Pg 24

Question 1

What does it mean for shareholder inspection rights that the shareholder must have a proper purpose?

Answer 1

The purpose must be one that is reasonably relevant to the shareholder’s interest as a shareholder. This is the threshold to being able to access the records, but it also controls the records the shareholder can access.

Question 2

What are some examples of proper purposes that a shareholder could have that would deem it appropriate for him to access corporate records?

Answer 2

– determining the value of shares
– communication with other shareholders to elect directors
– investigate mismanagement
– concern with investment return
– profitability of the corporation
– determine the corporation's financial condition
– solicit proxies
– in support for derivative litigation
- investigate self-dealing
– corporate waste

Question 3

If a shareholder wants to lobby another shareholder to elect a group of candidates to the board, and he seeks information about who he should be lobbying, so before the meeting he asked the corporation for that information and was given access to stock ownership information, but not anything that isn’t related to electing defendants, is that OK as far as shareholder inspection goes?

Answer 3

Yes

Question 4

What are some examples of improper purposes that a shareholder could have for inspecting corporate records that would mean that he shouldn’t be accessing the records?

Answer 4

– ulterior or vindictive motives
– mere curiosity
– anything asked for in bad faith
– trying to sabotage the corporation by making confidential information public

Question 5

Is it possible to access corporate records if you are a shareholder that has both a proper and improper purpose in doing so?

Answer 5

No. The reasoning is that you don’t want shareholders to use a Trojan horse to smuggle in an improper motive

Question 6

Who has the burden to show the purpose the shareholder had in accessing records of a corporation?

Answer 6

The burden is on the plaintiff to show that there was a proper purpose unless the shareholder only wants to see a list of other shareholders, then that is an exception

Question 7

What is involved in the scope of a shareholder inspection of corporate records?

Answer 7

He can only access documents that are relevant to the proper purpose. He doesn’t have a right to make a general search of records or documents, he can only search ones that are necessary or essential to fulfil his purpose. The shareholder has the burden of making specific reference to the documents he is seeking.

Question 8

If a shareholder provides a proper purpose for wanting to inspect corporate records, what must a corporation do?

Answer 8

Give him access to all documents in their possession that meet that purpose

Question 9

What determines the scope of inspection with regard to shareholder inspection rights?

Answer 9

The purpose

Question 10

If documents that a shareholder wants access to under shareholder inspection rights are not already in the possession of the corporation, does the corporation have to get those records or create new records for the shareholder?

Answer 10

No

Question 11

What is the rule for timing with regard to shareholder inspection rights?

Answer 11

A shareholder must be the holder of shares in the corporation at the time of the DEMAND for inspection and at the time that the thing HAPPENED.

Question 12

What are the two different actions that a shareholder can bring?

Answer 12

– direct action

– derivative action

Question 13

When would a shareholder bring a direct action against a corporation?

Answer 13

When he experiences direct harm. Ie: he finds out the corporation declared a dividend two months ago but didn’t pay him, so he can sue for his dividend. If successful, he can be reimbursed for his litigation expenses

Question 14

What’s the difference between a shareholder bringing a direct action and bringing a derivative action?

Answer 14

– direct: injury to the shareholder results in recovery to the shareholder
– derivative: injury to the corporation results in recovery to the corporation

Question 15

What is a derivative action?

Answer 15

When the corporation was injured through something to do with mismanagement, then shareholders can bring suit on behalf of the corporation. I.e.: if the CEO hired his loser sister to do the legal work, but she wasn’t a lawyer, shareholders can sue.

Question 16

Is it possible for a shareholder to join direct and derivative claims into the same lawsuit?

Answer 16

Yes

Question 17

What do shareholders need to bring a derivative action against the corporation?

Answer 17

• standing

– a written demand

Question 18

What is required for a shareholder to have standing to sue a corporation in a derivative suit?

Answer 18

• he must have been shareholder of the corporation at the time of the act or omission he is complaining of, or he became one through transfer by operation of law from someone that was a shareholder at the time
  – he must fairly and adequately represent the interests of the corporation in order to enforce the right of the corporation

Question 19

If someone hears that a corporation is engaging in corporate waste, then he buys stock and tries to sue the corporation, is that OK?

Answer 19

No, because he would not have standing since he didn’t have stock at the time of the waste

Question 20

If your grandma had shares in a corporation for 10 years, then she died and wills the shares to you, can you file a derivative action against a corporation?

Answer 20

Yes, because you became a shareholder through transfer by operation of law and Grandma was a shareholder at the time of the corporate waste

Question 21

If a shareholder sells his stock during a lawsuit against the corporation, does he still have standing?

Answer 21

No, because of the continuing ownership rule, you must still have stock with the company to sue them

Question 22

What is required with regard to a demand if a shareholder is suing a corporation?

Answer 22

He must make a written demand on the corporation to take action. If 90 days pass without the corporation taking action or irreparable injury to the corporation would result by waiting for 90 days, he can bring suit.

Question 23

What is the rationale behind making a shareholder make a written demand on the corporation to take suitable action before a shareholder can bring a derivative suit against the corporation?

Answer 23

It gives the board an opportunity to evaluate the situation

Question 24

What are things that shareholders should include in their written demand before they bring a derivative suit against a corporation?

Answer 24

• that shareholder had an ownership of shares at the time of the alleged action
  – the date of the action
  – that the shareholder is still a shareholder
  – explanation of the concern with the corporation
• request that the corporation address the concern

Question 25

When will a derivative action be dismissed?

Answer 25

If the corporation determines in good faith and after reasonable inquiry that the preceding is not in the best interest of the corporation. This happens by a majority vote of independent directors.

Question 26

If a corporation and a shareholder agree to settle out of court for a derivative action, what happens?

Answer 26

They need the court’s approval to do it because they don’t want the shareholder settling for his own advantage instead of the corporation’s advantage. The court says settlements must be fair and reasonable to the corporation