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Corporations > Fact Pattern 4: Shareholders > Flashcards

Fact Pattern 4: Shareholders Flashcards

1
Q

Do shareholders manage the corporation?

A

No. Directors manage the corporation. However, in a close corporation, the shareholders will run the corporation.

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2
Q

What are the characteristics for a close corporation?

A
  1. few shareholders; and

2. stock not publically traded.

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3
Q

How can management be set up in a close corporation?

A

Can be a board of directors, and run like a normal corporation. Or can eliminate the board and have shareholders run the business and appoint a manager.

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4
Q

What is a shareholder management agreement? What must be done to make sure it is binding though?

A

Sets up alternative management. Two ways to do this:
1. In the articles and approved by all shareholders; or
2. by unanimous written shareholder agreement.
Must put the agreement conspicuously on the front and back of stock certificates. However, if it is not done it will not invaliditate the agreement, it will simply make life easier.

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5
Q

Do shareholders owe the other shareholders a fiduciary duty?

A

yes, in a close corporation. A closed corporation is similar to a partnership and the duty is of utmost good faith.

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6
Q

What happens if there is oppression of minority shareholders?

A

Minority can sue the majority shareholders for breach of fiduciary duty. Courts allow this because a majority can deny any voice to the minority, fire them from employment, refuse to declare dividends, and refuse to buy minorities stock. Therefore, when discussing oppression of the minority, remember:

  1. Breach of fiduciary duty; and
  2. Inability to escape.
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7
Q

Can licensed professionals start a close corporation?

A

Yes. Lawyers, doctors, CPA, etc. can start a professional corporation, which must have P.C. or P.A. in the name.

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8
Q

Are shareholders liable for corporate obligation or shareholder torts?

A

No.

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9
Q

Can shareholders be liable for corporate debts?

A

No. The corporation is liable for its own debts.

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10
Q

What type of corporations can a plaintiff pierce the corporate veil?

A

Close corporations only.

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11
Q

What is required for a court to pierce the corporate veil and hold the shareholders responsible?

A
  1. They must have abused the privilege of incorporation; and
  2. Fairness must require holding them liable.
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12
Q

If the court wants to pierce the corporate veil due to an “alter ego,” what must it find?

A
  1. Shareholder abused the privilege of incorporation;
  2. Fairness must require piercing;
  3. Was the shareholder using the corporation like an alter ego of himself? I.E. paying personal bills, commingling personal and corporate property, etc.?
    Then yes.
    The main examination is what are the identities of interests.
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13
Q

What is undercapitalization as it applies to piercing the corporate veil?

A

Shareholders failed to invest enough money to cover prospective liability and it would be unfair to give them limited liability due to this underfunding.

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14
Q

What is a shareholder derivative suit?

A

A shareholder is suing to enfore the corporations claim, not her own personal claim. Its a case where the corporation is not pursuing its own claim, so a shareholder stops in to prosecute on the corporations behalf.

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15
Q

Hypo: S, a shareholder of corp. sues the board for breaching the duty of care or loyalty. Is this derivative?

A

Yes. Because the corporation could sue. The duties owed to the corporation have been violated.

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16
Q

If the shareholder wins the derivative suit, who is entitled to what?

A

The corporation gets the money from the judgment.

The shareholder plaintiff recovers costs and attorneys’ fees.

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17
Q

If the shareholder loses the derivative suit, who is entitled to what?

A

Shareholder cannot recover attorneys’ fees or costs. Shareholder can also be liable for the costs and attorney fees of the defendant, if the suit was without reasonable cause.

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18
Q

What are required for a shareholder to maintain a derivative suit?

A
  1. Stock ownership at the time the claim arose and throughout the suit;
  2. Shareholder must provide adequate representation to the corporations best interests;
  3. Shareholder must make written demand on corporation that the corporation bring the suit. In some states the demand is required and must wait 90 days post-demand to sue, others allow for shareholder to skip this step if the demand would be futile (suing board);
  4. The corporation joined as a defendant, even though it is the corporations claim, it is still a defendant.
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19
Q

Can the parties settle a derivative suit?

A

Only with court approval.

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20
Q

When will a derivative suit be dismissed by a corporation?

A

Upon an independent investigation that concluded that the suit is not in the corporations best interests. Court will examine the following in deciding whether dismissal is warranted:

  1. Those recommending dismissal were truly independent; and
  2. They made a reasonable investigation.
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21
Q

Who is allowed to vote in shareholder meetings?

A

Outstanding stock. Outstanding stock is the stock that are issued but not reacquired.

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22
Q

How much outstanding stock is here?
Articles allow for 10,000 authorized shares, Corporation issues 7,000 shares, Then corporation reacquires 1,000 of the shares. How many shares are outstanding?

A

6,000 shares. Issued - Reacquired = Outstanding

23
Q

Who is the record shareholder?

A

The person shown as the owner of the stock in the corporate records. The record date is the voter eligibility cut off.

24
Q

Hypo: C Corp. Sets its annual meeting for July 7 and record date for June 8. S sells B her C Corp. stock on June 25. Who is entitled to vote the shares at the meeting?

A

It is S because she owned the stock on June 8, the record date.

25
Q

Can the corporation vote reacquired stock?

A

No. Nobody votes that stock because it is not outstanding on the record date.

26
Q

What is a voting proxy?

A

A proxy is a:

  1. writing;
  2. signed by record shareholder;
  3. directed to secretary of corporation;
  4. authorizing another to vote the shares.
27
Q

How long is a proxy agreement good for?

A

11 months unless otherwise agreed upon.

28
Q

Can a shareholder revoke the proxy given?

A

Yes, in writing to the corporate secretary; or attending the meeting and voting the shares.

29
Q

How to create a irrevocable proxy?

A

It must be a proxy coupled with an interest. This requires:

  1. the proxy says it is irrevocable and
  2. the proxy-holder has some interest in the shares other than voting.
30
Q

Hypo: A gives B an option to buy A’s stock.. A gives B an irrevocable proxy to vote that stock at the meeting. Can A revoke that proxy?

A

No. Because it states it is irrevocable and it is coupled with an interest.

31
Q

What is required to create a voting trust?

A
  1. Written trust agreement, controlling how the shares will be voted;
  2. copy to the corporation;
  3. Transfer legal title to the voting trustee;
  4. Original shareholders receive trust certificates and retain all shareholder rights except voting.
32
Q

What is required to create a voting pool?

A
  1. In writing;

2. Signed.

33
Q

What are the two kinds of shareholder meetings?

A
  1. Annual meetings - An annual meeting must occur once every 15 months. this is where directors are elected.
  2. Special meetings - Can be called by the board, or the president, or the holders of 10% of the shares, or anyone else authorized by the bylaws.
34
Q

What notice is required for a special shareholder meeting?

A

Must give written notice to every shareholder entitled to vote between 10 and 60 days prior to. The notice must state the date, time, place of the meeting and also the purpose of the meeting.

35
Q

What are shareholders entitled to vote on?

A
  1. elect directors;
  2. remove directors;
  3. fundamental corporate changes.
36
Q

What is required to establish a quorum of shareholders?

A

Focuses on the shares rather than shareholders. Requires a majority of the outstanding shares.

37
Q

How many votes is required to:

  1. Elect a director?
  2. Approve a fundamental corporate change?
  3. Remove a director?
  4. Other matters?
A
  1. Electing a director requires a plurality (the person who gets the most votes);
  2. Approve a fundamental change requires the majority of shares entitled to vote;
  3. Remove a director requries the majority of shares entitled to vote;
  4. Other matters is the majority of shares that actually vote.
38
Q

What is cumulative voting?

A

don’t vote for each seat individually. Rather have one at large election. the top two or three finishers are elected to the board. This must be specially provided for in the articles.

39
Q

What is a right of first refusal and is it allowed?

A

It is allowed because it is not an undue restraint on alienation. Right of first refusal requires a shareholder to offer their stock to the corporation first before selling or giving it away to someone else.

40
Q

If a restriction is valid, what else is required for it to be enforced?

A
  1. The restriction is conspicuously noted on the stock certificate; or
  2. The transferee had actual knowledge of the restriction.
41
Q

What shareholders can demand access to the corporations books and records?

A

Any shareholder.

42
Q

What is required for a shareholder to have access to the corporations books or records for non-controversal things, such as articles, bylaws, minutes of shareholders meetings, etc.?

A
  1. written;

2. 5 business days in advance.

43
Q

What is required for a shareholder to have access to the corporations books or records for controversial things, such as excerpts of board meetings, accoutning records, or records of shareholders?

A
  1. Must be written;
  2. 5 business days in advance;
  3. state a proper purpose for the demand - must be related to her interest as a shareholder.
44
Q

If the board refuses the shareholders access to the records, does she have another option?

A

Yes. She can seek a court order and if she wins, she gets access and her costs and attorneys fees covered.

45
Q

Do directors have to fulfill the normal process to see records?

A

No. Directors have unfettered access to the records.

46
Q

What are distributions?

A

Payments by the corporation to the shareholders.

47
Q

What are the types of distributions?

A
  1. Dividends
  2. Repurchase Shareholders Stock
  3. Redemption (a forced sale to the Corporation at prices set in articles).
48
Q

What are the types of stock that can receive dividends?

A
  1. Common stock.
  2. Preferred Stock - means paid first at a set price.
  3. Cumulative dividend - accrues year to year. If the corporation has not paid dividends in the years prior, then multiple the amount times the number of years.
49
Q

Hypo: Dividends of $400,000. 100,000 common stock. 20,000 preferred stock with a $2 preference. What is the dividing amounts?

A

The preferred stock is paid first. So, 20,000 at $2 is $40,000.
Then, that leaves $360,000 for the remaining 100,000 common stock. So, the common stock receives $3.60 a stock.
Preferred simply gets paid first, not more.

50
Q

Hypo: $400,000 in dividends. 100,000 common stock. 20,000 $2 preferred that is cumulative. No dividends have been paid out for the three prior years. How much does each recieve?

A

A cumulative dividend accrues year to year. The corporation will have to pay for the three prior years. The corporation has to pay them $2 times 4 for the 4 years missed. That is $8 per share multiplied by 20,000. That is $160,000. So, that leaves $240,000 for the common stock, which is $2.40 a share.

51
Q

What are the three types of funds that a corporation may have?

A
  1. Earned surplus - generated by business activities. Consists of all earnings minus all losses minus distributions previously paid. This is the proper fund for paying distributions.
  2. Stated Capital - generated by issuing stock, when a corp issues stock, it allocated proceeds between stated capital and capital surplus. This cannot be used for distributions.
  3. Capital Surplus - Also generated by issuing stock and can be used for distribution if certain exceptions apply.
52
Q

What is the difference between stated capital and capital surplus funds?

A

On a par issuance, the par value will go to stated capital, while the surplus will go to capital surplus. For example, if issuing 10,000 shares with a par value of $2, the stated capital will be $20,000. However, if those 10,000 shares sell for $5 per share, equaling $50,000. Then $20,000 will be stated capital and the remaining $30,000 will be capital surplus.

53
Q

When can capital surplus be used for distributions?

A

When the shareholders are informed of the source and the distribution will not make the company insolvent. Insolvent means:

  1. the corporation is unable to pay its debts as they come due; or
  2. total assets are less than total liabilities.
54
Q

Are directors liable for improper distributions? What about shareholders?

A

Directors are jointly and severally liable for improper distributions. However, shareholders are only liable if they knew the distribution was improper when they received it.

Corporations (6 decks)

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