FACT PATTERN 4: SHAREHOLDERS- SHAREHOLDER VOTING

Question 1

What SH has a right to vote (if there has abeen a recent sale of that share)?

Answer 1

General rule: the “record shareholder” as of the “record date” has the right to vote.

Question 2

What is the record shareholder?

Answer 2

the person shown as the owner in the corporate records

Question 3

What is the record date?

Answer 3

The record date is a voter eligibility cut-off date.

Question 4

C Corp. sets its 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?

Answer 4

S will vote because she owned the shares on the record date, June 6.

Question 5

The corporation re-acquires stock before the record date, so it is the owner of this “treasury stock” as of the record date. Does it vote this stock?

Answer 5

No

Question 6

S owns stock in C Corp.; S is the record shareholder. After the record date, S dies. Can S’s executor vote the shares?

Answer 6

Yes

Question 7

What is a proxy?

Answer 7

A proxy is a
(i) writing (fax and e-mail are OK),
(ii) signed by record shareholder (e-mail OK if can identify sender),
(iii) directed to secretary
of corporation,
(iv) authorizing another to vote the shares.

Question 8

On February 2, 2012, S sends a letter to secretary of C Corp. authorizing Don Draper to vote her shares. Can Don vote S’s shares at the 2012 annual meeting in July?

Answer 8

Yes it is a proxy, A proxy is basically an agency

Question 9

On February 2, 2012, S sends a letter to secretary of C Corp. authorizing Don Draper to vote her shares. Can Don vote S’s shares at the 2013 annual meeting in July 2013?

Answer 9

No, Proxy is good for 11 months unless the proxy states otherwise.

Question 10

On February 2, 2012, S sends a letter to secretary of C Corp. authorizing Don Draper to vote her shares. What if, before the 2012 meeting, S writes to the secretary of C Corp. that she now wants Jim Cramer to vote her shares at the 2012 meeting?

Answer 10

That is ok, she has revoked Draper’s proxy.

Question 11

Can S revoke her proxy even though it states that it is irrevocable?

Answer 11

Yes

Question 12

What is the only way you have an irrevocable proxy?

Answer 12

The only way to have an irrevocable proxy is if it is a “proxy coupled with an interest.” This requires

(1) the proxy says it’s irrevocable and
(2) the proxyholder has some interest in the shares other than voting.

Question 13

S sells B her shares after the record date but before the annual meeting. S gives B an “irrevocable proxy” to vote the shares at the annual meeting. Can S revoke this proxy? Why?

Answer 13

No, it is coupled with an interest. Here, the proxyholder has such an interest because she OWNS the shares.

Question 14

What is the requirement for a voting trust?

Answer 14

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

Question 15

Can shareholders enter into voting agreements?

Answer 15

Yes

Question 16

What are the requirements for a voting (“pooling”) agreement?

Answer 16

The voting agreement must be in writing and signed (an oral agreement will not work)

Question 17

Are voting agreements specifically enforceable?

Answer 17

Some states yes, some states no.

Question 18

Where do shareholders vote usually?

Answer 18

Shareholders usually take action at a meeting. Instead,

Question 19

How else can shareholders vote?

Answer 19

they can act by unanimous written consent signed by holders of all voting shares (email is OK).

Question 20

If SHs have a meeting, does it have to be in the state of incorporation?

Answer 20

No

Question 21

What are the 2 kinds of shareholder meetings?

Answer 21

Annual and special SH meetings.

Question 22

What do SH do at the annual SH meeting?

Answer 22

Elect directors

Question 23

By statute how often do corporations have to have an annual meeting? What if the corporation fails to have the annual meeting, what can a shareholder do?

Answer 23

If no annual meeting held in 15 months, a

shareholder can petition the court to order one.

Question 24

Who can call a special SH meeting?

Answer 24

(1) the board or
(2) the president, or
(3) the holders of at least 10 percent of the voting shares, or
(4) anyone else authorized in the bylaws.

Question 25

10 percent of the shares call a special shareholder meeting to remove an officer. OK?

Answer 25

It is ok to call the meeting, but whatever you decide will not be binding because directros appoint and remove officers

Question 26

What kind of notice must be given for a SH meeting? When must it be delivered?

Answer 26

must give written notice (fax or e-mail OK) to every shareholder entitled to vote. Deliver it between 10-60 days before the meeting.

Question 27

What must be in the notice for a reglar SH meeting? A special SH meeting?

Answer 27

always must state time and place of the meeting. For special meetings, must also state the purpose of the meeting.

Question 28

Why is the statement of purpose important in a notice for a SH meeting?

Answer 28

Cannot do anything that is not listed in the purpose of the special meeting.

Question 29

What is the consequence of failure to give proper notice to all shareholders?

Answer 29

action taken at the meeting is void unless those not sent notice waive the notice defect.

Question 30

How can SHs waive a notice defect?

Answer 30

1) Express–in writing and signed anytime (fax and e-mail are OK)
2) Implied–attend the meeting without objection.

Question 31

Does there need to be a quorum at the SH meeting?

Answer 31

Yes

Question 32

How do you determine quorum at a SH meeting? What does it focus on?

Answer 32

focuses on the number of shares represented, not the number of shareholders.

Question 33

What is the general rule for quorum at a SH meeting?

Answer 33

a quorum requires a majority of outstanding voting shares.

Question 34

X Corp. has 120,000 voting shares outstanding. X Corp. has 700 shareholders. What or who constitutes a quorum?

Answer 34

At least 60,001 voting shares.

Question 35

Is a SH quorum lost if people leave the meeting?

Answer 35

No

Question 36

What is the vote needed to an action at a shareholders meeting that has met quorum?

Answer 36

votes cast in favor of the action exceed the votes cast against the action (unless the articles provide for a greater voting requirement).

Question 37

X Corp. has 120,000 voting shares outstanding. 62,000 voting 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 the shareholders?

Answer 37

There is a quorum, at least 25,001

Question 38

When is cumulative voting available?

Answer 38

only available when shareholders elect directors

Question 39

Why do some corporations use cumulative voting for its directors?

Answer 39

to give small shareholders a better chance of electing someone to the board.

Question 40

How does cumulative voting work?

Answer 40

For cumulative voting, multiply the number of shares times the number of directors to be elected

Question 41

You own 1,000 shares of stock in C Corp. C Corp. has nine directorships open for election. You believe that Napoleon Dynamite should be director of C Corp. Under cumulative voting, how many votes can you cast for Napoleon?

Answer 41

9000 votes, distribute those votes over as few or as many candidates as you want.

Question 42

The articles of C Corp. are silent as to whether shareholders can vote cumulatively. Do the shareholders have cumulative voting? why or why not?

Answer 42

Generally, no. If it is not in your articles you don’t get cumulative voting.

Question 43

What is the general rule for transferability of stock?

Answer 43

generally, it is freely transferable.

Question 44

Can stock transferability be restricted (especially in closely held corporations)?

Answer 44

Yes

Question 45

Under what circumstances will stock transfer restrictions be upheld?

Answer 45

Stock transfer restrictions will be upheld provided they are reasonable under the circumstances. (means there can’t be an absolute prohibition)

Question 46

Can a stock transfer restriction be enforceable against a transferee?

Answer 46

Generally no, even if the restriction is reasonable and thus valid,

Question 47

What are the exceptions when a stock transfer restriction can enforceable against a transferee

Answer 47

a stock transfer restriction cannot be invoked against the transferee unless either (a) it is conspicuously noted on the stock certificate or (b) the transferee had actual knowledge of the restriction.

Question 48

Who can demand access to inspect (and copy) the books and records of the corporation?

Answer 48

Generally, any shareholder.

Question 49

What procedure must the SH follow to get access to inspect (and copy) the books and records of the corporation?

Answer 49

shareholder must make a written demand stating the documents desired and a proper purpose for inspection.

Question 50

In order to inspect a company’s documents a shareholder must make a written demand stating the documents desired and a proper purpose for inspection.What does “proper purpose” mean?

Answer 50

A purpose related to her role as a SH.

Question 51

What can the SH do it the corporation refuses to allow a proper inspection?

Answer 51

the shareholder can seek a court

order.

Question 52

If the SH wins the court order, ordering a corporation to allow them to inspect records what can she recover in addition to the access tot the documents?

Answer 52

If she wins, she can recover costs and attorney’s fees incurred in making the motion.

Question 53

do directors have to go through the same procedure as SHs to get access to corporate books and records?

Answer 53

No, they have unfettered access.

Question 54

What are distributions?

Answer 54

payments by the corporation to shareholders

Question 55

What are the three types of corporate distributions?

Answer 55

1. dividends
2. repurchase
3. redemption

Question 56

What is a repurchase?

Answer 56

a voluntary sale of a shareholder’s stock to the corporation

Question 57

What is a redemption?

Answer 57

a forced sale of a shareholder’s stock to the corporation at a price set in the articles

Question 58

Who has discretion to make distributions?

Answer 58

The board

Question 59

Is there a right to distributions?

Answer 59

No, There is no right to a distribution until it is declared

Question 60

An action to compel declaration of a distribution is what kind of action?

Answer 60

It is a direct action

Question 61

What must the SH show in an action to compel declaration of a distribution?

Answer 61

To win, you must make a very strong showing of abuse of discretion.

Question 62

What are the four different types of SHs that get dividents?

Answer 62

Preferred, Participating, Cumulative, Common

Question 63

the board of directors declares dividends totaling $400,000, Who receives dividends (how much per share) if the outstanding stock is 100,000 shares of common stock?

Answer 63

$4 per share

Question 64

the board of directors declares dividends totaling $400,000. Who receives dividends (how much per share) 100,000 shares of common and 20,000 shares of preferred with a $2 preference?

Answer 64

20,000 preferred shares multiplied by a $2 preference equals a total preference of $40,000. That is paid first. That leaves $360,000, which goes to the common shares. Because there are 100,000 of those, each common share gets $3.60.

Question 65

the board of directors declares dividends totaling $400,000 Who receives dividends (how much per share) if the outstanding stock is 100,000 shares of common and 20,000 shares of $2 preferred participating?

Answer 65

20,000 shares get paid first (because they are preferred) and also get paid again (because they are participating). Work the preferred aspect just as in hypo #2: 20,000 shares multiplied by $2. equals $40,000 total preference. Pay that first. That leaves $360,000, as in hypo #2.
Preferred SH get 2+3=5 per share, common SH get $3 per share.

Question 66

the board of directors declares dividends totaling $400,000. Who receives dividends (how much per share) if the outstanding stock is 100,000 shares of common and 20,000 shares of $2 preferred that is cumulative (and no dividends have been paid in the three prior years).

Answer 66

A cumulative dividend accrues year-to-year. So the corporation owes the cumulative holders for the three prior years, plus this year (when the dividend
was declared). That means the corporation owes them four years’ worth of a $2 preference. Four years multiplied by $2 equals $8 per share. So the corporation owes $8 to each cumulative preferred share. There are 20,000 such shares.
20,000*8=160,000 paid first that leaves 240,000 for the common shares. So common gets 2.40 per share. CP 8

Question 67

For any distribution (dividend, repurchase, redemption), which funds can be used traditionally?

Answer 67

1. Earned surplus

2. Capital surplus

Question 68

which funds can never be used traditionally for a distribution??

Answer 68

Stated capital

Question 69

What is earned surplus?

Answer 69

Money that is generated by business activity. It consists of all earnings minus all losses minus distributions previously paid.

Question 70

What is stated capital?

Answer 70

Money that is generated by issuing stock (par value).

Question 71

C Corp issues 10,000 shares of $2 par stock for $50,000. Of that, how much is stated capital and how much is capital surplus?

Answer 71

On a par issuance the 20 k goes to stated capital. the rest goes to capitol surplus, 30K

Question 72

Who allocates consideration between stated capitol and capital surplus when there is a no-par issue?

Answer 72

The BOD

Question 73

What is capital surplus?

Answer 73

This that is generated by issuing stock that is in excess of par payments.

Question 74

What must the BOD do if they wish to use capital surplus for distributions?

Answer 74

if you inform the shareholders

Question 75

What is the modern view for distributions?

Answer 75

The modern view does not look at the funds. It says a corporation cannot make a distribution if it is insolvent or if the distribution would render it insolvent.

Question 76

What are the 2 types of insolvency for corporations?

Answer 76

a. The corporation is unable to pay its debts as they come due; or
b. Total assets are less than total liabilities (and liabilities include preferential liquidation rights). We will see those rights shortly.

Question 77

Who is liable for improper distributions?

Answer 77

Directors are jointly and severally liable for improper distributions. Remember however, the directors’ good faith reliance defense.

Question 78

When are SHs personally liable for receiving improper distributions?

Answer 78

Shareholders are personally liable only if they knew the distribution was improper when they received it.