Closely Held Firm Flashcards
Shareholder Agreements
- Contract among shareholders to protect minority shareholders
- Voting pool: minority shareholders seek representation on the board via voting pool agreements obligating shareholders to vote together as a single block
Shareholder agreements that attempt to control actions of directors
- minority shareholders frequently bargain for rights with respect to specified corp transactions
- Affirmative rights: right to name certain corp officers, right to employment, right to certain salaries or dividends
- Negative covenants: rights to veto certain corporate transactions
Transfer restrictions
- Used to control selection of business associates
- provide certainty in estate planning,
- ensure that corp complies with corp statutes,
- S corp regulation,
- securities act exemptions
- imposed in the charter or bylaws of corp or separate agreement among or between shareholders
Transfer restrictions 2 part test
Valid if:
1) restrictions comply with the formal requirements relating to adoption of the restriction and conspicuously noted on the share certificates , and
2) restrictions must be for a proper purpose, reasonableness of purpose
Types of transfer restrictions
- Option: shareholder must offer the corp or other shareholders the option to purchase the shares, either at price specified by prior agreement or price offered by prospective 3rd party purchaser
- Buy-sell agreement: corp or other shareholders are obligated to purchase shares
- provides liquidity for shareholders who wish to withdraw
- determines price of shares at a time when none of the parties to agreement know which of them will be sellers/purchasers
- allows principals or corp to plan with certainty
Legitimate business purpose example
– limiting the number of shareholders to avoid the expense of SEC disclosure statements and, by limiting shareholders to employees, aligning interests of employees with the corporation
Voting Trusts
- legal title to shares is transferred from shareholders to voting trustees
- Shareholders retain financial rights but trustees possess exclusive voting power over shares
- Voting trustees issue voting trust certificates to the beneficial owners of the shares. Certificates can be traded
- Voting trusts ensure continuity of management – often used in reorganization plans or to prevent dissension among various factions of shareholders
Classified Shares
- purpose: allocating control among classes of shareholders
Examples: - giving class veto power over decisions
- giving class no voting power
- allowing class to vote only on certain matters
- providing right to board representation to certain classes
Delaware: • “[A]ny rights, preferences and limitations of preferred stock that distinguish that stock from common stock must be expressly and clearly stated [and] will not be presumed or implied”
Cumulative voting
♣ Method of counting shareholder votes in director elections in which each shareholder is entitled to cast a number of votes equal of the product of the number of such shareholders’ shares times the number of directors to be elected
- provide that shareholders do not have the right to cumulate their votes for directors unless the articles of incorporation provide otherwise. These are “opt in” provisions
Supermajority Requirement
- Protects minority shareholders by giving them veto powers over corporate decisions without offending corporate norms because corporate statutes allow high quorum and voting requirements
- Adoption of a Supermajority Requirement:
- DGCL: majority vote
- MBCA: “any amendment to the articles of incorporation that adds a greater quorum or voting requirement must meet the same quorum requirement and be adopted by the same vote” as required by the proposed provision.
Preemptive Rights
o The rights of a shareholder to subscribe to the portion of any increase in a corporation’s capital stock necessary to maintain the shareholder’s relative voting power as against other shareholders
- the default rule is against preemptive rights but that a corporation may provide for them by including a provision to that effect in the articles of incorporation
Deadlock
- Occurs when shareholder vote is divided
- Usually leads to dissolution of the corporation, which requires shareholder and director approval. If approval doesn’t occur and deadlock persists, the corporation may be judicially dissolved upon a showing of deadlock
- Buyouts are a common remedy
Oppression of minority shareholders
Massachusetts rule - prove that there was a “legitimate business purpose” for their action
- demonstrate that that purpose could have been achieved with “action less harmful to the minority’s interest”
