Corporations Flashcards
CONTROLLING SHAREHOLDERS
Non-disclosure of special facts (or circumstances).
Rule: 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.
Is it a special fact? reasonable investor would consider important in making a investment decision.
Who can sue? has to be a deal w/ a SH
Measure of damage – difference between price paid & value of stock a reasonable time after public disclosure
CONTROLLING SHAREHOLDERS
Market trading on inside information.
Market Trading of Corp’s Stock
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.
CONTROLLING SHAREHOLDERS
Freeze-Out Mergers
Rule: All mergers must have a legitimate corporate purpose, even if approved by the requisite # of shares.
o E.g. Majority SH merges Corp w/ another Corp, which they own & minority SH’s interests are purchased.
Court reviews whole transaction: (1) overall course of dealing & (2) fairness of the price.
o Factors: whether (1) deal is tainted by self-dealing or fraud, or (2) minority SH dealt w/ fairly, or (3) legitimate business reason for merger.
DISSOLUTION
What are the steps to winding up after dissolution?
Steps to winding up (i.e. liquidating): gather all assets convert them to cash pay creditors distribute remainder to SH, pro-rata by share unless there’s a dissolution preference, which means that SH gets paid first o Must say “dissolution preference.”
➩ SH cannot agree that they can be paid before creditors. Remember that SH may also be a creditor (e.g. made loan to corp) so he wears two hats & will be paid first as a creditor.
CONTROLLING SHAREHOLDERS
Sale of shares, assets, or positions on BOD.
Sale of Controlling SH’s Interest:
Controlling shareholder can sell his shares at a premium & keep the money unless he sold to looters w/o making a reasonable investigation
o Remedy: disgorge the Seller’s profit & he is probably liable for all damage to the corporation.
De facto sells Corp assets → remedy is that SH get to share in the premium paid by the buyer.
Position on BOD → fiduciaries cannot sell their positions
DISSOLUTION
What is necessary for involuntary dissolution?
For involuntary dissolution, tell court:
Resolution of BOD/majority of shares entitled to vote → Corp has insufficient assets to discharge liability or dissolution would be beneficial to SH
½ + of shares entitled to vote → directors too divided to manage; SH too divided to elect directors; internal dissention makes dissolution beneficial to SH
Any SH entitled to vote → SH unable to elect directors for 2 annual meetings
**20% + of voting shares in a close corp → Mgmt’s illegal, oppressive or fraudulent acts toward the complaining SH or Mgmt’s wasting, diverting or looting of assets
o Mgmt = directors or managing SH
Ct. can deny if complaining SH can get fair return (e.g. by ordering buyout) but will consider if liquidation is the only way to get a fair return
**Corp. or non-complaining SH can avoid by → w/in 90 days of the petition, buy the petitioner’s shares at fair value on terms approved by the court.
CONTROLLING SHAREHOLDERS
Shareholders duties to other shareholders.
Rule: Outside 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.
Controlling shareholder →Owes a duty.
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.
FUNDAMENTAL CORP CHANGES
What is necessary for a share exchange?
One company acquires all the outstanding shares of one or more class of another corporation.
Deliver plan of exchange to Dept. of State for filing
These are ONLY fundamental changes for the SELLING corporation so only SH of the selling corp. have rights of appraisal.
Ex: S Corp wants to sell all of its assets to B or B wants to acquire all the shares of S corp. Majority of the shares entitled to vote for the SELLING corp. Number of shares of B that must approve the sale = ZERO b/c they don’t vote b/c it’s not a fundamental change for the buyer.
DISSOLUTION
What is necessary for voluntary dissolution?
NO board vote necessary.
Need votes of majority of SHARES entitled to vote. (NOT those “actually voted”)
Certificate of dissolution delivered to Dept. of State for filing.
FUNDAMENTAL CORP CHANGES
Transfer of all assets not in the ordinary course of business.
Transfer of all of the assets NOT in the ordinary course of business:
Only a fundamental change for SELLING corporation so only SH of selling corporation have rights of appraisal.
No delivery to Dept. of State necessary.
FUNDAMENTAL CORP CHANGES
Tort liability for share exchange & transfer of assets.
Company acquiring assets will NOT be liable for the torts of the company whose assets it acquired unless:
o the deal provides otherwise, or
o the purchasing company is a mere continuation of the seller, or
o the deal was entered fraudulently to escape such obligations.
Different from merger b/c general rule is NO SUCCESSOR LIABILITY b/c the Seller of assets still exists.
FUNDAMENTAL CORP CHANGES
How can a change be made to the certificate?
Must be approved by Directors AND majority of the SHARES entitled to vote.
Then deliver certificate of amendment to Dept. of State for its filing.
Caveat: this is majority of all shares – NOT majority of those actually voting at quorum. Ex: Directors approve an amendment & recommend it to the SH. If there are 4,000 outstanding shares entitled to vote, a majority (2,001) must vote for the amendment.
Exception: If amendment will change or strike a supermajority quorum or voting requirement for shareholder (not director) voting → needs director approval & approval by 2/3 of the shares entitled to vote. Does not matter when Corp was formed.
FUNDAMENTAL CORP CHANGES
What are the requirements for a merger or consolidation & what is its effect?
Merger = A Corp merges into B Corp. → A corp disappears & B survives
Consolidation = A Corp. and B Corp. form C Corp. (both disappear)
EACH company’s BOD adopts a plan of merger (or consolidation) AND
Shareholder approval needed from BOTH corps
Deliver a certificate of merger (or consolidation) to Dept. of State for filing.
Successor Liability = surviving company succeeds to all rights & liability of the constituents.
Rights of Appraisal – only if SH of Corp that disappeared (i.e. not for SH of surviving company)
FUNDAMENTAL CORP CHANGES
What must the SH do to perfect the right of appraisal?
Before the SH vote, file written objection & your intent to demand payment with the corporation, AND (before vote)
Abstain or vote against the change, AND (at vote)
After the vote, make written demand to be bought out. (after vote)
FUNDAMENTAL CORP CHANGES
What is a short-form merger?
No SH approval if a parent corp. owns 90% or more of each class of stock of the subsidiary that is merged into a parent Corp.
Dissenting SH still have the right of appraisal even though they didn’t get to vote.
DISTRIBUTIONS
What are redemptions? Repurchases?
Redemptions
Forced sale to corporation at a price set in the certificate.
Must be done proportionately within each class of stock.
Repurchases
Corp pays SH to repurchase shares.
Individually negotiated & can discriminate except in a close corporation, where must give equal opportunity to all SH.
FUNDAMENTAL CORP CHANGES
What is the right of appraisal?
When the corporation wants to make a fundamental corporate change the dissenting shareholder has the right to force the corporation to buy his shares at fair value.
If SH & Corp cannot agree on fair value, the CORPORATION sues to determine the value. Court cannot discount the shares if they are minority shares and not controlling shares.
DISTRIBUTIONS
Who is liable for unlawful distributions?
**Directors are personally liable for unlawful distributions
SH who knew the distribution was unlawful when they received it.
(Derivative suit)
Defense: Director’s GF reliance on what people told him
FUNDAMENTAL CORP CHANGES
What actions by Corp trigger the right of appraisal?
Amendments to the certificate: (1) a preference, (2) change of redemption rts., (3) alters or abolishes preemptive rt., (4) limits voting rights.
consolidation
your Corp merges into another corp
your corp transfers substantially all of its assets;
your corporation’s shares are acquired in a share exchange
DISTRIBUTIONS
What funds may be used for any distribution?
Surplus = Assets – liabilities – stated capital
NEVER stated capital
DISTRIBUTION
WHEN CAN A CORP MAKE A DISTRIBUTION?
Whenever, even if it lost money last year BUT cannot if it is insolvent or if the distribution would render it insolvent.
“Insolvent” = Corporation is unable to pay their debts as they come due in the ordinary course of business.
DISTRIBUTIONS
BOD declares a dividend of 400,000. 100,000 shares common, 20,000 $2 preferred. Preferred participating? Cumulative?
100,000 shares of common stock. → $4/share
Preferred → $2 per share. $40k. That leaves $360k, which goes to the common shares so they each get $3.60 per share.
Participating (i.e. pay again) → $40k first to preferred SH. $360k remains to split among 120,000 b/c goes to common & preferred participating. $3 per share for the common, ($2 + $3) $5 total per share for preferred.
Cumulative - Corp owes them for 4 years (3 prior yrs. of no dividend & this year) of their $2 preference. 4 yrs. x $2 = $8 per share. 20,000 x $8 = $160k - all preferred so pay it first. Leaves us w/ $240k that goes to the common. $2.40 per share for common.
DISTRIBUTIONS
What is stated capital?
Par Stock → Stated capital = par value of the issuance, excess is surplus
No-Par stock → within 60 days after issuance, BOD can allocate any part, but not all, to surplus but if BOD does nothing within 60 days of issuance, it all goes to stated capital.
STOCK TRANSFER BY SH
Stock Transfer Restrictions
Can be set in cert., bylaws, or agmt.
Will be upheld if “reasonable under the circumstances” (i.e. not an undue restraint on alienation) and
(1) it is conspicuously noted on the stock certificate or
(2) the transferee had actual knowledge of restriction.
E.g. ROFR – if price reasonable okay, but restriction requiring approval for sale, not okay b/c corp could refuse for no reason
SH RIGHT TO INSPECT
What must a SH do to inspect Corp records?
Minutes of SH Proceedings & Record of SH – any SH, on 5 days written demand
Corp can demand affidavit – SH purpose is (1) not other than in interest of the Corp and (2) that he has not within 5 yrs. tried to sell any list of SH (can NEVER demand more info) - Corp can deny access if SH refuses
Current list of D and O – any SH on 2 days written demand
Latest (1) annual balance sheet, (2) profit & loss stmt & (3) latest interim stmts distributed to SH or public - any SH can make a written request & Corp must provide docs (usually by mail).
*Common law right to inspect - all SH, to inspect records at a reasonable time & proper place for a proper purpose (related to her role as a SH)
SHAREHOLDER VOTING
When is cumulative voting possible & how does it work?
Only available when SH are electing directors and certificate specifically allows it.
Formula: # of shares x # of directors to be elected.
Ex: Own 1,000 shares, 9 on BOD open for election → 9,000 votes to give – can split them any way.
Percentage of Share required to elect one director = 100 divided by (# of directors being elected + 1).
Ex: 9 directors being elected – would need 1 share more than 10% to elect one.
DISTRIBUTIONS
What are the 3 ways to make distributions from the Corp & who has a right to them?
dividend
payment to repurchase shares
payment to redeem shares (forced sale to Corp at price set in certificate).
**Distributions are declared in the BOD’s discretion
NO SH right to a distribution until it is declared.
Court will only interfere only on a showing of BAD FAITH or DISHONEST PURPOSE. Practically impossible.
SHAREHOLDER VOTING
What is the notice requirement & what does it entail?
General Rule: Must give written (email okay) notice to every SH entitled to vote, for every meeting (annual or special) between 10-60 days before the meeting.
Content:
when and where the meeting is
Say if proposed action would entitle SH to appraisal rights & tell why (& include statute about appraisal rights).
Special Meeting Content:
who is calling meeting
stmt of purpose → the only business that can be done
Ex: Stated purpose = to remove a particular officer. Not possible b/c SH does not remove officers.
SHAREHOLDER VOTING
What happens when there is a failure to give notice to entitled voters?
If no notice is given to shareholders entitled to vote, the action taken is VOID unless those not given notice waive by:
(1) in writing & signed anytime, or
(2) person not given notice, shows up at the meeting without objecting.
SHAREHOLDER VOTING
Who can call a special meeting of the shareholders?
BOD
anyone provided in the certificate or bylaws
Note: Special meeting must be called by BOD if failure to elect enough directors to conduct business of the Corp. If BOD fails to do so, holders of 10% of the voting shares may demand meeting in writing. Corp. Sec. must give notice of the meeting & if does not SH may give it.
SHAREHOLDER VOTING
How do shareholders vote?
Rule: To take a valid act at a meeting, a quorum must be met.
Quorum = a majority of the outstanding SHARES (NOT SH).
Once quorum met, there is always a quorum, even if SH leaves.
Majority of shares actually voting in favor or against proposal required for valid act.
Certificate/bylaws - reduce quorum but never less than 1/3 of shares entitled to vote.
Majority approval requirement can NEVER be changed.
Certificate – can increase the # nec. for a quorum or # nec. to pass a resolution at the meeting (supermajority)
SHAREHOLDER VOTING
Requirements for a Voting Trust.
Purpose → small SH who want to increase influence on Corp policy can “block vote”
Written Trust Agmt controlling how the shares will be voted
Copy to Corp
Transfer legal title of shares to voting trustee; and
Original SH receive voting trust certificates & retain all SH rights except for voting
Time limit = 10 yr. maximum but w/in 6 months of expiration, can extend for another term of up to 10 years.
SHAREHOLDER VOTING
What are the 2 ways for SH to take a valid act?
2 Ways SH can take a valid act:
Written consent signed by the holders of all voting shares to act w/o a meeting.
Meeting.
SHAREHOLDER VOTING
Which SH get to vote?
General rule: record owner as of record date has the right to vote.
Record owner = whomever Corp records indicate
Record date = voter eligibility cut-off, set no less than 10 & no more than 60 days before the meeting.
Exceptions:
Corp reacquires stock (treasury) – NO vote
SH dies after record date – executor can vote
Proxies :(1) writing, (2) signed by record SH or auth. agent, (3) directed to the Sec. of the Corp., (4) authorizing another to vote shares.
o good for 11 months, unless says otherwise
o revocable (can change mind) even if it says “irrevocable” UNLESS Proxy (saying “irrevocable”) coupled with an interest is irrevocable.
