Shareholders Flashcards
Close corporation duty
In a close corporation, the fiduciary duty of loyalty owed by shareholders to one another is a punctilio of the honor the most sensitive. Shareholders still do not have management capabilities unless there is a shareholder management agreement in the articles of incorporation or by unanimous written shareholder agreement.
Controlling SH
Controlling shareholders may not use their power to benefit at the expense of minority shareholders. A controlling shareholder is one who owns a majority of the shares and thus has a majority of the vote.
Shareholder liability
Shareholders are generally not liable for acts or debts of the corporation. However, Shareholders may be liable for the corporation’s acts if the court allows a creditor to pierce the corporate veil. When a corporation is unable to pay its debts due to insolvency, the creditor may attach to the shareholders’ personal assets if the shareholder abused the privilege of incorporation and fairness so requires. The court may find it fair to pierce the corporate veil where there is fraud, or the shareholder is using the corporation to shield his existing personal obligations.
Piercing the Corporate Veil
If the shareholders ignore corporate formalities such that the corporation is an alter ego or mere instrumentality of the shareholders of another corporation, and some additional injustice results, the shareholders may be held personally liable.
If the shareholders ignore corporate formalities such that the corporation is an alter ego or mere instrumentality of the shareholders of another corporation, and some additional injustice results, the shareholders may be held personally liable.
Shareholders may be held liable if the corporation was inadequately capitalized at the time of formation.
Derivative actions
A shareholder may sue to enforce the corporation’s claim through a derivative action. To commence a derivative proceeding, the plaintiff must have been a shareholder at the time the claim arose (or by operation of law).
First, the shareholder must make a written demand on the corporation to take action. In some states, the shareholder can commence suit 90 days later unless, 1) the shareholder has earlier been notified the corporation rejected the demand, or 2) irreparable injury would result by waiting.
The suit should be dismissed by the court because an independent investigation by independent directors concluded that it is not in the corporation’s best interest. The court will typically dismiss if the investigation was truly independent and they made a reasonable investigation.
Proxy
A proxy is a signed writing authorizing another to vote a shareholders’ shares. A proxy is revocable generally, unless it is coupled with an interest or given as a security. Proxies are coupled with an interest if the proxy holder essentially pays for the right to be a proxy, such as where the proxy has purchased the underlying shares from the owner of record.
Soliciting Proxies
When soliciting proxies, there must be 1) full and fair disclosure of all material facts with regards to the proposal, 2) no material misstatements, omissions or fraud in connection with the proposal, and 3) management must include certain shareholder proposals on issues other than election of directors.
Voting Trust
Shareholders may pool their votes with a voting trust. This is a written agreement determing how shares will be voted given to the corporation. Legal title of the shares must be given to the voting trustee and the original shareholders receive a trust certificate.
Written voting agreements
Alternatively, shareholders may enter into a signed, written voting agreement, which is increasingly enforceable.
SH meetings
Corporations must hold annual meetings. They may also call special meetings via the BoD, the president, the holders of 10% of shares and anyone else authorized to do so by articles or by laws. Shareholders must be provided with notice not fewer than 10 or more than 60 days before the meeting. The notice must state the meeting’s purpose. If there is no notice, the action is voidable unless notice was waived.
Right of first refusals
Right of first refusals are valid stock transfer restrictions.
Dividend Distribution
Dividend distribution is within the sole discretion of the board, and may not be made if the corporation is or will be rendered insolvent. Shareholders only have a right to dividends once they are declared.
Joint and Several Liability for improper distributions
Directors are jointly and severally liable for improper distributions. However, directors will not be liable if the distributions were based on financial statements prepared according to reasonable accounting practices, or by relying on information from employees or officers.
