Shareholders

Question 1

Close Corporations

Answer 1

Shareholders can run the corporation directly in a close corporation. The characteristics of a close corporation are that there are few shareholders, and the stock is not publicly traded. In a close corporation,
we can set up management with a board of directors and run it like a regular corporation. Or we can set up management differently, such as by eliminating the board and having shareholders run the business, or appointing a manager, and so on.

Question 2

Special Fiduciary Duty in Close Corporations

Answer 2

We just saw that whoever manages the corporation owes the duties of care and loyalty to the corporation. In many states, courts impose a fiduciary duty on shareholders owed to other shareholders

Question 3

Piercing the Corporate Veil

Answer 3

To pierce the corporate veil and hold shareholders personally liable:
* The shareholders must have abused the privilege of incorporating; and
* Fairness must require holding them liable. So courts may pierce the corporate veil to avoid fraud or unfairness by shareholders in a close corporation.

Question 4

Alter Ego (Identity of Interests)

Answer 4

If the shareholders ignore corporate formalities such that the corporation may be considered the “alter ego” or a “mere instrumentality” of the shareholders or another corporation, and some basic injustice
results, a court might pierce the corporate veil.

Question 5

Undercapitalization

Answer 5

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

Question 6

Fraud, Avoidance of Existing Obligations, or Evasion of
Statutory Provisions

Answer 6

The corporate veil may be pierced where necessary to prevent fraud or to prevent an individual shareholder from using the entity to avoid his existing personal obligations. But the mere fact that an individual
chooses to adopt the corporate form of business to avoid future personal liability is not itself a reason to pierce the corporate veil.

Question 7

Who Is Liable

Answer 7

Normally, only shareholders who are active in the operation of the business will be personally liable. Liability is joint and several. Remember, piercing the corporate veil allows imposition of liability on a shareholder. That shareholder might be another corporation. For example, a parent corporation forms a subsidiary to avoid its own obligations

Question 8

DERIVATIVE SUITS SHAREHOLDER AS PLAINTIFF AND RECOVERY

Answer 8

In a derivative suit, a shareholder is suing to enforce the corporation’s claim, not her own personal claim. In other words, if a shareholder believes the corporation has been wronged but the directors have not done anything to enforce its rights with respect to the
wrong, the shareholder may be able to bring a shareholder derivative suit to enforce the corporation’s rights.

Question 9

Direct Actions

Answer 9

A direct action may be brought for a breach of a fiduciary duty owed to the shareholder by an officer or director.

Question 10

REQUIREMENTS FOR DERIVATIVE SUITS
Standing

Answer 10

To commence and maintain a derivative proceeding, a shareholder 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

Demand Requirements

Answer 11

Under the MBCA, the shareholder must make a written demand on the corporation (usually, that means the board) to take suitable action. In some states, this demand must always be made, and the shareholder cannot sue until 90 days after making this demand, unless:
(1) the shareholder has earlier been notified that the corporation has rejected the demand; or (2) irreparable injury to the corporation would result by waiting for the 90 days to pass

Question 12

Corporation Joined as Defendant

Answer 12

The corporation must be joined to the suit as a defendant. Even though the suit asserts the corporation’s claim, since the corporation did not do so, it is joined as a defendant.

Question 13

WHO VOTES Outstanding Stock and Record Shareholders

Answer 13

Authorized stock is the number of shares the corporation may issue (it’s set in the articles). Issued stock is the number of shares the corporation has sold. So what’s outstanding stock? It’s the shares the
company issued but has not reacquired

Question 14

Record Shareholder and Record Date

Answer 14

Shareholders of record on the record date may vote at the meeting. The record date is fixed by the board of directors but may not be more than 70 days before the meeting.

Question 15

Requirements for Voting Trust

Answer 15

A voting trust is a written agreement of shareholders under which all of the shares owned by the parties to the agreement are transferred to a trustee, who votes the shares and distributes the dividends in
accordance with the provisions of the voting trust agreement. In some states, the trust is not valid for more than 10 years unless it is extended by the agreement of the parties. The requirements are:
* A written trust agreement, controlling how the shares will be voted;
* A copy of the agreement (including names and addresses of the beneficial owners of the trust) is given to the corporation;
* Legal title to the shares is transferred to the voting trustee; and
* The original shareholders receive trust certificates and retain all shareholder rights except for voting.

Question 16

Requirements for Voting Agreement

Answer 16

Rather than creating a trust, shareholders can enter into voting (or “pooling”) agreements providing for how they’ll vote their shares. The requirements are that the agreement be in writing and signed

Question 17

Notice

Answer 17

Shareholders must be notified of meetings not fewer than 10 or more than 60 days before the meeting. Notice must be in writing (fax or email is fine) to every shareholder entitled to vote. Notice may be waived in writing or by attendance.

Question 18

Consequences of Failure to Give Proper Notice

Answer 18

If proper notice is not given to all shareholders, whatever action was taken at the meeting is voidable (maybe void), unless those who were not sent notice waive the notice defect. How can such waiver occur?
In either of two ways:
* Express waiver, meaning in writing and signed any time (fax or email are fine) OR
* Implied waiver, meaning the shareholder(s) attend the meeting without objecting at the outset

Question 19

Cumulative Voting Optional

Answer 19

Cumulative voting usually comes up only in close corporations. It gives smaller shareholders a better chance of electing someone to the board of directors. Note that this is available only when shareholders elect directors.

Question 20

Straight Voting

Answer 20

Usually, with straight voting, we have a separate election for each seat on the board being elected. Each outstanding share gets one vote for each seat. The candidate who gets more votes than another
is elected to that seat.

Question 21

Director Liability

Answer 21

Directors are jointly and severally liable for improper distributions. A director who votes for or assents to a distribution that violates the above rules is personally liable to the corporation for the amount of the distribution that exceeds what could have been properly distributed.