Shareholders

Question 1

Shareholder Management

Answer 1

Generally, shareholders have no direct control in management.
- they can act in their personal interests
- have no fiduciary duty to corporation or fellow shareholders

Question 2

Shareholder Liability

Answer 2

Limited to liabilities for unpaid stock, a pierced corporate veil, or the absence of a de facto corporation.

Question 2

Close Corporations

Answer 2

Shareholders can run the corporation directly in a close corporation.
Close corporations:
- do not publicly trade stock
- have few shareholders
- can set up management differently (can eliminate the board; have shareholders run business; etc.)

Question 3

How do you set up management differently in a close corporation?

Answer 3

By executing a shareholder management agreement. Can be executed by: (1) including it in the articles and approval by ALL shareholders; or (2) by unanimous written shareholder consent.

Whoever manages = owes the duty of care and loyalty

Question 4

Special Fiduciary Duties in Close Corporations

Answer 4

Many states: courts impose a fiduciary duty on shareholders owed to other shareholders
- duty of controlling shareholders to minority shareholders: controlling shareholders cannot use their power to benefit at the expense of minority. Also have a duty to disclose material information to minority.
- oppression of minority: shareholders being oppressed can sue for breach.

Question 5

Can shareholders be held liable for corporate debts?

Answer 5

Shareholders generally cannot be held liable for corporate debts UNLESS a court pierces the corporate veil.

** YOU CAN ONLY PIERCE THE CORPORATE VEIL IN CLOSE CORPORATIONS.

Question 6

PIERCING THE CORPORATE VEIL

Answer 6

To pierce the veil and hold shareholders personally liable:
- the shareholders must have abused the privilege of incorporating; and
- fairness must require holding them liable

Courts will pierce to avoid fraud or unfairness by shareholders in a close corporation. Something like sloppy administration is not enough.

Question 7

Common scenarios for piercing the corporate veil

Answer 7

1. Alter Ego (Identity of Interests)
   - if corporation is “mere instrumentality” of the shareholders + injustice occurs = court might pierce
2. Undercapitalization
   - at time of formation, not enough capital to cover prospective liabilities
3. Fraud, Avoidance of Existing Obligations, or Evasion of Statutory Provisions
   - court can pierce to prevent fraud or avoidance of existing obligations; avoiding future personal liability however is not a good enough reason

Question 9

If the veil is pierced, who is held liable?

Answer 9

Only the shareholders who were active in the operation of the business. In that case, they will have joint and several liability.

Remember: shareholder could be another corporation (bc corp = person)

Question 10

Derivative Suit

Answer 10

In a deriv. suit, the shareholder is suing to enforce the corporation’s claim, not her own personal claim.

Question: Could the corporation have brought this suit? If so, it’s a derivative claim.

Question 11

Direct Action

Answer 11

A direction action may be brought for a breach of fid. duty owed to the shareholder by an officer/director. To distinguish this from a derivative suit, ask: (1) who suffers the most immediate and direct damage: the corp. or the shareholder; and (2) to whom did the defendant’s duty run: the corp. or shareholder?

In a shareholder direct action: any recovery is for the benefit of an individual shareholder.

Question 12

Requirements of a Derivative Suit

Answer 12

1. Standing - must own (or have inherited) stock at time of wrong and fairly & adequately represent corporation’s interest
2. Demand Requirements

MBCA: Shareholder must make written demand on corporation to take action.
Some states: demand + 90 day waiting period UNLESS (1) corp rejected demand; or (2) irreparable injury would result by waiting 90 days.
**Other states: **demand not required if futile
3. Corporation Joined as Defendant

Question 13

Dismissal of Derivative Suit

Answer 13

• dismissal or settlement may occur only with court approval
• dismissal proper if suit is not in corporation’s best interests & based on independent investigation
  - most states: court will dismiss if court finds (1) committee was truly independent; and (2) reasonable investigation was made

Question 14

Burden of Proof in Derivative Suits

Answer 14

Shareholder has burden of proving decision was made in bad faith
BUT if majority of shareholders had a personal interest in the controversy, burden shifts on corporation to show good faith

Question 15

Shareholder Votes

Answer 15

Authorized stock: number of shares corporation may issue
Issued stock: number of shares corporation has sold
Outstanding stock: shares that have been issued but not reacquird by corp.

Unless provided otherwise, each outstanding share is entitled to ONE vote

Question 16

Record Shareholders and Record Date

Answer 16

Shareholders of record on the record date may vote at the meeting.

Record date: fixed by the board (but can’t be more than 70 days before meeting).

Question 17

Exceptions to General Rule that Record Owner on Record Date Votes

Answer 17

1. Treasury Stock - company cannot vote (b/c stock isn’t outstanding)
2. death of shareholder
3. voting by proxy
4. shareholder voting trusts/agreements

Question 18

What is voting by proxy?

Answer 18

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.

Question 19

Proxy Characteristics

Answer 19

Revocable: a proxy is generally revocable by the shareholder and may be revoked by: (1) him attending the meeting to vote themselves; (2) in writing to the corporate secretary; or (3) subsequent appointment of another proxy

Irrevocable: only if it states it is irrevocable and is coupled with (1) an interest; or (2) given as security. So, here, the proxy must say its irrevocable and the proxy holder has some interest in the shares other than voting.

Question 20

Requirements for a Voting Trust

Answer 20

1. written trust agreement, controlling how the shares will be voted
2. a copy of the agreement given to the corp.
3. legal title to the shares is transferred to voting trustee
4. OG shareholders receive trust certificates and retain all shareholder rights except for voting

Some states: trust only valid for 10 years, unless extended by agreement

Voting trust: 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 agreement.

Question 21

Requirements for Voting Agreement

Answer 21

(1) signed writing

Some states: specific enforcement

Shareholders enter into voting (pooling) agreements providing for how they’ll vote their shares. Doesn’t have to be filed with corp. and not subject to limits.

Question 22

Where do shareholders vote?

Answer 22

1. Meetings; or
2. Unanimous written consent signed by all shareholders

Question 23

Types of shareholder meetings

Answer 23

1. Annual shareholder meeting - mandatory (must be held within 15 months or shareholder can go to court to enforce)
2. Special meetings - can be called by the board, president, holders of at least 10% of outstanding shares, or anyone authorized in articles/bylaws.

annual meetings are important bc this is how directors are elected by shareholders

Question 24

Meeting Notice

Answer 24

Shareholders must be notified not fewer than 10 days or more than 60 days before the meeting. Must be in writing to every shareholder entitled to vote.

May be waived by writing or attendance.

Must state: time, date, place of meeting.
If special meeting - notice must also state purpose.

Question 25

Effect of Notice Defects

Answer 25

If proper notice isn’t given, meeting is voidable, unless waived.

Waiver occurs in two ways:
1. express waiver (in writing, signed); or
2. implied waiver (shareholder(s) attended meeting and did not object at the outset)

Question 26

What issues do shareholders vote on?

Answer 26

1. elect directors
2. remove directors
3. fundamental corporate changes
4. whatever else the board gives them permission to vote on

Question 27

How do shareholders vote?

Answer 27

Need a quorum represented at meeting, which focuses on the number of shares represented (not shareholders)

*General rule: *quorum = majority of outstanding shares entitled to vote (unless stated otherwise; bylaws can require a greater number)

Shareholders will be deemed to have approved a matter if the votes cast in favor outweigh the votes cast against the matter (unless bylaws/articles afford greater proportion)

Shareholder quorum will not be lost if some leave the meeting *unlike directors

Question 28

In general - voting

Answer 28

Unless provided otherwise, specific votes required for certain matters are:

to elect a director: plurality (whoever gets most votes, wins)
**to approve change: **
- traditional majority of shares entitled to vote
- now: majority of shares that actually vote on the issue
**to remove director: **
- traditional: majority of shares entitled to vote
- now: majority of shares that actually vote on issue
- other matters: majority of shares that actually vote on the issue