Shareholders Flashcards
Can shareholders manage a corporation?
Not generally, because the BOD’s job is to manage
BUT! shareholders may manage a closely-held corporation
What is a close corporation?
Few shareholders (no magic number)
Stock not publicly traded
What are the requirements to have the shareholders manage a close corporation? (5)
- Provision in the certificate (taking away bd power);
- All incorporaters approve;
- conspicuously noted on front and back of all shares;
- all subsequent shareholders have notice; AND
- shares are not listed on an exchange or regularly quoted over-the-counter
When close corp managed by shareholders, who owes the duty of care and loyalty?
The shareholders who actually manage the corp
What is the duty owed by close corp shareholders to each other?
Duty of utmost good faith
(Gives minority shareholders a remedy for behavior that defeats their reasonable expectations)
What are reasonable expectations of most people who invest in a close corporation?
- A job
- A voice in management
- Some return on investment
What is a professional services corporation (P.C.)?
- Allows professionals (doctors, lawyers) to operate as a corporation
- Shareholders must be licensed professionals, but can hire unlicensed employees
- Liable for own malpractice, but not for that of the others
- Shareholders not liable for contracts/rent (the entity is liable)
How are P.C.s governed?
By general rules for other corporations, except:
- must have P.C. in name
- Must indicate profession to be practiced
- Must indicate name and addresses of the professionals
- Must certify that each shareholder, director, and officer is licensed to practice
What happens if a shareholder in a p.c. dies?
P.C. must buy back the decedent’s shares.
What is the test for piercing the corporate veil? (close corporations only)
- Abuse of the privilege of incorporating
- Fairness requires holding a shareholder liable (i.e., shareholder in question exercises complete domination and control over the business to perpetrate fraud or injustice) (alter ego; undercapitalization)
When the corporate veil is pierced, which shareholders in a close corp are held liable?
The active wrongdoers
What types of claims are most likely to pierce the corporate veil?
Tort (rather than contract)
What is the rule for wages in a close corp?
The 10 largest shareholders are personally liable for wages and benefits to employees
How do you tell if a suit is derivative?
By asking whether the corporation could have brought this suit (if so, it’s derivative)
Who recovers in a successful derivative suit?
The corporation!
The shareholder bringing suit gets att’y fees and costs, usually from the judgment won for the corporation, but no damages to shareholders
(N.B. Occasionally shareholders can recover directly IF recovery by the corporation would return money to the wrongdoes, e.g., a close corporation with only three shareholders)
What are the requirements for bringing a shareholder derivative suit? (6)
- Shareholder owned stock when the claim arose, owns the stock when action is brought, and keeps it all the way through judgment;
- P adequately represents the interests of the corp and shareholders;
- P can be required to post a bond for shareholder costs (unless own more than 5% or $50,000 in stock);
- Shareholders must make a demand of the BOD, unless it would be futile;
- P must plead with particularity her efforts to get the board to sue, or why demand is futile; AND
- Corporation must be joined as a defendant.
What can satisfy ownership when a claim arises?
- Ownership at the time
- Obtaining ownership by operation of law from somebody who did own it at the time (Inheritance; divorce decree)
When is a demand futile?
- Majority of bd is interested, or under control of interested directors
- Bd did not inform itself of the transaction to the extent reasonable under the circumstances
- The transaction is so egregious on its face that it could not be the result of sound business judgment
