Partnership Voting Flashcards
When can a SH proposal by proxy be turned down?
a shareholder proposed resolution for a proxy statement can only be turned down when the proposal both concerns less than 5% of total earnings or assets, and when it is not significantly related to the business.
OTHERWISE SIGNIFICANTLY RELATED TO THE BUSINESS
This is a caveat to the 5% or less requirement which takes into account the overall image of the business. In this case allegations of animal cruelty were deemed to be significant enough to overcome the fact that the sale of pate made up less than 5% of Iroquois business.
SH Inspection Rights
- Internal affairs doctrine
- Everything internal is Governed by state law of incorp
- NY law - need to own stock for 6 months to inspect + cannot be for a purpose other than business of corp
Can join with existing SH of 6mo or more to inspect
In interest of corp if econ interest to SH
- Minn Law - SH can get corporate records only for “proper purpose”
- Proper purpose is concern over profits
Review of Directors Action
Absent proof that the primary purpose of a director’s action was to interfere with the shareholders’ voting rights, courts will apply the business judgment rule test to review the director’s actions. If there is proof indicating interference of the rights, the court will require a defendant to justify their actions.
Voting Trust Agreement
- Legal ownership of shares must be transferred to the trustee
- Trustee votes shares
- Agrmnts must be filed public rec
- Limited 10 yrs or less
Private SH Voting Agreements
Where shareholders agree amongst themselves to vote in a certain way.These agreements do not have to meet the requirements of voting trust agreements.
Irrevocable Proxy
Must be coupled with an interest in the stock or corp - separate from power of proxy holder
Formula for Guaranty Election of 1 Director
- Calculate Total # of Votes
- Person 1 (Shares x #Directors) + Person 2 (Shares x #Directors) + etc…
- Formulate Shares needed for 1 director
- (Total Votes/(#Directors+1)) + 1 = x
Pooling Votes
Shareholders can agree to pool their votes and have a third party intercede when there is any disagreement as to how to vote.
SH Agreements to Control
- Shareholders can not form an agreement to control the decisions traditionally vested in the judgment of the directors of a company.
- SH agreements cannot restrict Director Action
NY Law
Limiting director action if:
- Bylaws approved by all SH
- Shares transferred only to people who know or consent to provision
Vote Pooling and Agreements Rule
- VOTE POOLING TO ELECT ARE OK; AGREEMENTS ON HOW TO VOTE ON INTERNAL MATTERS NOT OK:
- The court affirms the validity of shareholders to agree to pool their votes, but they decline to allow them to use their voting power but not pool the director’s powers. Directors cannot limit their power by voting agreement or receive money to vote in a certain way because they are fiduciaries of the corporation.
CLOSELY HELD CORPS: There are two kinds of closely held corporations:
- Close held corporations, and;
- Regular closely held corporations are just small corporations, typically amongst people who know each other.
- Statutory Close Corporations.
- Statutory close held corporations are corporations which file with the SEC for closely held corporation status which exempts them from some of the statutory requirements for larger corporations.
Close Corp Massachusets Rule
- SH in closed corp have a fiduciary duties of partners
- Breach of Fid Duty Test:
- Maj must show legit busin purp
- If shown, must show could have achieved purpose from less harmful alternative action
- Remedy:
- Equalize the treatment the majority SH would have received if there hadn’t been a breach of FD
Close Corp Delaware Rule
If you don’t K for protections, you don’t get them - no fiduciary relationship
Buyout Clauses
Buyout clauses will be enforced unless unconscionable
At Will v Permanent Employment
- At Will: EE can quit any time, ER can fire anytime
- Some states presume At Will (NY) unless clear agreement for permanent employment (for cause)
- Other States (CA) recognize at will can turn into expectation of permanent employment through time, words and conduct less than clear agreement
- Absent an employment contract, an employee is an at-will employee when his shareholder agreement provides a buyback provision of his shares if they are terminated for any reason.
Whether Defendants violated a fiduciary duty when they removed Plaintiff from his position after a falling-out between the parties.
Shareholders in a close corporation owe each other a duty of acting in good faith, and they are in breach of their duty when they terminate another shareholder’s salaried position, when the shareholder was competent in that position, in an attempt to gain leverage against that shareholder
Test for CLosed Corps
the test for close corporations, should be whether the management decision that severely frustrates a minority owner has a legitimate business purpose.
RECOMMENDED COURSE OF ACTION FOR CORPORATIONS:
Corporations should keep records of employee performance, keep notes in the reviews of negative performance, and make it clear that employment is at will. They should not make express representations of permanent or continued employment, or representations that create a reasonable belief of permanent employee.
Fairness of Buyout Price
the court implied that in such a situation that the court would intervene if the buyout price had been artificially low.
Remedy for a Freeze-Out
The remedy for a freeze-out is to restore to the minority shareholder the benefits which she reasonably expected, but has not received because of the fiduciary breach.
Frozen Out SH
Frozen out SH had no right to buyout - only has right to the income
Whether a majority and minoirty SH are owed the same loyalty
- the determining factor for the fiduciary duty owed is whether a party would be considered a controlling party.
- Minority shareholders owe majority shareholders a fiduciary duty in the same manner that majority owners owe minority shareholders, and therefore the majority can seek judicial intervention for decisions that are unjustifiable for the corporation’s interests.
Disclosure of Merger in CLose Corp
A closely held corporation has a duty to disclose a potential merger or buyout when attempting to buy shares from an unwary shareholder, even if the deal has yet to reach an agreement as to price or structure of the deal.
