Shareholders Flashcards
What powers do shareholders have in their collective capacity?
Shareholders can elect directors, remove directors with or without cause, amend bylaws, and approve fundamental changes in the corporation.
Fundamental changes include amendments to articles, mergers, dissolutions, and the sale of substantially all corporate assets.
When do shareholders have exclusive power to amend the bylaws?
When the corporation’s articles reserve that power exclusively to shareholders or when shareholders explicitly state that the board cannot amend, repeal, or reinstate a bylaw.
This ensures that the board cannot interfere with certain governance aspects.
What is required for shareholders to receive notice of meetings?
Shareholders must receive timely written notice of each annual and special meeting 10 to 60 days prior to the meeting date.
The notice must include the place, date, hour, and purpose for special meetings.
What constitutes a quorum at a shareholder meeting?
A majority of the shares entitled to vote constitutes a quorum, unless the articles provide otherwise.
What is cumulative voting?
Cumulative voting allows shareholders to allocate all their votes to any candidate when there are multiple openings on the board, strengthening minority shareholders’ ability to elect a director.
In contrast, straight voting limits shareholders to one vote per share for each candidate.
What is required to remove a director in a corporation with straight voting?
The entire board or any individual director can be removed with or without cause by a majority of the shares entitled to vote in the election of such directors.
Under cumulative voting, what is required to remove a director?
No director can be removed if the votes against removal would be sufficient to elect him under cumulative voting rules.
What is the process for proposing amendments to the articles?
Amendments are proposed by the board and submitted to shareholders for approval, with notice including a copy of the amendment.
What are the two exceptions to the shareholder approval requirement for mergers?
- Approval is not required if the corporation will survive the merger and the articles do not change.
- A parent corporation does not need approval for a merger involving a subsidiary if it owns at least 90% of the voting power.
What voting rights do shareholders generally have?
Each share is entitled to one vote unless otherwise provided by statute or articles.
What is required for a proxy agreement to be valid?
The shareholder must provide the proxy holder with a
- written, signed authorization or
- an electronically transmitted authorization.
How can a shareholder revoke a proxy?
By delivering a writing to the corporation, presenting a subsequently executed proxy, or in-person appearance and vote at the meeting.
What is a voting trust?
A voting trust involves a transfer of legal title and is more strictly regulated than voting agreements.
What rights do shareholders have regarding information and inspection?
Shareholders have the right to examine articles, bylaws, minutes of meetings, and a list of shareholders of record, and have a qualified right to inspect accounting books.
This right is exercised upon a good faith demand for a proper purpose.
What are appraisal rights for dissenting shareholders?
Dissenting shareholders have the right to obtain payment of the fair value of their shares in the case of a fundamental change, excluding certain subsidiary shareholders.
What is a direct suit?
A direct suit is brought when the wrong or harm is directly to the shareholder, such as compelling the payment of dividends.
What is a derivative suit?
A derivative suit is an equitable action brought by a shareholder on behalf of the corporation, typically involving an alleged breach of fiduciary duty.
What is the prerequisite to bringing a derivative action?
The shareholder must make a written demand on the corporation’s board to bring a suit on behalf of the corporation and allow at least 90 days to pass.
What duty do controlling shareholders have?
Controlling shareholders have a duty of good faith and must refrain from exercising control to obtain benefits not shared with minority shareholders.
What is ‘piercing the corporate veil’?
Piercing the corporate veil occurs when a court disregards a corporation’s separate entity to hold shareholders liable on corporate obligations to prevent grave injustice.
What factors contribute to piercing the corporate veil?
- Undercapitalization
- Failure to observe corporate formalities
- Commingling of corporate and personal funds
- The corporation being an alter ego of its shareholders.
What must be proved to pierce the corporate veil?
Three elements must be proved:
* Shareholder “control” that effectively renders the corporate form a façade
* Use of the corporate form to obtain an improper or fraudulent purpose
* Injury or unjust loss resulting from this wrongful use of the corporate form
These elements establish the basis for disregarding the limited liability protection typically afforded by a corporation.
What fact patterns typically trigger a ‘piercing the corporate veil’ analysis on the bar exam?
Two fact patterns typically trigger this analysis:
* A close corporation where corporate formalities are not observed and corporate and personal funds are commingled
* A parent corporation and its subsidiary when there is insufficient segregation of their respective businesses, records, and finances
Recognizing these patterns can help in understanding when to apply the concept of piercing the corporate veil.
