Shareholders

Question 1

Can SHs manage a corporation?

Answer 1

Generally, NO! (the BOD manages the corporation) EXCEPTION: SHs CAN manage the business directly in a “close corporation”

Question 2

What is a “close corporation”?

Answer 2

A corporation w/ “FEW” SHs The stk is NOT publicly traded

Question 3

Do you NEED to have SH management in a close corporation?

Answer 3

NO! You do not HAVE to have SH mgmt; you CAN have a BOD BUT, if you want to have SH mgmt, you need 5 things… 1) a prvn in the certificate restricting or transferring bd pwr to SHs (or others); 2) ALL incorporators or SHs (voting AND nonvoting) must approve the certificate; 3) it is conspicuously noted on the front and back of all shares 4) ALL subsequent SHs have notice of the special certificate; AND 5) shares are NOT listed on an exchange or regularly quoted OTC

Question 4

In a close corporation run by SHs, who owes the duties of care AND loyalty?

Answer 4

The managing SHs owe the duties of CARE and LOYALTY to the corporation

Question 5

In a close corporation, what duties are owed to the minority SHs?

Answer 5

Fid duties are imposed on SHs dealing w/ EA. OTHER: cntrling SHs cannot use their pwr… for PERSONAL GAIN at the expense of the minority SHs or the corporation; OR to OPPRESS minority SHs or the corporation They owe a duty of UTMOST good faith Policy: cts want to give minority SHs a remedy for behavior that “defeats reasonable expectations for investing”

Question 6

What is a professional service corporation?

Answer 6

Members of a LICENSED profession (doctors or lawyers) CANNOT practice the prof’n thru a general business corp→they form a professional service corporation Abbreviated “P.C.” Certificate MUST meet the general corporation reqs of the BCL: must also indicate the profession to be practiced AND the names/addys of original SHs, directors or officers. SHs, officers AND directors MUST be licensed, but can hire non-profs as employees (certification of status MUST BE in the certificate) If a SH dies or is disqualified→ the P.C. MUST buy the stock Each profn’l is resp for his OWN malpractice, BUT not that of the others (thus, better than a partnership) Profn’ls are NOT resp for Ks entered into by the entity in its OWN name

Question 7

What are scenarios where cts will “pierce the corporate veil” and hold SHs personally liable?

Answer 7

REMEMBER: general rule is that SHs are NOT liable for what the corp does; BUT in a CLOSE corporation, SHs can be PERSONALLY liable if the court pierces the corporate veil. To PCV (i) SHs must have abused the privilege of incorporation; AND (ii) fairness reqs holding them liable (to prevent fraud or injustice) [ALWAYS STATE THE ABOVE RULE FIRST]

1) Alter ego (identity of interests, agency, excessive domination): Look for commingling of personal and corporate funds, personal use of corporate assets, if the SHs exercises COMPLETE domination and control over the company to perpetuate fraud or injustice, NOTE: the “SH” can be another corp entity
2) Undercapitalization: SH failed to INVEST ENOUGH to cover prospective liabilities NOTE: undercapitalization ALONE is NOT enough to PCV in NY→ you’d ALSO need some plus factor: excessive domination, fraud or illegality.
3) Wages - In a close corp., the 10 largest SHs are personally liable for the wages and benefits to the company’s employees

NOTE: PCV is more likely to be in TORT vs. K

Question 8

What is a SH derivative suit?

Answer 8

When a SH is suing to enforce the CORPORATION’S claim (NOT her own personal claim). Always ask: “could the CORPORATION have brought this suit?”; If YES→ it’s a derivative suit. Normally for breaches of fid. duties owed to the corp (care/loyalty)

Question 9

What is a “direct suit”?

Answer 9

When a SH is suing for a PERSONAL claim (NOT one on behalf of the corporation, derivative) i.e. suit for preemptive rights or to compel a dividend

Question 10

What happens if a SH wins OR loses a derivative suit?

Answer 10

SH wins: Corp gets money. If recovery by the corporation would return the money to the violators, then maybe SH gets award (e.g. in a close corporation). Suing SH gets atty’s fees, usually from the judgement won for the corp.

SH loses: SH CANNOT recover costs & expenses. SH probably liable to the Corp for its costs. Other SHs CANNOT sue the same ∆s on the same trxn (i.e. res judicata)

Question 11

What are the 6 reqs for a proper SH derivative suit?

Answer 11

1) Stock ownership when claim AROSE and through JUDGMENT (or gotten it by operation of law from someone who did, like inheritance or divorce decree)
2) SH must adequately rep the interests of the corp AND the SHs
3) SH can be req’d to post a BOND for ∆’s costs NOT req’d if she owns ≥5% of the stock OR her stock is worth more than $50k
4) SH must make a DEMAND on directors that the corporation sue. NOT req’d if doing so would be FUTILE: Maj of BOD is interested (or under cntrl of interested dirs); or BOD did not inform itself of the trxn to the extent reasonable under the circumstances; or the trxn was SO egregious on its face that it COULDN’T have been based on sound jdmt. If bd REFUSES after demand, SH could sue ONLY IF…Maj of BOD is interested; OR The PROCEDURE was incomplete/inadequate (e.g. didn’t use a special litigation committee, SLC)
5) SH must plead w/ “PARTICULARITY her efforts to get the BOD to sue or why it was FUTILE to do so”
6) The CORPORATION must be joined in the litigation AS A ∆(!!!)

Question 12

What 2 factors does a ct consider when deciding to dismiss a derivative suit (based on SLC motion)?

Answer 12

1) The INDEPENDENCEof the those making the investigation 2) Sufficiency of the INVESTIGATION If these two things are OK, the ct WILL dismiss

Question 13

Can parties DISMISS or SETTLE a derivative suit?

Answer 13

Yes, but ONLY with ct approval

Question 14

Can a director OR officer ever bring a derivative suit?

Answer 14

A director or officer CAN sue another director or officer to compel her to ACCOUNT for violation of dutiesOR MISAPPROPRIATION of corp assets. The suing director or officer does NOT have to meet the reqs for bringing a SH derivative suit. The director or officer sues in OWN name, but recovery goes to the CORP

Question 15

Which SHs get to vote their shares?

Answer 15

General rule: record owner as of record date has the right to vote. Record owner = whomever Corp records indicate Record date = voter eligibility cut-off [set b/t 10-60 days before the meeting]

EXCEPTIONS: 1) Corp reacquires stock→NO vote for treasury stk (not outstanding) 2) SH dies after record date→executor can vote 3) Proxies: OK for SH voting. A proxy is a (1) writing;(2) signed by record SH or auth. agent; (3) directed to the corp. secretary;(4) authorizing another to vote shares Proxies are ONLY good for 11 months, unless says otherwise. Proxies can be revoked(even if “irrevocable”) by: (1) a writing; OR (2) the SH attending the meeting NOTE: you CAN have an “irrevocable proxy”IF (i) it says “irrevocable”; AND (ii) the proxy-holder has SOME interest in the stock other than voting (e.g. an option to buy the stock); this is called “proxy coupled w/ an interest” NOTE: SH death ONLY revokes proxy WHEN written notice of death is received by the corp secretary

Question 16

What are 2 ways SHs can “block vote”?

Answer 16

Pockets of SH can pool their votes via..1) Voting trust 2) Voting (“pooling”) agreement NOTE:When giving advice, MUST state BOTH

Question 17

What are the 4 reqs of a voting trust?

Answer 17

1) Written trust agmt cntrling how the share will be voted; 2) Copy of agmt to the corporation; 3) Transfer of legal title of shs to voting trustee; AND 4) Original SHs receive voting trust certificates and retain ALL rights except for voting

NOTE: the MAXIMUM time ltd on voting trusts in 10 YEARS (but w/in 6mths of expiration can extend for another 10yr term)

Question 18

What are the 2 reqs for a voting (“pooling”) agmt?

Answer 18

1) Entered into by SHs (NOT directors) 2) Agmt must be written AND signed

NOTE: Two SHs CAN agree to vote their shs to elect each other as directors, BUT they CANNOT agree abt what actions they’d take once in office (NO voting agmt for director voting). Voting agmts are NOT specifically enforceable.A proxy given SUBJECT TO a voting agreement is IRREVOCABLE, IF it states so

Question 19

What are the only two ways for SHS to take a valid act?

Answer 19

1) written consent of the holders of ALL voting shares 2) Voting at an annual OR special meeting

Question 20

What are 2 types of SH meetings and their key aspects?

Answer 20

1) Annual meeting: where directors are elected Just need a PLURALITY (not a majority of votes) for election of directors (majority for everything else). If annual mtg is not held, one can be COMPELLED by a ct order
2) Special meeting called by: (i) the BOD; OR (ii) anyone provided in the certificate or bylaws NOTE: Either meeting can be held ANYWHERE (no NY req)

Question 21

What is the notice req for a SH meeting?

Answer 21

For annual AND special mtgs: corp must give WRITTEN notice (e-mail OK) to every SH entitled to vote b/t 10-60 days BEFORE the meeting. Notice must ALWAYS state the time/place. If the meeting is abt something that COULD req APPRAISAL RIGHTS, the notice must say so and tell why

Special meetings: must ALSO state who called it AND the purpose of the meeting Must be abt something SHs can ACTUALLY vote on (i.e. it cannot be a mtg to remove an OFFICER) NOTE: the mtg will be LTD to ONLY that purpose) IF NO notice is given, the action at the meeting is VOID. BUT, the action could be upheld IF those NOT given notice WAIVE the defect by: (i) doing so in a signed writing; OR (ii) attend the meeting w/o objection

Question 22

What are the quorum reqs for a SH meeting?

Answer 22

NOTE: The focus is on the # OF SHARES, NOT the # of SHs Generally, quorum = majority of outstanding shares. The certificate or bylaws CAN lower the majority quorum req; provided it’s not lowered BELOW 1/3d BUT can never reduce the req. of majority approval
A SUPERMAJORITY quorum req can be imposed ONLY IF it’s in the certificate (NOT bylaws). A SUPERMAJORITY vote req can be imposed ONLY IF it’s in the certificate (NOT bylaws)

NOTE: once a quorum is ESTABLISHED it CANNOT be lost due to voter attrition (Cf. director voting quorum reqs) Majority means of those ACTUALLY VOTING (abstentions don’t count)

Question 23

What are key apsects of cumulative voting?

Answer 23

A voting device that can help minority SHs get representation on the BOD Cumulative voting is ONLY available WHEN a prvn is in the CERTIFICATE; AND SHs are voting in DIRECTOR elections # VOTES received = # of shares X # of directors to be elected Votes can be distributed in any way (i.e. can be put behind one candidate) % of shares req’d to elect ONE director = 100 / (X + 1) X = # of directors being directed Must get ONE more share than the calc’d %

Question 24

What is the right of SHs to inspect AND copy corporate books/records?

Answer 24

ANY SH on 5 days written demand can demand to REVIEW: (i) minutes of SH proceedings; AND (2) record of SHs The corporation can demand the SH give an affidavit (under oath) that his purpose is NOT other than the interest of the corp AND he has not tried to sell SH list w/in 5 yrs
ANY SH on 2 days written demand can REVIEW list of current directors and officers. No affidavit req.
ANY SH on written demand can REQUEST/REVIEW the corp’s latest (i) annual B/S; (ii) profit and loss stmt; AND (iii) interim stmts

Question 25

What are reasonable expectations of most ppl who invest in a close corporation?

Answer 25

employment, a return on investment and a voice in management