Shareholders

Question 1

SHAREHOLDER MANAGEMENT OF CORPORATION

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

CLOSE CORPORATION

What is a “close corporation”?

Answer 2

Close Corporation =

(i) A corporation w/ “FEW” SHs; AND
(ii) The stk is NOT publicly traded

Question 3

5 REQUIREMENTS IF CORPORATION CHOOSES TO HAVE SHAREHOLDER MNGMT

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

Answer 3

You do not HAVE to have SH mgmt; you CAN have a BOD

BUT, if you want to have SH mgmt, you need 4 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) ALL subsequent SHs have notice of the special certificate; AND
4) share are NOT listed on an exchange or regularly quoted OTC dealer

Question 4

WHO IS OWED A DUTY IN CLOSE CORPS

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

DUTIES OWED TO MINORITY SHAREHOLDERS IN CLOSE CORP

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

Answer 5

In close corporations FIDUCIARY DUTIES are imposed on SHAREHOLDERS in their dealing w/ EACH OTHER:

CONTROLLING SHAREHOLDERS cannot use their pwr…

(i) for PERSONAL GAIN at the expense of the minority SHs or the corporation; OR
(ii) to OPPRESS minority SHs or the corporation

CONTROLLING SHAREHOLDERS owe a duty of UTMOST good faith

Policy: Courts want to give minority SHs a remedy for behavior that “defeats their reasonable expectations for investing”

Question 6

PROFESSIONAL SERVICES CORPORATION

What is a professional service corporation?

Answer 6

Professional Service Corporations:
Members of a LICENSED profession (doctors or lawyers) CANNOT practice the the profession through a general business corporation→ INSTEAD 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 their stock

MALPRACTICE: Each professional is resp for his OWN malpractice, BUT not that of the others (thus, better than a partnership)

CONTRACT LIABILITY: Each professional is NOT resp for Ks entered into by the entity in its OWN name → the ENTITY will be liable

Question 7

PIERCING THE CORPORATE VEIL (PCV)

What 2 ways can SHs “pierce the corporate veil”?

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:

(i) they abuse the privilege of incorporating; AND
(ii) fairness requires holding them liable (to prevent fraud)

FAIRNESS will require PCV IF:

(i) The shareholder exercises COMPLETE DOMINION and CONTROL over the corp; AND
(ii) the exercise of dominion is done to perpetuate FRAUD or INJUSTICE

[ALWAYS STATE THE ABOVE RULE FIRST]

Note: If close corp and one shareholder commits the fraud or injustice and the other does NOTHING wrong, the bad shareholder only will be held liable

Two common fact patterns…
1) ALTER EGO:
the SHs exercises COMPLETE domination over the company “to perpetrate fraud or injustice” to the πs: (i) Commingling personal and corporate funds; and
(ii) Use of corp assets for personal use

NOTE: the “SH” can be another corp entity – e.g. A corporation forming a subsidiary to avoid its obligations and totally controls the subsidiary

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 complete domination ORfraud/injsutice

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

Question 8

LIABILITY OF TOP 10 SHAREHOLDERS OF A CLOSE CORPORATION

In a close corporation, what are the Top 10 SHs personally liable for?

Answer 8

In a close corporation, the Top 10 SHs ARE personally liable for WAGES AND BENEFITS of the COMPANY’s EMPLOYEES

Question 9

SHAREHOLDER DERIVATIVE SUIT

What is a SH derivative suit?

***HIGHLY TESTED MATERIAL

Answer 9

SHAREHOLDER DERIVATIVE SUIT = 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 brought for breaches of fid. duties owed to the corp (care/loyalty)

Question 10

DIRECT SUIT

What is a “direct suit”?

Answer 10

DIRECT SUIT= When a SH is suing for a PERSONAL claim (NOT one on behalf of the corporation, derviative)

Seeking declaration of a dividend is probably direct b/c SH seeking to put money in her OWN pockets

Question 11

EFFECT of WINNING OR LOSING A DERIVATIVE SUIT

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

***HIGHLY TESTED MATERIAL

Answer 11

IF SH WINS

1) 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 where A commits the wrong and B and C shareholders ONLY recover so that A doesn’t get back 1/3 of the recovery

2) SUING SH GETS ATTY FEES

IF SH LOSES

1) SH CANNOT RECOVER COSTS AND EXPENSES
2) SH PROBABLY LIABLE TO CORP FOR ITS COSTS
3) NO OTHER SHs CAN sue the SAME ∆s on the same trxn (i.e. res judicata)

Question 12

6 REQUIREMENTS FOR A PROPER DERIVATIVE SUIT

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

***HIGHLY TESTED MATERIAL

Answer 12

The 6 requirements for bringing a shareholder derivative suit =

1) Stock ownership WHEN CLAIM AROSE AND UNTIL 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–BUT 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—BUT NOT req’d if doing so would be FUTILE…
FUTILE IF:
(i) Maj of BOD is interested (or under cntrl of interested dirs)
(ii) The BOD violated a duty of care
(iii) The trxn was SO egregious on its face that it COULDN’T have been based on sound jdmt

NOTE: If bd REFUSES after demand, SH could sue ONLY IF…

(i) Maj of BOD is interested; OR
(ii) 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 13

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

***HIGHLY TESTED MATERIAL

Answer 13

IF S makes the demand and the board refuses to have the corporation sue, S will be able to bring the derivative suit anyway IF she can show:

1) The LACK OF INDEPENDENCEof the those making the investigation
2) The INSUFFICIENCY of the INVESTIGATION

If these two things are NOT PRESENT, the ct WILL dismiss

Question 14

Can parties DISMISS or SETTLE a derivative suit?

***HIGHLY TESTED MATERIAL

Answer 14

Yes, Parties can DISMISS or SETTLE a derivative suit

BUT ONLY with ct approval

Question 15

DERIVATIVE SUIT BY DIRECTOR OR OFFICER

Can a director OR officer ever bring a derivative suit?

***HIGHLY TESTED MATERIAL

Answer 15

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 16

RULES FOR SHAREHOLDER VOTING

Which SHs get to vote their shares?

Answer 16

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 b/c Treasury Stock is NOT OUTSTANDING (it is reacquired)
* Common BAR Question*

2) SH dies after record date→executor can vote

3) Proxies: OK for SH voting			
BUT PROXY MUST BE  a:
(1) writing (fax or email is okay);
(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 that they are voting on as a proxy BUT the interest is 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 Otherwise death alone does NOT revoke the proxy

Question 17

VOTING TRUST AND POOLING AGREEMENTS

What are the 2 ways for SHs to “block vote”?

***HIGHLY TESTED MATERIAL

Answer 17

Pockets of SH can pool their votes via..

1) VOTING TRUST
2) VOTING (“POOLING”) AGREEMENT

NOTE:When giving advice on BAR EXAM, MUST state BOTH

Question 18

VOTING TRUST REQUIREMENTS

What are the 4 reqs of a voting trust?

***HIGHLY TESTED MATERIAL

Answer 18

Requirements for voting trust:

(1) WRITTEN trust AGREEMENT controlling how the shares will be voted;
(2) COPY sent to Corp;
(3) TRANSFER LEGAL TITLE of shares to voting trustee; and
(4) ORIGINAL shareholders RECEIVE voting trust certificates AND retain all shareholder rights except for voting

NOTE: the MAXIMUM time allowed on voting trusts in 10 YEARS – BUT w/in 6 months of expiration can renew for up to 10 more years

Question 19

RQMTS FOR POOLING AGREEMENTS

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

***HIGHLY TESTED MATERIAL

Answer 19

Requirements for voting agreement (or “pooling” agreement):

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, BUT they CANNOT agree abt what actions they’d take once in office (NO voting agmt for director voting)
GUARANTEED BAR QUESTION

3) Voting agmts are NOT specifically enforceable
4) A proxy given SUBJECT TO a voting agreement is IRREVOCABLE, IF it states so

Question 20

ONLY 2 WAYS FOR SHAREHOLDERS TO MAKE A VALID ACT

What are 2 ways for SHs to validly vote?

Answer 20

The ONLY 2 ways the shareholders can take a valid act are:

1) Voting by written consent of the holders of ALL VOTING SHARES;
OR
2) Voting at an annual OR special meeting

Question 21

2 TYPES OF SHAREHOLDER MEETINGS

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

Answer 21

The two kinds of shareholder meetings ARE:

1) ANNUAL MEETING: where directors are elected

VOTING RQMTS:

(i) Just need a PLURALITY (not a majority of votes) for ELECTION OF DIRECTORS
(ii) NEED A 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 22

NOTICE RQMT for SHAREHOLDER MEETING

What is the notice req for a SH meeting?

Answer 22

NOTICE REQUIREMENTS:

1) 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
2) Notice must ALWAYS state the time/place
3) If the meeting is abt something that COULD allow for APPRAISAL RIGHTS, the notice must say so and tell why
4) Special meetings: must ALSO state WHO CALLED it AND the PURPOSE of the meeting

5) Mtg MUST be abt something SHs CAN ACTUALLY VOTE ON
NOTE: cannot be a mtg to remove an OFFICER b/c SH cannot vote on this UNLESS they hired officer p/t a provision being added to the Cert of Inc.

NOTE: the mtg will be LTD to ONLY that purpose

6) 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 23

QUORUM and VOTING THRESHOLD FOR SHAREHOLDER VOTING

What are the quorum reqs for a SH meeting?

Answer 23

NOTE: The focus is on the # OF SHARES, NOT the # of SHs

GENERALLY:

1) quorum = majority of outstanding shares

DECREASING QUORUM: The CERTIFICATE or BYLAWS CAN lower the majority quorum req; provided it’s not lowered BELOW 1/3

INCREASING QUORUM: A SUPERMAJORITY quorum 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 (THIS IS DIFFERENT FROM director voting quorum reqs)

2) VOTING = Typically requires

(i) DIRECTOR ELECTION = PLURALITY
(the person who gets more votes for that seat on the
board than anyone else)

(ii) FUNDAMENTAL CORPORATE CHANGE = MAJORITY of shares ENTITLED to Vote (Very tough standard)
(iii) Other Matters = Majority of shares ACTUALLY VOTING on the issue

NOTE:

DECREASE In APPROVAL Threshold: we can NEVER reduce the req of majority approval

Majority means of those ACTUALLY VOTING (abstentions don’t count)

INCREASE In APPROVAL Threshold: A SUPERMAJORITY vote req can be imposed ONLY IF it’s in the CERTIFICATE (NOT bylaws)

Question 24

CUMULATIVE VOTING

What are key aspects of cumulative voting?

Answer 24

CUMULATIVE VOTING = A voting device that can help minority SHs get representation on the BOD

Cumulative voting is ONLY available WHEN (i) a provision is in the CERTIFICATE; AND
(ii) SHs are voting in DIRECTOR elections

VOTES entitled to vote = # of shares X # of directors to be elected

Votes can be distributed in any way (i.e. can be put behind one candidate)

CUMULATIVE VOTING EXISTS ONLY IF CERTIFICATE ALLOWS FOR IT

Question 25

SHAREHOLDER RIGHT OF INSPECTION OF CERTAIN DOCUMENTS

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

***HIGHLY TESTED MATERIAL

Answer 25

1) ANY SH on 5 days written demand can demand to REVIEW:
(i) minutes of SH proceedings; AND
(ii) 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

The corporation can deny access w/o the affidavit but CANNOT require more than the two points above

2) ANY SH on 2 days written demand can REVIEW list of current directors and officers

No affidavit can be req’d

3) ANY SH on written demand can REQUEST/REVIEW the corp’s latest:
(i) annual B/S;
(ii) I/S; AND
(iii) interim stmts

Corp can send info requested by mail

4) All shareholders also have a common law right to inspect records at a reasonable time and proper place.

Inspection must be for a proper purpose, which means
something related to your role as a shareholder.

It is unclear what documents this common law right
covers

5) Directors have unfettered access to inspect corporate books and records!

DIRECTORS NEED this access to be able to satisfy their BOARD DUTIES.

Question 26

REASONABLE EXPECTATIONS OF INVESTORS IN CLOSE CORPORATIONS

Answer 26

The reasonable expectations of most people who invest in a close corporation are:

(i) A JOB
(ii) A VOICE in MANAGEMENT; and
(iii) Some RETURN on INVESTMENT