Rights of Shareholders

Question 1

What is a SH derivative suit?

Answer 1

A suit to enforce a cause of action of the corporation

Question 2

What are the requirements for bringing a SH derivative suit?

Answer 2

1) Contemporaneous stock ownership;

2) Must make demand on directors that the corporation bring suit

Question 3

What is necessary to satisfy the contemporaneous stock ownership requirement?

Answer 3

SH bringing suit must have owned at least 1 share of stock when the claim arose; AND they must fairly and adequate represent the corporation’s interests

Question 4

What happens after a demand is made on the directors?

Answer 4

The directors either accept the demand (thus filing suit on behalf of the corp.), reject it, or do nothing.

Question 5

If the Board rejects the demand or does nothing for 90 days, what happens?

Answer 5

A committee of 2 or more independent directors investigate the cause of action - it can move for dismissal if it concludes (as it always does) that the derivative suit is not in the best interest of the corp.

Question 6

What are the consequences of a successful derivative suit?

What are the limits on recovery against individual directors?

Answer 6

Recovery goes only to the corp. itself

$100K or last year’s compensation, whichever is greater

Question 7

Which SH have a right to vote at a meeting?

Answer 7

In general, only record SH as of record date have the right to vote.

Question 8

What is a record SH?

What is the record date?

Answer 8

The person shown as the owner in the corporate records.

A voter eligibility cut-off set by the board no more than 70 days before the meeting.

Question 9

What is a proxy?

Answer 9

1) A writing or electronic transmission;
2) authorized by the record SH;
3) directed to the secretary of the corp.
4) authorizing another to vote the shares; and
5) valid for only 11 months.

Question 10

Are proxies revocable?

Answer 10

Yes, unless 1) labeled irrevocable and 2) coupled with an interest (consideration, e.g. the shares themselves)

Question 11

What is the rule concerning annual meetings?

Do SH vote at annual meetings?

Answer 11

Every corp. must have an annual meeting where at least ONE board of director spot is open for election

Yes. @ special meetings too.

Question 12

What are special meetings

Answer 12

Meetings to vote on specific proposals and fundamental corporation changes

Question 13

How much notice must be given to SH in advance of annual meeting?

Special meetings to vote on fundamental corp. changes?

Answer 13

10 to 60 days prior to meeting

25 to 60 days

Question 14

What must be in the notice for the annual meeting?

For special meetings?

Answer 14

Time and place

Time, place, and meetings special purpose (nothing can happen at the meeting that isn’t described in the notice)

Question 15

What is the consequence of failure to give proper notice to all SH?

Answer 15

The action is void UNLESS those without notice waive objection EITHER by showing up at the meeting or sending in a written waiver

Question 16

In order for the meeting to take place, there must be a QUORUM represented.

How is the quorum measured for SH?

Answer 16

By number of SHARES represented, not the number of SH.

Question 17

What are the three ways that shares can be represented?

Answer 17

1) In person;
2) By proxy;
3) by electronic transmission;

Question 18

Can a quorum be broken by leaving a meeting?

Answer 18

No; once a share is represented for any person, it is deemed represented for the rest of the meeting

Question 19

What constitutes a quorum?

If X Corp. has 120K shares outstanding and 700 SHH, what constitutes a quorum?

Answer 19

A majority of outstanding shares represented for any purpose, unless otherwise provided in the AoI

60,001 shares

Question 20

If quorum is present, how many votes are required to approve a measure?

Answer 20

The votes for the measure must exceed the votes against (excludes abstentions)

Question 21

If two SH decide they want to increase their influence on corp. policy by “block voting”, how can they do that?

Answer 21

1) Voting trusts;

2) Voting agreements

Question 22

What is a voting trust?

Answer 22

A formal delegation (in writing) of voting power to a trustee for up to 10 years

Question 23

What is a voting agreement

Answer 23

An agreement in writing to vote shares as a majority of signers direct

Question 24

How does cumulative voting work?

Answer 24

Under cumulative voting, when voting for board members in an election SH may multiply shares by the number of open slots.

Thus, if you own 1000 shares and there are nine slots open, you have 9000 votes to put behind a candidate in a single election in which the top 9 win.

Question 25

What is the Articles of a C-Corp are silent as to whether SH can vote cumulatively?

Answer 25

Cumulative voting not allowed unless expressly permitted.

Question 26

When do SH have an UNQUALIFIED right to inspect and copy the books and records of the corp.?

When is that right merely qualified?

Answer 26

For corp. records (e.g. AoI, bylaws, minutes) maintained at the corp.’s principal office, provided that the SH provides a signed written request giving 5 days notice

For additional corp. books and records, provided:

1) the SH has been a record holder for 6 months; owns 5% or more of the stock; OR who obtains court approval; AND
2) provides 5 days written notice stating a “proper purpose”

Question 27

When are dividends distributed to SH?

Answer 27

At the Board’s discretion

Question 28

Who receives dividends if:

1) The outstanding stock is exclusively common stock?
2) The outstanding stock is both preferred and common stock?
3) The outstanding stock is both preferred and common stock and the latter is participating?
4) The outstanding stock is both common stock and preferred stock, where the latter is cumulative and there have been no dividends in the last 3 years?

Answer 28

1) The common stock SH (paid last and equally)
2) The preferred stock SH first (typically at a preferred dividend rate), with the remainder to common stock SH
3) The preferred stock SH first (typically at a preferred dividend rate), with the remainder shared equally among the common stock and preferred stock SH
4) The preferred stock SH will receive 4 years worth of dividends (typically at a preferred dividend rate), with the remainder to common stock SH.

Question 29

When may the corp. NOT award dividends or any distributions to SH?

Answer 29

If the dividend would render it insolvent

Question 30

What does it mean to be insolvent?

Answer 30

The corp. is a) unable to pay its debts as they come due; OR b) its assets are less than its liabilities, either before or after the dividend

Question 31

Are directors personally liable for unlawful dividends or distributions?

What defenses apply?

Answer 31

Yes.

1) Good-faith reliance on financial representatives;
2) 2 year statute of limitations
3) Right to contribution from other directors AND SH

Question 32

When may SH agrees to eliminate formalities?

Answer 32

Requirements:

1) Only for non-public corporations (not listed on a national exchange or traded in a regular market);
2) Provided there is a unanimous SH agreement in Articles or Bylaws (valid for 10 years, unless otherwise indicated)

Question 33

What are the consequences of eliminating formalities?

Answer 33

1) No piercing the veil to render SH liable, even if they fail to observe formalities;
2) Possibility of obtaining S-corp status, provided there are no more than 100 SH and 1 class of stock (benefit: can opt for pass-thru taxation)