Real-Life Decision Making
Problem-solving skills are extremely important to corporate lawyers. They are regularly expected to handle complex financial transactions, such as a merger between two large companies, or an initial public offering on the stock market. Their job is to make the best possible decision for their client, even when it means recommending something other than what the client originally asked for.
You are a corporate lawyer who works in a large law firm. Your client is one of the owners of a medium-sized oil firm. He wants you to open up a new class of preferred shares in the company.
This is not as easy as it sounds. Preferred shares are a separate class of shares from regular or common shares. When stockholders purchase common shares, that gives them voting rights in company decisions. Their voting rights are probably quite small. For example, a person owning 100 shares of a company may have less than one percent of the total vote. Still, it does give stockholders a voice in running the company.
By contrast, people who purchase preferred shares do not gain any voting rights. However, they do receive dividends. Preferred shares are often a great way to attract investors who are searching for a safe investment but don't want to be bothered with making decisions about the company.
Since paying dividends means less money for regular shareholders, it is not surprising that companies are often legally prevented from increasing the number of preferred shares without consulting the shareholders. That is the case here. Before issuing more preferred shares, your client's company must allow the shareholders to vote on the matter.
But your client does not want this. Instead, he thinks the board of directors should be able to decide the issue. The board has already met, and everyone supports the idea. Nonetheless, you are legally prevented from doing what he wants. What do you say to him?