Corporate Governance and Shareholders

Question 1

When the articles of incorporation contain an inaccuracy or were defectively executed, what may be done to fix them?

Answer 1

Filing articles of correction with the state

Question 2

How may the articles of incorporation be amended?

Answer 2

1. If no stock has been issued, then the board (or absent them, the incorporators) may amend the articles.
2. If stock has been issued, then it’s a two step process:

(a) the board must adopt the amendment; and
(b) the shareholders must approve by majority vote

Question 3

Who do the bylaws bind?

Answer 3

Directors, officers, and shareholders, but not third parties with no knowledge of the bylaws

Question 4

Who may amend the bylaws?

Answer 4

Generally the board, but shareholders may amend or change the bylaws

Question 5

What bylaws are expressly limited to shareholder adoption or amendment?

Answer 5

Generally matters involving voting, shareholder rights, or director liability, including:

1. Amendment of voting provisions;
2. Authorized shares;
3. Personal liability of directors;
4. Selection, removal, or voting rights of directors;
5. Quorums;
6. Actions by shareholders;
7. Classes of membership or voting rights of members;
8. Definition of minimum vote;
9. Management by shareholders; or
10. Issuance and retention of shares.

Question 6

When does an amendment to a bylaw take effect?

Answer 6

When adopted, unless otherwise provided

Question 7

How many times a year must a corporation hold a shareholders’ meeting?

Answer 7

At least once each calendar year.

Question 8

What is the purpose of a shareholders’ meeting?

Answer 8

The primary purpose is to elect directors, but any business not subject to shareholder control may be addressed

Question 9

What is done in a special meeting?

Answer 9

Whatever is specified by meeting

Question 10

Who may call a special meeting?

Answer 10

1. The board;
2. Shareholders who own at least 20% of the shares entitled to vote at the meeting; or
3. as provided by the bylaws

Question 11

Where is a special meeting held?

Answer 11

At the executive office of the corporation, unless bylaws provide otherwise

Question 12

How much notice is necessary for the shareholders for a special meeting?

Answer 12

At least 5 days, unless the meeting involves a fundamental change, in which case at least 10 days

Question 13

Can a shareholder waive notice for a meeting?

Answer 13

Yes, either in signed writing or by attending

Question 14

What must a notice of meeting contain?

Answer 14

The time, date, and place of the meeting

Question 15

If the annual meeting is not held, who may call it?

Answer 15

Any shareholder, if not held within six months of designated time

Question 16

Can the right to vote of a subscriber who has not fully paid for stock be limited or denied?

Answer 16

Yes

Question 17

Can a corporation vote on its own stock?

Answer 17

No, generally not

Question 18

What are the primary issues that shareholders can vote on?

Answer 18

Election of the board and fundamental corporate changes

Question 19

How much of a voting right does each share of stock get?

Answer 19

Typically one vote per stock, but the AOI can create classes of stock that have greater or even no voting power

Question 20

For a decision at a shareholders’ meeting to be valid, what is required?

Answer 20

A quorum of the shares eligible to vote

Question 21

What is a quorum for a shareholders’ meeting?

Answer 21

A majority, unless the bylaws provide otherwise

Question 22

When is a plurality of shareholder approval appropriate?

Answer 22

For the election of the directors

Question 23

What is cumulative voting?

Answer 23

A shareholder may cumulate and cast all votes for one director in the event more than one is elected

Cumulative voting is a presumed shareholder right in PA, unless the articles provide otherwise

Question 24

For how long is a voting proxy valid?

Answer 24

3 years, unless a longer period is specified

Question 25

When is a proxy revocable?

Answer 25

A proxy is revocable unless it includes a statement of irrevocability and is coupled with an interest.

Question 26

When is revocation of a proxy effective?

Answer 26

When written notice is given to the corporation or its agent

Question 27

Under SEC guidelines for public traded corporations, when is a proxy solicitation valid?

Answer 27

1. Full and fair disclosure of material facts relating to any proposals;
2. Free from omissions, material misstatements, and fraud; and
3. Corporate management must include shareholder proposals and allow proponents to explain their position.

Question 28

What is a “voting pool”?

Answer 28

A binding voting agreement among shareholders that can be specifically enforced

Question 29

Who has the right to inspect and copy corporate records?

Answer 29

Any shareholder for any proper purpose

Question 30

When and where can a shareholder inspect corporate records?

Answer 30

During normal business hours at the corporation’s principal place of business

Question 31

What are the two types of shareholder suits?

Answer 31

1. Direct suits (i.e., breach of a duty owed to the shareholder by a director or officer)
2. Derivative suits (i.e., an action brought on behalf of the corporation)

Question 32

What is required for a shareholder to bring a derivative suit?

Answer 32

1. The shareholder must own the shares from the time of the wrong until disposition of the case; and
2. the shareholder must first make a written demand that the board enforce the corporation’s rights and the board must refuse such demand

Question 33

In PA, when is a demand on the board excused?

Answer 33

When futile or there would be irreparable injury to the corporation

Question 34

Is an oral demand sufficient?

Answer 34

No

Question 35

When does a shareholder have standing to bring a derivative suit?

Answer 35

When the shareholder held shares at:

1. the time of the wrong; and
2. the time the action is filed, and throughout the pendency of litigation

Question 36

What factors guide whether to pierce the corporate veil?

Answer 36

1. Undercapitalization at the time of formation
2. Disregard of corporate formalities
3. Use of corporate assets as shareholder assets
4. Self-dealing
5. Siphoning of funds
6. Use of corporate form to avoid legal obligations
7. Shareholder’s impermissible control or domination over the corporation; and
8. Wrongful, misleading, or fraudulent dealings with creditors

NOTE: PA courts are reluctant to pierce the veil

Question 37

What three situations justify piercing the corporate veil?

Answer 37

1. Alter ego (ignoring corporate formalities)
2. Inadequate capital
3. Fraud or personal gain

Question 38

What duties does a controlling shareholder owe to the corporation?

Answer 38

Fiduciary obligations; they cannot freeze out or oppress minority shareholders