Shareholder Informational Rights and Proxy Voting June 13, 2007

1. Shareholder Informational Rights and Proxy VotingJune 13, 2007

2. CLASS AGENDA State Law Statutory Framework State Law Affirmative Disclosure Requirements Federal Law Statutory Framework Federal Securities Law Overview Proxy Solicitations and SEC Rule 14a-9 Shareholder Proposals Proxy Contests

3. Basic Premises Corporation shareholders are owners of the corporation. Nevertheless, neither state law nor federal law permits them an unlimited right to be informed of everything about the corporation or to obtain all information about the corporation. Shareholders do, however, have certain informational rights to information under state law and federal law. Shareholder Informational Rights and Proxy Voting

4. Shareholder Informational Rights and Proxy Voting From a practical perspective, corporations (other than close corporations) may have thousands of shareholders and the provision of information to each of them without limitation would be impracticable, overly burdensome, and expensive.

5. Shareholder Informational Rights and Proxy Voting Further, most public corporation shareholders are disinterested in minute information and, rather, are interested primarily in the market value of their investment. They generally do not attend corporation shareholder meetings. Instead, shareholder involvement is conducted mainly through the proxy voting process. The law recognizes these realities.

6. Statutory Framework: State Law At common law, shareholders acting in good faith had a right to inspect books and records to advance the interests of the corporation. A majority of states now grant shareholders a right under corporation statutes to inspect books and records, including a list of shareholders, upon a showing of a properpurpose.

7. Statutory Framework: State Law Alabama Code§ 10-2B-16.02(a)[RMBCA § 16.02(a)] permits a shareholder—any shareholder, whether of record or beneficial—a right to inspect, upon 5 business days’ written notice, those records listed in –16.01(e): • Articles of Incorporation • Bylaws • Stock creation board resolutions • Shareholder meeting minutes (3 years) • Director/officer names and addresses • Annual report or Revenue Department information

8. Statutory Framework: State Law Alabama Code§ 10-2B-16.02(b) [RMBCA § 16.02(b)] permits a shareholder who: • has held “of record” for at least 180 days or • is the holder “of record” of at least 5% of the outstanding shares…

9. Statutory Framework: State Law …the right to inspect all books, papers, records of account, minutes and record of shareholders, if the shareholder gives the corporation written notice of his or her demand, statingthepurpose therefor, at least 5 business days before the date on which he or she wishes to inspect and copy. This right encompasses a shareholder list and board minutes not encompassed by subsection 16.02(a).

10. Statutory Framework: State Law The purpose for inspection under -16.02(b) must be a “proper purpose,” stated with reasonable particularity, and made in “good faith.” See -16.02(c). The records requested must be directly related to the stated purpose. The burden of proof in Alabama is on the corporation, not the shareholder, to disprove the propriety of the stated purpose.

11. Statutory Framework: State Law DGCL § 220 is similar to RMBCA in most respects, including a requirement of a statement of a “proper purpose” for inspection, but there is no 2-tier inspection right. Under Delaware law, there is a presumption that a request for a shareholder list is for a proper purpose. Otherwise, the burden is on the shareholder to prove propriety of purpose.

12. Statutory Framework: State Law Inspection of Shareholder List: Most shareholders “of record” of publicly held corporations are not the “beneficial owners” of securities. For example, the record list may reflect that the shareholder is Merrill Lynch, but Merrill is just a “nominee” and Merrill’s shares are actually composed of “street name” holdings of a multitude of beneficial owners.

13. Statutory Framework: State Law Inspection of Shareholder List: Would it be meaningful to provide only a record list of names shareholders in response to an inspection request? No. A meaningful list must include the names of non-objecting beneficial owners—NOBOs—as well record list nominees. See Sadler v. NCR, 928 F.2d 48 (2d Cir. 1991) (applying NY law).

14. Affirmative State LawDisclosure Requirements Shareholder inspection rights are triggered by shareholders, not by corporations, and the corporate disclosure obligation is not affirmative but, rather, it is responsive. We will see that federal shareholder informational rights are largely affirmative obligations of corporations. There are, however, certain state corporate affirmative obligations.

15. Affirmative State LawDisclosure Requirements Financial Statement Disclosure § 10-2B-16.20 requires that a corporation mail to its shareholders within 120 days after the end of its fiscal financial statements, including a balance sheet, an income statement, and a statement of changes in shareholders’ equity as of the end of the fiscal year. This obligation is satisfied by SEC reporting companies through compliance with federal reporting requirements.

16. Affirmative State LawDisclosure Requirements Duty of Candor Under Delaware law, a board of directors and other insiders have a state law fiduciary duty to disclose to shareholders fully and fairly all material information within the board’s control when it seeks shareholder action. See Shell Petroleum, Inc. v. Stroud, 606 A.2d 112 (Del. 1992).

17. Affirmative State LawDisclosure Requirements Duty of Candor A fact is considered material if there is a "substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." See Shell Petroleum, Inc. v. Stroud, 606 A.2d 112 (Del. 1992).

18. Affirmative State LawDisclosure Requirements Duty of Candor "While it need not be shown that an omission or distortion would have made an investor change his overall view of a proposed transaction, it must be shown that the fact in question would have been relevant to him." Barkan v. Amsted Industries, Inc., 567 A.2d 1279, 1289 (Del. 1989).

19. Affirmative State LawDisclosure Requirements Duty of Candor This materiality test involves an evaluation of factual evidence and a legal conclusion as to whether the information would be relevant to a shareholder. It is left to the shareholder to make a decision whether the information would cause a change of decision about the transaction.

20. ShareholderInformational Rights Under Federal Law

21. Federal Securities Law Overview Securities Act of 1933—investor protection law that governs registration and exemptions from registration of securities for initial offer or sale to investors.

22. Federal Securities Law Overview The ’33 Act is a disclosure law. An analogy is that it is much like the Motion Picture Association of America’s PG, R, G, and NC ratings. Theoretically, the MPAA doesn’t regulate the level of sex and violence that can appear in movies. The ratings just disclose what you’re getting and you are then free to buy all the sex and violence you want.

23. Federal Securities Law Overview Same goes for the ’33 Act disclosure requirements. Issuers of securities have to disclose through a prospectus a lot of information about the securities, the issuer, management, and other items considered material to investors. Theoretically, investors may then evaluate what is being offered to them and it’s up to the investor to make a decision whether to buy or not buy.

24. Federal Securities Law Overview The definition of the term “security” in § 2(a)(1) of the ’33 Act (and elsewhere in the securities law statutes) is extremelybroad. It includes not only equity stocks but debt instruments; caps, collars, floors, and other hedge instruments; some CDs; undivided interests in oil and gas mineral rights; participation interests in profit-sharing plans; “investment contracts;” and on and on.

25. Federal Securities Law Overview Securities Exchange Act of 1934—governs the regulation of the securities markets after the initial offer and sale of securities into the market. The ’34 Act covers broker-dealers, proxy solicitations, public reporting by and relating to public companies, “insider” trading, securities fraud, and tender offers.

26. Federal Securities Law Overview Securities regulation is a system of “dual regulation” by the federal government and state governments. State securities laws are referred to as “blue sky” laws, a term coined long ago and referring to laws intended to regulate sellers of worthless securities evidencing no more than the clear “blue sky.”

27. Federal Securities Law Overview Unlike the federal ’33 Act, however, some state blue sky laws purport to regulate the merits or quality of securities. If a state securities administrator deems a security too risky, it may deny the issuer’s offer or sale of the security in the state.

28. Federal Securities Law Overview In addition to civil liabilities that are associated with violations of federal and state securities laws, most violations are also criminal. For example, fraud “in connection with any security…” is a crime under § 1348 of the federal criminal code and is punishable by monetary fines, imprisonment, or both.

29. Federal Securities Law Overview The antifraud provisions of the federal securities laws are found in: • § 17(a) of the ’33 Act • § 10(b) of the ’34 Act and Rule 10b-5 • § 14(a) of the ’34 Act and Rule 14a-9 • § 14(e) of the ’34 Act and Rule 14e-3 The antifraud provisions apply to any transaction in interstate commerce and cannot be waived by any party to the transaction.

30. Federal Securities Law Overview In addition, every state has its own antifraud provisions. Violations of those state provisions are also subject to separate civil liabilities, monetary fines, and imprisonment.

31. Federal Securities Law Overview There is much, much more to the securities laws than we will touch upon in our brief overview of some basic statutes and rules. Securities law practice involves dealing with elaborate and complex statutes, regulations, and administrative materials with relatively substantially risk given the dollar amounts involved in stock offerings and the exposure to prospective and existing investors.

32. U.S. Securities and Exchange Commission • The federal securities laws are administered by the United States Securities and Exchange Commission. • The SEC consists of 5 Commissioners appointed by the President, 4 Divisions and 18 Offices. With approximately 3,100 staff, the SEC is small by federal agency standards, but it wields great power in financial regulation and enforcement. Headquartered in Washington, DC, the SEC has 11 regional and district offices throughout the country. Seewww.sec.gov.

33. Securities Exchange Act of 1934 The Securities Exchange Act of 1934, which is referred to as the Exchange Act or the ’34 Act, among other things, imposes public disclosure and information delivery requirements on corporations whose securities are registered under § 12(g) of the ’34 Act. These corporations are what we mean by the term “public companies.”

34. Securities Exchange Act of 1934 What securities are generally required to be registered under “34 Act § 12(g)? • Any security that is traded on a national securities exchange (NYSE, NASDAQ, AMEX, etc.) and • Any equity security issued by a corporation with total assets > $5MM and held by 500 or more persons

35. ’34 Act Reporting Public companies are subject to the periodic reporting requirements of the ’34 Act. They are required to file with the SEC: • Annual Report on Form 10-K, currently within 75 days after the end of the fiscal year (after 12/15/2005, within 60 days) • Quarterly Reports on Form 10-Q, currently within 40 days after the end of the fiscal quarter (after 12/15/2006, within 35 days) • Current Reports on Form 8-K to report certain specified material information and to report voluntarily other material corporate developments.

36. ’34 Act Proxy Solicitations In addition to the reporting requirements, public companies are subject to the ’34 Act proxy solicitation requirements and the “proxy rules” promulgated thereunder. The definitions of “proxy” and “solicitation” are very broad and essentially encompass every request from a public company to shareholders for a decision to be expressed in the form of a proxy.

37. ’34 Act Proxy Solicitations SEC Rule 14a-3 requires the delivery of a “proxy statement” in connection with any proxy solicitation. The proxy statement must contain the information specified in Schedule 14A. Rule 14a-3 also requires the delivery of an annual report to shareholders along with a proxy statement for an annual meeting proxy solicitation and sets forth the information requirements for the annual report.

38. ’34 Act Proxy Solicitations SEC Rule 14a-9 embodies the general antifraud proscriptions applicable to proxy solicitations. Rule 14a-9 prohibits the use of any proxy soliciting material (we’ll just refer to this as the “proxy material”) containing any statement that is false or misleading with respect to a material fact or which omits any material fact that would make a statement in that proxy statement or any previous disclosure false or misleading.

39. ’34 Act Proxy Solicitations In J.I. Case Co. v. Borak (USSC 1964) (see Text p. 216), and repeatedly thereafter, the U.S. Supreme Court has recognized an implied private right of action under Rule 14a-9. There is an implied private right of action under SEC Rule 14a-9.

40. ’34 Act Proxy Solicitations In Borak the Court found an implied private right of action even though neither the ’34 Act nor the proxy rules provided explicitly for any private right of action. The Court has recognized implied rights on many occasions. For example, it has found implied privacy rights in “penumbra”—these are defined as the shadows or an area where something exists to an uncertain degree—of the U.S. Constitution.

41. ’34 Act Proxy Solicitations The Borak decision was based on a general rule of the law of torts, which you may remember from that course. It is found in the Restatement (Second) of Torts§ 286, which provides that a court may adopt as a standard of conduct the requirements of a legislative or administrative regulation the purpose of which is protect against a harm intended to be prevented.

42. ’34 Act Proxy Solicitations Well, back to SEC Rule 14a-9. The rule prohibits the use of any proxy material containing any statement that is false or misleading with respect to a material fact or which omits any material fact that would make a statement in that proxy statement or any previous disclosure false or misleading.

43. ’34 Act Proxy Solicitations: Materiality In order for a false or misleading statement or an omission of a statement to be actionable, that statement must relate to a fact that is material. Materiality is an essential element of any claim based on one of the federal securities laws’ antifraud provisions. The American Heritage Dictionary defines “material” as “of sufficient importance or relevance as to have possible significant influence on an outcome.”

44. ’34 Act Proxy Solicitations: Materiality How has the United States Supreme Court defined the terms “material” or “materiality” for purposes of Rule 14a-9?

45. ’34 Act Proxy Solicitations: Materiality The controlling case on the definition of “materiality” under ’34 Act § 14(a) and Rule 14a-9 is TSC Industries v. Northway, Inc. (USSC 1976) (see Text p. 218).However, its definition of materiality has become the general standard for the materiality definition and has been followed under other sections of the Securities Act of 1933 and the ‘34 Act.

46. TSC Industries: Materiality Therefore, TSC Industries is a very important case in the area of securities law.

47. TSC Industries: Materialty The Text does not provide the facts of this case, but the facts were that: • National Industries purchased 34% of TSC's voting securities from TSC's founder and principal shareholder and his family in a friendly transaction • TSC’s founder and his son promptly resigned from TSC's board of directors

48. TSC Industries: Materialty • 5 National nominees were placed on the board, including National's president and EVP, who subsequently became, respectively, TSC’s board chairman and executive committee chairman • TSC’s board approved a proposal to buy the remainder of TSC so that National would then own 100% of TSC • A Joint Proxy Statement and Prospectus recommending the proposal and soliciting proxy votes was sent to TSC’s remaining stockholders

49. TSC Industries: Materialty • The solicitation of TSC’s stockholders’ proxies was successful—they approved the transaction • Northway, stockholder of TSC, sued claiming that the proxy statement was incomplete and materially misleadingin violation of 14(a) and Rule 14a-9 in that it omitted material facts relating to the degree of National's control over TSC certain unfavorable information about the proposal contained in a letter from an investment banking firm

50. TSC Industries: Materialty Therefore, this case alleged fraud due to an omission of material facts as opposed to a false or misleading statement of material facts. That is, it is a material omission case.