Shareholders

Question 1

Shareholders management powers

Answer 1

Generally, none. Power to manage is vested in directors. Shareholders have no direct control in the management of business.

Question 2

What are the duties of shareholders?

Answer 2

Generally, none. Shareholders may act in their own interest and have no fiduciary duties to the corporation or fellow shareholders.

Question 3

When are shareholders generally held liable?

Answer 3

Unpaid stock, pierced veil, or absence of a de facto corporation.

Question 4

Shareholders management power in a closely held corporation?

Answer 4

Shareholders can be allowed to manage a closely held corporation.

Question 5

Closely held corporation

Answer 5

A smaller corporation in size, limited to:

• 100 shareholders
• stock cannot be traded on public market, and
• only one class of stock.

The CHC can be either managed by a traditional board of directors, or shareholders may directly manage.

Question 6

Shareholder Management Agreement

Answer 6

This agreement sets up the alternative shareholder management of a close corporation and must be expressly stated to eliminate the board and implement the shareholders.

Question 7

What are the two ways to set up a shareholder management agreement?

Answer 7

1. In the articles and approved by shareholders, or
2. By a unanimous written shareholder agreement.

Question 8

If shareholders manage a closely held corporation, what duties do they owe?

Answer 8

They now owe duties of care and loyalty, just as the directors would in a management position.

Question 9

What duties do shareholders generally have in a closely held corporation?

Answer 9

Courts impose the fiduciary duty of utmost good faith between shareholders.

Policy: Because a CHC looks more like a partnership, with few owners who are usually employed by the business).

Question 10

Duties of controlling shareholders to Minority shareholders

Answer 10

Controlling shareholders cannot use their power to benefit at the expense of minority shareholders.

Question 11

Oppression of Minority Shareholders

Answer 11

Oppressed minority shareholders can sue the controlling shareholders who oppress them for breach of this fiduciary duty.

Question 12

Professional Corporations

Answer 12

Generally limited to licensed professionals.
1. all directors, officers, and shareholders must be licensed professionals, and

2. professionals are personally liable for their malpractice.

Question 12

Can shareholders be liable for corporate debt?

Answer 12

Shareholders generally cannot be held liable for corporate debts because the corporation is liable for its actions.

However, shareholders may be personally liable for what the corporation did if the court pierced the corporate veil and it can ONLY happen in closely held corporations.

Question 13

Piercing the veil

Answer 13

A court can hold shareholders personally liable IF:

1. The shareholders abused the privilege of incorporating, and
2. Fairness must require holding them liable.

Question 14

Alter Ego:

Answer 14

The court must pierce the veil if:

1. The corporation ignores corporate formalities to the extent the corporation becomes a mere instrumentality, AND
2. some basic injury results.

Question 15

Undercapitalization

Answer 15

The corporate veil may be pierced when the corporation is inadequately capitalized, so that at the time of the formation, there is not enough unencumbered capital to reasonably cover prospective liabilities.

Note: prospective liability will be based off of the nature of the business.

Question 16

Piercing the veil to prevent fraud, avoiding existing obligations, or evading statutory provisions

Answer 16

May be pierced when necessary to prevent fraud or to prevent an individual shareholder from using the entity to avoid personal obligations presently.

Question 17

True or false: Court will pierce the veil if a person incorporates to avoid future liabilities.

Answer 17

False. This alone is not enough.

Question 18

If shareholders are liable, which ones are held liable?

Answer 18

Generally, only shareholders active in the operation of the business will be personally liable.

Question 19

Can courts pierce the veil and hold a corporate shareholder liable?

Answer 19

Yes. They will treat corporate shareholders just as they do humans.

Question 20

What types of cases does piercing the veil apply to?

Answer 20

Torts. NOT contracts.

Question 21

What is a derivative lawsuit?

Answer 21

When a shareholder can bring a claim on behalf of the corporation when they believe the corporation has been wronged and the corporation is not doing anything, or has declined to do anything, to protect the interest.

Question 22

What is the primary issue when considering a derivative action

Answer 22

Whether the corporation could have brought the claim itself?

Question 23

How do you know whether the shareholder should bring a direct action or a derivative action?

Answer 23

Ask:

1. Who suffered the most immediate and direct damage (shareholder or corp), and
2. who did the defendant’s duty run (shareholder or corp).

A direct action is required when any recovery is for the benefit of the shareholder.

Question 24

What are the requirements for Derivative suits?

Answer 24

1. Standing
2. Meet demand requirements, and
3. Corporation being joined as defendants.

Question 25

What is required for derivative standing?

Answer 25

1. Claimant being a shareholder at the time when the claim arose OR received stocks via transfer from someone who owned it at the time the claim arose.

AND

2. Shareholders must fairly and adequately represent the corporations interest.

Question 26

What are demand requirements

Answer 26

Under the MBCA, shareholders mustt make a written demand on the corporation to take suitable action.

In some states, the demand MUST make the demand and wait at least 90 days after making the demand unless: (1) the shareholder has earlier been notified that the corporation has rejected the demand, or (2) irreparable injury to the corporation will result if they are required to wait 90 days.

Question 27

What is the requirement to join the corporation as a defendant?

Answer 27

Corporations must be joined as a defendant because they did not bring the lawsuit on their own, even though the corporation is derivatively a plaintiff.

Question 28

What is the requirement for court approval of dismissal or settlement

Answer 28

When a party moves to dismiss, they have to show that:

1. An investigation was conducted by independent directors or panel, and
2. The director or panel determined that the suit is not in the corporations best interest.

Question 29

Who has the burden of proof in a derivative action?

Answer 29

Generally the shareholder has the burden to show that the corporate decision was not in the best interest of the corporation.