Pg 41 Flashcards
How are close corporations very similar to S corporations?
- S corporations: require an election under subchapter S, just one class of stock, no more than 100 shareholders, only individuals as shareholders, no non-resident alien shareholders.
There’s lots of overlap in the criteria, so it is easy for a close corporation to also meet S corporation criteria and get pass-through taxation.
If a company’s owners are its key employees and they want to limit their liability to their investments and to sell their interests occasionally without being subject to stock exchange rules, would close corporate status be good for them?
Yes, it would give liability protection and allow the owners to sell their interest without dealing with rules for publicly traded stock.
Why is it good when a seller of stock keeps a minority interest in the corporation instead of selling total ownership?
Because the corporation gets the benefit of his experience, he has an incentive not to compete with the corporation, the corporation has continuity of management and employee morale, and third parties continue to associate with a corporation because of its brand and goodwill.
What are the major differences between a close corporation and a publicly held corporation?
– close corporation: majority shareholder is usually the CEO and can name or remove directors at will
– publicly held: has professional managers that only own an insignificant fraction of the corporation’s outstanding shares and the owners are not a cohesive group.
What is deadlock?
When there is a confluence of opposing views, unwillingness to compromise, competing groups in the corporation come to an impasse and neither group can get a working majority.
What is the result of the deadlock?
It can result in dissolution. If the differences between the shareholders are such that it is no longer reasonable to expect they will be able to resolve their differences.
If there is deadlock, what are the two different kinds of dissolution that can come from it?
Voluntary and involuntary
What is the difference between voluntary dissolution and involuntary dissolution after deadlock?
- voluntary: through the affirmative vote of a majority of the shareholders or 2/3 vote in some jurisdictions
– involuntary: the court can dissolve the corporation if there has been fraud, illegality, gross mismanagement, or oppression of minority shareholders and the dissension among shareholders is so great that corporate business cannot be carried on, so winding up is necessary.
Deadlock in publicly traded companies is very rare, so where is it almost exclusively found?
In closed corporations
What is the problem that deadlock creates?
Anything that is impacted by the deadlock is stymied and nothing can happen with regard to it
What are the major reasons deadlock happens with regard to a board of directors?
– death, resignation, illness, incapacity
– lack of a quorum
Why is having an odd number of directors a really good idea?
It helps avoid deadlock
What are different ways to deal with deadlock on the board of directors?
- mediation: meet with a neutral third-party that tries to help everyone come to a resolution.
– arbitration: meet with a neutral third-party that tries to come to a resolution, but has the power to make an enforceable decision that binds all the directors.
– provisional directors: an additional director can be named to the board after deadlock and he has the power to vote to break the tie.
If shareholders are deadlocked over electing a director or something else, what are the ways that you can do a shareholder deadlock?
- Russian roulette
– Texas shoot out
– Dutch auction
How do you deal with shareholder deadlock through Russian roulette?
One or more shareholders serve notice on the other shareholders, name a price that they value their interest in the company, the receiving group can then buy the shares of the offer at the price stated, or sell its shares to the offeror at the price stated
