Closely held corporations

Question 1

Key issues

Answer 1

1. No separation of ownership and control.
2. SH can take power away from directors by USA
3. SH can protect themselves through majority oppression through specified voting rules
   - Ringuet v Bergeon
   - Re Barsh v Feldman
4. SH can protect themselves by negotiating to overcome illiquidity but need to be careful with pricing.
5. Less monitoring cost since there are fewer directors, but less efficiency since less delegation.

Question 2

Bob, Bill and Steve

Answer 2

1. Share transfer restrictions
2. Buy-sell agreement
3. Lack of Liquidity of shares and minority discount

Contractual ways to protect the minorities:

1) Re-write bylaws
2) Keep a board in place and have a class vote

Question 3

Special provisions

Answer 3

ss 102, 146 - USA - binds investor to the agreement if declaration is made on shares.
S145.1 - Vote pooling
Share transfer restrictions
s49(9) - share transfer restriction - usually not allowed in public corp

Question 4

Different treatment under CBCA

Answer 4

1) Waiver of notice to SH meeting - s136
2) Resolution by Unanimous consent in SH meeting - s142
3) Avoid proxy requirement - s149
4) No audit required for private corp + less than 2.5mm asset + less than 5mm rev) - s163
5) No financial disclosure - s139

Question 5

Ringuet v Bergeon [1960 SCC]

Answer 5

Facts: SH signed K saying that they would vote the same way for BoD with the penalty of share transfer. Appellants voted themselves in and excl. B from mgt. B sued to enforce K and transfer shares, claiming that the K was contrary to public order.

Court: There’s nothing illegal or contrary to public order in an agreement among SHs owning or proposing to own the majority of issued shares of a co. to unite upon a course of policy or action and upon the officers they will elect.

• SHs have the right to combine their interests and voting powers to secure such control of a co and ensure that the co will be managed by certain persons in a certain manner
• This is a private arrangement

Question 6

Re Barsh and Feldman [1986 OHCJ]

Answer 6

Facts: B, B’s son, and F each had one share of corp. When B died, he gave his share to his son. Pre-existng SH agreement that require all SH to vote. Son sought to sell land and tried to call a meeting. F refused to attend. Son apply to court to change quorum from unanimity.

Court: Feldman is not unreasonable in refusing to call or attend a meeting which would have resulted in his losing control.
- courts reluctant to interfere with closely held corp and arrangement made among SH to protect their interest.

Question 7

Share transfer restrictions

Answer 7

Allow owners to maintain relative share ownership and power, similar to issuance restrictions.

Types:

1) First option restriction - cannot sell shares w/o first offering to the corp or other SH
2) Absolute restriction
3) Consent restriction - can sell if approved by the Board
4) Buy-sell agreement - SH must sell upon triggering event
5) buyback rights: corp has the right to buy back SH on certain event.

Question 8

Choose between a closely held and widely held corp

Answer 8

Pros of being a public corp:

• increase value of shares
• advantages of a public market
  1) efficiencies in info production
  2) availability of a 2ndary market
  3) easier access to market and fundnig

Cons of being a public corp:
- cost of regulation, transaction cost asso. with continuous disclosure, tax, agency cost