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BARBRI - NY Corporations > 4. Shareholders > Flashcards

4. Shareholders Flashcards

1
Q

What is a close corporation?

A
  1. Few shareholders

2. The stock is not publicly traded

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2
Q

If you want to have shareholder management in a close corporation, you have a provision in the certificate restricting or transferring board power to shareholders (or others). You also need:

A

(1) All incorporators or shareholders (voting and nonvoting) approve it;
(2) It is conspicuously noted on front and back of all shares;
(3) All subsequent shareholders have notice and
(4) Shares are not listed on an exchange or regularly quoted over-the-counter.

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3
Q

In a close corporation run by shareholders, who owes the duties of care and loyalty?

A

The managing shareholders

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4
Q

What are reasonable expectations of most people who invest in a close corporation?

A
  1. A job
  2. A voice in management
  3. Some return on investment
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5
Q

Professional service corporations

A

Members of a licensed profession, like doctors and lawyers, cannot practice the profession through a general business corporation. But they can form a professional service corporation, usually abbreviated “P.C.”

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6
Q

Must shareholders, officers, and directors in a P.C. be licensed professionals?

A

Yes, but we can hire non-professionals as employees.

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7
Q

Are the professionals in a PC liable for their own malpractice?

A

Yes, but not for that of the others.

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8
Q

Are the professionals liable for contracts entered by the entity or for rent due on leases in the
P.C.’s name?

A

No, the entity is liable.

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9
Q

What happens if a shareholder in a P.C. dies or is disqualified from the practice?

A

The entity must buy back his shares.

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10
Q

When might a shareholder be personally liable for what the corporation did?

A

A shareholder might be personally liable for what the corporation did if the court “pierces the corporate veil”

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11
Q

PCV can happen in what kind of corporation?

A

In close corporations only.

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12
Q

Requirements to PCV and hold shareholders personally liable

A

(1) they must have abused the privilege of incorporating and

(2) fairness must require holding them liable.

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13
Q

Why might fairness require PCV?

A

If a shareholder exercises complete domination and control over the business to: perpetrate fraud or injustice.

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14
Q

What is a shareholder derivative suit?

A

In a derivative suit, a shareholder is suing to enforce the corporation’s claim, not her own personal claim. It’s a case in which the corporation is not pursuing its own claim, so a shareholder steps in to prosecute the claim.

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15
Q

Generally, who gets the recovery in a successful derivative suit?

A

The corporation

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16
Q

What does the shareholder that is successful in a shareholder derivative suit receive?

A

Costs and attorney’s fees, usually from the judgment won for the corporation. After all, she conferred a benefit on the corporation by suing and winning.

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17
Q

If S loses the derivative suit, can S still recover costs and expenses?

A

No

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18
Q

If S loses a shareholder derivative suit, is S liable to the defendants for their costs?

A

Probably, because the winner usually recovers costs from the loser.

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19
Q

What are the requirements for bringing a shareholder derivative suit?

A
  1. Stock ownership when claim arose, when the action is brought, and through judgment.
  2. Plaintiff must adequately represent the interests of the corporation and shareholders.
  3. S can be required to post a bond for the defendant’s costs. She does not have to, though, if she owns five percent or more of the stock or her stock is worth more than $50,000.
  4. S must make a demand on directors that the corporation sue.
  5. Special pleading requirement: S must plead with particularity her efforts to get the board to sue or why the demand was futile.
  6. The corporation must be joined in the litigation – as a defendant. That makes no sense, because it is the corporation’s claim, but that’s the rule.
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20
Q

Suppose S makes the demand and the board refuses to have the corporation sue. Can S now
bring the derivative suit anyway?

A

Only if she can show that a majority of the board is interested, or its procedure was incomplete or inadequate.

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21
Q

Can the corporation move to dismiss a derivative suit?

A

The corporation can move to dismiss. The motion is based on a finding by independent directors (or a committee of independent directors, sometimes called a “special litigation committee”) that the suit is not in the corporation’s best interests.

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22
Q

What does the court look at in deciding whether to dismiss a derivative suit?

A
  1. Independence of those making the investigation

2. The sufficiency of the investigation

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23
Q

What shareholders vote?

A

General rule is that record owner as of record date has the right to vote.

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24
Q

Who is a record owner?

A

The record owner is the person shown as the owner in the corporate records.

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25
Q

What is the record date?

A

The record date is a voter eligibility cut-off, set no fewer than 10 and no more than 60 days before the meeting.

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26
Q

Exceptions to the general rule that record owner on record date votes

A
  1. Treasury stock - It is not outstanding
  2. Death of shareholder - the decedent’s executor can vote the shares
  3. Proxies - OK for shareholder voting
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27
Q

A proxy is a

A

(1) writing,
(2) signed by record shareholder or authorized agent,
(3) directed to secretary of corporation,
(4) authorizing another to vote the shares.

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28
Q

How long is a proxy good for?

A

11 months unless it says otherwise

29
Q

How can a proxy be revoked?

A
  1. In writing or
  2. By attending the meeting and voting, or
  3. When written notice of death is received by the corporation
30
Q

Can S revoke her proxy even though it states that it is irrevocable?

A

Yes

31
Q

When is a proxy really irrevocable?

A

(1) It says irrevocable and
(2) The proxy-holder has some interest in the stock other than voting.

(this is called an irrevocable proxy)

32
Q

Requirements for voting trust

A

(1) Written trust agreement controlling how the shares will be voted;
(2) Copy to corporation;
(3) Transfer legal title of shares to voting trustee; and

(4) Original shareholders receive voting trust certificates and retain all
shareholder rights except for voting.

33
Q

Is there a time limit on voting trusts?

A

Yes, a 10 year maximum.

34
Q

Can shareholders enter into voting agreements?

A

Yes

35
Q

What is required for a voting agreement?

A

In writing and signed

36
Q

Are voting agreements specifically enforceable?

A

No

37
Q

Two shareholders agree to vote to elect each other as directors. That’s OK, because electing directors is something shareholders do. But what if they then agree about what actions they will take once they are directors?

A

That is void, there are no voting agreements for director voting.

38
Q

What are the only two ways the shareholders can take a valid act?

A
  1. Written consent of the holders of all voting shares, or

2. A meeting

39
Q

What do we do at the annual meeting?

A

Elect directors

40
Q

If the annual meeting is not held, what happens?

A

A court can order one

41
Q

Special meeting: Who can call one?

A

1) board or

2) anyone provided in the
certificate or bylaws.

42
Q

Notice requirement for shareholder meetings

A

Must give written notice (e-mail is OK) to every shareholder entitled to vote, for every meeting (annual or special) between 10 and 60 days before the meeting.

43
Q

Contents of a notice of a shareholder meeting

A
  1. It always must state the time and place
  2. If action proposed at the meeting is something on which shareholders would have appraisal rights, the notice must say so and tell why (and even include the statute about appraisal rights).
  3. Who called it and the purpose of the
    meeting.
44
Q

What happens if the corporation does not give notice to everyone entitled to vote?

A

Any action at the meeting is void.

45
Q

Shareholders generally get to vote on these things:

A

(1) to elect directors
(2) to remove directors and
(3) on fundamental corporate changes.

They may also vote on other things if the board asks for a shareholder vote on those things.

46
Q

how many shareholders are needed to be present to vote at a shareholder meeting?

A

Every time the shareholders vote, we must have a quorum represented at the meeting.

General rule: a quorum requires a majority of outstanding shares.

47
Q

Can a shareholder quorum be lost if people leave the meeting?

A

No, that is a different rule from director voting

48
Q

Can the certificate or bylaws reduce a quorum to less than a majority?

A

Yes in the certificate or bylaws, but never fewer than 1/3 of the shares entitled to vote.

49
Q

Is it possible to impose a requirement that a supermajority (e.g., 90%) of the shares entitled to vote to be present at the meeting to constitute a quorum?

A

Yes, in the certificate only, and not the bylaws.

50
Q

Is it possible to impose a requirement that resolutions at a meeting must be approved by a supermajority (say, 2/3 of the shares)?

A

Yes, in the certificate only, and not the bylaws.

51
Q

If the quorum requirement is met, the shareholders vote. What vote is required?

A

(1) To elect a director: plurality (the person who gets more votes for that seat on the board than anyone else).
(2) To approve a fundamental corporate change.
(3) Other matters: majority of the shares that actually vote on the issue.

52
Q

How and when do shareholders use cumulative voting?

A
  1. Cumulative voting is only available when shareholders are voting to elect directors. It is a device to help small shareholders get representation on the board.
  2. Multiply number of shares times number of directors to be elected.
53
Q

If the certificate says nothing about cumulative voting, do the shareholders get to use
cumulative voting?

A

No, this exists only if the certificate says so

54
Q

S has 100 shares of $4 par, C Corp. stock. Can S sell her shares for less than $4 a share?

A

Yes, par is an issuance rule, and those apply only when the corporation is selling its own stock.

55
Q

Where are stock transfer restrictions set?

A

In the certificate, or bylaws, or an agreement.

56
Q

Stock transfer restrictions are valid if:

A

They are not an undue restraint on alienation

57
Q

Even if a stock restriction is valid, it cannot be invoked against the transferee unless either:

A

1) it is conspicuously noted on the stock certificate or

2) the transferee had actual knowledge of the restriction.

58
Q

Regarding (1) minutes of shareholder proceedings and (2) the record of shareholders. Who can demand access to these?

A

Any shareholder on five days written demand.

59
Q

Three types of distributions

A

(1) dividend or
(2) payment to repurchase shares or
(3) to redeem shares [forced sale to corporation at price set in certificate].

60
Q

Distributions are declared in the Board’s discretion. So when do shareholders have a right to a distribution?

A

When the Board declares it.

61
Q

Will a court interfere with the Board’s discretion and order a distribution?

A

Only on a showing of bad faith or dishonest purpose.

62
Q

What is preferred stock?

A

Preferred means pay first.

63
Q

What is preferred participating stock?

A

Participating means pay again. So these shares get paid twice – once as preferred and again because they are participating.

64
Q

Which funds may be used for any distribution (dividend, repurchase, redemption)?

A
  1. Surplus
  2. Stated capital
  3. mm
65
Q

How is surplus computed?

A

Assets - Liability - Stated Capital

66
Q

Can stated capital be used for distributions?

A

Never

67
Q

Corporation can make distributions even though it lost money last year; corporation cannot make distributions if it is insolvent or if the distribution would render it insolvent. What does “insolvent” mean?

A

The corporation is unable to pay its debts as they come due in the ordinary course of business.

68
Q

Directors are personally liable for unlawful distributions. So are shareholders who knew the distribution was unlawful when they received it. Who would sue to recover here?

A

The corporation

BARBRI - NY Corporations (6 decks)

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