Corporate Shareholder Rights Flashcards
What type of s/h is allowed to inspect records?
Who is allowed to inspect
- These rules orig existed at common law
• TBOC 21. 218
(a) A beneficial owner of shares that are held in a voting trust is a “holder of shares represented by a beneficial interest” and is allowed to bring suit to look at records
• DGCL 220
∙ These rights are available to beneficial owners in a voting trust AND
∙ shares held by a nominee
∙ only SH’s are allowed to bring these suits
∙ DE via the Saito case – The continuing wrong theory
- In DE you are allowed to sue as a SH even if you were not a SH when the action occurred, the action still must be going on
∙ Can only get records that the corp. could obtain legally & it doesn’t matter if 3P vendors created the document but the source and manner of obtaining them is irrelevant, so long as they are in the corp’s possession
• These are basically the same thing
What are the limitations on s/h inspection?
i. DE
• 220(b): the purpose needs to be reasonably related to the SH’s/Demander’s interest as a SH
• If the purpose is related to breach of duty, the SH burn to show credible basis of breach of fid. duty OR wrongdoing
ii. TBOC
• 21.218(b) The only SH’s that are allowed to bring these suits are ones that:
(1) have held shares for at east 6 months or longer, OR
(2) you have to own at least 5% of the outstanding shares
What is the purpose of s/h inspection?
i. DE 220(b)
• 220(b): the purpose needs to be reasonably related to the SH’s/Demander’s interest as a SH
• If the purpose is related to breach of duty, the SH burn to show credible basis of breach of fid. duty OR wrongdoing
ii. TX
• 21.218(b) The primary purpose needs to be good and there cannot be any elaboration on the proper purpose
• This is the common law equiv to 220(b) – so it adds that you need the search to be reasonable related to your interest as a SH
How can you get info about the Corp w/o getting it from the Corp directly?
- State Finanicial Reporting & Margin Tax reports are ways of getting info about a corp without getting it from the Corp directly
State Financial Reporting
i. MBCA 16.20
• states that every corp. should submit to their SH’s an annual balance sheet and a statement of income every year
ii. TBOC 21.219
• You first need to ask with a hand writing demand, then after asking, you should be able to get the annual and interim financial statements
∙ This would include a balance sheet, and
∙ statement of income
∙ in reasonable detail
• the corp gets a reasonable time to prepare and
iii. TBOC is not as revolutionary as MBCA
f. Margin Tax Reports
i. Tex. Tax Code 171.202:
• Annual Report filed with the Comptroller
• This includes information so that the Comp. can calculate the margin tax
• Also have to give the State the names and address of the Officers and D’s
• 171.209: owner of the filing entity as the right to obtain from Comptroller, don’t have to ask the corp
ii. TTC 171.209:
• Public Information Report, aka: available to the public
• This is basically the same as an annual report (stated above), EXCEPT it also gives information on any entity that owns at least 10% of your ownership interest
How are Corporate companies regulated?
a. Sarbanes Exchange Act of 1934 (helps defined publicly-held co’s)
i. Sec.12: certain companies must register certain classes of “equity” securities with the SEC:
• (b): issuers who have shares traded on nat’l securities exchange (NASDAQ)
• (g): if not traded on a nat sec xchange, then if issuers with:
∙ Total assets of more than $1,000,000
- Rule 12g-1 exemption for issuers of total assets of no more than $10,000,000
∙ A class of shares held by at least 500 people
• Also must register with SEC by filing Form 10 (this gives information to the public about the company)
How are proxies regulated?
• A matter of state law o S/H may vote by written proxy o 11 months validity (unless) o Revoked if appear in person (unless) • 34 Act 14(a) prohibits solicitation of proxies in Sec 12 companies in violation
What are the key concerns of a Close Corporation?
a. Close corps resemble partnerships:
i. Small number of owners, owner-management, no public market for shares, and restrictions on transferability of ownership interests.
b. Special problems are raised when SH of a CC attempt to change the normal rules that control how to the power to manage the corp’s biz is vested exclusively in the directors
i. Key concerns of the close corporation:
• Getting and keeping control of corporation
• Protecting minority s/h interests from controlling, over-reaching SH
∙ Cumulative voting protects minority s/h—allows certain % of minority s/h’s to get some representation on the Bd
∙ That is when you number of shares you have * number of directors and can divide up that number how you want (can give them all to one director)
• Purchase and sale of shares
∙ Want to make sure you trust the people that are in and running your business
∙ (1) Restrictions on transfer help keep strangers out
∙ (2) Liquidity- require corp to purchase under certain circumstances not diversified
∙ (3) Price Fixed or mechanism to determine P fixed
What are ways for the s/h to remain in control of a closely-held corporation? (S/H Control Devices)
• Shareholder combinations to get control (e.g., to elect a majority of the Board):
- Voting agreements
- Voting trusts
- Creation of a holding company
• Contracts to protect minority shareholders:
∙ Super-majority quorum and voting requirements
∙ Shareholder agreements
What are proxies?
o Proxy: agency power to vote shares on owner’s behalf
• Written
• Valid for 11 months unless you say longer’
• BUT proxy is based in agency law and is revocable
• Revocable unless its irrevocable and
• Given as security for performance of a duty or
• Coupled with an interest (sometimes a high interest is needed, ie financial interest)
o TBOC 21.369(a)(6) proxy given in aid of voting agreement deemed coupled with an interest
What are voting agreements?
- Voting agreements are when shareholders agree in advance on how to cast votes in the future
= Remember, a voting agreement is a CONTRACT between shareholders. Consideration is the mutual exchange of promises
Main idea
• K
• Needs to state the VA expressly
• Needs to have a mechanism if tie, and also state how they will vote
• Also add in a proxy and that it is irrevocable
iii. TBOC § 6.252 (BELOW)
iv. Validity
• Any number of SH’s can enter into a voting agreement.
• Agreement is not part of the governing docs of the entity
• There can be no secret agreements:
∙ Must file copy at corp’s principal office and have it available for inspection by any s/h
• Term:
∙ Majority—10 yr max with 1 renewal in last year of term
∙ TBOC & Minority—NO limit
Rational is this is a small corp, and they will need it just as much 20 yrs from now.
v. Vote Determining Mechanism
• Agreement must specify the mechanism to be valid:
∙ Agree to vote together in advance, AND
∙ Agree to mechanism to figure how you are going to vote in future.
Needs to account for risk of deadlock b/c this is always possible.
Need this to make sure that the agreement would come to a vote under any circumstance
∙ EX: Ringling Bros agreement was to vote as they would agree later. This was only valid b/c there was a vote-determining mechanism – that arbitrator would decide – that determines how shares would be voted if they couldn’t agree.
What are voting trust?
Overview:
• Each SH transfers legal title of his shares to a trustee in return for a transferable “voting trust certificate”: that evidences her equitable ownership of the shares involved and carries the right to dividends and other distributions of assets.
• Separates the voting rights and legal title to shares from the beneficial ownership of shares.
• It is a “voting” trust as opposed to a regular trust b/c it gives the trustee the right to vote.
Voting Trusts under TBOC§ 6.251
• Written voting trust agreement
∙ Any number of SH can enter into a written voting trust agreement to confer on trustee the right to vote or otherwise represent ownership interests in the entity.
- The written trust agreement is to make sure that the trustee does what the SH’s want
- Basically separating the right to vote and the legal title to those shares and put the right to vote in the trust
∙ Copy must be filed with corporation and open to inspection by other s/h’s
∙ No term limits in Texas
∙ $$$ that goes to people that owner the shares originally flows thru to the beneficial owners of the original share holders
• Must contain a vote determining mechanism
What are the differences b/w voting trusts and voting agreements?
∙ Key difference between voting agreement & voting trust:
- Shares are of record in the name of the trustee
(i) This was problem with Abercrombie: they did not transfer record owner - Only the shareholder of record has the right to vote; thus only the trustee can vote. But the beneficial owner gets to instruct the trustee how to vote.
(i) He will vote as A, B, and C tell him OR if they disagree then with the man
• Problems with VT
∙ There are a lot of complicated provisions within the vT agreement that make sure the orig SH gets all the money but that the trustee has the right to vote
∙ Trusts are more protective than agreements
What are the characteristics of a holding co?
- Gets full ownership and previous S/H gets share in the holding company
- S/H vote for B/D and Board votes S/H
- Control S/Hs in Operating Co.
- Transfer shares outright to Holding Co, for shares of Operating Co.
What are the characteristics of a holding co?
- Gets full ownership and previous S/H gets share in the holding company
- S/H vote for B/D and Board votes S/H
- Control S/Hs in Operating Co.
- Transfer shares outright to Holding Co, for shares of Operating Co.
