Shareholders

Question 1

When do shareholders run a corporation on a day to day basis?

Answer 1

Typically never, unless it is a closely held corporation that the shareholders agreed to dispense with the board

Question 2

How do shareholders indirectly control corporations?

Answer 2

By electing directors, amending by-laws, and approving fundamental changes

Question 3

When do shareholders of record have a right to vote?

Answer 3

1. At the annual meeting to elect directors

2. Regarding fundamental corporate changes

Question 4

When must notice of meetings be given to shareholders?

Answer 4

1. Annual meeting—> date, time, location
2. Special meeting—> date, time, location, purpose
3. Improper notice—> action taken at meeting can be nullified, but improper notice is waived by attending the meeting without complaint

Question 5

Proxies

Answer 5

1. Written proxies valid for 11 months and a re generally revocable by attendance or later appointment
2. Under federal law, proxy solicitation must fully and fairly disclose all material facts and make no material most statements in connection with proxy solicitation (i.e., would a reasonable investor find the information important in making an investment decision)

Question 6

Quorum

Answer 6

1. Majority of outstanding voting shares must be present for valid vote
2. Once quorum reached, shareholder leaving does not invalidate voting

Question 7

Voting trust

Answer 7

Shareholder transfers share ownership to a trustee who votes shares as agreed. Valid in most states for 10 years but can be renewed.

Question 8

Shareholder management agreements

Answer 8

Used in smaller corporations; shareholder may agree to run the corporation in any way and can even dispense with the board.

Question 9

Share transfer restrictions

Answer 9

Shares generally freely transferable. Shares may conspicuously provide for restriction if reasonable.

Question 10

Shareholder inspection rights

Answer 10

1. Limited right to inspect the books, paper, accounting records with 5 days’ written notice and proper purpose related to the shareholder’s rights
2. Unqualified right to inspect the articles & bylaws, minutes of board meetings, names and addresses of directors, and recent annual reports

Question 11

Shareholder pre-emptive rights

Answer 11

1. Right to purchase shares to maintain proportionate ownership interest
2. Under the MBCA, the right only exists if it’s been provided for

Question 12

In what situations does a shareholder not have pre-emptive rights?

Answer 12

1. Shares issued as compensation
2. Shares issued within 6 months of incorporation
3. Shares issued for consideration other than money
4. Non-voting shares with a distribution preference

Question 13

Direct shareholder suit

Answer 13

Enforce the right of the shareholder

Question 14

Derivative shareholder suit

Answer 14

Enforce a right belonging to the corporation

Shareholder must own shares at the time of the wrong; must maintain ownership throughout the suit; and demand board to bring suit

Question 15

Dismissal of shareholder suit

Answer 15

If a majority of the board of directors with no personal interest determine in good faith that the suit is not in the best interests of corporation

Question 16

Distributions

Answer 16

Dividends or assets after dissolution. No right to receive unless/until declared by the board.

Question 17

Insolvency: no distribution if:

Answer 17

1. Corporation unable to pay debts when due

2. Total assets are less than total liabilities

Question 18

Cumulative shares

Answer 18

If distribution is not declared or paid in a certain year, it accumulates until paid

Question 19

Cumulative if earned distributions

Answer 19

Preference accumulates only if profits for year were sufficient to pay preference

Question 20

Participating distributions

Answer 20

Receive stated preference and a share of the distribution made to common shareholders

Question 21

Director liability

Answer 21

Director who votes for an unlawful distribution is personally liable for the excess

Good faith defense—> may rely on accountants or reliable officers/employees who indicate distribution was unlawful

Question 22

Shareholder liabilities

Answer 22

Shareholders are not fiduciaries and can act in self-interest.

Exception: controlling shareholder cannot use control to obtain a special advantage at expense of minority shareholder