Stockholder approval: Overview, definition, and example
What is stockholder approval?
Stockholder approval refers to the process in which a company’s shareholders (stockholders) are asked to approve certain significant corporate actions, decisions, or changes. These actions may include mergers, acquisitions, amendments to the company’s articles of incorporation or bylaws, issuance of new shares, and other major business decisions that could affect the company’s structure, operations, or governance.
Stockholder approval is typically required under corporate law or a company’s governing documents (such as its charter or bylaws) for certain actions, especially those that may substantially alter the rights or financial interests of shareholders. In publicly traded companies, stockholder approval is often sought through a shareholder vote during an annual or special meeting, and the results are legally binding.
Why is stockholder approval important?
Stockholder approval is important because it ensures that the company’s shareholders, as the owners of the business, have a say in major decisions that could impact their investments. It provides a system of checks and balances, ensuring that significant decisions are made in the best interests of the company and its shareholders.
For companies, seeking stockholder approval helps maintain transparency, prevent conflicts of interest, and ensure compliance with legal requirements. For shareholders, it is an opportunity to influence the direction of the company and ensure that management acts in their best interests.
Understanding stockholder approval through an example
Imagine a company is planning to merge with another business. The merger is a significant change that will impact the company’s structure, operations, and stock price. To proceed, the company must obtain stockholder approval by holding a shareholder vote. If the majority of shareholders vote in favor of the merger, the company can move forward with the transaction. Without stockholder approval, the merger cannot legally proceed.
In another example, a company wants to issue new shares to raise capital. According to its corporate governance rules, stockholder approval is required to authorize the issuance of additional shares. The company calls a special meeting where shareholders vote to approve or reject the proposal. If the majority approves the issuance, the company can go ahead with the plan; otherwise, the proposal is blocked.
An example of a stockholder approval clause
Here’s how a stockholder approval clause might look in a corporate agreement or shareholder resolution:
“The Company shall seek stockholder approval for the following corporate actions: (i) any merger or acquisition involving the Company; (ii) any issuance of additional shares of common stock; (iii) any amendment to the Company’s articles of incorporation that would alter the rights of stockholders. Stockholder approval shall be obtained by a majority vote at a duly convened meeting of stockholders or by written consent in accordance with the Company’s bylaws.”
Conclusion
Stockholder approval is a key aspect of corporate governance, ensuring that shareholders have a voice in major decisions that affect their investments. By requiring stockholder approval for significant corporate actions, companies maintain transparency, comply with legal standards, and protect shareholder interests. For shareholders, it is an important right that allows them to influence the company’s future and ensure that their interests are aligned with management decisions.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.