IV. Shareholders

Question 1

Do SH get to manage the Corp.?

Answer 1

• NO b/c the Board manages.
• BUT can in a close corp. (Few SH; Stock is NOT publicly traded)
• IF we want to eliminate the board and have SH management…either:
  
  • In the articles AND approved by ALL SH…OR
  • By unanimous written SH agreement

Many courts note that a close corp. functions like a partnership so apply Fid. Duties to each other into the close Corp.

Question 2

Can SH be held liable for the acts or debts of the Corp.?

Answer 2

NO Generally. The Corp. IS liable for what it does.

BUT…SH might be personally liable for what the corp. did IF the court “pierces the corporate veil” (PCV). ONLY in Close Corp.

• TO PCV and Hold SH personally liable:
  (1) They must have ABUSED the privilege of incorporating and
  (2) Fairness MUST require holding them liable

Classic Fact Patterns:

(1) Alter Ego (identity of interests) = Commingling assets
(2) Undercapitalization (not enough to cover prospective liabilities) = Courts may be more willing to PCV for a tort victim than for a K claimant
- WE PCV to impose liability on SH for what SHOULD be a corporate debt

Question 3

SH Derivative Suits (SH as π)

Answer 3

In a derivative suit: A SH is suing to enforce the corporation’s claim NOT her OWN personal claim

Req:

(1) Stock Ownership when the claim arose and throughout the suit
(2) Adequate representation of corp.’s interest
(3) Must make written demand on corp. that corp. bring the suit
(4) Corp. MUST be joined BUT as a ∆
(5) Parties can settle or dismiss a derivative suit ONLY w/court approval

Question 4

SH Voting

Answer 4

General Rule = The “Record SH” as of the “record date” has the right to vote

EXCEPTIONS:

• Corp. re-acquires stock BEFORE the record date = NOBODY does
• Death of SH (executor can vote the shares)
• PROXIES: (SH voting)
  
  • (i) Writing (ii) Signed by record SH (iii) Directed to Sec. of Corp. (iv) Authorizing another to vote the shares

S can revoke the proxy EVEN though it states that it is irrevocable
-Only way to have irrevocable proxy = Proxy coupled w/an interest (Proxy says its irrevocable and proxy-holder has some interest in the shares other than voting)

Voting Trusts and Agreements

Question 5

Where do SH vote?

Answer 5

ANNUAL Meeting = IF none held w/in 15 mos.SH can petition court to order new one

SPECIAL Meeting = Can be called by:

(1) The Board
(2) The President
(3) Holders of at least 10% of voting shares or
(4) Anyone else authorized in the bylaws

• Remember S can’t remove OFFICERS
• Waiver can occur = Express in writing and signed anytime; Implied attend meeting w/out objection

Question 6

How do SH vote?

Answer 6

Generally on: (1) To Elect Directors (2) To Remove directors (3) On Fundamental Corporate Changes

• MUST have quorum (FOCUSING ON SHARES represented)
  
  • Requires generally a maj. of outstanding shares

-Cumulative voting is available ONLY when SH elect directors

Question 7

Stock Transfer Restrictions

Answer 7

Okay if they are reasonable (right of 1st refusal okay)

• Conspicuously noted on the stock cert.
• Transferee had actual knowledge of the restriction

Question 8

Right of SH (personally or by agent) to inspect (and copy) the books and records of the corp.

Answer 8

Any S on 5 days written demand can demand access. Proper purpose

Question 9

DISTRIBUTIONS

Answer 9

Payments by the Corp. to SH.

• Dividends or
• TO repurchase SH stock or
• Redemption (forced sale to corp. at price set in articles)

-Distributions are in the Board’s discretion

For any DISTRIBUTION which funds can be used?

(1) Earned surplus (Generated by the biz activity)
(2) Stated capital (NEVER can be used; Generated by issuing stock)
- on par issuance
- Any excess over par goes to capital surplus
(3) Capital surplus (Yes, IF we inform the SH; generated by issuing stock)

Directors are jointly and severally liable for improper distributions.