Close Corporations

Question 1

Close Corporations

Characteristics

Answer 1

1. Stock not publicly traded
   a. No “ready market” for shares
   b. May have transfer restrictions
2. Stock held by a small number of shareholders
   a. Usually comprised of family/friends
   b. Shareholders tend to serve as board members and/or officers
   c. Concern: Minority Shareholders may be subjected to abuse or oppression

Generally, a substantial majority of shareholders participate in management and operations
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IRS Definition

1. Is not a personal service corporation and
2. Has more than 50% of the value of its outstanding stock held by five or fewer individuals

Question 2

Close Corporations

Veil Piercing

Answer 2

Close corporations are not inherently more susceptible, despite relaxed considerations of shareholder involvement in management and corporate formalities

Courts generally consider whether veil piercing will achieve equity

Question 3

Close Corporations

Fiduciary Duties

Answer 3

Shareholders do not have fiduciary duties based solely on shareholder status

Controlling shareholders have fiduciary duties (similar to partnership)

Some states impose heightened fiduciary duties on controlling shareholders

Question 4

Close Corporations

Fiduciary Duties:
Equal Opportunity to Reacquire Stock

Answer 4

When a close corporation reacquires its own stock, it is subject to the additional requirement that the stockholders, as directors or controlling stockholders, caused the corporation to enter into the stock purchase agreement must act with the utmost good faith and loyalty to the other stockholders

If the stockholders whose shares were purchased was a member of the controlling group, the controlling group must cause the corporation to offer each stockholder an equal opportunity to sell a ratable number of shares to the corporation at an identical price

Question 5

Close Corporations

Formation

Answer 5

Formed the same as other corporations

The articles of incorporation must recite that the corporation is being formed as a close corporation

Question 6

Close Corporations

Termination

Answer 6

A close corporation may terminate its status as a close corporation by amending its articles of incorporation, usually requiring a two-thirds shareholder vote

Status as a close corporation automatically terminates if any of the conditions required of a close corporation is breached

Close corporations may also terminate as would any other corporation

Question 7

Close Corporations

Taxation

Answer 7

Double Tax (does not pass through)