a presidential election.  Directors hold a fiduciary obligation to the company and the shareholders.  Where is that in our presidential election?  Why vote for someone who is intentionally withholding key material information that relates to your rights and laws applicable to you?

In a simplistic explanation, the law applicable to shareholders’ decisions, including voting and whether to buy/keep the company shares, requires directors’ disclosure of all material information that a reasonable investor would think important in making the decision.  The relevant information varies from circumstance to circumstance.  But it most definitely includes disclosure of any conflicts.  Directors should disclose conflicts and seek waiver of the conflict from the shareholder(s).  If the information is not disclosed or is inaccurate, the shareholders have recourse.  In some cases, the vote may be unwound.  This may, actually, include unwinding a merger of one company into another.  This is no small thing.

Voting is one of those essential rights granted to us.  Voters would be interested to know if that right is compromised by, for instance, lack of material information.  As with a vote for directors to the board of a company, information provide to the voters from potential candidates should be all relevant, accurate information that a reasonable voter would want to know.  This includes conflicts.  For instance, if a candidate or, say, a president has done his taxes in a certain way, shouldn’t the voters be entitled to know?  Since, among other things, the president will be able to greatly influence our tax laws and policies and may have conflicts weighing in favor of or against certain tax decisions that may not align with the majority of the population, let alone those who voted for him.    Why isn’t it required that the candidate for public office disclose all materially relevant information?  Given the option to choose not to buy shares in a company that didn’t provide adequate information, shareholders still bought shares.  This is why the regulations for full disclosure have been created.  Why shouldn’t we protect voters for their fundamental right the way market regulators protect investors?

And why shouldn’t the default approach be to unwind a vote, like appointment of a director or a merger, when the voters weren’t provided all the materially relevant information?

Are there more legal protections for our rights as investors in companies than those upheld for proper election of public officials?  Certainly, we have seen a public official or two at some point in their private capacities assert their rights as investors for breach of duties owed to them.

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