7-11 Shareholders

Question 1

Can shareholder run the corporation directly in a close corporation?

Answer 1

Yes.

Question 2

there are two ways to set up a shareholder management agreement:

Answer 2

• in the articles and approved by all shareholders OR
• by unanimous written shareholder agreement

Question 3

Can shareholders be held liable for corporate debt?

Answer 3

Generally no. BUT a shareholder might be personally liable for what the corporation did if the court pierces the corporate veil. This can ONLY happen in close corporations.

Question 4

to pierce the corporate veil and hold shareholders personally liable:

Answer 4

1. the shareholders must have abused the privilege or incoporating and
2. fairness must require holding them liable

Question 5

there are three situations where the corporate veil is often pierced:

Answer 5

1. alter ego
2. undercapitalization
3. fraud, avoiding existing obligations, or evasion of statutory provisions

Question 6

Who may pierce the corporate veil?

Answer 6

Generally, creditors may be allowed to pierce the veil. Courts rarely ever allow shareholder to pierce.

Question 7

What is a derivative suit?

Answer 7

A shareholder is suing to enforce the corporation’s claim, not her own personal claim.

Ask: Could the corporation have brought this suit? If so, it’s a derivative suit.

Question 8

Suppose a shareholder brings a derivative suit and loses. Can other shareholders later sue the same defendants on the same transaction?

Answer 8

No.

Question 9

S does not own stock when the claim arose, but his uncle did. His uncle dies and S inherits Uncle’s stock. Does S have standing?

Answer 9

Yes because he got the stock by operation of law from someone who owned it when the claim arose.

Question 10

when can parties settle or dismiss a derivative suit?

Answer 10

Only with court approval.

Question 11

S owns stock in C Corp. S is the record shareholder. After the record date, S dies. Can S’s executor vote the shares?

Answer 11

Yes.

Question 12

a proxy is:

Answer 12

1. a writing
2. signed by the record shareholder
3. directed to the secretary of the corporation
4. authorizing another to vote the shares

Question 13

When will a proxy be irrevocable?

Answer 13

Only if it states that it is irrevocable and is coupled with an interest or given as security.

This requires (1) the proxy says it’s irrevocable and (2) the proxy holder has some interest in the shares other than voting.

Question 14

Special shareholder meetings may be called by

Answer 14

(1) board of directors
(2) the president
(3) the holders of at least 10% of the outstanding shares, or
(4) anyone else authorized to do so in the articles or bylaws

Question 15

When must shareholders be notified of meetings?

Answer 15

Not fewer than 10 or more than 60 days before the meeting.

Notice must be in WRITING to every shareholder entitled to vote.

Question 16

If proper notice is not given to all shareholders, whatever action was taken at the meeting is:

Answer 16

voidable, unless those who were not sent notice waive the notice defect.

Question 17

shareholders generally get to vote on these things:

Answer 17

• to elect directors
• to remove directors
• on fundamental corporate changes

(they may also vote on other things if the board asks for a shareholder vote on those things)

Question 18

X corp has 12,000 shares entitled to vote. X corp has 700 shareholders. What or who must be represented at the meeting to constitute a quorum?

Answer 18

6,001 shares at least

Question 19

What are distributions?

Answer 19

Payments by the corporation to shareholders.

Question 20

Is a suit to compel the declaration of a distribution direct or derivative?

Answer 20

Direct because harm is to shareholder.

Question 21

Which shareholders get dividends?

Answer 21

The record shareholder of the stock as of the record date will receive the dividend.

Question 22

director liability for unlawful distributions

Answer 22

Directors are jointly and severally liable for improper distributions

Question 23

shareholder liability for unlawful distributions

Answer 23

ONLY if they knew the distribution was improper when they received it.

Question 24

types of fundamental corporate changes:

Answer 24

• amending the articles
• merging or consolidating into another company
• transferring substantially all assets
• converting to another form of business
• dissolving

Question 25

shareholder approval for a fundamental corporate change

Answer 25

traditionally a majority of the shares entitled to vote. (increasingly states require only a majority of the shares that actually vote on the proposed fundamental change)

Question 26

Types of corporation dissolution

Answer 26

voluntary or involuntary

Question 27

how does involuntary dissolution happen?

Answer 27

Also known as judicial dissolution meaning that it happens by court order. Different players can ask for this.

Question 28

Can the attorney general seek judicial dissolution?

Answer 28

Yes, on the ground that the corporation fradulently obtained its articles of incorporation or that the corporation is exceeding or abusing its authority.

Question 29

shareholders may petition for involuntary dissolution on any of the following grounds

Answer 29

• director abuse, waste or assets, or misconduct
• directors are deadlocked and irreparable injury to the corporation is nigh
• shareholders have failed to elect one or more directors for a period that includes at least two consecutive annual meeting dates OR
• corporation has abandoned its business and failed to dissolve

Question 30

steps for winding up the corporation:

Answer 30

1. given written notice to known creditors and publish notice of dissolution in a newspaper in the country of its principal place of business;
2. gather all assets;
3. convert assets to cash;
4. pay creditors; and
5. distribute any remaining sums to shareholders, pro rata by share, unless there is a liquidation preference

Question 31

Can shareholders of record after the record date vote at a shareholders’ meeting?

Answer 31

No, only shareholders of record on the record date may vote at a shareholders’ meeting.

Question 32

Are proxies revocable?

Answer 32

Proxies generally are revocable unless they say that they are irrevocable and are coupled with an interest.

Question 33

When are proxies coupled with an interest?

Answer 33

Proxies are coupled with an interest if the proxy holder essentially pays for the right to be a proxy, such as where the proxy holder has purchased the underlying shares from the owner of record.

Question 34

How can proxies be revoked?

Answer 34

Proxies may be revoked by a subsequent instrument or by the shareholder of record showing up to vote in person.

Question 35

May a shareholder attend a shareholders’ meeting and vote his shares himself?

Answer 35

Yes, can vote his shares personally.

Question 36

Can outstanding shares be voted?

Answer 36

ONLY outstanding shares may be voted so yes.

Question 37

Are repurchased shares outstanding?

Answer 37

Shares that were issued and outstanding but were repurchased (called treasury shares in some jurisdictions) are NOT outstanding.