Corp - Shareholders

Question 1

What are the characteristics of a close corporation and who can run them?

Answer 1

(1) Few Shareholders
(2) Stock is not publicly traded
(3) Substantial Shareholder Involvement in Management

Directors or Shareholders can run the corporation.

Question 2

How can shareholders eliminate the board of directors and run the corporation?

Answer 2

(1) In the articles or bylaw and approved by all shareholders OR
(2) Written agreement signed by all SHs and filed with the corporation.

Question 3

What duty does each stockholder owe to each other stockholder?

Answer 3

A Duty of utmost good faith and loyalty.

More stringent then director duty of loyalty - same as owed in partnership.

**CONTROLLING Shareholders in a close corporation cannot pursue a course of conduct when an alternative exists that would be less harmful to the minority shareholders.

Question 4

Can a close corporation purchase shares from a majority/controlling SH without making the same offer to minority shareholders?

Answer 4

NO - Must make same pro-rata offer to minority shareholders [EQUAL ACCESS RULE]

Question 5

Are shareholders liable for acts or debt of the corporation?

Answer 5

No, corporation is liable unless the court has grounds to pierce the corporate veil.

Question 6

When can a court pierce the corporate veil?

Answer 6

Only in Close Corporations.

AND

Only if (1) Shareholders have abused the privilege of incorporation and (2) fairness requires that shareholders are personally liable. [To avoid fraud or basic injustice.]

Easier to obtain for a Tort Case!

Question 7

What are the two classic fact patterns for piercing the corporate veil?

Answer 7

(1) Commingling Personal and Corporate Funds/Using Corporate funds for personal use.
(2) Undercapitalization Theory - not carrying sufficient insurance or making a sufficient investment for a dangerous activity.

Question 8

Requirements for a shareholder to bring a derivative suit on behalf of a corporation.

Answer 8

Must a suit that a corporation can bring. Can’t be a personal claim [a direct suit]

(1) P must have stock ownership at the time the claim arose or obtained it by operation by law.
(2) P must have fairly and adequately represent the interests of the corporation. [P must own the stock through the litigation.
(3) P must make a written demand on directors that the corporation bring suit. [Must make even if it would be futile.
(4) SH cannot file the suit until 90 days after making demand unless (1) corporation rejects demand before that or (2) waiting the 90 days would cause irreparable injury to the corp.
(5) Corp. can move to dismiss the derivative suit if a majority of disinterested shares or a majority of disinterested directors (at least 2) found in good faith that after reasonable inquiry that the suit was not in corp.’s best interest.

Question 9

What does P recover if they win a derivative suit?

Answer 9

Corp. recovers the judgment, but P receives costs and attorney’s fees from the corp if there is a judgment.

P can recover attorneys’ fee in the even of a loss, but only if suit brought substantial benefit to corp.

P may owe D’s attorney’s fee if sues without reasonable cause or an improper purpose.

Question 10

Who has the burden of show that the recommendation not to pursue the claim was disinterested, made in good faith, reasonable inquiry?

Answer 10

(1) If a majority of the board is interested, the corp must show that the test was met.
(2) If a majority is not interested, the SH has the burden to show the test was not met.

Question 11

What is a required for a proxy?

Answer 11

Proxy is a (i) Writing (fax and e-mail OK), (ii) signed by record SH, (iii) directed to the secretary of corporation, (iv) authorizing another to vote for the shares.

Good for 11 months.

Can revoke even if it says its irrevocable.

Question 12

When is a proxy irrevocable?

Answer 12

(1) Proxy says irrevocable
(2) Proxy holder has some interest in stock other than voting. [i.e they own the shares and acquired proxy from pre-record date owner.]

Question 13

What are two ways for shareholders to pool their voting power?

Answer 13

(1) Voting Trust

(2) Voting Agreement [more prevalent]

Question 14

What are the requirements for a voting trust?

Answer 14

(1) Written trust agreement controlling how the shares will be voted
(2) File a copy with corporation
(3) Transfer legal title of shares to voting trusee
(4) Original shareholders receive trust certificates and retain all shareholder rights other than voting.

MBCA set no time limit on voting trust. Less popular b/c more time consuming to create.

Question 15

What is required for a voting agreement.

Answer 15

An agreement in writing and signed by statute.

Voting agreements are specifically enforceable in Massachusetts.

Note: No voting agreement for directors [they are void]

Question 16

What are the two ways shareholders can take a valid corporate act?

Answer 16

(1) Unanimous written consent (e-mail and fax ok) of the holders of all voting shares; OR
(2) Meeting that satisfies the quorum and voting rules

Question 17

What happens if no annual meeting is held within 15 months (or within 6 months of fiscal year end)?

Answer 17

Any SH can ask a court to order one.

Question 18

Who can call a special meeting?

Answer 18

(a) board
(b) shareholders of at least 10% of the voting shares (40% if its a public corp.); or
(c) someone else as provided in the articles or bylaws.

Question 19

What is the notice requirement for a meeting?

Answer 19

Must give each SH written notice to every SH entitled to vote, for every meeting (annual or special) between 7 and 60 days before the meeting.

Must tell people when, where, and why

Can’t act outside of the why (purpose).

Question 20

What is the consequence of failing to give proper notice to all SH?

Answer 20

Action taken at meeting unless waiver received.

Express Waiver - in writing and signed anytime and filed with the minutes of the meeting; or

Implied Waiver - you attend the meeting w/o raising the issue (objection at the outset).

Question 21

What is the quorum for a SH meeting?

Answer 21

If the articles are silent, a quorum requires a majority of the shares entitled to vote. [Articles can move quorum up, but not down]

Quorum is not lost if people

Majority of those actually voting can tie up a corporation unless articles requires more.

Question 22

Where are stock transfer restrictions set up?

Answer 22

In the articles, by laws, or by agreement.

However, they cannot be an undue restraint on alienation. Right of first refusal is fine as long as the corporation offers a reasonable price.

Question 23

Can a stock transfer restriction be held against a 3P?

Answer 23

Cannot be invoked against the transferee unless either

(A) it is conspicuously noted on the front and back of the stock certificated; OR

(B) the transferee had actual knowledge of the restriction.

Question 24

How can a SH view routine documents (article, bylaws, annual report, etc.)?

Answer 24

Unqualified right to inspect.

Make a written demand at least 5 business days in the advance.

Question 25

What about less routine document [acctg records, minutes of board meetings, record of SHs]?

Answer 25

A shareholder must make a written demand stating a proper purpose of getting the document.

Proper purpose must reflect a shareholder interest.

Must state the records desired with reasonable particularity and must be made at least five days before inspection.

Question 26

When doe shareholders have a right to distribution?

Answer 26

When the board declares it.

Action to compel a distribution is tough to win - have to have a very strong showing of abuse of discretion.

Question 27

When can a corporation not make a distribution?

Answer 27

(1) If the corporation is insolvent or if the distribution would render it insolvent.
(2) Assets are less than liabilities including liquidation preference.

Question 28

Are directors personally liable for improper distributions?

Answer 28

Yes, they are strictly liable if they are deemed to have approved the distribution.

Defenses –> Good Faith Reliance

Question 29

Are shareholders liable for unlawful distributions?

Answer 29

Only if the SH knew it was improper when they received it.