Closely Held Corporations

Question 1

Closely held corporation

Answer 1

(1) All corp’s issued stock in all classes may not be held by more than specified # of persons not to exceed 30.
(2) All issued stock of all classes subject to at least 1 restriction on transfer per §202.

A closely held corporation must be stated as such in its certificate to be recognized as one under DE law

Question 2

Possible restrictions on issued stock

Answer 2

a. Offer of first refusal
b. Mandatory redemption or forced transfer
c. Corp or s/h approval of transfer (akin to the personal element in partnerships)
d. Restriction on transfer to certain persons (unless manifestly unreasonable)
e. Any other lawful restriction on transfer or registration.

Question 3

Nixon v. Blackwell

Answer 3

Sued that employee profit share plan and key man life insurance deprived other class B holders of equal liquidity rights. HELD: Corp not closely held b/c not stated in AoI. Rule: Corp. directors do not have a fiduciary duty to treat all shareholders equally if there is no business reason to do so.
* HOWEVER, entire fairness standard of review applies to this transaction b/c directors on both sides.

Question 4

Peculiar Features of Closely Held Corporations

Answer 4

• Shareholders’ agreement can permit a majority of shareholders to interfere w/ BoD’s discretion or power.
• AoI of closely-held corp may pemit corp to be managed by shareholders rather than directors (akin to partnership).
• Shareholder agreements are valid even if corp. operates like a partnership.

Question 5

Locked-In

Answer 5

Transfer of shares restricted by §202 or lack of free market for transfer
No general fiduciary duty for a closely held corp to repurchase shares of minority s/hs.

Question 6

Blaustein v. Lord Baltimore Capital

Answer 6

Blaustein was verbally promised to sell for full value after holding 10 years. Sued when deal was made more conditional. She lost b/c not valid contract.

Question 7

Frozen Out

Answer 7

Minority s/hs may have no control over corp’s activities and may be denied compensation if they are also employees of the corp.

Question 8

Ex Ante Solutions to Address Lock ins and Freeze outs

Answer 8

(1) Voting trust – avoids conflict
* Must be in writing & copy of trust filed w/ corp’s registered DE office
* No time limit (max 10 years)
(2) Shareholder agreement / contract
* Breach in contract, but not enforceable w/ specific performance.
* Can require s/h to appoint specific directors but not specific officers.
(3) Irrevocable Proxy .
* Must state it is irrevocable & interest is sufficient to support irrevocability
(4) Buy-sell agreements.