Controlling Shareholders & Related Topics (least tested of all 6 stacks)

Question 1

Traditional Rule

Answer 1

Outside the close corporation, shareholders generally do not owe fiduciary duties to each other or to the corporation. They can act in their own self-interest.

Question 2

Controlling S/H Duty

Answer 2

• A s/h who also occupies a control position (such as a director position) OR whose ownership is such that she has working control over the corp, owes the corporation a fiduciary duty to minority s/h and, sometimes, to others (including the corporation.
• She cannot use a dominant position for individual advantage at the expense of minority s/h or the corporation.

Question 3

Sale of Controlling S/H’s Interest

Answer 3

• B/c of her control, the controlling s/h may be able to sell her shares at a premium. That means she can sell them for more than their economic value because her stock carries w/ it the power to control the corporation.
• If she sells the stock for more than its economic worth, the excess profit = “control premium” and she generally gets to keep it.

Question 4

When does a selling controlling S/H NOT get to keep her control premium? Any other damages?

Answer 4

1- Controlling s/h sold to looters w/o making a reasonable investigation –> disgorge the control premium AND seller is probably liable for all damage to the corporation

2- Controlling s/h de fact sells a corporate asset. This happens where the buyer has no interest in running the corp, but bought the stock just to get access to corporation assets –> all s/h should share in the premium

3- Controlling s/h sells a seat on the board. Fiduciaries cannot sell positions. (ex- sells controlling interest and agrees that she and her directors will resign from the board) –> disgorge the premium

Question 5

FREEZE OUTS

Answer 5

• merger aimed solely at cashing out minority shareholders unfairly. Usually, majority shareholders cause their corporation to merge w/ another corporation which they own. The minority shareholders/ shares are purchased for cash, so they have no interest in either corporation.
• Courts MIGHT protect the minority s/hs
• Courts will look at the transaction as a whole and ask: (i) is there a fair price? (ii) fair dealing? (iii) a legitimate corporate purpose for the merger? [note: all mergers must have a legitimate CORPORATE purpose]

Question 6

INSIDER TRADING: MARKET TRADNG ON INSIDE INFO

HYPO- director or officer engages in market trading of her corps stock based on inside info from the corp. She makes a profit by doing so . . .

Answer 6

• In NY she has breached a duty to the corporation
• The corporation can sue to recover her profit
• A S/H could bring a derivative suit on behalf of the corp (provided derivative suit requirements met)`

Question 7

INSIDER TRADING: NONDISCLOSURE OF “SPECIAL FACTS” (common law insider trading)

• Rule?
• What can sue?
• measure of damage?

Answer 7

• All directors and officers (and prob controlling s/h) owe a duty not to trade on “special facts” in a securities transaction w/ a non-insider. So they cannot trade on secrets; they must abstain or ensure disclosure so others are on the same footing.
• A s/h w/ whom the director/officer deals w/ and violates the special facts doctrine sues in a direct suit
• Damage = difference btw price paid and value of stock a reasonable time after public disclosure

Question 8

INSIDER TRADING: NONDISCLOSURE OF SPECIAL FACTS

• what are special facts?

Answer 8

Those a reasonable investor would consider important in making an investment decision