Shareholders

Question 1

Shareholders ability to manage

Answer 1

SH generally do NOT manage the corporation. That is left to the board.

Sh have indirect control through voting, director elections, bylaws, and approving fundamental changes

But, if corp’s stock not traded on exchange, Sh can eliminate the board and run the corporation if (1) such power is provided for in the bylaws and approved by all SH; or (2) by unanimous written SH agreement

Question 2

Closely held corporations

Answer 2

SH Can manage the corporation in CHC. If so, some courts hold that SHs owe each other same duties of loyalty and care

requires small # of Sh and no market for the company’s stock

Question 3

Oppression of minority SH in CHC

Answer 3

harmed minority SH can sue controlling Sh who oppressed her in CHC

RULE: majority SH have a duty to refrain from using their control to obtain a special advantage or to cause the corporatoin to take action that UNFAIRLY PREJUDICES minority SHs

Rationale: NO WAY OUT. NO MKT FOR SHARES

Question 4

Professional Corps

Answer 4

May be created but must have PC or PA in its name and purpose must be to practice in a particular profession

Can employ non-professionals but not render professional services

Still liable for personal malpractice. Only protected from corporation’s debts

Question 5

SH Liablity

Answer 5

generally no liability because corporations have limited liability. Not responsible for debts of corporation

Question 6

Piercing the Corporate Veil

Answer 6

allows Sh to be personally liable for corporation’s debts. Limited to CHC

Test: (1) Sh must have abused the privilege of incorporation, and (2) Fairness must require holding them liable

ALWAYS SAY: “Courts may be more willing to PCV for a tort victim than for a K claimant because a tort victim did not voluntarily choose to transact with the corporation and knowingly assume risk of limited liability. More fair to compensate tort victims”

Question 7

Alter Ego

Answer 7

When corporation ignores corporate formalities such that it may be considered an alter ego of the Sh or another corporation. must still be FAIR to hold them liable

When Sh treat corporate assets as their own, fail to observe formalities, etc.

Question 8

Undercapitalization

Answer 8

When the corporation is inadequately capitalized at the time of formation so that there is not enough capital to reasonably cover prospective liabilities

Question 9

SH Derivative Suit

Answer 9

When a SH asserts the corporation’s rights rather than her own.

Question 10

Direct Suit

Answer 10

When a SH sues in her own capacity. Ask yourself (1) who suffers the most immediate and direct damage, Corp or SH? and (2) to whom did the D’s duty run, corp or SH?

Recovery goes to individual in direct suits

Question 11

Derivative Suit damages

Answer 11

Recovery goes to corporation. P usually just receives costs and attorney’s fees

If P loses derivative suit, CANNOT recover costs and attorneys fees. Also liable to the D’s attorneys fees and costs if he sued without REASONABLE CAUSE

Question 12

Derivative Suit requirements

Answer 12

(1) stock OWNERSHIP when the claim arose and throughout the suit;
(2) ADEQUATE REPRESENTATION of the corporation’s interest;
(3) WRITTEN DEMAND to the corp (the board) to bring the suit (NOTE: in many states you must make this demand and cannot sue until 90 days after. Some states, demand is not required if it would be futile, such as if a majority of directors are D’s)
(4) corporation must be joined, but as a D

Question 13

Settling or dismissing a derivative suit

Answer 13

May only be done with court approval

Corporation’s motion to dismiss must be based on an independent investigation (by independent directors or court-appointed panel) that the suit was NOT in the corp’s best interest

Question 14

Annual meetings

Answer 14

Corp must hold annual SH meetings.

If none held in 15 months since last meeting, a SH can petition the court to order one

Question 15

Special meeting

Answer 15

may be called by (1) the board; (2) the president; (3) the holders of at least 10 percent of the voting shares; or (4) anyone else in the bylaws

Question 16

Notice of SH meetings

Answer 16

SH must be given written notice, not less than 10 or more than 60 days before the meeting (10-60).

Notice must state the date, time and place of meeting. For SPECIAL MEETINGS, purpose must be included as well

NOTE: can’t do anything else other than what is listed as the purpose in special meetings

Question 17

Waiver of notice

Answer 17

Express waiver in writing and signed, or implied waiver by attending the meeting without objection

Question 18

SH Eligibility to vote (Record date)

Answer 18

record SH on the RECORD DATE may vote at the meeting

Exception: (1) If SH dies, executor may vote shares. (2) if stock becomes treasury stock as of the record date, cannot vote them.

NOTE: Record date is fixed by the board but may not be more than 70 days before the meeting

NOTE: If no record date, deemed to be the day the notice of meeting is mailed to SH

Question 19

Proxy

Answer 19

Requirements: (1) WRITING; (2) SIGNED by record SH (or email); (3) directed to the SECRETARY of the corp; (4) authorizing ANOTHER to vote the shares

Question 20

Duration of proxy

Answer 20

VALID FOR 11 MONTHS, unless if they provide otherwise

Question 21

Revocability of proxy

Answer 21

Freely revocable, even if proxy states its irrevocable

ONLY WAY TO BE IRREVOCABLE: (1) proxy states it is irrevocable; and (2) proxyholder has some INTEREST in the shares other than voting them (such as if proxyholder owns the share AFTER record date, but before voting them. Also can be option to buy shares or pledge of the shares even. ANY INTEREST beyond mere voting)

Question 22

Voting Trust

Answer 22

WRITTEN agreement of Sh under which all shares in the agreement are transferred to a TRUSTEE, who votes the shares and distributes dividends accordingly

NOTE: 10 YEAR MAX

NOTE: a copy of the trust agreement and names and addresses of the owners of the trust must be given to the corporation

Question 23

Voting Agreement

Answer 23

Agreement providing for a manner in which SHs will vote their shares

Requirements: writing and signed. That’s it!

Specifically enforceable, unless otherwise stated

Need not be filed with the corp and is NOT subject to any time limits

Question 24

SH Quorum

Answer 24

Generally, requires a majority of outstanding voting shares to constitute a quorum, unless provided a GREATER number

NOT measured by number of SH. focuses on number of shares.

Quorum NOT lost if people leave the meeting

Question 25

Cumulative Voting

Answer 25

Limited to director elections

Multiply number of shares times number of directors to be elected

Purpose: device to give small Sh a better chance of electing someone to the board

NOT a default rule. articles must provide it

Question 26

Voting in general

Answer 26

SHs entitled to one share, one vote, unless otherwise provided

If quorum present, approval requires a majority of votes cast (votes cast in favor exceed votes cast against)

Question 27

Unanimous Written Consent

Answer 27

Sh may act by UWC by unanimous consent of all Sh entitled to vote on the action

Question 28

Stock Transfer Restrictions

Answer 28

Upheld so long as they are REASONABLE. basically can’t be a complete prohibition on alienation

Ex: ROFR is fine.

Question 29

Third party transferee and stock transfer restrictions

Answer 29

Third party purchaser is bound by transfer restrictions if (1) the restriction’s existence is CONSPICUOUSLY NOTED on the certificate; or (2) the third party had KNOWLEDGE of the restriction at the time of purchase

Question 30

Inspection rights

Answer 30

SH has qualified right to inspect corporation’s books, papers, accountings, records, etc. upon 5 DAYS WRITTEN NOTICE STATING A PROPER PURPOSE for the inspection. Proper purpose is one that is REASONABLY RELATED to the person’s interest as a SH)

May send an agent such as an attorney to inspect

NOTE: Directors have unfettered access to books and records

Question 31

unqualified right to inspect

Answer 31

any Sh may inspect the following records, regardless of purpose: (1) corp’s articles and bylaws; (2) board resolutions regarding classification of shares; (3) minutes of Sh meetings from past 3 years; (4) communications sent by corp to Sh over past 3 years, (5) a list of names and biz addresses of corp’s current directors and officers; and (6) company’s most recent annual report

Question 32

Right to distribution

Answer 32

distributions are always in the BOARDS DISCRETION.

NO right to distribution until it is declared by the board.

NOTE: if you bring an action to compel declaration of a distribution, must make a VERY STRONG showing of abuse of discretion b/c BJR strongly protects right to discretion

Question 33

Limitations on distributions

Answer 33

Distribution NOT permitted if corp would become insolvent: (1) unable to pay its debts as they become due; or (2) corp’s total assets would be less than the sum of its total liabilities

Also look for any restrictions in the articles

NOTE: MODERN VIEW! Traditional view looks to capital surplus, etc.

Question 34

Preferred Stock

Answer 34

preferred stock has a right to receive dividends before common SH

Question 35

Preferred Participating

Answer 35

Preferred gets paid first and then the preferred shareholders participate in the leftover amount with the common. Thus get paid again.

Question 36

Preferred Cumulative Shares

Answer 36

accrue year-to-year.

When dividend declared, corporation owes for the years that dividends were not paid

Question 37

Earned Surplus

Answer 37

Amount generated by business activity. ALL EARNINGS minus ALL LOSSES minus DISTRIBUTIONS PREVIOUSLY PAID

May be used for distributions!

Question 38

Stated Capital

Answer 38

generated by issuing stock and can NEVER be used for distributions

If Par – par value x number of shares goes to stated capital and excess goes to capital surplus

if no par – board allocates

Question 39

Capital Surplus

Answer 39

Payments in excess of par plus amounts allocated in a no-par issuance

MAY be used for distributions

Question 40

Liability for improper distributions

Answer 40

Directors are jointly and severally liable (but remember BJR)

SH are personally liable ONLY if they knew distribution was improper when received

Question 41

Derivative Suit and Directors’ Approval

Answer 41

If a majority of directors who do not have a personal interest in the transaction find in GOOD FAITH after REASONABLE INQUIRY that the suit is NOT in the corporation’s best interest, derivative action MAY NOT BE BROUGHT

NOTE: STILL NEED AT LEAST TWO DIRECTORS TO DO THIS. If you don’t have two, can bypass this requirement