Shareholder Rights

Question 1

List the key rights of shareholders:

Answer 1

(1) to vote on directors and resolutions at annual shareholder meetings
(2) to call special meetings (10% of s/h)
(3) to propose resolutions
(4) to vote on executive compensation
(5) to vote on amendments to articles or bylaws affecting their rights
(6) to approve loans to officers or directors
(7) to inspect and copy
(8) to sue for fraud, gross negligence, or breach of fiduciary duty
(9) to reimbursement of legal expenses if prevailing in a derivative action
(10) to appraisal in the event of a fundamental change

Question 2

What types of corporate meetings are there?

Answer 2

• annual shareholder meetings - must be held every year to elect directors
• other shareholder meetings
• special board meetings - called by at least 10% of shareholders
• regular board meetings

Question 3

What is required to call a special board meeting?

Answer 3

• by 10% of shareholders or the board
• must make a written demand upon the corporation
• specifying the meeting’s purpose
• 2 days notice

Question 4

What notice to shareholders is required for regular board meetings?

Answer 4

None - they may be held without notice to shareholders.

Question 5

What notice is required for shareholder meetings not involving fundamental changes?

Answer 5

• date, time, place of the meeting
• at least 10 days notice
• but not earlier than 60 days beforehand

Question 6

What notice is required for shareholder meetings that involve fundamental changes?

Answer 6

• date, time, place of the meeting
• description of the significant issues
• 20 days notice
• not more than 70 days beforehand

Question 7

What qualifies as a “fundamental change” requiring more notice to shareholders?

Answer 7

• changes affecting s/h rights
• plans of merger
• sale of substantially all assets
• dissolution

Question 8

Who may propose a resolution?

Answer 8

Any shareholder owning at least 1% of outstanding shares, valued at a minimum of $1,000

Question 9

How do shareholders determine if they are eligible to propose resolutions?

Answer 9

The corporation must make available a list of eligible shareholders 10 days before the meeting.

Question 10

What happens if the shareholder attends the meeting despite a problem with notice?

Answer 10

The right to notice will be waived if the shareholder:

(1) attends the meeting and
(2) does not object at the beginning of the meeting

Question 11

What is a shareholder leaves a meeting and there is no longer a majority of shareholders left at the meeting?

Answer 11

Once a quorum is present, all actions conducted thereafter at the meeting will be authorized, even if a disgruntled shareholder has walked out.

Question 12

What is required to vote by proxy?

Answer 12

(1) signed appointment form

(2) valid for a maximum of 11 months

Question 13

When can notice, proxies, and consent be given by electronic transmission?

Answer 13

When the shareholder has consented to the communication mode.

Question 14

Can the board get shareholder approval to act without a physical meeting?

Answer 14

Yes if all shareholders entitled to vote on the action sign a consent to the action.

Question 15

What is required for a voting block trust?

Answer 15

(1) written trust agreement

(2) valid for a maximum of 10 years

Question 16

What records must the board maintain at its principle place of business?

Answer 16

• accounting records
• list of shareholders
• articles of incorporation
• bylaws
• minutes of board meetings

Question 17

What is required for a shareholder to exercise the right to inspect and copy records?

Answer 17

• make a written demand to inspect
• specify a proper purpose for which there is credible evidence
• 5 business days in advance
• pay reasonable charges for copies, if required

Question 18

What is an example of a wrongful purpose that would allow a corporation to refuse to permit a shareholder to inspect and copy records?

Answer 18

if inspecting them for personal non-corporate business or to compete with the corporation

Question 19

What information must shareholders receive annually?

Answer 19

Shareholders must receive financial statements, including a balance sheet and income statement, within 120 days of the close of the fiscal year.

Question 20

What is a direct shareholder action?

Answer 20

• when the individual shareholder(s) claim a harm to their personal finances, not to the corporation
• e.g., payment of dividends to only one class of shareholders

Question 21

What is a derivative action?

Answer 21

• the board’s failure to enforce a corporate right has injured the corporation itself

Question 22

How many votes in favor of an action are required to pass ordinary resolutions vs. fundamental changes?

Answer 22

Ordinary: simple majority >50%

Fundamental:

• under the RMBCA also >50% (“a mere voting preponderance”)
• many states still require 2/3
• most states require a higher percentage for close corporations

Question 23

What rights do dissenting shareholders have when a fundamental change has been approved?

Answer 23

Dissenting shareholders have “appraisal rights” to receive the fair value of their shares in cash.

This may be the only remedy, as the act cannot usually be challenged as unauthorized, unless fraudulent or unlawful.

Question 24

What is the procedure if a dissenting shareholder exercises its appraisal rights?

Answer 24

(1) s/h must give written notice of objections before the vote and the intent to demand appraisal rights
(2) s/h must tender certificates to the corp. and not vote
(3) the corp. has 30 days to pay its estimate of fair value, plus accrued dividends and interest, and provide its calculation and financial statements
(4) s/h has 30 days to demand a higher amount
(5) corp. has 60 days to file for a judicial determination of fair value
(6) if the corp. does not file, it must pay the demand

Question 25

What are shareholders’ rights with regard to distributions?

Answer 25

Shareholders have not absolute right to distributions or dividends. Once the board declares distributions or dividends, it becomes a liability of the corporation and the shareholders become unsecured creditors.