(5) Corporations: Shareholders Flashcards
Shareholder Liability and Piercing the Corporate Veil
Shareholders, directors and officers are generally not personally liable for the liabilities and obligations of the corporation. Courts may hold individual corporate shareholders, directors, and officers liable for actions taken on behalf of the corporation in the following situations (this is called piercing the corporate veil): (1) the corporation is acting as the alter ego of the shareholders 0 where there is little or no separation between the shareholder and the corporation (i.e., where an individual uses the corporation for personal reasons); (2) where the shareholders failed to follow corporate formalities; (3) the corporation was inadequately capitalized at its inception to cover debts and prospective liabilities; OR (4) to prevent fraud.
Shareholders in a close corporation - Piercing the Corporate Veil
Shareholders in a close-corporation will be personally liable to the other shareholders for any damage that results from them breaching their duty of loyalty and good faith.
Will the court pierce the corporate viel for contract disputes
A court is more likely to pierce the corporate veil for tort actions than for contract disputes.
Shareholder Meetings: Proxy Voting
A shareholder may vote at a shareholders meeting without attending through the use of a proxy. A valid proxy must be signed on (a) an appointment form or (b) an electronic transmission.
*An oral proxy is invalid.
*A proxy must be accepted if there are no reasonable grounds to deny its genuineness and authenticity on its face.
How long does a proxy last? And how must a proxy act?
Shareholder Meeting: Proxy Voting
The person who is granted the proxy must act in accordance with the agreement (aka voting a certain way).
A proxy is only valid for 11 months unless the proxy states otherwise.
Revocation Rule
Shareholder Meeting: Proxy Voting
Proxy agreements are freely revocable by the shareholder even if the proxy states that it is irrevocable, unless the proxy is coupled with an interest or legal right then the proxy is irrevocable if the proxy states it is irrevocable.
Definition:
Shareholder Voting Agreements
A voting agreement is when Shareholders sign an agreement providing how they will vote their shares.
Rule:
Shareholder Voting Agreements
A voting agreement is enforceable and a breach of contract claim may be brought to enforce this right. A shareholder voting agreement must be in writing and signed by all parties.
*A voting agreement has no durational limit.
*A voting agreement is governed by contract law.
*A voting agreement is not revocable unless it would be under contract law.
*A voting agreement cannot remove a shareholders right to elect or remove directors nor can it remove a director or officers powers.
Shareholder Voting Trust
A voting trust is a more formal voting agreement. A voting trust can only last for 10 years and requires that (1) legal ownership of the shares be transferred to the trust; and (2) the shareholders provide the trust agreement to the secretary of the corporation.
Shareholder’s Right to Inspect Books and Records
Under the RMBCA a shareholder has an unqualified right to inspect and copy the following records during regular business hours at the corporation’s principal office. The shareholder must provide at least 5-days written notice. (1) Articles of incorporation; (2) Bylaws; (3) Resolution by the Board of Directors concerning the classification of shares; (4) Minutes of shareholder meetings for the past 3 years; (5) written communications sent to the shareholders within the last 3 years; (6) names and business addresses of the current directors and officers; and (7) its most recent annual report.
Shareholder’s Right to Inspect Books and Records - Additional Rule
A shareholder also has the right to inspect and copy certain (1) accounting records (annual financial statements from the last 3 years and any audit or other financial statements); (2) excerpts of the board of directors meeting minutes; (3) record of shareholders if: (a) the inspection is during regular business hours at a reasonable location specified by the corporation; (b) the shareholder provides at least 5 days written notice; (c) the demand is made in good faith and for a proper purpose; (4) the purpose is described with particularity; and (5) the records are directly connected with the purpose.
Define “A proper purpose”
Shareholder’s Right to Inspect Books and Records
is a purpose reasonably relevant to the shareholders interest as a shareholder. The following have been deemed to be a proper purpose: (a) determination of the value of shares; (b) whether the corporation engaged in illegal conduct; (c) to investigate wrongdoing or mismanagement; and/or (d) to protect the shareholders financial interest in the corporation, the interest in voting or selling shares or bringing a lawsuit to protect those interest.
Define “to show good faith”
Shareholder’s Right to Inspect Books and Records
the shareholder must present evidence to establish a credible basis to infer possible wrongdoing (a mere suspicion is insufficient). A good faith interest in exposing/preventing wrongdoing is sufficient.
Can a shareholders right to inspect books and records be abolished or limited by the articles of incorporation or bylaws?
Shareholder’s Right to Inspect Books and Records
NO
Definition & Rule
Shareholder Litigation - Direct Action
Definition: A direct action involves an injury or breach of a duty owed to a shareholder of a corporation.
Rule: The damages awarded in a direct action will be paid directly to the shareholder member.
