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This question is for publicly traded companies. Shareholders elect board members at annual meetings, board members appoint officers, and officers/employees run the day to day operations of a corporation. Although officers have significant authority, major decisions like CEO stock options must be decided and approved by the board. Therefore, if a major shareholder of a large corporation (say 15%) meets with a CEO candidate without the board's knowledge or discretion and offers that candidate options to entice them to join the company, this would be considered unethical or even illegal. Is that correct?

Furthermore, if the major stockholders choose to not sit on the board for some reason (even someone who owned 51% of all stock), would this mean they cannot make major decisions for the company even though they own the majority of the shares?

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Last question first: shareholders do make major decisions for the company - they elect the board and vote on resolutions at general meetings. That is all they do - a shareholder does not have the right or the power to "make decisions for the company". That's not to say that they don't have influence and can't make representations to the company or its officers, of course.

Board members have an obligation to the company not to the shareholders or any subset of them - irrespective of who voted or didn't vote for them.

For your specific question, a shareholder has no power, as a shareholder, to make offers on behalf of the company to anyone.

  • Thank you. Do you know if it is a criminal violation for major shareholders to go behind the board or coerce the board to make certain decisions? Or is it a civil penalty? – user27343 Jan 31 '19 at 22:32
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    People can speak to whoever they like in a free society and shareholders have no duties towards their company that they could be violating. Coercing people is illegal but to coerce someone you have to use force or threats - influence is not coercion. – Dale M Jan 31 '19 at 22:35
  • This is a decent answer, but I also provided an answer to clarify more fully the question about a shareholder giving a CEO options. – ohwilleke Jan 31 '19 at 23:52
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The question does not specify a jurisdiction and I am answering primarily based upon U.S. law. But, I have no good reason to believe that the law in most other countries that have publicly traded corporations would be different.

if a major shareholder of a large corporation (say 15%) meets with a CEO candidate without the board's knowledge or discretion and offers that candidate options to entice them to join the company, this would be considered unethical or even illegal. Is that correct?

This would not necessarily be either unethical or illegal. The shareholder couldn't obligate the corporation to provide those options, but the shareholder could buy those options personally and the give them to the CEO candidate if the CEO candidate accepted the job.

In general, a shareholder owes almost no duties to anyone (except not to oppress minority shareholders), and since this doesn't appear to be oppression of minority shareholders, the shareholder hasn't breached any duty.

The CEO would probably have an obligation under the applicable securities laws to disclose the existence of the options the CEO received if the CEO candidate got the jobs and the options, in a publicly held corporation. But, generally speaking, owning stock options in a a company in which you are a CEO is not a violation of any duty of loyalty owed by the CEO or CEO candidate to the Corporation (to whom CEOs owe almost all of their duties).

As long as the CEO candidate doesn't promise the shareholder donor that the CEO will do something illegal, or something contrary to the best interests of the company as the CEO sincerely believes them to be, this wouldn't obviously be either a crime or a civil wrong.

Of course, if there was a promise to do something illegal it would constitute a conspiracy or solicitation of a crime or tort, giving rise to criminal or civil liability as the case might be to both parties.

Likewise, if there was a promise to do something the CEO believed was clearly contrary to the best interests of the corporation, this would probably be the crime of commercial bribery, or the tort of interference with contract by the shareholder and a breach of a fiduciary duty of loyalty by the CEO, and might also constitute securities fraud via market manipulation in some circumstances.

In real life, there might also be situations where the CEO either promises to do something, or is motivated to do something, that isn't clearly contrary to the best interests of the corporation in the CEO's opinion, but also wasn't precisely what the CEO sincerely believed was in the best interests of the corporation (e.g. hiring the donor shareholder's nephew to be a junior executive of the corporation, when the nephew wasn't incompetent but also wasn't the most qualified candidate for the job). This kind of gray area would typically not give rise to criminal or civil liability in a publicly held, for profit, corporation, which is very hard to establish in court even in clear cases, even though this kind of conduct that is a gray area in a for profit corporation might be clearly illegal if it took place in a governmental agency (see the endnote below).

Without these improper promises, however, few people would consider it unethical either. Indeed, arguably, the shareholder is going "above and beyond" ethically by using the shareholder's personal resources to help a business the shareholder has invested in without getting anything directly in return for this contribution from the corporation, the other shareholders or the CEO (all of whom benefit from the gift of the options). It isn't really different in principle from holding a welcoming banquet to a new CEO without charging the corporation for the event. Whether that was a gift or compensation for tax purposes would be a hard question that I won't even attempt to answer.

In closely held companies, transactions like this wouldn't be terribly uncommon.

if the major stockholders choose to not sit on the board for some reason (even someone who owned 51% of all stock), would this mean they cannot make major decisions for the company even though they own the majority of the shares?

Shareholders get to vote in elections for the board of directors, and to vote on resolutions presented to the shareholders such as amendments to the articles of incorporation and board policy issues presented to shareholders by either the board of directors or blocks of shareholders who present the issue to the shareholder.

Typically, a shareholder with a large percentage of stock (a 10% threshold would be pretty common but each company's bylaws would determine the exact amount), can also convene a special meeting of the shareholders to conduct any business that the shareholders have the authority to conduct, including, in most cases, a vote on removing members of the board of directors without cause and replacing them with new directors.

These are pretty major decisions.

Also, since every member of the board will typically owe their appointment in part to the support of the large shareholders in the company (in practice, of course, directors are almost always elected unanimously on a Soviet ballot with only one candidate for each position), every director will normally be very solicitous of a large shareholder's opinions on corporate decision making even though they are legally bound to follow any particular large shareholder's directions, even if the shareholder owns a majority or supermajority of the outstanding shares.

END NOTE

In particular, there are two parts of the United States Constitution that address situations like these for certain federal employees: "the Foreign Emolument Clause and the Presidential Emolument Clause. The first of these provisions prohibits any "person holding any office of profit or trust under [the United States]" from "accept[ing]… any present, emolument, office, or title, of any kind whatever, from any king, prince, or foreign state" without Congressional consent. And the second prohibits the President from receiving "any…emolument" from the United States or any of the states, other than his official compensation."

  • So theoretically a shareholder could buy options and deliver them to the CEO. However, the power to give the CEO options (without anyone buying them) only falls on the board. Therefore, a major shareholder couldn't entice a CEO to join a company by saying, "the board will offer you a comfortable options package." He/she would be speaking on behalf of the board if they said that, and if the board disagreed with their strategy, the shareholder could be inclined to pressure or manipulate the board. Obligating the board is illegal, but wouldn't manipulation or pressure be illegal as well? – user27343 Feb 1 '19 at 3:09
  • The power to give the CEO options does not only fall on the board. Anyone can buy and sell and transfer options. I can go out and buy some options on General Motors stock and give them to a prospective CEO of GM if I want to do so. A shareholder certainly doesn't have the power or authority to dictate what compensation the corporation will provide a CEO candidate, as the shareholder doesn't have apparent authority to do so, and any CEO who believed that the shareholder could would be a fool not worthy of the post. The shareholder could merely say, "I'll push the board to compensate you well." – ohwilleke Feb 1 '19 at 16:14

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