Disclosure Provisions of the Model Business Corporation Act

By Keller, Stanley | Law and Contemporary Problems, Winter 2011 | Go to article overview
Save to active project

Disclosure Provisions of the Model Business Corporation Act

Keller, Stanley, Law and Contemporary Problems



In the past, when a nonpublic corporation sought shareholder approval for a fundamental change (such as a merger), it would provide a notice of the meeting stating its purpose and, if applicable, a statement regarding dissenters' appraisal rights. That is all the Model Business Corporation Act (MBCA) required, (1) and corporations generally paid little attention to a so-called "duty of disclosure" requiring them to provide additional information to shareholders, if such a duty even existed. Of course, in the case of public corporations subject to the Securities and Exchange Commission's (SEC) proxy rules, federal law mandated extensive disclosure. (2)

Times have changed. Now, even corporations that are not subject to the SEC's proxy rules may have to provide robust disclosure under state law. Indeed, in some cases, state law requires public corporations to provide even more disclosure than is mandated by the SEC's proxy rules. (3) This change has taken place primarily as a result of the development of the corporate common law, although there have been some statutory developments, including those under the MBCA. The development of disclosure requirements through decisional law rather than through statutory prescriptions highlights the important question of when corporate law should be codified legislatively and when it should be left to case-by-case judicial development. The American Bar Association's Committee on Corporate Laws ("the Committee") confronted this question when considering disclosure requirements as part of its continuing evaluation of the MBCA.



Historically, corporate statutes provided little guidance on the disclosures required when seeking shareholder approval. There was the notice of meeting, stating the meeting's purpose so that shareholders were alerted to the subject matter to be considered. If the matter triggered appraisal rights, the shareholders would have to be informed of those rights and the procedure to assert them. Little more was required under these statutes.

Similarly, corporate statutes typically did not mandate that information about the corporation be provided to shareholders on a regular basis, except in situations where corporate action required shareholder approval. Rather, shareholders were left to rely on their inspection rights and, beginning in 1960, the ability under the MBCA to request the corporation's available, recent financial statements. (4) It was not until 1978 that the MBCA required the corporation to provide annual financial statements to shareholders. (5)

This state corporation-law disclosure regime can be contrasted with the federal securities-law regime under which public companies--by statute and SEC regulations--are required to provide detailed information on a regular basis and in connection with shareholder actions. For example, companies subject to the SEC's reporting requirements must electronically file with the SEC an annual report, quarterly reports, and current reports covering specified events. Companies subject to the SEC's proxy rules are required to provide annual reports with financial statements and certain other information to shareholders. If corporate action is being taken by shareholders--including election of directors, approval of equity-compensation plans, or approval of fundamental changes like amendments or mergers--additional information, including transaction-specific information, is required.

Beginning about thirty years ago, the courts--especially in Delaware--began to focus on the inability of shareholders to effectively exercise their voting franchise if they were not given adequate information. This translated into a duty for directors, operating under traditional standards of care and loyalty, to ensure that shareholders received adequate disclosure so that they might properly exercise their voting rights on an informed basis.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Cite this article

Cited article

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Disclosure Provisions of the Model Business Corporation Act


Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?