17.3 State and federal laws stipulate how stockholder control is to be exercised. First
corporations must hold an election of directors periodically.
17.4 Stockholders can appear at the annual meeting and vote in person, but typically
they transfer their right to vote to a second party by means of a proxy.
Management always solicits stockholders’ proxies and usually gets them.
However, if earnings are poor and stockholders are dissatisfied, an outside group
may solicit the proxies in an effort to overthrow management and take control of
the business. This is known as a proxy fight.
17.5 The question of control has become a central issue in recent years. The frequency
of proxy fights has increased, as have attempts by one corporation to take over
another by purchasing a majority of the outstanding stock. This latter action is
called a takeover
17.6 Managers who do not have majority control (more than 50 percent of their firms’
stock) are very much concerned about proxy fights and takeovers, and many of
tem attempt to get stockholder approval for changes in their corporate charters
that would make takeovers more difficult.
17.7 Common stockholders often have the right, called the preemptive right, to
purchase any new shares sold by the firm. In some states, the preemptive right is
automatically included in every corporate charter.
17.8 The purpose of the preemptive right is twofold. First, it enables current
stockholders to maintain control. If it were not for this safeguard, the
management of a corporation could issue a large number of additional shares and
purchase these shares itself. Management could thereby seize control of the
corporation and frustrate the will of the current stockholders.
- Types Of Common Stock
18.1 Although most firms have only one type of common stock, in some instances
classified stock is used to meet the special needs of the company, Generally,
when special classifications of stock are used, one type is designated Class A,
another Class B, and so on. Small, new companies seeking funds from outside
sources frequently use different types of common stock. For example, when
Genetic Concepts went public recently, its Class A stock was sold to the public,
and it received a dividend, but this stock had no voting rights for five years. Its
Class B stock, which was retained by the organizers of the company, had full
voting rights for five years, but the legal terms stated that dividends could not be
paid on the Class B stock until the company had established its earning power by
building up retained earnings to a designated level. The use of classified stock
thus enabled the public to take a position in a conservatively financed growth
company without sacrificing income, while the founders retained absolute control
during the crucial early stages of the firm’s development. At the same time,