Powers of Shareholders

Question 1

Shareholders Power over Management

Answer 1

Shareholders in their collective capacity, have the power to elect directors, remove directors with or without cause, amend the bylaws, and approve fundamental changes in the corporation.

Question 2

Fundamental Changes

Answer 2

Refers to such things as amendments to the articles, merger, dissolution, and the sale all or substantially all corporate assets.

Question 3

Control over the Bylaws: Shareholders v. Board

Answer 3

Generally, they both have the power. However, the power belongs exclusively to the shareholders if:

• the corporation’s articles reserve that power exclusively to shareholders; or
• shareholders in amending, repealing, or adopting a bylaw expressly provide that board of directors may not amend, repeal, or reinstate that bylaw.

Question 4

Shareholder Meeting

Answer 4

Shareholder action typically occurs at shareholder meetings. Each shareholder of record must be provided with timely written notice of each annual and special shareholder meeting 10 to 60 days prior to the meeting date.

Question 5

Shareholder Resolutions

Answer 5

Not a statutory right but considered a fundamental right under the common law. Generally permissible if they make a recommendation or request that the corporation or board of directors take a specified action; conversely, resolutions seeking to mandate or bind the corporation or the board are not considered proper.

Question 6

Quorum Req. at Shareholder Meetings

Answer 6

A majority of shares entitled to vote constitutes a quorum, unless the articles provide otherwise. Assuming a quorum, shareholder action requires the affirmative vote of a majority of shares present at the meeting unless the articles provide for a greater proportion.

Question 7

Voting for Directors (Straight v. Cumulative Voting)

Answer 7

• Straight voting –> when shareholders may not give more than one vote per share to any single nominee (e.g. if you have 500 shares you can vote a maximum of 500 shares for each candidate).
• Cumulative Voting –> shareholders may allocate all of their votes to any particular candidate if there are multiple openings on the board.

Question 8

Removing Directors for Corp that Have Straight Voting

Answer 8

If a corporation has straight voting, and unless otherwise provided in the articles of incorporation, the entire board of directors or any individual director can be removed with or without cause by a majority of the shares entitled to vote in the election of such directors.

Question 9

Removal for a Corporation that has Cumulative Voting

Answer 9

No director can be removed if the votes against removal would be sufficient to elect him under cumulative voting rules.

Question 10

Amendments to the Articles and Other Proposals for Fundamental Change

Answer 10

In general, amendments to the articles are proposed by the board and submitted to the shareholders for approval.

Question 11

Quorum Req. for Meeting to Consider an Amendment to the Articles

Answer 11

Must be at least a majority of the votes entitled to vote on the amendment

Question 12

Plan for Merger or Share Exchange

Answer 12

Must be adopted by the board and then submitted to the shareholders for approval.

Question 13

Quorum Req. for a Meeting to Consider a Merger

Answer 13

Must be at least a majority of the votes entitled to vote on the merger.

Question 14

When Shareholder Approval is Not Required for a Merger/Share Exchange

Answer 14

When:

• the corporation will survive the merger or be the acquiring corporation in a share exchange; and
• the corporation’s articles of incorporation will not change; and
• the merger or share exchange will not itself affect a change in the number of outstanding shares held by the corporation’s shareholders or affect a change to the preferences, limitations, or relative rights of those shares; and
• the issuance of shares as part of the merger or share exchange does not otherwise require shareholder approval.

Question 15

What if a Parent Corporation Is Acquiring a Subsidiary?

Answer 15

The merger plan does not require shareholder approval if the parent corporation owns at least 90% of the voting power of each class and series of outstanding shares of the subsidiary that has the voting power.

Question 16

Disposition of Substantially All of a Corporation’s Assets Outside the Regular Course of Business

Answer 16

• Requires shareholder approval if it would leave the corporation “without a significant continuing business activity.”
• A corporation will be conclusively held to have retained a significant continuing business activity if its activity represents at least 25% of its assets at the end of the most recent fiscal year and 25% of either its income or revenue from that year

Question 17

Proxy Voting

Answer 17

• In order for a proxy agreement to be valid, the shareholder must provide the proxy holder with either a written, signed authorization or an electronically transmitted authorization.
• No proxy shall be valid after the expiration of 11 months unless otherwise provided in the proxy agreement itself.

Question 18

Qualification of Voters

Answer 18

Unless a statute or the articles of incorporation provide otherwise, each share is entitled to one vote, and each fractional share is entitled to a proportionate vote. The articles may deny or limit the voting rights of a class.

Question 19

Voting for a Jointly Owned Stock

Answer 19

Either co-owner can vote, but if either disagree and each tries to vote, the vote is split 50-50.

Question 20

Voting for Stock Owned by a Partnership

Answer 20

May be voted by any partner, but in the event of disagreement, it is voted under the terms of the partnership, or by the majority of partners.

Question 21

Voting for Stock Owned by a Corporation

Answer 21

May be voted by the officer or agent prescribed by the bylaws or as the board of directors determines.

Question 22

Disqualification of Voting

Answer 22

Stock may not be voted if any installment on the subscription has been duly demanded and is overdue and unpaid.

Question 23

Can a Corporation Vote for Its Own Stock?

Answer 23

No. Not directly or indirectly.

Question 24

Consolidating Voting Power

Answer 24

Can be accomplished with a voting trust or voting agreement

Question 25

Voting Trust

Answer 25

Involve a transfer of legal title.

Question 26

Voting Agreement (Pooling Agreement)

Answer 26

Contracts whereby shareholders bind each other to vote a certain way on particular issues.

Question 27

Can Voting Agreements Contrast the Discretion of the Board?

Answer 27

Yes, absent fraud or other illegal objectives.

Question 28

Right to Information

Answer 28

Shareholders have a right to information that is important to a shareholder’s voting and investing decisions (e.g. annual financial statements).

Question 29

Right to Inspection

Answer 29

• Shareholders have an unqualified under statute and CL right to examine the articles, bylaws, minutes of a shareholders’ meeting, and list of shareholders of record.
• Shareholders also have a qualified right under statute and CL to inspect (and make copies of) accounting books and the records and minutes of director meetings.

Question 30

Exercising the Right to Inspect Accounting Books and the Records & Minutes of Director Meetings

Answer 30

The right is exercisable upon a good faith demand for a proper purpose + with specificity as to that purpose and the items sought to be inspected + the records are directly connected with his purpose.

Question 31

Right to Inspect Records and Minutes: Good Faith

Answer 31

• (Investigation of corporate wrongdoing)- shareholder must present evidence establishing a “credible basis” for the belief of possible wrongdoing (suspicion is not enough).
• (Social or political interests)- shareholders must be able to identify shareholder interests.

Question 32

Right to Inspect Records & Minutes: Proper Purpose

Answer 32

A proper purpose is any purpose reasonably relevant to a shareholder’s interest as a shareholder including but not limited to:

• investigating potentially illegal transactions
• investigating activities posing an economic risk to corporation

Question 33

Right to Bring Suit

Answer 33

Include:

• Direct suits
• Derivative suits

Question 34

Direct Suits

Answer 34

When the wrong or harm is direct to the shareholder (e.g. shareholder can bring suit against corporation to compel the payment of dividends)

Question 35

Bringing a Suit to Compel Payment of Dividends

Answer 35

• Remember that the decision of whether to declare a dividend is generally within a director’s judgment (and falls under the business judgment rule).
• A shareholder has no inherent right to be paid a dividend.
• A shareholder must prove that the directors’ refusal to declare a dividend amounted to fraud, bad faith, or an abuse of discretion.

Question 36

Bad Faith in Refusing to Declare a Dividend

Answer 36

Bad faith is evidenced when the decision to not declare a dividend is motivated by:

• Intense hostility of the controlling faction against the minority
• Exclusion of the minority from employment by the corp
• High salaries, bonuses, or corporate loans made to the officers in control
• When the majority group might be subject to high personal income taxes if substantial dividends are paid
• The existence of a desire by the controlling directors to acquire the minority stock interests as cheaply as possible

Question 37

Note on Earmarks for Failure to Declare a Dividend

Answer 37

If the earmarks are not the motivating causes for the dividend decision, they do not constitute bad faith. In other words, the shareholder must prove that the earmarks were the motivating causes.

Question 38

Derivative Suits

Answer 38

Equitable actions brought by a shareholder on behalf of the corporation and for the corporation’s benefit (often breach of an officer’s or director’s duty)

Question 39

Requirements for Bringing a Derivative Suit

Answer 39

• The shareholder must have been a shareholder when the transaction complained of occurred
• Shareholder must have made a written demand upon the corporation and allow 90 days to have passed, unless irreparable injury would result by waiting 90 days.

Question 40

Dismissal of a Derivative Suit by the Board

Answer 40

The board can seek dismissal of a derivative suit when a majority of directors, who do not have a material interest in the derivative action determine, in good faith, and after conducting a reasonable inquiry, that continuance of the suit would not be in the best interests of the corp.

Question 41

Duties of Controlling Shareholders

Answer 41

Controlling shareholders have a duty of good faith whereby they must refrain from exercising control so as to obtain a benefit from the corporation not shared proportionately with minority shareholders

Question 42

Examples of Improper Conduct by a Controlling Shareholder

Answer 42

Include:

• causing the board to guarantee, or enter into, a loan made by or with a majority shareholder
• causing the board to issue additional stock to a controlling shareholder at less than fair market value for the purpose of diluting the minority’s interest
• causing the board of directors to enter into a K with a majority shareholder on unfair terms
• causing the board to dissolve the corporation, merge it with a company owned by the controlling shareholders, or sell it assets, for the purpose of excluding the minority shareholders from participation in a profitable business

Question 43

Shareholder Liability

Answer 43

Shareholders are generally not personally liable for the debts of the corporation in which they hold stock.

Question 44

Exception to Shareholder Liability: Piercing the Corporate Veil

Answer 44

Courts may hold shareholders liable on corporate obligations when it is necessary to prevent or avoid a grave injustice (i.e., the entity is used to commit fraud or to achieve inequitable results).

Question 45

Factors that go Into Piercing the Corporate Veil

Answer 45

Factors that go into a piercing the corporate veil determination include:

• the extent to which the corporation is undercapitalized;
• the extent to which corporate formalities have not been observed;
• the extent to which corporate and personal funds have been commingled; and
• the extent to which the corporate entity is no more than the alter ego of its shareholders

Question 46

Plaintiff’s Burden of Proof for Piercing the Corporate Veil

Answer 46

P must prove:

• shareholder control that effectively renders the corporate form a facade (corporation was the alter ego of the shareholder)
• use of corporate form to obtain an improper or fraudulent purpose; and
• injury or unjust loss resulting from this wrongful use of the corporate form