Controlling SHs

Question 1

What duties do a cntrling SH owe minority SHs?

Answer 1

CANNOT use dominant position for individual advantage at expense of minority SH or the corp.

Common scenario: close corporations

Question 2

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

Answer 2

Fine

Sells the stock for more than its economic worth (i.e. “cntrl premium”), she generally gets to keep the excess

Not Fine
1) Selling to looters w/o making a reasonable investigation

REMEDY: Ct (i) disgorge seller’s profit AND (ii) seller 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 (i) deal is tainted by self-dealing or fraud;(ii) minority SH dealt w/ fairly;OR (iii) legitimate business reason for merger

Question 4

What is market trading on inside information?

Answer 4

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

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

“Special fact” = 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