Closely Held Corporations

Question 1

Closely Held Corp. Defined

Answer 1

1) Ownership by a small number of shareholders, most or all of whom are active in management of the corp. 2) No general market for the corp. stock 3) Some limitation upon the transferability of the stock.

Question 2

Shareholder Agreements- Voting Agreements

Answer 2

Shareholders exchange promises to vote their shares in some specific way or as some part of the group shall direct. In the absence of fraud or illegal motive= agreements are enforceable.

Question 3

Shareholder Agreements- Pooling Agreements

Answer 3

Shareholders can pool their votes and have a 3rd party intercede when there is any disagreement as to how to vote.

Question 4

Remedy of Breach

Answer 4

If the voting agreement enforceable= specific performance. Equitable relief if legal remedy is inadequate.

Question 5

Duties

Answer 5

Shareholders owe each other an even stricter duty than controlling shareholders in publicly held corp. Duties of utmost good faith & loyalty.

Question 6

Freeze-Outs

Answer 6

When shareholders combine to remove another shareholder from all decision-making roles and deny him a return on investment. Exception if control group can demonstrate legitimate business purpose for its decision. Court will use the least destructive remedy; restore minority shareholder.

Question 7

Force Outs

Answer 7

Forcing a shareholder to sell his shares (extreme remedy).

Question 8

Transfer of Control

Answer 8

A shareholder may sell his stock to whomever he wants at the best price he can get. Types of purchase transactions: Direct from shareholders (purchase of stocks)- purchaser may buy all or only a controlling portion of outstanding stock. Purchase of assets- purchaser offers to buy a corp.’s assets & corp. itself holds a vote of its shareholders on the offer.