Shareholders

Question 1

Do shareholders get to manage the corporation?

Answer 1

No - Usually the board of directors are the ones that manage the corporation
EXCEPTION: The closed corporation - SH may run the Closed Corporation directly
A closed corporation is:
1. Only a few SH (no magic number)
2. Stock is not publicly traded
*Most corporations on the bar will be closed corporations
*But if the SH of a Closed Corporation want to have a board they are not precluded from doing so

Question 2

In a closed corporation where there is a board of directors, how can the SH get rid of the board?

Answer 2

There are 2 ways to do so:

1. Get it in the articles of incorporation and approved by the board; or
2. By unanimous SH written agreement

Question 3

If the SH a closed corporation eliminate the board of directors who owes duties of loyalty and care to the corporation?

Answer 3

Managing SH’s
*BAR - Many courts note that a close corporation functions like a partnership (with few owners, who usually work for the business). Because of this, they have applied partners’ fiduciary duties to each other into the close corporation. So shareholders in close corporations must treat each other with utmost good faith.

Question 4

Can the minority of SH’s in a close corporation sue the majority SH’s?

Answer 4

Yes. Different from duty of care and duty of loyalty to a corporation. REASON: Because the oppression thwarts the legitimate goals for investing (watch for oppression in the close corp. the big guys sticking it to the little guys) Examples: controlling shareholders might deny the minority any voice in corporate affairs, fire them from employment, refuse to declare dividends, and refuse to buy the minority’s stock (so the minority is getting no return on investment).

Question 5

What are the incorporations known as a “professional corporation” or “professional association.” The name must have one of those phrases or “P.C.” or “P.A.”

Answer 5

Licensed professionals can incorporate under these names, i.e. lawyers, CPA’s, doctors, etc.

• The professionals may always be personally liable for their own torts (corporations do not shield impunity)
• General Rule: The laws governing corporations apply to P.C.’s and P.A.’s - for example in the case of a merger

Question 6

Can SH’s be held liable for the acts or debts of the corporation?

Answer 6

General Rule: No, the corporation is liable for those
EXCEPTION: A SH may be liable when the court pierces the corporate veil, however this can only happen in close corporations
**Remember that the SH may also be another corporation, not always a human - e.g. Pierce the subsidiary for debts of the parent

Question 7

What is the test to pierce the corporate veil?

Answer 7

2 Elements:

1. The SH must have abused the privilege of incorporating
2. Fairness must require holding the SH liable
   a. to avoid fraud or unfairness by SH’s of a close corporation, sloppy management is not enough

Question 8

How is the first element, SH must have abused the power of incorporation, met?

Answer 8

This is known as the “alter ego” and happens when:
1. Co-mingling of personal and corporate money and assets;
2. Undercapitalization (e.g. A corp is formed with dangerous activity and does not buy insurance when it should have, to cover prospective liabilities)
BUT REMEMBER, both prongs to the test must be met to pierce the corporate veil
***GOOD LINE ON THE BAR - Court are more willing to pierce the corporate veil for a tort victim than a contract claimant

Question 9

In a close corporation where X is a SH and Y is a SH and X co-mingles assets and the court pierces the corporate veil, may Y also be held liable?

Answer 9

No - Y did nothing wrong.

Question 10

What is a SH derivative suit?

Answer 10

This is a lawsuit where the SH is suing the corporation (strange because the SH is the corporation), this is not a personal claim by the SH, rather he is acting as the corporation, so in essence the corporation is suing itself
-Always could the corporation have brought this suit, if so derivative

Question 11

Which type of suit is always a derivative suit and why?

Answer 11

SH sues the board of directors for breaching the duty of care or loyalty:
Because in these cases the question of whether the corporation could bring the suit is always yes, because these are the duties that are owed to the corporation, and not to the SH

Question 12

SH sues the directors of the corporation for issuing new stock without honoring her preemptive rights, is this a derivative suit?

Answer 12

No. This is a direct suit of the SH (it is a personal claim) the corporation has not been hurt, the SH has

Question 13

What about if the SH sues the Board of Directors to force the company to declare dividends, is this a derivative suit?

Answer 13

No - This is a direct suit because the SH is trying to line his own pockets

Question 14

What about if one SH in a close corporation wants to sue another SH in a close corporation for oppression, is this a derivative suit?

Answer 14

No - This is a direct suit, This is a breach of the duty owed from one SH to another, and not to the corporation

Question 15

What happens if the SH plaintiff in a derivative suit wins the case?

Answer 15

The corporation gets the money, and the SH plaintiff will generally be reimbursed for the court costs and atty fees

Question 16

What happens if the SH plaintiff in a derivative suit loses the case?

Answer 16

Screwed. Cannot collect atty’s fees and court costs, and can be sued by the corporation for their reasonable atty fees and costs

Question 17

Can other SH later sue the same defs on the same transaction?

Answer 17

No - Claim preclusion - That claim has been precluded - It is the corp and so has already come

Question 18

What are the requirements to bring a derivative suit?

Answer 18

The SH must have:
1. Stock ownership in the corporation (duh, needs to be a SH) when the claim arose (no matter how it was achieved (i.e. inheritance, operation of law, etc.)
2. Adequate representation of the corporations interest (just throw in this sentence)
3. Must make a written demand on the corporation (usually that means against the board) that the corp must bring the suit, in many states have to wait 90 days until after the demand to begin the litigation
EXCEPTION - Some states do not require the demand because it would be futile (i.e. When the sitting directors will be def.’s in the case, this is almost always true on the bar exam, they are breaching duties, it is always futile -hey go sue yourself) - because in the demand the directors would need to make the suit but for obvious reasons will not

Question 19

How can the corporation move to dismiss a derivative suit?

Answer 19

Only with the courts approve and By getting an independent investigation, of independent directors (Special Litigation Committee), or a court appointed panel that finds that the litigation is not in the corps best interest

Question 20

In SH voting, who is allowed to vote?

Answer 20

The General Rule: A ‘record” SH as of the “record” date has the right to vote - Record voter and record date must line up in order to vote
EXCEPTION:
1. Death of a SH, whoever the share were passed to can assume his place
2. If the corporation reacquires stock before the record date (FIND OUT) (Because it is unissued, Just know this)
3. Proxies - May vote; to be a proxy must;
a. Writing (fax or email ok)
b. signed by the record SH (Email ok if can identify the sender)
c. Directed to secretary of the corporation
d. Authorizing another to vote for the shares
e. Good for only 11 months unless it states otherwise
f. Proxy can be revoked if SH attends meeting; *SH may revoke even where the contract says “irrevocable”
g. The only way to have an irrevocable proxy is (a proxy coupled with an interest):
i. The proxy says that it is irrevocable; and
ii. The proxy holder has some interest in the shares other than voting (e.g. an option to buy SH’s shares) - Comes from Agency Law