Shareholders

Question 1

Can shareholders be held liable?

Answer 1

Generally no. But, shareholders can be held liable when the court pierces the veil.

Question 2

What kinds of corporations are subject to piercing the veil?

Answer 2

Close corporations.

Question 3

What is required for a court to pierce the corporate veil?

Answer 3

Shareholders must have

1. Abused the privilege of incorporating; and
2. Fairness must require holding them liable.

Question 4

What is a proxy?

Answer 4

A shareholder’s written and signed authorization allowing a third-party to vote on the shareholder’s behalf.

Question 5

Can a proxy be revoked?

Answer 5

Yes, unless it was coupled with interest or the written agreement said it was irrevocable.

Question 6

How can a proxy be revoked?

Answer 6

1. By a written instrument revoking the proxy subsequent to its formation, and
2. By the shareholder showing up to the shareholder’s meeting in person and voting.

Question 7

Can treasury shares be voted?

Answer 7

No. Only outstanding shares can be voted.

Question 8

What are the only kinds of shares that can be voted?

Answer 8

Outstanding shares.

Question 9

When does a shareholder have preemptive rights?

Answer 9

When the articles so provide.

Question 10

Can a shareholder waive her preemptive rights?

Answer 10

Yes.

Question 11

A waiver evidence by writing is _________.

Answer 11

Irrevocable under all circumstances.

Question 12

Preemptive rights never apply to:

Answer 12

1. Shares issued as compensation to directors, officers, agents, or employees of the corporation
2. Shares authorized in the articles that are issued within six months after incorporation
3. Shares issued for consideration other than money
4. Shares without general voting rights but having a distribution preference

Question 13

What are the demand requirements for a shareholder’s initiation of a derivative suit?

Answer 13

The shareholder must make a written demand on the corporation to take action. A derivative proceeding may not be commenced until 90 days after the date of demand, unless: (i) the shareholder has earlier been notified that the corporation has rejected the demand; or (ii) irreparable injury to the corporation would result by waiting 90 days to pass.

Question 14

What is a shareholder’s burden of proof in a derivative suit?

Answer 14

He must show that the decision was not made in good faith after reasonable inquiry.

But, if a majority of the directors had a personal interest in the controversy, the corporation will have the burden of showing that the decision was made in good faith after reasonable inquiry.

Question 15

Can the plaintiff recover attorney’s fees from the corporation?

Answer 15

Yes. If the suit was successful and the court determines that the suit conferred a substantial benefit on the corporation.

Question 16

On what issues do shareholders have the decisive vote?

Answer 16

1. Electing and removing directors

2. Fundamental changes to the corporation

Question 17

What is an appraisal remedy?

Answer 17

Shareholders who descent from a fundamental corporate change can force the corporation to purchase their stock shares at fair market value.

Question 18

How is an appraisal remedy executed?

Answer 18

To use the appraisal remedy, the shareholders must (i) file an objection to the transfer before or at the shareholders’ meeting at which the vote is taken; (ii) they must not vote in favor of the plan; and (iii) they must send the corporation a written demand for the fair value of their shares.

If the corporation does not want to pay what the shareholders have demanded, the corporation must file a suit to have the court determine fair value.

Question 19

Does a shareholder have a right to inspect the corporation’s books?

Answer 19

Yes. The shareholder has a right to inspect the corporations books if the inspection is pursuant to a permissible purpose, i.e. a purpose relating to the shareholder’s rights as a shareholder in the company.

Written notice 5 days in advance of the inspection is required.

Question 20

What is a direct action brought by a shareholder?

Answer 20

A suit to enforce the rights of that shareholder?

Question 21

What is a derivative action brought by a shareholder?

Answer 21

An action brought on behalf of the company to correct a wrong committed by the corporate officers or to enforce the company’s rights that are not being enforced by the officers.

Question 22

Do shareholders owe each other duties?

Answer 22

Usually shareholders are free to act as they choose. Controlling shareholders, however, owe minority shareholders the following duty:

A controlling shareholder must refrain from using his control to obtain a special advantage or to cause the corporation to take action that unfairly prejudices the minority shareholders.