Global Journal of Management and Business Research, D: Accounting and Auditing, Volume 22 Issue 2

not have the right to exercise control over the corporation’s assets. The corporation’s board of director’s holds that right.” Thus, it is the board, not the shareholders, that has the power to contract with corporate assets. This finding, combined with the previous finding that shareholders have no right to possess , results in the verdict below. Shareholders have no right to use corporate assets. h) Liability of Execution Do shareholders have the liability of execution against corporate assets? The liability of execution is “the liability of the owner’s interest to be taken away from him for debt, either by execution of a judgment debt or on insolvency...” (Honoré 1961, 123) In order for shareholders to have the liability of execution , personal creditors would need the power to legally enforce payment in corporate assets. Entity shielding, as defined in this paper, disables personal creditors from this power ; thus, shareholders cannot have the liability of execution . Shareholders do not have the liability of execution. i) Prohibit Harmful Use Do shareholders have a duty to prohibit harmful use of the corporate assets? In order for shareholders to have a duty to prohibit harmful use , others must have corresponding rights to recourse, if the duty is breached. State statues prohibit parties wronged by the corporation from pursuing recourse against the shareholders. For example, “A shareholder of a corporation is not personally liable for the acts or debts of the corporation...” (MBCA §6.22(b)) Thus, because of limited liability, the most shareholders can lose is the market value of their stock. Shareholders have no duty to prohibit harmful use of corporate assets. j) Right to Manage Do shareholders have a right to manage the corporate assets? Honoré defines the right to manage as the “…right to decide how and by whom the thing owned will be used.” […] “This right depends, legally, on a cluster of powers, chiefly powers of licensing acts which would otherwise be unlawful and powers of contracting: the power to admit others to one’s land, to permit others to use one’s things, to define the limits of such permission, and to contract effectively in regard to the use (in the literal sense) and exploitation of the thing owned.” (Honoré 1961, 116) The analysis on the right to use , established that shareholders cannot directly contract with corporate assets. But, as Honoré implies, the right to manage also includes the power to permit others to use the thing and to “define the limits of such permission.” For our purposes, this definition translates to the following questions: (1) To what degree do shareholders have the power to designate board membership? (2) To what degree do shareholders have the power to limit board discretion in managing corporate assets? Related to the first question, legal experts maintain that the shareholder’s right to vote in board elections gives shareholders negligible power to designate board membership. These experts cite several contributing factors. First, absent a proxy contest, the nominees of the existing board are automatically elected. 18 Second, shareholders who do launch proxy contests pay for the printing and distribution of the proxy materials, while incumbent directors and management pay with corporate funds. Third, shareholders are “rationally apathetic” toward proxy fights, in part, because they have the option to sell their shares. 19 Forth, boards can create obstacles for insurgents by staggering the terms of its members 20 and increasing the number and heterogeneity 21 of shareholders in order to reduce “…the incentive and ability of each shareholder to gather information and monitor effectively…” (Monks 2001, 102)The result, explains Former SEC Chair, Arthur Levitt Jr., is that “…board elections are one-party affairs, with the incumbent board’s choices winning in virtually every case” […] “A director has a better chance of being struck by lightning than losing an election.” (Levitt 2006, 14) Others who voice similar opinions include Vice Chancellor of the Delaware Court of Chancery, Leo Strine, 22 and legal scholars Bob Monks, 23 Stephen Bainbridge, 24 and Jill Frisch. 25 18 “In practice…the election of directors (absent a proxy contest) is predetermined by the existing board nominating the next year’s board.” (Bainbridge 2002, footnote 10). 19 “Rather than try to control the decisions of the management, which is harder to do with many stockholders than with only a few, unrestricted salability provides a more acceptable escape to each stockholder from continued policies with which he disagrees.” (Alchian and Demsetz 1972, 13) 20 Many boards are staggered, meaning that discontent shareholders must have their insurgents prevail in two consecutive elections in order to elect a majority of the board. Delaware General Corporation Law section 141(d) permits a corporation’s charter to create up to three classes of directors, only one of which is elected each year, or boards may be classified with shareholder approval. 21 To the extent shareholders differ in levels of information and preferences, they are a heterogeneous group. “When, as is often the case today, the corporation has a complicated capital structure consisting of several classes of shares or is part of a holding company system which has such a capital structure, the interests of the dominant shareholders may be widely divergent from those of the holders of other classes, particularly if the corporation fails to prosper.” (Dodd 1941, 926) 22 Vice Chancellor of the Delaware Court of Chancery, Leo Strine, has noted in a law review article that the "proxy mechanism is titled heavily in favour of the management slate, and contested elections rarely occur outside the takeover context," [which of course raises questions about] "a corporate election process that is so heavily biased towards incumbents and their self-chosen successors." (Quoted in Donaldson 2005) The Effects of Entity Shielding on Claims to Assets: Implications for Financial Reporting 26 Global Journal of Management and Business Research Volume XXII Issue II Version I Year 2022 ( )D © 2022 Global Journals 23 "[T]he American shareholder cannot nominate directors, he cannot remove them, he cannot--except at the arbitrary pleasure of the SEC-- communicate advice to them. Democracy is a cruelly misleading word