Shareholders

Question 1

Do shareholders owe fiduciary duties?

Answer 1

No, not even to each other. But, SH’s in a close corporation owe duty of utmost good faith to minority SHs.

Question 2

Are shareholders personally liable for corporate obligations?

Answer 2

No! But in close corporations, the court can pierce the corporate veil under certain circumstances.

Question 3

What is required for a court to pierce the corporate veil?

Answer 3

1. Corp. is acting as the alter ego of the shareholder – when he/she utilizes the corp. for personal reasons;
2. There is a failure to follow corporate formalities;
3. Corp. is inadequately capitalized at its inception; OR
4. To prevent fraud.

PCV allows the court to disregard the corporate form and hold shareholders personally liable.

Question 4

What is the alter ego scenario for PCV?

Answer 4

When shareholders ignore corporate formalities such that the corporation could be considered a mere instrumentality of the shareholders AND some basic injustice results.

Question 5

What is the undercapitalization scenario for PCV?

Answer 5

May be pierced where the corporation is inadequately capitalized at the time of formation such that prospective liabilities could not be covered.

More likely to be pierced for tort victims than contract claimants.

Question 6

In the event of PCV, are passive investors also held liable?

Answer 6

No.

Question 7

What is a derivative suit?

Answer 7

When a shareholder sues to enforce the corporation’s claim, not her own personal claim.

Question 8

What is a direct suit?

Answer 8

When a shareholder sues to enforce her own claim for a breach of a fiduciary duty owed to her.

Question 9

If a shareholder wins a derivative suit, who gets the money?

Answer 9

The corporation. But the shareholder may recover reasonable expenses from the corporation.

Question 10

Standing to bring a derivative suit

Answer 10

Must have been a shareholder at the time the claim arose or must have become a shareholder through transfer by operation of law from someone who did own stock at the time the claim arose.

Question 11

What demand is required for derivative suits?

Answer 11

A derivative suit cannot be commenced until 90 days after the demand, unless the corp.:

1. Rejects the demand, or
2. Will suffer irreparable harm if forced to wait.

Demand may also be futile when director on whom demand would be made would be the defendant.

Question 12

Must the corporation be joined to a derivative suit?

Answer 12

Yes, must be joined as DEFENDANT.

Question 13

Which shareholders may vote?

Answer 13

Only registered shareholders on the record date are entitled to vote at the shareholders meeting (even if an SH sells the shares before the meeting).

Record date cannot be more than 70 days before meeting, set by board.

Question 14

What is voting by proxy?

Answer 14

Shareholders may give another a proxy giving the other the right to vote the shares.

A proxy is:

1. a writing
2. signed by the record shareholder
3. directed to the secretary of the corporation
4. authorizing another to vote the shares.

A proxy is good for 11 months unless it says otherwise.

Question 15

How can a shareholder vote her shares?

Answer 15

A shareholder may vote her shares in person or by proxy executed in writing.

Question 16

How can a proxy be revoked?

Answer 16

Proxies are generally revocable unless they say they are irrevocable and are coupled with an interest.

May be revoked by a subsequent instrument or by the shareholder of record showing up to vote in person.

Question 17

When is a proxy coupled with an interest?

Answer 17

When the proxy holder essentially pays for the right to be a proxy, like when the proxy holder buys the underlying shares form the owner of record.

Question 18

What is a voting agreement?

Answer 18

An agreement that provides for how a shareholder will vote their shares.

Must be signed and in writing.

Specifically enforceable.

Question 19

What is the rule for annual shareholders’ meetings?

Answer 19

Corporations MUST hold annual shareholders’ meetings. Typically, directors are elected.

Question 20

Who may call a special meeting?

Answer 20

1. Board
2. President
3. Holders of at least 10% of the outstanding shares, or
4. Anyone else authorized by articles/bylaws.

Meeting must be for a proper purpose.

Question 21

What notice is required for a shareholder meeting?

Answer 21

Written notice must be given to every shareholder entitled to vote:

1. At least 10 days advance notice of the meeting (but not more than 60 days);
2. The meeting’s date, time, and place; AND
3. A description of the meeting’s purpose (for special meetings only).

Question 22

Why is the statement of purpose important for a shareholder meeting?

Answer 22

The shareholders can’t do anything else at that meeting.

Question 23

What do shareholders typically vote on?

Answer 23

• To elect directors
• To remove directors
• On fundamental corporate changes
• Other things the board asks for

Question 24

How can a shareholder waive notice?

Answer 24

1. Signed writing, or
2. Attend meeting without objecting at the outset

Question 25

How many shareholders must be at a meeting for a vote?

Answer 25

Quorum, based on number of SHARES represented.

Generally, a quorum is a majority of outstanding shares entitled to vote, unless the articles/bylaws require a greater number.

Question 26

How many shareholder votes does a matter need to pass?

Answer 26

Simple majority (yes > no) (unless otherwise stated).

But for certain matters –

• To elect a director: plurality
• To approve a fundamental corporate change: majority of shares entitled to vote
• To remove a director: majority entitled to vote
• Other: majority of shares that actually vote

Question 27

What is cumulative voting?

Answer 27

An SH’s total number of votes = shares owned x director spots open.

Only available when shareholders elect directors.

Question 28

Can a corporation impose stock transfer restrictions on shareholders?

Answer 28

Yes, if reasonable (like right of first refusal).

Restriction can also be imposed against the 3P purchaser if conspicuously noted on stock certificate or transferee had actual knowledge at time.

Question 29

What are the requirements for a shareholder’s right to inspect?

Answer 29

Must make written demand at least 5 business days in advance.

Question 30

What can a shareholder inspect per their inspection right?

Answer 30

Without explaining purpose:

• Articles of Incorporation;
• Bylaws;
• BoD Resolutions
• Minutes of SH meetings (for past 3 years);
• Name and business addresses of current directors and officers; and
• Most recent annual report.

Must state proper purpose for:

• Excerpts of board meeting minutes
• Corporation’s accounting records
• Shareholder records

Question 31

What are a directors’ inspection rights?

Answer 31

Unfettered access to corporate books and records.

Question 32

What are distributions?

Answer 32

Payments by the corporation to shareholders (dividends, redemptions, of shares, repurchases of shares, etc.).

Question 33

Who has discretion to declare distributions?

Answer 33

Board of directors. Shareholders have no right to compel distribution (unless abuse of discretion).

Question 34

Which shareholders get dividends?

Answer 34

The record shareholder of the stock as of the record date.

Question 35

When is distribution not permitted?

Answer 35

If, either:

1. the corporation would not be able to pay its debts as they came due, or
2. the corporation’s total assets would be less than the sum of its total liablities.

Question 36

When is a shareholder personally liable for unlawful distribution?

Answer 36

Only if they knew the distribution was improper when they received it.