SH Flashcards
SH powers
SHs generally don’t manage (Bd does) but they can manage business directly in a close corp (a corp with a few SH or stock that is not publicly traded). can still have Bd though in close corp. if you want SH management, must have a provision in certificate restricting or transferring bd power to SH and the following:
1) all incorporators or SH approve it
2) conspicuously noted on front and back of all shares
3) all subsequent SH have notice, AND
4) shares are not listed on any exchange or OTC
- in close corp run by SH, managing SH owes FD to corp
- in close corp, trend toward imposing FD on SH in dealings with each other…controlling SHs cannot use their power for personal gain or at the expense of minority SH or corporation or to oppress minority SH or corporation. Owe a duty of utmost good faith. Gives SH remedy for oppression (behavior that defeats reasonable expectations for investing).
- members of a licensed profession cannot practice in a general business corp., must practice in a professional service corp (PC). D, O, and SH must be licensed professionals but can hire nonprofessionals as employees. Liable for own malpractice but not others. Not liable for Ks or rent (entity is). remain liable for tort claims.
- PC certificate must meet general corporation requirements and indicate profession to be practiced and include names and addresses of original SH, D, and O; also need certification of professional license. If a SH is disqualified from practice, PC must buy the stock
SH liability for corp. action
- generally not liable for corporate debts or acts. corporation is liable for what it does.
- SH might be personally liable if court pierces corporate veil. PCV can only happen in close corps.
- to pierce corporate veil and hold SH personally liable,
(1) they must have abused the privilege of incorporating, and
(2) fairness must require holding them liable (to prevent fraud or use of corp as cloak for illegality) - classic fact patterns: 1) alter ego: commingling of funds, treating corporate assets as own (agency), excessive domination; 2) undercapitalization (have to invest enough to cover prospective liabilities; but undercapitalization on its own isn’t enough in NY; also need complete domination and fraud or injustice)
- in NY, SH must exercise complete domination over corp to perpetrate fraud or injustice
- PCV to impose liability on SH (might be another corp or parent)
- expect PCV more in tort than K
SH wages
-in close corp, 10 largest SH are personally liable for wages and benefits of company’s employees
SH derivative suits **
- in derivative suit, SH is suing to enforce corp.’s claim, not her own personal claim
- always ask: could corp have brought suit? if yes, it is derivative.
- direct suit if for SH’s personal claim
- probably not derivative suit if for declaration of dividend, unless part of mismanagement by directors
- waste of corporate assets: derivative breach of DoL
- if SH wins derivative suit, corp gets recovery. SH receives costs and atty fees, usually from judgment won for corp. SH MAY be able to recover damages if recovery by corp would give money back to bad guys
- if SH loses, SH cannot recover costs and expenses and will probably be liable to defts for their costs . Later SHs cannot sue on same transaction–claim is barred.
requirements for bringing SH derivative suit
1) stock ownership when claim arose (owned stock or have gotten it by operation of law (inheritance or divorce decree) from someone who owned it at time claim arose) AND at time of action and through entry of judgment
2) must adequately represent interests of corp and SH
3) SH can be required to post a bond for deft’s costs –doesn’t have to though if she owns 5% or more of stock, or her stock is worth more than $50k
4) SH must make a demand on directors that corp sue
BUT no need to make demand if it would be futile to do so: 1) if majority of board is interested or under control of interested directors; or 2) board did not inform itself of the transaction to extent reasonable under circumstances; or 3) transaction is so egregious on its face that it could not be the result of sound business judgment
5) P must plead with particularity her efforts to get board to sue, or why demand is futile**
6) corp. must be joined in litigation as a deft
-if SH makes demand and board refuses to have corp sue, SH can bring derivative suit anyway only if SH can show that majority of board is interested OR its procedure was incomplete or inadequate
NY: D or O can sue another D or O to compel her to account for neglect or violation of duties in management or misappropriation of corporate assets. If D or O bringing suit, doesn’t need to meet these requirements because suing in own name (recovery still to corp)
corp’s motion to dismiss derivative suit
motion to dismiss based on a finding by independent directors (or SLC) that suit is not in corp’s best interests
in deciding whether to dismiss, court looks to
1) independence of those making the investigation
2) sufficiency of investigation
-parties can dismiss or settle derivative suit only with court approval (may require notice to SH)
SH voting
general rule is that record owner as of record date has right to vote (owner in corporate records)
exceptions:
- treasury stock
- if SH dies, SH’s executor can vote
- proxies are ok for SH voting (proxies must be signed writings by recorded SH or agent, directed to secretary of corp, authorizing another to vote for shares; fax or email is a writing); proxies are goo for 11 months unless they say otherwise; can revoke proxy in writing or by attending meeting and voting; if SH who gave proxy dies, proxy is revoked only when secretary receives written notice of death; can be revoked even if it says it is irrevocable. Can be irrevocable if it says so, AND proxy holder has some interest in stock other than voting (ie a proxy coupled with an interest)
-voting trusts and voting agreements:
requirements for voting trust:
1) written trust agreement controlling how shares will be voted
2) copy to corp
3) transfer legal title of shares to voting trustee; AND
4) original SH receive voting trust certificates and retain all SH rights except for voting.
10 yr max on voting trusts (but can extend for another term within 6 mos of expiration)
requirements for voting agreement:
- only SHs can enter into these, Ds cannot
- must be in signed writing
- not specifically enforceable in NY: can’t get ct to force person to vote the way they agreed to (will only be enforced at law and only remedy available is damages)
- proxy given subject to voting agreement is irrevocable if it says so
- SHs can agree to vote to elect each other as directors but cannot agree abotu what actions to take as directors (no voter agreements for director voting)
where do SH vote
SH can take valid act only by:
1) written consent of holders of all voting shares
2) a meeting
- meetings don’t need to be held in NY
- elect directors at annual meeting (with highest vote-getter winning–only need plurality to win)
- ct can order annual meeting if one isn’t held
- special meeting can be called by bd or anyone provided in certificate or bylaws
- notice: must give written notice (email ok) to every SH entitled to vote for every meeting between 10 and 60 days before meeting. Notice must state time and place of meeting. If action proposed at meeting is something in which SH would have appraisal rights, notice must say so and tell why (and even include statute about appraisal rights). Notice of special meeting must state who called it and purpose (can’t do anything outside of that stated purpose at meeting).
- special meeting must be for something SH can vote on
- if corp doesn’t give notice to everyone entitled to vote, any action at meeting is void (unless those not given notice waive notice defect either expressly (signed writing) or impliedly (by attending meeting without objection)
how do SH vote
- must be quorum represented at meeting (focusing on number of shares represented, not number of SH)–majority of outstanding shares
- certificate or bylaws can reduce quorum but never to fewer than 1/3rd of shares entitled to vote
- BUT can never reduce requirement of majority approval
- can impose supermajority voting requirement and quorum requirement but ONLY in certificate, not bylaws (same as with bd)
- if quorum is met, majority may act to bind corp (majority=majority of shares actually voting in favor or against proposal) (abstentions don’t count)
- once quorum is established, it can’t be lost if people leave (unlike board)
cumulative voting
only available when SH are voting to elect directors. device to help small SH get representation on board. exists only if certificate says so.
multiply # of SH x # of directors to be elected.
formula:
100/(number of directors being elected +1) = need one share more than this percentage
transfer of stock by SH
corps allow for transferability of ownership interest
- amt of consideration: par irrelevant–not an issuance
- stock transfer restrictions: can be set in certificate or bylaws or by agreement; valid if not an undue restraint on alienation; a right of first refusal is acceptable so long as price offered is reasonable; corp. probably can’t demand that selling SH get corp approval; buyback provisions (requirement of sale back to corp when SH dies or retires) are valid
even if restriction is valid, it cannot be invoked against transferee unless either:
1) it is conspicuously noted on stock certificate (binding universally then but always binding on those with actual notice)
or
2) transferee had actual knowledge of restriction (so with BFP, need one of these two)
“NY has held that reasonable restrictions on sale of shares…are valid and will be upheld.” Right of first refusal is reasonable restriction on alienation, provided there is no restriction on price. A restriction requiring unanimous consent before sale is prohibition on sale, is unreasonable. If breach reasonable restriction, may be held liable for damages resulting from failure to abide by restriction…
right of SH to inspect books and records of corp
any SH on 5 days written demand can access minutes of SH proceedings and record of SH. corp can demand that SH give affidavit that purpose is not other than in interest of corp and he has not tried to sell any SH list within 5 years BUT cannot demand more detail in affidavit. corp can deny access if SH refuses to furnish affidavit
any SH can demand list of current D and Os on 2 day’s written demand–no affidavit
SH may make written requests for corp’s latest annual balance sheet, profit and loss statement, and interim statements distributed to SH or public. corp must provide docs, can do so by mail.
all SH have CL right to inspect records at a reasonable time and place provided inspection is for a proper purpose (something related to role as SH)
-director has unfettered access to inspect corp books and records
distributions
payments by corp to SH
types: dividend, payment to repurchase shares, payment to redeem shares (forced sale to corp at price set in certificate)
distributions declared in board’s discretion. SHs have right to distribution when bd declares it. Ct will interfere with bd’s decision on distribution only if there is a showing of bad faith or dishonest purpose
- preferred gets paid before common shares
- participating means pay again: so preferred participating gets paid 2x (once as preferred and again bc participating)
-cumulative: add up. for years in which no dividend was paid, cumulative was adding up. so corp owes cumulative holders for prior years where there haven’t been dividends plus this year (year dividend is declared)
funds for distributions
surplus can be used: A - L - stated capital
stated capital can never be used for distributions: equal to par value of issuance. if no par issuance, bd can allocate any part but not all of issuance to surplus
- corp can make distributions if it loses money in one term but cannot make distributions if it is insolvent or if distributions would render it insolvent (ie corp must be able to pay its debts as they come due in ordinary course of business)
- directors personally liable for unlawful distributions, as are SH who knew distribution wasu nlawful when they received it (corp’s claim: so brought by corp or derivative)
- redemptions are set in certificate and must be done proportionately within each class of stock. repurchases are individually negotiated (so corp can discriminate on repurchases; BUT might have to give equal opportunity to all SH in close corp)
covenants not to compete in SH agreements
covenant must be reasonable and service must be unique
to be reasonable: (i) covenant has reasonable business purpose (such as to prevent former business owners and employees from unfairly taking customers), (ii) not be too broad in geographical scope, and (iii) be limited to a reasonable duration
