4. Shareholders Flashcards
Management
Do SHs manage the company? How come?
No, because the board does
Management
What one type of company can SHs manage?
Close corp (few SHs and not publically traded)
Management
What special duty is owed by SHs in a close corp?
Duty of utmost good faith
Piercing the corporate veil
What are the two requirements?
- SHs must have abused privilege of incorporating
- Fairness must require holding them liable
Piercing the corporate veil
What are the two instances where the CV will be P’d?
- Alter ego
- Undercapitalisation
Piercing the corporate veil
What are the two instances where the CV will be P’d?
- Alter ego
- Undercapitalisation
Piercing the corporate veil
What two things can trigger alter ego?
- Mixing corp and personal funds
- Using corporate assets as your own
Piercing the corporate veil
In an alter ego case, who is liable?
Only the abusing SH
Piercing the corporate veil
What is the structure of an alter ego answer?
- State the general rule that SHs are not personally liable
- State PCV 2 steps
- Apply facts to abuse and fairness
Piercing the corporate veil
What is undercapitalisation?
Corp does not have enough money to cover prospective liabilities
Piercing the corporate veil
What is the structure of an undercapitalisation answer?
- State the general rule that SHs are not personally liable
- State PCV 2 steps
- State corp was undercapitalised when formed
Piercing the corporate veil
In an undercapitalisation case, what plaintiffs is a court more likely to PCV for?
Tort victims, as opposed contract
Derivative Suits
What is a derivative suit?
Suit brought by SH on behalf of corp
Derivative Suits
What question do we ask to determine if an action by a SH is a derivative suit?
Could the corp have brought this suit themselves?
Derivative Suits
Who gets the proceeds from a derivative suit?
The corp directly, but SH is reimbursed
Derivative Suits
What are the two consequences when a SH loses a derivative suit?
- Cannot recover costs from corp
- SH personally liable for D’s costs if SH sued without reasonable cause
Derivative Suits
What are the four requirements a SH must satisfy to take a derivative suit?
- Stock ownership when claim arose and throughout the case
- SH must adequately represent corp’s interest
- Make written demand on corp to take the suit
- Join D as defendant
Derivative Suits
After making a written demand on the corp to take the suit, what is the waiting period set by most states before SH can commence suit?
90 days
Derivative Suits
What is the one exception to the 90 day waiting period?
Where waiting is futile, e.g. directors are defendant who would never sue themselves
Derivative Suits
How can a derivative suit be dismissed?
With court approval only
Shareholder Voting - Who votes?
What is the record shareholder vote rule?
The person who owns the stock at the record date votes, even if they sell the stock between the record date and the vote
Shareholder Voting - Who votes?
What happens if a SH dies between record date and the vote?
His estate vote
Shareholder Voting - Who votes?
What is a proxy vote?
Writing signed by record SH, directed to secretary or corp, authorises another to vote his share
Shareholder Voting - Who votes?
Unless otherwise stated, how long does a proxy last?
11 months
Shareholder Voting - Who votes?
How is a proxy revoked?
- In writing to secretary
- By attending meeting and voting
Shareholder Voting - Who votes?
When is a proxy truly irrevocable?
The proxy-holder has an interest in the share, other than voting
Shareholder Voting - Who votes?
When are the ways to poor voting power together?
- Voting Trust
- Voting Agreement
Shareholder Voting - Who votes?
What is a voting trust and what is its max duration?
Written trust agreement controlling how shares will be voted, which transfers legal title to the voting trustee
Shareholder Voting - Who votes?
What rights do SHs retain when they enter into a voting trust?
All rights, except right to vote
Shareholder Voting - Who votes?
What is a voting agreement?
A written contract to vote a certain way, signed
Shareholder Voting - Who votes?
Are voting agreements allowed?
States a split, but there is a trend towards yes
Shareholder Voting - Where do they vote?
Does there have to be a meeting for a vote?
No, SHs can assent to an action unanimously in writing
Shareholder Voting - Where do they vote?
Does the meeting have to be in the state of incorporation?
No
Shareholder Voting - Where do they vote?
What notice is required for meetings?
Between 10 and 60
Shareholder Voting - Where do they vote?
Does the purpose of the meeting need to be included in the notice?
Only if it is a special meeting, i.e. not the annual meeting
Shareholder Voting - Where do they vote?
What is the scope of a special meeting?
Cannot go beyond the purpose stated in the notice
Shareholder Voting - How do they vote?
What do SHs vote on, and is this list absolute?
- Elect/remove directors
- Fundamental corporate changes
No, board can broaden scope of what SHs can vote on
Shareholder Voting - How do they vote?
How is a quorum determined?
Majority of the number of shares, not shareholders
Shareholder Voting - How do they vote?
What vote is required to elect a director?
Director who gets most votes wins
Shareholder Voting - How do they vote?
What vote is required to remove a director?
Traditionally, majority of shares entitled to vote
Recent trend toward majority of votes cast at meeting
Shareholder Voting - How do they vote?
What vote is required for all other matters?
Majority of votes cast at meeting
Stock Transfer Restrictions
Are STRs allowed?
Yes, unless an undue restraint on alienation
Stock Transfer Restrictions
If A sells stock with an STR to B, what two things are required to make it enforceable against B?
- STR conspicuously noted on stock
- B had actual knowledge of STR
Right to Inspect or Copy Corp’s Records
Who can demand access?
Any SH
Right to Inspect or Copy Corp’s Records
What are the two categories of records?
- Non-controversial
- Controversial
Right to Inspect or Copy Corp’s Records
What one thing must a SH do to access non-controversial records?
Request in writing 5 days in advance
Right to Inspect or Copy Corp’s Records
What one thing must a SH do to access controversial records?
Request in writing 5 days in advance and state a proper purpose
Right to Inspect or Copy Corp’s Records
Do directors need to request access? How come?
No, they have unfettered access to everything
Distributions
Do SHs have a right to a distribution? How come?
No, distributions are at the discretion of the board
Distributions
Is a suit to compel a distribution a direct or derivative suit, and what must SH show?
Direct; serious abuse of discretion, e.g. no distribution but board pays themselves a bonus
Distributions
What is the order of priority?
- Cumulative shares (if any)
- Preferred shares (if any)
- Common stock
