Shareholders

Question 1

Can Shareholders manage a corporation?

Answer 1

Generally, NO! (the board manages the corporation)

EXCEPTION: Shareholders CAN manage the business directly in a close corporation

Question 2

What is a close corporation?

Answer 2

1) A corporation with FEW shareholders

2) The stock is NOT publicly traded

Question 3

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

Answer 3

NO! You CAN have a board BUT, if you want to have shareholder management, you need 4 things…

1) a provision in the certificate restricting or transferring board power to shareholders (or others);
2) ALL incorporators or shareholders (voting AND nonvoting) must approve the certificate;
3) ALL subsequent shareholders have notice of the special certificate; AND
4) shares are NOT listed on an exchange or regularly quoted OTC dealer

Question 4

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

Answer 4

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

Question 5

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

Answer 5

Fiduciary duties are imposed on shareholders dealing with EACH OTHER: controlling shareholders cannot use their power…

1) for PERSONAL GAIN at the expense of the minority shareholders or the corporation; OR
2) to OPPRESS minority shareholders or the corporation
3) They owe a duty of UTMOST good faith

Policy: courts want to give minority shareholders 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 profession through a general business corporation→they form a professional service corporation (P.C.)

Certificate MUST meet the general corporation requirements of the BCL: must also indicate the profession to be practiced AND the names/addresses of original shareholders, directors or officers

Shareholders, officers AND directors MUST be licensed, but can hire non-professionals as employees (certification of status MUST BE in the certificate)

If a shareholder dies or is disqualified→ the P.C. MUST buy the stock

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

Professionals are NOT responsible for contracts entered into by the entity in its OWN name

Question 7

How can shareholders pierce the corporate veil?

Answer 7

REMEMBER: general rule is that shareholders are NOT liable for what the corporation does; BUT in a CLOSE corporation, shareholders can be PERSONALLY liable if

(i) they abuse the privilege of incorporation; AND 
(ii) fairness requires holding them liable

[ALWAYS STATE THE ABOVE RULE FIRST]

Two fact patterns…

1) Alter ego: the shareholders exercise COMPLETE domination over the company “to perpetrate fraud or injustice” to the πs
- Commingling personal and corporate funds
- Use of corp assets for personal use
- NOTE: the “shareholder” can be another corp entity

2) Undercapitalization: Shareholder failed to INVEST ENOUGH to cover prospective liabilities

** NOTE: undercapitalization ALONE is NOT enough to pierce the corporate veil in NY→ you’d ALSO need complete domination ORfraud/injsutice

** NOTE: Piercing the corporate veil is more likely to happen in TORT than in contract

Question 8

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

Answer 8

TOP 10 shareholders are personal liable for wages AND benefits of the company’s employment

Question 9

What is a shareholder derivative suit?

Answer 9

When a shareholder 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 fiduciary duties owed to the corp (care/loyalty)

Question 10

What is a direct suit?

Answer 10

When a shareholder is suing for a PERSONAL claim (NOT one on behalf of the corporation, derviative)

Question 11

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

Answer 11

Shareholder wins:

1) Corporation gets money. If recovery by the corporation would return the money to the violators, then maybe shareholder gets award (e.g. in a close corporation)
2) Suing shareholder gets attorney’s fees

SH loses:

1) Shareholder cannot recover costs & expenses
2) Shareholder probably liable to the corporation for its costs
3) Shareholders CANNOT sue the same ∆s on the same transaction (i.e. res judicata)

Question 12

What are the requirements for a proper shareholder derivative suit?

Answer 12

1) Stock ownership when claim AROSE until JUDGMENT (or gotten it by operation of law from someone who did, like inheritance or divorce decree)
2) Shareholder must adequately represent the interests of the corporation AND the shareholders
3) Shareholder can be required to post a BOND for ∆’s costs. NOT required if she owns ≥5% of the stock OR her stock is worth more than $50k
4) Shareholder must make a DEMAND on directors that the corporation sue

NOT required if:

- Doing so would be FUTILE...										
- Majority of board is interested (or under control of interested directors)
- The board violated duty of care
- The transaction was SO egregious on its face that it COULDN'T have been based on sound judgment

If board REFUSES after demand, shareholder could sue ONLY IF…

- Majority of board is interested; OR
- The PROCEDURE was incomplete/inadequate (e.g. didn't use a special litigation committee, SLC)

5) Shareholder must plead with “PARTICULARITY her efforts to get the board to sue or why it was FUTILE to do so”
6) The CORPORATION must be joined in the litigation AS A ∆(!!!)

Question 13

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

Answer 13

1) The INDEPENDENCEof the those making the investigation
2) Sufficiency of the INVESTIGATION

If these two things are OK, the court WILL dismiss

Question 14

Can parties DISMISS or SETTLE a derivative suit?

Answer 14

Yes, but ONLY with court approval

Question 15

Can a director OR officer ever bring a derivative suit?

Answer 15

A director or officer CAN sue another director or officer to compel her to ACCOUNT for violation of dutiesOR MISSAPPROPRIATION fo corporate assets

The suing director or officer does NOT have to meet the requirements for bringing a shareholder derivative suit

The director or officer sues in OWN name, but recovery goes to the corporation

Question 16

Which shareholders get to vote their shares?

Answer 16

General rule: record owner as of record date has the right to vote

Record owner = whomever corporate records indicate

Record date = voter eligibility cut-off [set between 10-60 days before the meeting]

EXCEPTIONS:

1) Corp reacquires stock→NO vote for treasury stock
2) Shareholder dies after record date→executor can vote
3) Proxies: OK for shareholder voting

Proxies is a

(1) writing;
(2) signed by record shareholder or authorizing agent; 
(3) directed to the corporate 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 shareholder 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 with an interest"

NOTE: Shareholder death ONLY revokes proxy WHEN written notice of death is received by the corp secretary

Question 17

How can shareholders “block vote”?

Answer 17

Pockets of shareholders can pool their votes via..

1) Voting trust
2) Voting (“pooling”) agreement

NOTE:When giving advice, MUST state BOTH

Question 18

What are the requirements of a voting trust?

Answer 18

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

NOTE: the MAXIMUM time limit on voting trusts in 10 YEARS

Question 19

What are the requirements for a voting (“pooling”) agreement?

Answer 19

1) Entered into by shareholders (NOT directors)
2) Agreement must be written AND signed

NOTE: Two shareholders CAN agree to vote their shares to elect each other, BUT they CANNOT agree about what actions they’d take once in office (NO voting agreement for director voting)

** Voting agreements are NOT specifically enforceable

** A proxy given SUBJECT TO a voting agreement is IRREVOCABLE, IF it states so

Question 20

How can shareholders validly vote?

Answer 20

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

Question 21

What are the types of shareholder meetings and their key aspects?

Answer 21

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 meeting is not held, one can be COMPELLED by a court 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 requirement)

Question 22

What is the notice requirement for a shareholder meeting?

Answer 22

For annual AND special meetings: corporation must give WRITTEN notice (e-mail OK) to every shareholder entitled to vote between 10-60 days BEFORE the meeting

- Notice must ALWAYS state the time/place
- If the meeting is about something that COULD require 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 about something shareholders can ACTUALLY vote on (i.e. it cannot be a meeting to remove an OFFICER)
- NOTE: the meeting will be limited to 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 without objection

Question 23

What are the quorum requirements for a shareholder meeting?

Answer 23

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

Generally, quorum = majority of outstanding shares

The certificate or bylaws CAN lower the majority quorum requirement; provided it’s not lowered BELOW 1/3

A SUPERMAJORITY quorum requirement 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 requirements)

NOTE: we can NEVER reduce the requirement of majority approval. Majority means of those ACTUALLY VOTING (abstentions don’t count)

A SUPERMAJORITY vote req can be imposed ONLY IF it’s in the certificate (NOT bylaws)

Question 24

What are key apsects of cumulative voting?

Answer 24

A voting device that can help minority shareholders get representation on the board

Cumulative voting is ONLY available WHEN

- a provision is in the CERTIFICATE; AND
- Shareholders 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 required to elect ONE director = 100 / (X + 1)
X = # of directors being directed
Must get ONE more share than the calculated %

Question 25

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

Answer 25

ANY shareholder on 5 days written demand can demand to REVIEW:

(i) minutes of shareholder proceedings; AND 
(2) record of shareholders			

The corporation can demand the shareholder give an affidavit (under oath) that his purpose is NOT other than the interest of the corporation AND he has not tried to sell shareholder lists within 5 years

ANY shareholder on 2 days written demand can REVIEW list of current directors and officers
- No affidavit can be required

ANY shareholder on written demand can REQUEST/REVIEW the corporation’s latest

(i) annual B/S; 
(ii) I/S; AND 
(iii) interim statements