Corporations

Question 1

What does it take to form a corporation in MA?

Answer 1

1. 1+ people sign and deliver the articles to the Secretary of State with the fee (possibly also hold an organizational meeting to select directors, officers, adopt by laws, and conduct business).
2. Articles must include
   (a) Corporate Name w/ magic words (Corp., Co., Inc., Ltd.)
   (b) Name and address of each incorporator (may be person or another corp.)
   (c) Information about the stock (type, authorized shares, number of shares per class, info on voting rights, etc.)
3. Include supplemental information - not part of articles
   (a) Name of registered agent and address within MA
   (b) Names of initial directors, president, treasurer, and secretary.
   (c) fiscal year of the corp.

Note***Statement of duration and purpose is not required.

Question 2

What is ultra vires?

Answer 2

“Beyond the scope of the articles”

Ultra vires contracts are valid, but shareholders can seek an injunction to try and stop the action, and the Corporation can sue the responsible managers for ultra vires losses.

Question 3

What is the significance of incorporating in MA?

Answer 3

Internal affairs of corp. are governed by MA law.

Question 4

What is an “S” corp?

Answer 4

Prevents double taxation, that is, taxing profits and then taxing again on dividends.

Question 5

What are the options available if those who wanted to form a corporation screw up the formation process?

Answer 5

Instead of having a de jure corporation, they will have a de facto corporation if:
1) There is a relevant incorporation statute (MBCA).
2) The parties made a good faith attempt at creating a corporation.
3) They have been acting like a corp.
Business is then treated as a corporation by all except the state.

There is a corporation by estoppel if:

1) One who treats the business as a corporation, may not be estopped from denying that it is a corporation.
2) It is a contract case (no torts)

Question 6

Are bylaws required? Who can amend them?

Answer 6

Not required. Can be amended by shareholders or board if the bylaws or articles allow for it. The articles control if there is a conflict.

Question 7

What is the role and liability of a promoter?

Answer 7

A promoter acts on behalf of the corp. before it officially exists. He is personally liable unless there is a novation.

Question 8

On Jan 10, P, acting as a promoter for a not yet formed corp. leases a building from DD and signs the lease in the name of the corp. On Feb 20, the corp is officially formed. Who is liable for the K? Under what circumstances might that change?

Answer 8

P, the promoter is liable unless there is a novation.

The corp. is only liable if they adopt the K, which they can do expressly or impliedly (corp. knowingly accepts a benefit of the K).

Both may be liable if the corp. adopts the K, but there is no novation.

Question 9

What is the secret profit rule?

Answer 9

Promoter cannot make a profit on her dealings with the corp. because she is a fiduciary of the corp.

Question 10

Jamie, Jen, Tom, and Burt Reynolds form a corporation to provide legal services to the city of Providence called Smokey and His Bandits, Inc. Jamie, Jen, and Tom are lawyers. Burt is not. Is this permissible?

Answer 10

No. In a professional corporation, the directors, officers, and shareholders must be licensed professionals and may only employ non-professionals if they do not render professional services. The name must also contain the designation “Professional Corporation” or “P.C.”

Note***Professionals will not be liable for other shareholder’s malpractice, but each will be liable for his or her own malpractice.

Question 11

What is an issuance?

Answer 11

When the corp. sells its own stock to raise capital.

Question 12

What is a pre-incorporation subscription?

Answer 12

A written offer to buy stock from the corporation. It is irrevocable for 6 months, unless the subscription says otherwise or all subscribers agree to the revocation.

They are revocable post-incorporation until accepted by the Board for the corp.

Question 13

What forms of consideration are acceptable for issuing stock in MA?

Answer 13

Just about anything including money, tangible or intangible property, services already performed for the corp, promissory notes, and contracts for future services.

Question 14

What is par value?

Answer 14

Minimum issue price (if in the articles [not required]).

If sell for less then the shortfall is called “water.” Directors are liable if they knowingly issued below par. The buyer is also liable. Third party buyers are only liable if they knew of the par value.

Question 15

What are pre-emptive rights in MA? This has been tested before.

Answer 15

A pre-emptive right is the right of an existing stockholder to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock including reacquired stock.

e.g. S owns 1000 shares of C corp. There are 5000 shares outstanding. C corp. is going to issue ad additional 3000. If S has pre-emptive rights, she has the right to purchase 600 if she wants.

To have pre-emptive rights, the articles or a K must provide for them.

Question 16

May another corporation be a director of a corporation?

Answer 16

No. It must be an adult natural person. Another corporation may be an incorporator but not a director.

Question 17

If bylaws are silent, how many directors must there be in MA?

Answer 17

If 1 shareholder = 1
If 2 shareholders = 2
If 3+ shareholders = 3

The shareholders or the board may set the number in the articles or bylaws notwithstanding the gap filler.

Re-election of directors by shareholders at the annual meeting must be “staggered” in MA.

Question 18

How may directors be removed in MA?

Answer 18

They may be voted out at the annual meeting if they are up for re-election;
OR
The shareholders may remove a director with cause since elections must be staggered in MA.
OR
A majority vote by the other directors may remove a director.

If a director resigns before his term he may be replaced by the shareholders or the Board to serve out the term.

Question 19

Under what two circumstances may the Board of Directors act?

Answer 19

1) Unanimous agreement in writing
2) At a properly called meeting, with a quorum, and a majority of the quorum votes for the matter in question.
(a) Regular meetings require no notice.
(b) Special meetings require 2 days notice of the date, time, and place (not purpose, reasonable oral or written notice is ok). Improper notice voids what happens at the meeting unless the directors not properly notified waive the defect.
(i) In writing and signed or by email; and
(ii) Filed with the minutes
OR
(i) By attending the meeting and not objecting at the ]
outset of the meeting due to lack of notice.

NoteDirectors may not use proxies or voting agreements.
Note*A quorum can be lost if people leave early.

Question 20

What is the role of directors? Important

Answer 20

The Board of Directors manages the business of the corporation. It sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental corporate changes to shareholders, etc.

Exceptions:

1) Closely held corps. might not have a board.
2) Boards can delegate some duties to committees, but not everything (see pg 15 of the lecture handout.)

Question 21

What is the duty of care? Memorize this…

Answer 21

A director owes the corporation a fiduciary duty of care. The burden is on the plaintiff to establish a violation.

A director must act

(1) In good faith;
(2) With the care that a person in a like position would reasonably believe appropriate under similar circumstances; and
(3) in a manner the director reasonably believes to be in the best interests of the corp.

A breach may be for:
(1) Nonfeasance - doing nothing. This requires that the director’s breach actually caused a loss to the corp, which is tough to show in some cases.
or
(2) Misfeasance - making a bad decision. However, if it is for a bad decision then even if it violates the D of C, there may be no liability because of the BJR which states:
A Court will not second guess a business decision if it:
(a) was informed;
(b) was made in good faith;
(c) was made without conflicts of interest; and
(d) had a RB.
The BJR means that a court will not second guess a board’s decision if it turns out badly, so long as the decision ws made on an informed basis, in good faith, with no conflicts of interest, and with RB.
A director is not a guarantor of success.

Question 22

What is the duty of loyalty? Memorize this…

Answer 22

A director owes the corporation a fiduciary duty of loyalty. The burden is on the defendant.

A director must act
(1) In good faith;
(2) With the care that a person in a like position would reasonably believe appropriate under similar circumstances; and
(3) in a manner the director reasonably believes to be in the best interests of the corp.
The BJR does not apply because the D of L is about conflicts of interest.

There may be a conflict of interest if:
(1) An interested director makes a transaction with the corp. Interested could mean that she has an interest in the other entity or a close relative does. In these cases, the transaction will be set aside or the director will be liable for damages unless the director can show:
(a) the deal was fair when it was made
or
(b) the director disclosed her interest and the material facts and the transaction was approved by the majority (at least 2) of the disinterested directors, a majority of all disinterested voting shares, or a majority of a committee of at least 2 disinterested directors.
Note***The courts may require showing of fairness if presented with only disinterested approval.

2) Competing ventures - violation results in a constructive trust of profits. May also be liable for damages, and, if she stole trade secrets, she may be liable in tort.

3) Corporate Opportunity (Expectancy) - Must bring corp. an opp. before you take advantage of it yourself, even if the corp does not have sufficient funds to take advantage. Must
(1) Tell the board about the opp. and
(2) Wait for the board to reject it.
The remedy is to sell the asset to the corp. at the cost the interested director paid or put his profits in a constructive trust if he has already sold it.

Question 23

Which directors are liable for violations?

Answer 23

A director present at a board meeting is presumed to concur with the board action unless:

1) He objects at the beginning of the meeting or promptly upon his arrival to holding the meeting or transacting business at it.
2) His dissent or abstention from the action is recorded in the minutes.
3) He delivers written notice of his dissent or abstention to the presiding officer of the meeting before its adjournment o to the corporation immediately after adjournment.

Notes***
Can’t dissent if you voted for.

Not liable if you missed the meeting.

Directors may rely in good faith on prepared reports. See page 20 of the lecture handout.

Question 24

Do officers owe the same duties of care and loyalty as directors?

Answer 24

Yes. They are agents of the corp. and may bind the corp. if they have authority.

Question 25

How are officers selected and removed?

Answer 25

By the Board of Directors. Even if can remove, they may be liable for breach of K if there’s an employment K at issue.

Must have a Pres, Treasurer, and Sec, but all three can be the same person.

Shareholders do not hire and fire officers. They hire and fire directors so that they can hire and fire the officers.

Question 26

Under what circumstances will directors and officers be indemnified?

Answer 26

WILL NOT BE:
Liable for breach of D of L; acts or omissions not in good faith or intentional misconduct or knowing violation of the law; improper personal benefit; or an improper distribution.

WILL BE:
Wholly successful defense on all claims on the merits or otherwise.

MAY BE:
Any other case not above (e.g. settlement.)
Good faith that she was acting in corp.’s int. required.
Disinterested directors or disinterested shareholders or independent legal counsel make the call.
Court may order indemnification if it is fair and reasonable under the circumstances.

Articles can limit or eliminate director liability for damages except for:

(a) breach of d of l;
(b) acts or omissions not in good faith or involve int. misconduct or knowing violation of the law.
(c) an improper personal benefit
(d) an improper distribution

This provision is only for directors, not officers.

Note***Often corps. will purchase insurance for director and officer liability.

Question 27

Do shareholders ever manage the corporation?

Answer 27

In general no, but they can if it is a closely held corp. if it is set forth in the articles or bylaws and approved by the shareholders or set forth in writing and signed by all the shareholders and filed with the corp.

If they do this, D of C and D of L owed by the shareholders to the corp.

Closely held corps have

1) Small # of shareholders
2) Stock not publicly traded
3) Substantial shareholder involvement as officers and directors.

Question 28

Are shareholders liable for the acts or debts of the corp? Memorize this…

Answer 28

Typically no because the corp is liable for what it does, but they can be if the court pierces the corporate veil.

This happens only in closely held corporations to avoid fraud or injustice.

The PCV and hold shareholders liable:

(1) The shareholders must have abused the privileges of incorporating and
2) Fairness requires holding them personally liable.

Classic patterns:

1) Alter ego (commingling of personal and corporate assets or treating corporate assets as his own.) Only wrongdoer held liable.
2) Undercapitalization (e.g. No insurance and only $1000 in capital for a company that disposes nuclear waste.)
3) Failure to follow corporate formalities.

Always:

1) State the general rule
2) Then state PCV standard
3) Remind the examines that courts may be more willing to PCV for a tort victim rather than a K claimant because, unlike a K claimant, a tort victim did not voluntarily choose to transact with a corp. and did not assume the risk of limited liability.

Question 29

Briefly describe shareholder duties.

Answer 29

Generally, shareholders do not owe fiduciary duties to each other or to the corp.

However, controlling shareholders cannot use her position for individual advantage at the expense of minority shareholders or the corp.

She may sell at a premium, but not to a looter/raider.
Also, may not freeze out a minority shareholder in a closely held corporation.

Note***There are additional duties for a closely held corp. see. page 25-26 of the lecture handout.

Question 30

What duties do shareholders of a closely held corporation have in MA?

Answer 30

In MA, shareholders in a close corp. get additional protection because they cannot get out if there’s a problem because their shares are not marketable.

Therefore, they owe each other a fiduciary duty of the “utmost good faith and loyalty.” This is the same duty that partners owe one another.

Shareholder can defend by citing a legitimate business purpose.
Plaintiff can rebut this by showing that the same LBP could have been achieved by other practicable means that were less harmful.

This differs from the D of L in that it is more stringent and goes to the duty of a shareholder to another shareholder rather than the corp.

Examples:

(1) Terminating minority shareholder employment
(2) Removing the minority from a board position
(3) Refusing to pay dividends
(4) Otherwise denying the minority any return on his investment.

Question 31

What are derivative suits? Memorize this…

Answer 31

Suits brought by a shareholder on behalf of the corp. against an officer or director (often for breach of fiduciary duty).

It is not a direct claim because if P wins, the corp. gets the $, but P is entitled to attorney’s fees and costs. If she loses, she is liable for D’s reasonable attorney fees and costs if the lawsuit was without reasonable cause or proper purpose.

To bring a derivative suit, P must:

1) Own stock when the claim arose
2) Must fairly and adequately represent the interests of the corp. (own stock throughout litigation).
3) Must make a written demand on the board to bring suit prior to bringing one himself.
(a) must do it even if futile.
(b) shareholder cannot file until 90 days after the demand unless the corp. rejects it or waiting would cause irreparable injury.
4) The corp. can move to dismiss if:
(a) majority of disinterested directors (at least 2) or a majority of disinterested shares find in good faith, after a reasonable inquiry, that the suit is NOT in the corp.’s best interest (e.g. low chance of winning or expense would exceed recovery or litigation costs better spent elsewhere.)
(b) Court may examine if this inquiry was really in good faith and dismiss.
(c) if majority of board was interested then corp must show that requirements were met. If majority of the board was not disinterested, the shareholder must show that the requirements were not met.
5) Corp must be joined as a D.
6) Settlement only with court approval

Question 32

Describe shareholder voting in a nutshell.

Answer 32

Only the shareholders on the record date may vote.

The shareholder herself, her estate, or proxy may vote.

Voting trusts and voting agreements for shareholders are permissible. Therefore, you can agree to vote for someone for director, but that person cannot bind himself a certain way to vote once she is a director.

Holders with at least 10% of the voting shares (40% if a public corp.) can call for special meetings.

Every shareholder must be notified of a special meeting. That notice must contain:
(1) Where
(2) When
(3) Why - state broadly so as not to pigeonhole yourself.
The meeting is being held.
If they remove an officer, the removal is not binding, but calling one to remove a director is fine.

Shareholder voting requires a quorum of the number of shares (not number of shareholders). The quorum is not lost if people leave the meeting.

Normally majority of the votes actually cast is needed to pass a resolution (not a majority of the quorum).

Question 33

What is cumulative voting and why do it?

Answer 33

Voting where shareholders’ votes are determined by their shares multiplied by the number of director seats up for election.

This can allow smaller shareholders to have a bigger say because they can place all their votes on one director.

Question 34

What restrictions does MA place on stock transfers?

Answer 34

Generally, a person may restrict stock transferability IAW with the articles, bylaws, or shareholder agreement (like right of first refusal is ok if price is reasonable). Restrictions against the transferee must be conspicuously noted on the stock cert. or transferee has actual knowledge of the restriction.

Absolute prohibitions on alienation are prohibited.

Question 35

Who may inspect the book and records of a corp.?

Answer 35

Any shareholder may inspect the books and records.

Routine docs (articles, bylaws, annual report, communications to shareholders, lists of directors and officers, minutes of shareholder meetings) require no reason.

Other docs (accounting records, minutes of board meetings, record of shareholders) require a reason and written demand 5 days before inspection.

Question 36

What are distributions?

Answer 36

Payments to shareholders like dividends , repurchase, and redemption.

A suit to compel declaration of a distribution is a direct suit (e.g. board refuses to declare dividend after receiving big profits and, instead, confers huge bonuses on themselves).

Dividends are paid by according to the type of stock held. See page 36 of the lecture handout.

Directors are strictly liable for improper distributions.

Question 37

How must fundamental changes be approved?

Answer 37

1) Board action adopting a resolution for a fundamental change.
2) Board gives written notice to all shareholders (whether or not they are entitled to vote.) The notice must describe the proposed change.
3) 2/3 shareholder approval of all voting shares.
4) Deliver a document to the Sec. of State.
5) Dissenting shareholders in closely held corporations have right of appraisal, which is the exclusive remedy absent a showing of fraud. Public corps can just sell on the market it they want out.

Note***This usually comes up in mergers and transferring substantial amounts or all of the corp.’s assets.

Question 38

How do corp.’s amend their articles?

Answer 38

1) Board action and notice to shareholders.
2) Shareholder approval by 2/3 of all shares.

Exceptions:

1) Changing the corp. name
2) Number of authorized shares.

Question 39

What is a merger?

Answer 39

Corp A disappears into Corp B, who survives.

Requires:

1) Board of director action and notice to all shareholders in both Corps.
2) 2/3 approval by all shares in the corp. entitled to vote in both corps. (as a general rule unless there’s no significant change to the surviving corp.)
3) No shareholder approval required where 90% or more owned subsidiary merges into a parent (=Short Form Merger.)
4) If approved, file articles of merger with the Sec. of State.
5) Remember the right of appraisal.
6) Surviving company takes on all rights and liabilities.

Question 40

What is required for a transfer (sale) of all or substantially all assets?

Answer 40

Requires:

1) Board of director action and notice to all shareholders in both Corps.
2) 2/3 approval by all shares in the selling corp. entitled to vote.
3) If approved, file articles of merger with the Sec. of State.
4) Remember the right of appraisal for the selling corp. shareholders.
5) No successor liability.

Question 41

Can a company convert from a corp. to another form like a partnership?

Answer 41

Yes with board action and 2/3 vote of the share entitled to vote. Deliver articles to Sec. of State.

Question 42

How may dissolution occur?

Answer 42

1) Voluntary - Board + 2/3 voting shares. Notify Sec. of State and creditors.

2) Involuntary
40% voting shares vote for it due to director gridlock that threatens irreparable harm or shareholder gridlock and failure to fill a vacant board seat at two annual meetings.
OR
Insolvency with unsatisfied judgment owed to creditor or admission of inability to pay creditor’s debt in writing.

3) Administrative - Sec of State dissolves for failure to do what is required or if the corp. is inactive. 90 days notice to fix is required.

Dissolution only triggers winding up. Gathering assets, converting to cash, paying creditors, then distributing to shareholders in that order.

If shareholders are paid before creditors, the directors are liable to the creditors and shareholders may have to return the money.

Question 43

What is the difference between debt and equity securities?

Answer 43

Debt securities are given to creditors.

Equity securities are given to investors.

Question 44

What are the two Securities Acts that I need to be familiar with for the bar?

Answer 44

1) Massachusetts Uniform Securities Act - prohibits fraud, material misstatements of fact, important omissions, or practice that would operate as a fraud in connection with sale of securities.

Must prove fraud. Negligence is not enough.

2) Massachusetts Consumer Protection Act - prohibits unfair or deceptive practices and unfair methods of competition in any business or trade including the sale of securities. E.g. stock offerings must be accurate in all respects. A material fact that buyer would consider important must be disclosed.

Does not apply to corp. governance. The fiduciary duties take over there.

Remedy = actual damages

Question 45

Which of the following statements regarding the president of a corporation is true?

A
The president of a corporation only has the authority that is expressly granted in the corporation’s articles of incorporation.

B
The president of a corporation always has implied authority to enter into contracts on behalf of the corporation.

C
The president of a corporation usually may not sign a contract with a third party in the absence of authorization from the board.

D The president of a corporation has absolute authority to run the corporation in any reasonable manner she sees fit under

Answer 45

C
The president of a corporation usually may not sign a contract with a third party in the absence of authorization from the board.

As an officer of the corporation, the president is an agent of the corporation and receives her power to manage from the directors. The ordinary rules of agency determine her authority and power. The president’s authority may be actual or apparent. If authority exists, actions taken by a corporate officer (such as entering into contracts) bind the corporation. An officer’s actual authority includes not only the authority expressly granted to the officer by the directors, the bylaws, the articles, and statutes, but also any authority that may be implied by the express grant. In this state, however, the implied authority of a president is extremely limited. Usually, the president may not sign a contract with a third party in the absence of authorization from the board. The business judgment rule protects directors whose reasonable decisions turn out to be poor or erroneous in hindsight. It does not give authority to a corporation’s president to run the corporation in any manner she sees fit.

Question 46

When a director has a personal interest in a proposed transaction with the corporation, what standard is used to determine whether a fact about that transaction is considered material and worthy of disclosure?

A Whether a director in the industry would consider the fact important in deciding whether to proceed with the transaction.
B Whether an experienced director would consider the fact important in deciding whether to proceed with the transaction.
C Whether an ordinarily prudent person would consider the fact important in deciding whether to proceed with the transaction.
D Whether a shareholder would consider the fact important in deciding whether to proceed with the transaction.

Answer 46

C Whether an ordinarily prudent person would consider the fact important in deciding whether to proceed with the transaction.

Question 47

Which of the following transactions most likely would be considered a conflicting interest transaction that could be enjoined or give rise to an award of damages?

A
A corporation hires a director’s grandson to perform clerical work for the corporation at a fair wage over other equally qualified candidates.

B
After just six months of service, the board of directors vote to give themselves a pay raise.

C
A director places the deciding vote that a corporation will make an interest-free loan to a start-up company that the director has formed, after fully disclosing his personal connection to the company to the other voting board members.

D
A director proposes that the corporation enter into a new business venture, and his wife, a fellow director, votes for the deal to show support for her husband despite her personal belief that the venture is foolish and likely to lose money for the corporation.

Answer 47

C
A director places the deciding vote that a corporation will make an interest-free loan to a start-up company that the director has formed, after fully disclosing his personal connection to the company to the other voting board members.

A director has a conflicting interest with respect to a transaction if the director knows that she or a related person (i) is a party to the transaction; (ii) has a beneficial financial interest in, or is so closely linked to, the transaction that the interest would reasonably be expected to influence her judgment if she were to vote on the transaction; or (iii) is a director, partner, etc. of another entity with whom the corporation is transacting business and the transaction is of such importance to the corporation that it would in the normal course of business be brought before the board. Nevertheless, such a conflicting interest transaction will not be enjoined or give rise to an award of damages if: (i) the transaction was approved by a majority of the directors (but at least two) without a conflicting interest after all material facts have been disclosed to the board; (ii) the transaction was approved by a majority of the votes entitled to be cast by shareholders without a conflicting interest in the transaction after all material facts have been disclosed to the shareholders; or (iii) the transaction, judged according to circumstances at the time of commitment, was fair to the corporation. The scenario here most likely to be found to be an impermissible conflicting interest transaction is the one where the director places the deciding vote to approve an interest free loan to his start-up company. It was improper for the interested director to cast the deciding vote, and it is unlikely that an interest-free loan would be seen as fair to the corporation. While it might be a conflict of interest for a corporation to hire a director’s relative, the fact that the grandson is qualified for the job and is being paid a fair wage indicates that the transaction was fair to the corporation and thus would be permissible. Next, despite an apparent conflict of interest, unless the articles or bylaws provide otherwise, the board may set director compensation. If the compensation is unreasonable it could be seen as a breach of the directors’ fiduciary duties, but it is not classified as a conflicting interest transaction. Similarly, the wife’s decision to vote with her husband despite her belief that the transaction was not in the best interests of the corporation, could be a breach of the wife’s fiduciary duties to the corporation as a director, but it is not an example of an impermissible interested director transaction since no fact indicates that the director or his wife had a personal interest in the new business venture.

Question 48

What can a shareholder in a close corporation do when he feels that a director has breached a fiduciary duty?

A The shareholder’s only option is to bring a derivative suit against the director because directors owe fiduciary duties to their corporation, not to the shareholders.
B The shareholder’s only option is to bring a direct action against the director because derivative actions are not available for close corporations.
C The shareholder has absolute discretion to decide whether to bring a derivative suit or a direct action against the director.
D The shareholder can bring a derivative suit, or if traditional law would not provide a complete remedy or recovery on the corporation’s behalf would not provide the shareholder a just measure of relief, he can bring a direct action.

Answer 48

D The shareholder can bring a derivative suit, or if traditional law would not provide a complete remedy or recovery on the corporation’s behalf would not provide the shareholder a just measure of relief, he can bring a direct action.

Direct suits are limited to actions where traditional corporate law does not provide a complete remedy or where recovery on the corporation’s behalf does not provide a just measure of relief to the complaining shareholder. Because of the small number of shareholders in a close corporation, the heightened fiduciary duties of corporate officers and directors run directly to the shareholders as well as to the corporation itself. Thus, shareholders in close corporations may sue directly rather than derivatively for breach of those duties.

Question 49

Controlling shareholders in a close corporation:

A Owe the same duty of loyalty generally applied to other business corporations.
B Owe one another the same duty of loyalty that partners owe to one another.
C Owe a fiduciary duty to the corporation, but not to their fellow shareholders.
D Owe no fiduciary duty to the corporation or their fellow shareholders.

Answer 49

B Owe one another the same duty of loyalty that partners owe to one another.

Question 50

Generally speaking, how much power do shareholders have in the decision whether or not to declare the payment of a dividend?

A As the record owners of the corporation, it is within the sole discretion of the shareholders whether the corporation will declare the payment of a dividend.
B
A shareholders’ vote is necessary to declare a dividend, but the issue can only be raised for a vote by the board of directors.

C
Shareholders can make a demand for a distribution at any time, which the board of directors must honor so long as the distribution would not cause the corporation to become insolvent.

D
Shareholders have very little right to compel the payment of a dividend; declaration is generally solely within the board’s discretion and it would take a very strong case in equity for a court to interfere with the directors’ discretion.

Answer 50

D
Shareholders have very little right to compel the payment of a dividend; declaration is generally solely within the board’s discretion and it would take a very strong case in equity for a court to interfere with the directors’ discretion.

The decision whether or not to declare distributions generally is solely within the directors’ discretion. The shareholders have no general right to compel a distribution; it would take a very strong case in equity to induce a court to interfere with the directors’ discretion. However, the directors’ decisions to make distributions are limited by solvency requirements.

Question 51

What is necessary for a shareholder to have standing to bring a derivative action?

Answer 51

The shareholder must have been a shareholder at the time of the alleged wrongful act or omission, or become a shareholder through transfer by operation of law from one who was a shareholder at that time, and he must be able to fairly and adequately represent the interests of the corporation.