Controlling SHs

Question 1

CONTROLLING SHAREHOLDER

What duties do a controloing SH owe minority SHs?

***HIGHLY TESTED MATERIAL

Answer 1

GENERALLY: Outside the situation of 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….
BUT…
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

CONTROLLING SHAREHOLDER

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

***HIGHLY TESTED MATERIAL

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 (her control premium)

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: Selling to a Buyer who 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

FREEZE OUT MERGER

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

***HIGHLY TESTED MATERIAL

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

FREEZE OUT MERGER STANDARD = Court reviews the ENTIRE Trnx as a whole transaction:

(1) overall course of dealing; AND
(2) fairness of the price

In looking into the transaction and price, the court will check for these 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

INSIDER TRADING: MARKET TRADING ON INSIDE INFORMATION

What is market trading on inside information?

Answer 4

Market Trading on Inside Information = 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)

Remedy (for sale before bad news) = Price Received - Price after a reasonable amount of time from the disclosure

Remedy (for purchase before good news) = Price after a reasonable amount of time from the disclosure - Price Paid

Question 5

NONDISCLOSURE of “SPECIAL FACTS” DOCTRINE

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

Answer 5

Rule: all directors, officers and 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” = a fact 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

Question 6

Can Shareholders Manage the Corporation?

Answer 6

In general, shareholders do not manage the corporation b/c the BoD does the managing

BUT shareholders can manage the corp in closely held corporations which are corporations with:

(i) Few Shareholders; AND
(ii) Stock that is NOT publicly traded