Shareholders *** Flashcards
Can s/h manage the corporation?
GENERALLY– NO, bc the board manages.
BUT- s/h can manage the business directly in a close (or “closely held”) corporation. In a close corp, you don’t have to have s/h management. You can still have a BoD.
What is a close corporation?
1- few shareholders; and
2- stock is not publicly traded
How do you have shareholder management in a close corp?
- you have a provision in the certificate restricting or transferring board power to shareholders (or others)
- ALL incorporators or s/h (voting & nonvoting) approve it;
- it is conspicuously noted on front & back of all shares;
- all subsequent s/h have notice; AND
- shares are not listed on an exchange or regularly quoted over-the-counter
In a close corp run by s/h, who owes the duties of care & loyalty?
The managing s/h owe the duties of care & loyalty to the corporation.
Duty of controlling shareholders in a close corporation?
- In a close corporation, there is a trend toward imposing fiduciary duties on shareholders in their dealings with each other.
- Most importantly, controlling shareholders cannot use their power for personal gain at the expense of minority shareholders or the corporation or to OPPRESS minority shareholders or the corporation. They owe a DUTY OF UTMOST GOOD FAITH.
Why do courts protect minority s/h in a close corporation?
To give them a remedy for behavior that defeats reasonable expectations for investing
Professional Service Corporations (P.C.’s)
- Members of a licensed profession, like doctors and lawyers, cannot practice the profession through a general business corporation. But they can form a professional service corporation.
- S/H, officers, and directors must all be licensed professionals (but they can hire non-professionals as employees
- The professionals are liable for their OWN malpractice but not for that of others (so better than partnership)
- Professionals are not personally liable for Ks entered into by the entity (entity is liable)
- In general, the P.C. is governed by rules of the business corporation. Certificate must meet the general corporation requirements except for the use of “P.C.” and must indicate the profession to be practiced and include the names and addresses of the original shareholders, directors, and officers. There must also be certification that each shareholder, director, and officer is licensed to practice the profession
- if a S/H dies or is disbarred, the P.C. must buy back the stock
Are the S/H liable for what the corporation does?
General ROL- NO; limited liability; the corp is liable for what it does
Exception- S/H might be personally liable for what a CLOSE CORP did if the court PIERCES THE CORP VEIL (PCV)
How do you pierce the corporate veil?
To PCV and hold a s/h in close corp personally liable:
1- they must have ABUSED the privilege of incorporating; AND
2- Fairness must require holding them liable
NOTE: We PCV to impose liability on a s/h. That s/h might be another corp. So if a parent corp forms a subsid to avoid its obligation, and totally dominates the subsidiary, the court might PCV to hold the parent liable.
PCV in a classic “Alter Ego” fact pattern
tougher standard in NY
Factor 1 “Abuse”– It is not enough for a s/h to just treat corporate assets as his own, in NEW YORK the s/h must EXERCISE COMPLETE DOMINATION over the company to perpetrate fraud or injustice against the P
Factor 2 “Fairness”- creditors not being paid seems unfair. However, we still must have complete domination over the company to perpetrate fraud or injustice.
PCV in a classic “Undercapitalization” fact pattern
IN NEW YORK undercapitalization (faling to have enough to cover prospective liabilities) is NOT enough for PCV. We also need complete domination and fraud or injustice.
Do we expect PCV more readily in tort or K cases?
More likely in tort than in contract— put this in an essay!
PCV Essay “RULE SECTION” Setup
1- State the general rule that s/h are not liable for corporate debts
2- state “but a s/h in a close corp might be liable if the court PCV’s”
3- state the PCV standard
4- state “additionally, in NY the s/h must exercise complete domination over the company to perpetrate fraud or injustice?”
5- state that PCV is more likely in tort than K
In a CLOSE CORPORATION, the 10 largest s/h are personally liable for what?
The wages & benefits of the companies employees.
- S/H Derivative Suits:
1- what is a derivative suit?
2- what are the requirements for bringing a s/h derivative suit?
1- In a derivative suit, a s/h is suing to enforce the CORPORATIONS CLAIM, not her own personal claim. It’s a case in which the corp is not pursuing its own claim, so a s/h steps in to prosecute the claim.
2- Requirements =
(i) s/h owned stock at the time the claim arose OR got the stock by operation of law (inheritance, divorce decree, etc) from someone who owned the stock when the claim arose;
(ii) s/h must own stock when the action is brought and through entry of judgment
(iii) s/h must adequately rep the interests of the corp & other s/h
(iv) s/h can be required to post a bond for the Ds costs. She doesn’t have to if she owns 5% or more of the stock OR her stock is worth more than $50,000.
(v) s/h must make a demand on directors that the corporation sue UNLESS doing so would be futile
(vi) s/h must plead w/ PARTICULARITY her efforts to get the board to so OR why demand would be futile
(vii) corp must be joined as a defendant
- S/H Derivative Suits:
- when might a demand be futile?
1- if majority of the board is interested or under the control of interested directors; OR
2- BoD did not inform itself of the transaction to the extent reasonable under the circs; OR
(3) transaction is so egregious on its face that it could not be the result of sound business judgment
- S/h Derivative Suits:
- Suppose s/h makes the demand and the board refuses to sue. Can s/h now bring the derivative suit anyway?
ONLY if s/h can show that a majority of the board is interested or its procedure was incomplete or inadequate. This is an unlikely scenario b/c if any of those things are true then s/h wouldn’t have made a demand in the first place b/c it would have been excused as futile.
- S/H Derivative Suits:
1- What happens if the s/h wins the derivative suit?
2- what happens if s/h loses the derivative suit?
1.
- corporation generally gets the recovery
- s.h receives costs and attorney’s fees, usually from the judgment won for the corp
- s/h might recover damages directly if recovery by the corporation would return money to the bad guys
2.
- s/h can’t recover costs and expenses
- s/h probably liable to the Ds for their costs
- other s/hs precluded from suing the same Ds on the same transaction
- S/H Derivative Suits:
1- Corp moves to dismiss– granted or no?
2- can the parties agree to dismiss or settle a derivative suit?
1.
- corp can move to dismiss based on a finding by independent directors (or a committee of independent directors called a “special litigation committee” that the suit is not in the corps best interests. [ex of not in best interests- low chance of recovery; cost of suit will exceed recovery)
- Court, in considering the motion, will consider: (1) the independence of those making the investigation; and (2) the sufficiency of the investigation
2.
- parties can dismiss or settle a derivative suit ONLY W/ COURT APPROVAL. Ct. may condition approval on notice to all shareholders.
Can a director or officer bring a derivative suit?
- A D/O can sue another D/O to compel her to account for violation of duties or misappropriate of corporate assets
- when a D/O brings such a case, he sues DOES NOT have to meet the requirements for a s/h derivative suit. The D/O sues in his own name BUT recovery is by the corporation.
S/H VOTING: Who votes?
- general rule?
- exceptions?
General ROL =
- the record owner as of the record date has the right to vote.
Exceptions =
1- treasury stock does not get to vote
2- the executor of a s/h who dies after the record date can vote the shares
3- Proxies
S/H VOTING:
Def: Record Owner
Def: Record Date
Record owner = the person shown as the owner in the corporate records
Record date = voter eligibility cut-off, set no fewer than 10 and no more than 60 days before the meeting
S/H VOTING:
Def: Proxy
1- a writing
2- signed by record s/h or authorized agent
3- directed to secretary of corporation
4- authorizing another to vote the shares
NOTE: fax or e-mail is considered a writing for this purpose
