Controlling Shareholders

Question 1

What duties do a cntrling SH owe minority SHs?

Answer 1

SH who has a control position (director position)OR has a controlling ownership interest owes a fiduciary duty to minority SH and sometimes to others (including the Corp) She CANNOT use dominant position for individual advantage at the expense of minority SH or the corp.

		Most likely to be an issue with close corporations

Question 2

When is a cntrling SH who sells his shares subject to liability?

Answer 2

If a CSH sells the stock for more than its economic worth (i.e. “cntrl premium”), she generally gets to keep the excess BUT, cts MAY impose liablity IF such a premium was the product of… 1) Selling to looters w/o making a reasonable investigation; REMEDY: The ct would disgorge the sellers profit AND the seller is probably liable for all damages to the corp

2) De facto selling corporate assets			Buyer has no interest in running the corporation, but bought the stock to get access to the corporate assets

		REMEDY: ALL SHs would share in the premium in addition to the CSH

3) Selling a seat on the board			Fiduciaries cannot sell positions

		REMEDY: Disgorge profits

Question 3

What is the std for CSH “freeze out” mergers?

Answer 3

All mergers must have a legitimate corporate purpose, EVEN IF approved by the requisite # of shares. E.g. Majority SH merges Corp w/ another Corp, which they own & minority SH’s interests are purchased

Std = Court reviews whole transaction: (1) overall course of dealing; AND (2) fairness of the price			Factors: whether (1) deal is tainted by self-dealing or fraud;(2) minority SH dealt w/ fairly;OR (3) legitimate business reason for merger		

Question 4

What is market trading on inside information?

Answer 4

Where director or an officer engages in market trading of her corp’s stock based upon inside information from the corporation → breach of a duty to the Corp Remedy = corp can sue to recover profit (i.e. it could be a derivative suit)

Question 5

What is the special facts doctrine (i.e. common law insider trading)?

Answer 5

Rule: all directors, officers & probably controlling SH owe an affirmative duty NOT to trade on “special facts” in a securities transaction w/ a non-insider → MUST abstain or ensure disclosure A “special fact” means that a reasonable investor would consider it important in making an investment decision

		A SH with whom the director or officer deals and violates the special facts doctrine can sue DIRECTLY (in her own name; not derivative)

		Measure of damage = value of stock a reasonable time after public disclosure MINUS price paid by insider