Shareholder Agreements and Transfer of Shares Flashcards
Three Types of Shareholder Agreements
(1) Voting Trust
(2) Pooling Agreement
(3) Transfer Restriction
Shareholder Agreement: Voting Trust
Agreement where all the participating shareholders decide to transfer their shares to a trustee
Trustee then votes the shares and distributes distributions
Limited to 10 years, but can be renewed
Shareholder Agreement: Pooling Agreement
Agreement among shareholders to vote all shares together as the majority of those in agreement dictate
Shareholder Agreement: Transfer Restriction
Often done in smaller corporations, where the restriction agreement provides that
shareholders will not sell shares to an outsider without giving the corporation a right of first refusal
Lawful purpose = valid
Absolute restriction = unreasonable and void
Enforceability of Transfer Restriction
Enforceable against third-party purchasers if:
(1) CONSPICUOUSLY NOTED on stock certificate; or
(2) Purchaser has ACTUAL KNOWLEDGE of the agreement
Federal Causes of Action
(1) Rule 10b-5
2) Section 16(b
Rule 10b-5
Governs the fraudulent purchase of sale of any stock or other security
Requirements for Rule 10b-5 Action
7
(1) P purchased or sold a security
(2) Transaction involved use of INTERSTATE COMMERCE
(3) D must have engaged in FRAUDULENT or deceptive conduct
(4) Conduct involved MATERIAL information
(5) SCIENTER
(6) P must have RELIED on D’s conduct
(7) P must have suffered HARM
Section 16(b) Action
Governs insider short-swing profits
Rationale: insider should be restricted from rapidly trading profits related to her firm’s stock
Section 16(b) Action Elements
(1) Publicly traded corporations (must have securities traded on national securities exchange or have assets of more than $10 million and more than 500 shareholders)
(2) Corporate insiders (directors, officers, or shareholders who hold more than 10% of any class of stock)
(3) Short-swing profits (corporate insider both bought and sold corporation’s stock during any 6 month period)
States Causes of Action
Tort of fraud
Tender Offer Rules
Person who acquires more than 5% of any class of stock needs to file a statement with SEC revealing their:
(1) Percentage ownership;
(2) Source of funding; and
(3) Purpose in acquiring the stock
