Corporations - SHAREHOLDER voting, rights and transfer of stock

Question 1

WHO exactly, gets to vote as a shareholder?

Answer 1

General Rule is that the RECORD OWNER as of record date has the right to vote

The RECORD OWNER is the person shwon as the owner in the corporate records. The RECORD DATE is a voter eligibility cut-off, set no fewer than 10 and no more than 60 days before the meeting

e.g. C-corp sets the annual meeting for July 7, and record date for June 6. S sells B her C Corp. stock on June 25. Who is entitled to vote the shares at the meeting, S or B? –S because she owned it on June 6th (we don’t care who owns it when the meeting rolls around) - had to own it on the record date

EXCEPTIONS:
(1) Corporation not allowed to vote its TREASURY STOCK - e.g. if a corporation reacquires stock on Jan 10, the record date is Jan 15, co doesnt get to vote those shares acquired

(2) DEATH of a SHAREHOLDER - e.g. S owns stock in C Corp. S is record owner. After the record date, S dies. S’s EXECUTOR can vote the shares
(3) PROXIES - ok for shareholder voting

Question 2

What is a PROXY? and what are its requirements?

Answer 2

Any shareholder entitled to vote at a meeting ( or to express consent or dissent without a meeting) may authorize another person to act for him by proxy

A proxy is

(1) a WRITING (note: a Fax or e-mail IS considerd a writing)
(2) SIGNED by the record shareholder or authorized agent,
(3) directed to secretary of corp
(4) authorizing another to vote the shares

e.g. on Feb 2, 2012, S sends letter to secretary of C Corp. authorizing Joey Gladstone to vote her shares. Joey may vote S’s shares bc this is a valid proxy

TIME-LIMIT: a PROXY is good for 11 MONTHS unless it says otherwise (on bar it will be silent, so 11 months)

could joey vote at the July 2013 annaul meeting as well?
NO a proxy is good for 11 months unless it says otherwise

Question 3

Revoking a Proxy

Answer 3

YES, you can revoke a proxy

(1) in WRITING or
(2) by ATTENDING the meeting and voting

What if S gives P a proxy and then dies, does this revoke the proxy?
-ONLY when written notice of death is received by the corporate secretary

Can S revoke her proxy even though it states that it is IRREVOCABLE?
–yes, just saying it is irrevocable is not enough to make it irrevocable

Question 4

Can you make a proxy irrevocable?

Answer 4

YES

proxy is IRREVOCABLE if:

(1) it says irrevocable and
(2) the proxy-holder has some interest in the stock other than voting.

This is called a “PROXY COUPLED WITH AN INTEREST” and it is irrevocable

e.g. S gives P an option to buy her stock. Then S gives P a proxy to vote at the upcoming meeting. The proxy says “irrevocabe.” Can S revoke this proxy?
NO bc
(1) it SAYS irrevocable and
(2) proxy holder has an interest in the stock other than voting

Question 5

Voting Trusts

Voting Trusts and Agreements

Answer 5

Requirements for VOTING TRUST:

(1) WRITTEN TRUST AGREEMENT controlling how the shares will be voted
(2) COPY to corporation
(3) TRANSFER LEGAL TITLE OF SHARES to TRUSTEE
(4) Original Shareholders receive voting TRUST CERTIFICATES and retain all shareholder rights except for voting

e.g. X, Y, and Z own relatively few shares of C Corp. They ask for advice about how they can increase their influence on corporate policy by “block voting” ie voting alike.

Question 6

Voting Agreements

Voting Trusts and Agreements

Answer 6

Requirements for Voting AGREEMENTS (or “pooling” agreement)

(1) must be IN WRITING
(2) SIGNED

remember: shareholders CAN enter into voting agreements, but DIRECTORS CANNOT

Are voting agreements specifically enforceable?
Apparently not, in NY can’t FORCE them to vote the way they agreed to

a PROXY given subject to a voting agreement is IRREVOCABLE if it SAYS SO

Question 7

What are the only 2 ways the shareholders can take a valid act?

Answer 7

(1) Written consent of the holders of ALL voting shares

2) a MEETING (either an “annual” or “special” meeting

Question 8

What kinds of shareholder meetings are there? and what happens at each?

Answer 8

There are 2 kinds of shareholder meetings

(1) ANNUAL - where you elect directors
(i) the highest vote getter for each seat on the board wins, even if he did not get a majority of the votes. All he needs is a PLURALITY, not a majority, of the votes
(ii) if annual meeting is NOT HELD, the court can ORDER ONE

(2) SPECIAL MEETING -can be called by
(i) the BOARD or
(ii) anyone provided in the certificate or bylaws

they need NOT be held in NY

NOTICE REQUIREMENT: must give written notice [email is ok] to every shareholder entitled to vote, for every meeting (annual or special) between 10 and 60 days before the meeting

Question 9

Who pay call a SPECIAL MEETING?

Answer 9

SPECIAL MEETING -can be called by

(i) the BOARD or
(ii) anyone provided in the certificate or bylaws

And notice of a SPECIAL MEETING must state:

(1) Who called it, and
(2) the purpose of the meeting
- – no business may be transacted at a special meeting not related to the purposes set forth in the notice

e.g. what if a proper person calls a special meeting of the shareholders, and the stated purpose of the meeting is to remove a particular officer? - not allowed, because the meeting must be something the shareholders can vote on and shareholders generally do not remove officers (they can remove DIRECTORS but not officers, unless the CERTIFICATE allows SHs to elect them) - so ok to call a meeting to remove a director, but not an officer

Question 10

What are the NOTICE requirements for calling a meeting?

Answer 10

NOTICE REQUIREMENT: must give written notice [email is ok] to every shareholder entitled to vote, for every meeting (annual or special) between 10 and 60 days before the meeting.

Contents of notice: must ALWAYS state the TIME and PLACE

Also, if the action proposed at the meeting is something on which shareholders would have APPRAISAL RIGHTS, the notice must say so and tell why (and even include the statute about appraisal rights)

And notice of a SPECIAL MEETING must state:

(1) Who called it, and
(2) the purpose of the meeting
- – no business may be transacted at a special meeting not related to the purposes set forth in the notice

Question 11

what happens if the corporation does NOT give NOTICE to everyone entitled to vote?

Answer 11

The action at the meeting is then VOID

BUT the action can be upheld if those not given notice waive the defect either

(1) Expressly, in writing and signed anytime
(2) Impliedly - if you attend the meeting without objection (despite not receiving notice)

Question 12

How do shareholders vote?

Answer 12

There must be a QUORUM represented at the meeting. Determination of a quorum focuses on the number of SHARES represented, not the number of shareholders. Generally, a quorum requires a majority of outstanding SHARES

If a QUORUM is met, a MAJORITY may act to bind the corporation. MAJORITY means majority of shares actually voting in favor or against the proposal (abstentations don’t count)

e. g. X Corp has 120,000 shares outstanding. X corp has 70 shareholders. What is a quorum?
- - At least 60,001 shares

e. g. 2 - X corp. has 120,000 shares outstanding. 62,000 shares are represented at the meeting but only 50,000 shares vote on a particular proposal. How many shares must vote for the proposal for it to be accepted by shareholders??
- - at least 25,001. You do NOT need majority of the 62,000 present, just majority of those who voted on the matter

Question 13

What constitutes a quorum for a shareholder vote?

Answer 13

Determination of a quorum focuses on the number of SHARES represented, not the number of shareholders. Generally, a quorum requires a majority of outstanding SHARES

Once a QUORUM is established at a shareholders’ meeting it cannot be lost if ppl leave the meeting (this is different from the rule for board meetings)

e. g. X Corp has 120,000 shares outstanding. X corp has 70 shareholders. What is a quorum?
- - At least 60,001 shares

However, the CERTIFICATE or BYLAWS can reduce a QUORUM to less than a majority, but NEVER to fewer than 1/3rd of the shares entitled to vote

Question 14

How can shareholder VOTING and QUORUM requirements be altered?

Answer 14

QUORUM REQUIREMENTS for shareholder action:
GENERAL RULE: quorum is a MAJORITY of votes of shares entitled to vote

Ability to alter QUORUM requirements:
(i) LESSER QUORUM - the CERTIFICATE or BYLAWS can reduce a QUORUM to less than a majority, but NEVER to fewer than 1/3rd of the shares entitled to vote

(ii) GREATER QUORUM - can impose a requirement that a SUPERMAJORITY (e.g. 90%) of the shares entitled to vote be present at he meeting to constitute a QUORUM, but ONLY in the CERTIFICATE, not the bylaws

VOTING REQUIREMENTS for Shareholder action:

GENERAL RULE: action requires a MAJORITY of the votes cast (ie actually voting - abstentation does not count)
— note: this is for voting OTHER THAN to elect directors, for electing directors just need a plurality of the votes cast

Ability to alter VOTING REQUIREMENTS:
(i) you can require that resolutions at a meeting must be approved by a SUPERMAJORITY (e.g. 2/3rds) in the CERTIFICATE ONLY

(ii) you can NEVER reduce the requirement of MAJORITY approval

(NOTE: these are the same rule as with the board - ie board can increase quorum requirement in CERTIFICATE only, can decrease quorum requirement)

Question 15

What vote is required to elect DIRECTORS?

Answer 15

Voting to elect directors is made by a PLURALITY of votes cast unless the articles or bylaws provide otherwise

Question 16

How and when do shareholders use CUMULATIVE VOTING?

Answer 16

Cumulative Voting is ONLY available when shareholders are voting to elect DIRECTORS. It is a device to help small shareholders get representation on the board
- multiple the number of shares times number of directors to be elected

e.g you own 1,000 shares of stock in C-Corp. C-Corp has 9 directorships open for election You believe Don should be Director of C Corp. Under CUMULATIVE VOTING you can cast 9,000 votes (you get 1000 per director seat but can cast them all for one seat)

This right to CUMULATIVE VOTING only exists if it is specified in the CERTIFICATE - if the CERTIFICATE says nothing about cumulative voting, shareholders DO NOT have this right

Question 17

Can a shareholder resell his shares for less than par?

Transfer of Stock by Shareholders

Answer 17

YES par is irrelevant because this is not an ISSUANCE, and par only applies to issuance of stock

Question 18

Stock Transfer Restrictions

Transfer of Stock by Shareholders

Answer 18

sometimes we want to impose restrictions on transfer (especially in close corporations - to keep outsiders out)

these restrictions, if they exist, are set in the Certificate, or bylaws or by agreement

e.g. federline is SH of Famous, INc. His stock is subject to a stock transfer restriction that requires him to offer it first to the corporation. This is a “right of First Refusal.” What happens if Federline sells his stock in violation of the agreement?

NEW YORK law forbids UNREASONABLE restrains on the alienation of shares

• -so STOCK TRANSFER RESTRICTIONS are valid IF they are not an UNDUE RESTRAINT ON ALIENATION
  (a) “RIGHT OF FIRST REFUSAL - IS acceptable so long as the price offered is reasonable. For example, if the corp offered to match Third Party’s offer.

(b) “BUYBACK PROVISIONS” - require a sale of one’s stock to the corporation when the shareholder DIES or RETIRES from working for the company - these are ACCEPTABLE - these are very common, especially in closed corporations

UNACCEPTABLE RESTRICTION
(c) Consent-type restrictions that require a shareholder to obtains consent/approval of other shareholders probably NOT ENFORCEABLE, where consent can be withheld for any reason or no reason at all 

NOTE: Even if the restriction is valid, it cannot be invoked against the transferee unless EITHER:

(1) it is CONSPICUOUSLY noted on the stock certificate OR
(2) the transferee had ACTUAL KNOWLEDGE of the restriction

Question 19

What is a RIGHT OF FIRST REFUSAL?

Answer 19

a stock transfer restriction requiring the seller shareholder to first offer his shares to the corporation or other shareholders before selling to someone else

Question 20

What is a “BUYBACK PROVISION” ?

Answer 20

A stock transfer restriction that requires a sale of one’s stock to the corporation when the shareholder DIES or RETIRES from working for the company

these are ACCEPTABLE - these are very common, especially in closed corporations

Question 21

Rights of Shareholders to Copy and Inspect the Books and Records of the Corporation

Answer 21

ANY SHAREHOLDER on 5 days WRITTEN DEMAND, can demand access to

(1) minutes of shareholder proceedings and
(2) the record of shareholders,

BUT

(i) as to these 2 things, the corporation can demand that the SHAREHOLDER give an AFFIDAVIT that his purpose is not other than in the interest of the corporation and he has not within 5 years tried to sell any list of shareholders
(ii) the corporation cannot demand and more detail than this in the affidavit
(iii) if the shareholder refuses to furnish the affidavit after the corporation demands it the corporation CAN DENY ACCESS

List of Current Directors and Officers - ANY SHAREHOLDER can demand this on 2 days written demand
(i) there is no AFFIDAVIT requirement for this

ANY SHAREHOLDER can make a written request and the corporation must provide the following documents (may do so by mail): corporation’s latest

(1) annual balance sheet
(2) profit and loss statement and
(3) interim statements distributed to shareholders or public

Question 22

COMMON LAW RIGHT TO INSPECTION

Answer 22

COMMON LAW RIGHT TO INSPECT RECORDS

All shareholders also have a common law right to inspect records at a reasonable time and place. Inspection must be for a proper purpose, which means something related to your role as a shareholder. What documents does this COMMON LAW RIGHT cover?

it is unclear how broad this is (just say that on the bar)

Question 23

Does a director have a right to inspect corporate books and records?

Answer 23

OF COURSE - he has unfettered access