Shareholders Flashcards
Do shareholders get to manage the corporation
a. The general answer is no. board of directors manages.
b. BUT shareholders can run the corporation directly in close corporation. A close corporation has:
i. Few shareholders
ii. Stock isn’t publicly raded.
iv. In a close corporation we can set up management with a board of directors
v. OR we can set up management ifferently—eliminate the board and have shareholders run the business or appoint a manager.
SH management agreement
i. 2 ways to do so
1. in the articles AND approved by all shareholders OR
2. by unanimous written shareholder agreement
ii. Either way the agreement should be conspicuously notd on the front an back of the stock certificates.
1. Failure to do so doesn’t affect validity.
iii. If the shareholders do this and set u pmanagement by shareholders or by a manager, duty of care and loyalty is owed to the corporation by whoever manages the corporation.
Special fiduciary duty of SHs in close corporations
i. Furthermore, courts in many states may also impose a fiduciary duty on shareholders owed to other shareholders.
1. Because a close corporation looks like a partnership (with few owners, who are usually employed by the business), many courts apply partnership duty b/w SHs of fiduciary duty of utmost good faith.
3. If theres oppression of minority shareholders they can sue the controlling shareholders who oppress tehm for breach of this fiduciary duty. For ex. the controlling shareholders might deny the minority any voice in corporate affairs, might fire from employment, miht refuse to declare dividends, may refuse to buy back minority stock.
4. Why do some courts let the minority shareholder sue here?
a. Because oppression thwarts her legit goals for investing
b. And minority has no way out because no public market
Professional corporations
e. Licensed professionals, including lawyers, medical professionals and CPAs may incorporate as a professional corporation or professional association, aka P.C. or P.A. The articles must state that the purpose is to practice in a particular profession
i. Directors, officers and shareholders usually must be licensed professionals. The PC may employ nonprofessionals but not to practice the profession.
ii. The professionals ARE personally liable for their malpractice.
iii. shareholders are generally not liable for corporate obligations or for other professionals’ malpractice
iv. Generally, the rules governing regular corporations apply to the PC.
Piercing the corporate veil
II. Can shareholders be held liable for corporate debts
a. Generally no, corporation is liable for what it does
b. BUT a shareholder may be personally liable for what the corporation did if the court pierces the corporate veil. piercing the corporate veil happens ONLY IN close corporations
i. TEST: piercing the corporate veil and holding shareholders personally liable
1. they must have abused the privilege of incorporating AND
2. fairness must require holding them liable
- sloppy administration is not enough. must be alter ego.
iii. ALTER EGO THEORY
using corp as alter ego. not following corporate formalities, commingling of funds or assets or lines of credit.
- but only the SHs who participate in commingling are liable
iv. Undercapitalisation
3. Here court may piercing the corporate veil because the corporation was undercapitalized when formed. Because they failed to invest enough to cover prosepective liabilities.
4. Unfair to let them have limited liability
For ex. a co hauling nuclear waste w/ only 1k capital
5. Courts may be more willing to piercing the corporate veil for a tort victim than for a k claim (like debt)
- in piercing the party being pierced may be a parent or sister or other related corporation
Derivative suits
a. In a derivative suit, a shareholder is suing to enforce the corporation cliam, not her own personal laim. It’s a case where the corporation is not pursuing its own claim, so a shareholder steps in to prosecute it for the corporation
i. Always ask if the corporation could have brought this suit.
1. If yes→ derivative
ii. S, a shareholder of C corporation, sues the board of directors for breaching the duty of care or loyalty. This is always derivative because these duties are owed to the corporation.
iii. S sues board of directors of C corporation for issuing new stock without honoring her preemptive rights. This is NOT derivative, is a shareholder personal claim
iv. S sues to force the company to declare dividends. NOT DERIVATIVE. Corporation isn’t hurt.
v. S sues another shareholder for oppression in a close corporation. NO THIS IS DIRECT
If shareholder π wins derivative suit
i. Money goes to the corporation! It’s the corporation’s claim!
ii. Π recovers costs and attorney fees usually from judgment won from the corporation. After all, she did a favor for the corporation by suing and winning
If SH πloses the derivative suit
the shareholder cannot recover cost and attorney fees
i. shareholder is liable to the ∆ he sued for ∆ costs and attorney fees if he sued without reasonable cause
ii. Later shareholders are barred from suing the same ∆ on the same transaction.
Requirements for SH derivative suit
continuous stock ownership, adequate representation by π, written demand on corp, join corporation as a ∆
i. Stock ownership when the claim arose and throughout the suit. Must own stock at time claim arose or have gotten it by operation of law from someone who owned it then
1. Inheritance or divorce decree
2. For ex. shareholder doesn’t own stock when claim arose, but uncle did. He inherits from his uncle
ii. Π must show he will e adequate rep of the corporation interest
iii. Π must make written demand on the corporation that the corporation bring the sut.
1. Many states you must always make this demand and cannot sue for 90 days until after making the deand
2. In mnay other states, you do not have to make demand if it would be futile.
a. Futile if for ex. the present directors will be ∆s in the suit.
iv. Corporation is joined as a ∆. Even though the suit asserts the corporation’s claim. The corporation didndt do so, so it is joined as a ∆
v. The parties can settle or dismiss only with cour approval.
1. Court may give notice to shareholders and get input on whether to settle or dismiss
How a corp may move to dismiss derivative suit
e. After derivative is filed, corporation may move to dismiss. This must be based upon independent investigaton that concludes that suit is not in corporation best interst (e.g. low chance of success ro expense of the case would exceed recovery if the corporation would win)
i. Must be made by independent directors or court-appointed panel of one or more independently appointed people.
1. Usually a special litigation committee of independent directors
ii. In ruling on MTD, if the court finds that those recommending dismissal were truly independent, and they made a resoanble investigation, court in most states will dismiss
SH voting: Who votes
a. Who voites: We know that authorized stock is the number of shares the corporation may issue (its set in the articles). We know that issued stock is the number of shares the corporation has sold. What is outstanding stock. Shares issued but not reacquired by the corporation
i. For ex 10k authorized shares, 7k issued, 1k reacquired.
1. 6k outstanding.
ii. Unless the questions says otherwise, assume that each outstanding share gets one vote. BUT you must be record shareholder of the outstanding stock as of the record date of the vote.
- Record shareholder is the person shown as the owner in the corporation records. Record date is voter eligibility cutoff.
- For ex. C corporation sets annual meeting for july 7 and record date for june 8. S sells b her stock on june 25th.
a. S is entitled to vote. We care who owned it on record date. Do not care who owns it now - Exceptions to general rule that record owner on record date votes
a. For ex. corporation reacquires stock before the record date, so it is the owner of this treasury stock as of the record date. It doesn’t vote this stock. It was not outstanding on the record date.
b. Death of a shareholder
i. After record date, S dies. Executor is allowed to vote the shares
c. Voting by proxy – a proxy is a writing fax or email 2) signed by record shareholder (email ok if you can ID sender) 3) directed to secretary of corporation, 4) authorizing another to vote the shares.
i. PROXY IS GOOD FOR 11 MOS unless it says otherwise.
ii. Can revoke proxy in writing to corporation secretary OR by attending the meeting and voting.
iii. Can revoke a proxy even if it says it’s irrevocable
1. To have an irrevocable proxy,it must be a proxy coupled with an interest. MUST
a. Say its irrevocable AND
b. The proxy holder has some interest in the shares other than voting
i. For ex. A gives B an option AND gives B an irrevocable proxy
ii. This is an irrevocable proxy coupled with an interest.
SH voting trusts and agreements
- for ex. XY and Z want to pool voting power
- Requirements for voting trust (10 yr max)
a. Writing trust agreement, controlling how the shares will be voted
b. Copy to the corporation
c. Transfer legal title to the voting trustee
d. Original shareholders receive trust certificates and retain all shareholder rights except for voting - Requirements for voting (“pooling”) agreement
a. Must have a document in writng and signed
b. These agreements are increasingly enforceable, but in many states they’re not
i. If your state grants enforcement, no need for a trust
Where do SHs vote
i. Usually in a meeting. Can also act by unanimous written consent (email is ok)
1. Meeting need not be held in state of incorporation
ii. 2 kinds of shareholder meetings
1. annual meeting—if no annual meeting held within 15 mos, shareholder can petition court to order one. This is required.
2. shareholders elect directors at the annual meeting.
iii. Special meeting can be called by 1) the board or 2) the pres or 3) holders of at least 10% of outstanding shares or 4) anyone else authorized in the bylaws.
1. But reason for meeting has to be for something in the orbit of shareholder power, so it cannot be cfor ex, to remove an officer.
iv. Notice requirement—must give written notice (Fax or email OK) to every shareholder entitled to vote. Deliver it between 10 and 60 days before the meeting.
1. Contents of the notice: must state date, time and place of meeting.
2. For special meetings, must also state the purpose of the meeting.
- Consequence of failing to give proper notice to all shareholders—action taken at meeting is void (some states voidable) unless those not sent notice waive the notice defect.
- Can waive through
a. Express—in writing and signed anytime
b. Implied—attend the meeting without objection AT OUTSET
How do SHs vote?
i. Usually on these things 1) to elect directors, 2) to remove directors and 3) on fundamental corporate changes. May also vote on other things if the board of directors asks for a shareholder vote on those things
1. Other things ex: amend bylaws.
ii. Every tie the shareholders vote, we must have a quorum. Determining quorum focuses on the number of SHARES represented, not the number of shareholders. Generally: quorum = majority of outstanding shares.
iii. Quorum cannot be lost if people leave the meeting
1. Unlike board of directors quorum which CAN be lost
iv. If quorum is met, shareholders vote. What vote required
1. To elect director: plurality
2. To approve a fundamental change (see later)
3. To remove a director: usually need majority of shares ENTITLED to vote. Increasingly though, treat this the same as “other matters”
4. Other matters: majority of the shares that ACTUALLY vote on the issue.
Cumulative SH voting
i. Available only when shareholders elect directors
ii. Usually with straight voting, theres a spate election for each seat on the board. Each share gets one vote pre seat.
iii. With cumulative voting, we do not vote for each seat individually. We have one at-large election. The top two (or whatever) finishers are elected to the board.
1. To determine your voting power when cumulative voting exists: multiply the number of shares times number of directors to be elected. So if there are two directors to be elected how many votes does each person have
a. A who owns 30 shares = 60 votes
b. B who owns 40 shares = 80 votes
2. Each allocates votes however she wants. And top two are eleted. Here A can get eelected to the board if she puts all 60 of votes on herself then A will finish in top 2.
iv. If articles are silent about cumulative voting, it DOES NOT EXIST
