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. …