FACT PATTERN 4: SHAREHOLDERS- SHAREHOLDER VOTING Flashcards
What SH has a right to vote (if there has abeen a recent sale of that share)?
General rule: the “record shareholder” as of the “record date” has the right to vote.
What is the record shareholder?
the person shown as the owner in the corporate records
What is the record date?
The record date is a voter eligibility cut-off date.
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?
S will vote because she owned the shares on the record date, June 6.
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?
No
S owns stock in C Corp.; S is the record shareholder. After the record date, S dies. Can S’s executor vote the shares?
Yes
What is a proxy?
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.
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?
Yes it is a proxy, A proxy is basically an agency
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?
No, Proxy is good for 11 months unless the proxy states otherwise.
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?
That is ok, she has revoked Draper’s proxy.
Can S revoke her proxy even though it states that it is irrevocable?
Yes
What is the only way you have an irrevocable proxy?
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.
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?
No, it is coupled with an interest. Here, the proxyholder has such an interest because she OWNS the shares.
What is the requirement for a voting trust?
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.
Can shareholders enter into voting agreements?
Yes
What are the requirements for a voting (“pooling”) agreement?
The voting agreement must be in writing and signed (an oral agreement will not work)
Are voting agreements specifically enforceable?
Some states yes, some states no.
Where do shareholders vote usually?
Shareholders usually take action at a meeting. Instead,
How else can shareholders vote?
they can act by unanimous written consent signed by holders of all voting shares (email is OK).
If SHs have a meeting, does it have to be in the state of incorporation?
No
What are the 2 kinds of shareholder meetings?
Annual and special SH meetings.
What do SH do at the annual SH meeting?
Elect directors
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?
If no annual meeting held in 15 months, a
shareholder can petition the court to order one.
Who can call a special SH meeting?
(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.
10 percent of the shares call a special shareholder meeting to remove an officer. OK?
It is ok to call the meeting, but whatever you decide will not be binding because directros appoint and remove officers
What kind of notice must be given for a SH meeting? When must it be delivered?
must give written notice (fax or e-mail OK) to every shareholder entitled to vote. Deliver it between 10-60 days before the meeting.
What must be in the notice for a reglar SH meeting? A special SH meeting?
always must state time and place of the meeting. For special meetings, must also state the purpose of the meeting.
Why is the statement of purpose important in a notice for a SH meeting?
Cannot do anything that is not listed in the purpose of the special meeting.
What is the consequence of failure to give proper notice to all shareholders?
action taken at the meeting is void unless those not sent notice waive the notice defect.
How can SHs waive a notice defect?
1) Express–in writing and signed anytime (fax and e-mail are OK)
2) Implied–attend the meeting without objection.
Does there need to be a quorum at the SH meeting?
Yes
How do you determine quorum at a SH meeting? What does it focus on?
focuses on the number of shares represented, not the number of shareholders.
What is the general rule for quorum at a SH meeting?
a quorum requires a majority of outstanding voting shares.
X Corp. has 120,000 voting shares outstanding. X Corp. has 700 shareholders. What or who constitutes a quorum?
At least 60,001 voting shares.
Is a SH quorum lost if people leave the meeting?
No
What is the vote needed to an action at a shareholders meeting that has met quorum?
votes cast in favor of the action exceed the votes cast against the action (unless the articles provide for a greater voting requirement).
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?
There is a quorum, at least 25,001
When is cumulative voting available?
only available when shareholders elect directors
Why do some corporations use cumulative voting for its directors?
to give small shareholders a better chance of electing someone to the board.
How does cumulative voting work?
For cumulative voting, multiply the number of shares times the number of directors to be elected
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?
9000 votes, distribute those votes over as few or as many candidates as you want.
The articles of C Corp. are silent as to whether shareholders can vote cumulatively. Do the shareholders have cumulative voting? why or why not?
Generally, no. If it is not in your articles you don’t get cumulative voting.
What is the general rule for transferability of stock?
generally, it is freely transferable.
Can stock transferability be restricted (especially in closely held corporations)?
Yes
Under what circumstances will stock transfer restrictions be upheld?
Stock transfer restrictions will be upheld provided they are reasonable under the circumstances. (means there can’t be an absolute prohibition)
Can a stock transfer restriction be enforceable against a transferee?
Generally no, even if the restriction is reasonable and thus valid,
What are the exceptions when a stock transfer restriction can enforceable against a transferee
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.
Who can demand access to inspect (and copy) the books and records of the corporation?
Generally, any shareholder.
What procedure must the SH follow to get access to inspect (and copy) the books and records of the corporation?
shareholder must make a written demand stating the documents desired and a proper purpose for inspection.
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?
A purpose related to her role as a SH.
What can the SH do it the corporation refuses to allow a proper inspection?
the shareholder can seek a court
order.
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?
If she wins, she can recover costs and attorney’s fees incurred in making the motion.
do directors have to go through the same procedure as SHs to get access to corporate books and records?
No, they have unfettered access.
What are distributions?
payments by the corporation to shareholders
What are the three types of corporate distributions?
- dividends
- repurchase
- redemption
What is a repurchase?
a voluntary sale of a shareholder’s stock to the corporation
What is a redemption?
a forced sale of a shareholder’s stock to the corporation at a price set in the articles
Who has discretion to make distributions?
The board
Is there a right to distributions?
No, There is no right to a distribution until it is declared
An action to compel declaration of a distribution is what kind of action?
It is a direct action
What must the SH show in an action to compel declaration of a distribution?
To win, you must make a very strong showing of abuse of discretion.
What are the four different types of SHs that get dividents?
Preferred, Participating, Cumulative, Common
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?
$4 per share
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?
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.
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?
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.
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).
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
For any distribution (dividend, repurchase, redemption), which funds can be used traditionally?
- Earned surplus
2. Capital surplus
which funds can never be used traditionally for a distribution??
Stated capital
What is earned surplus?
Money that is generated by business activity. It consists of all earnings minus all losses minus distributions previously paid.
What is stated capital?
Money that is generated by issuing stock (par value).
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?
On a par issuance the 20 k goes to stated capital. the rest goes to capitol surplus, 30K
Who allocates consideration between stated capitol and capital surplus when there is a no-par issue?
The BOD
What is capital surplus?
This that is generated by issuing stock that is in excess of par payments.
What must the BOD do if they wish to use capital surplus for distributions?
if you inform the shareholders
What is the modern view for distributions?
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.
What are the 2 types of insolvency for corporations?
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.
Who is liable for improper distributions?
Directors are jointly and severally liable for improper distributions. Remember however, the directors’ good faith reliance defense.
When are SHs personally liable for receiving improper distributions?
Shareholders are personally liable only if they knew the distribution was improper when they received it.
