controlling SH and related topics

Question 1

duties

Answer 1

outside close corp, SH generally do not owe FD to each other or to corp. can act in own self-interest

Question 2

controlling shareholder duties

Answer 2

controlling SH (either through control position or ownership that constitutes working control) owes FD to minority SH and sometimes to others (including corp). Cannot use dominant position for individual advantage at expense of minority SH or corp.

Question 3

sale of controlling SH interest

Answer 3

may be able to get premium for control (ie sell shares for more than their economic value as percentage of ownership of corp bc stock carries with it power to control corp)

SH generally gets to keep control premium BUT cts may impose liability if: 1) controlling SH sold to looters without making a reasonable investigation (in which case, seller’s profit is disgorged and seller is probably liable for damage to corp); 2) controlling SH de facto sells a corp asset (ie controller bought control stock just to get to corps assets, often comes up with looting) (here, all SH share in premium); 3) controlling SH sells seat on bd–FDs cannot sell positions (disgorge profits)

Question 4

freeze outs

Answer 4

all mergers must have a legitimate corporate purpose, even if approved

watch for freeze out merger aimed solely at cashing out minority SHs unfairly. usually controller mergers corp with another they own, purchasing minority’s shares to push minority out

cts look at transaction as a whole: must be fair price, fair dealing, and legitimate corp purpose for merger

factors: 1) whether deal is tainted by self-dealing or fraud; 2) whether minority SH are dealt with fairly; 3) whether there is a legitimate business reason for merger

Question 5

insider trading

Answer 5

market trading on inside info: when a D or O engages in market trading of her corp’s stock and profits–this is a breach of duty to corp and corp can sue to recover profit (derivative)

nondisclosure of “special facts”: all D and Os (and controllers) owe duty not to trade on special facts in securities transaction with non-insider–cannot trade on secrets; must abstain or ensure disclosure so others are on same footing

• special facts: those a reasonable investor would consider impt in making an investment decision
• who can sue: SH with whom D or O deals and violates the special facts doctrine
• measure of damage: difference btw price paid and value of stock a reasonable time after public disclosure