Shareholders

Question 1

Shareholders - Meetings and Voting

Answer 1

• Meetings
  
  • An annual meeting of shareholders is required. The primary purpose is to elect directors.
• Voting
  
  • The primary issue upon which shareholders are entitled to vote is the selection of the board of directors. Shareholder approval is also required for fundamental corporate changes (frequently tested issue), such as structural changes to the corporation (sale/merger of corporation).

Question 2

Shareholders - Proxy Voting

Answer 2

Proxy Voting (Not frequently tested)

A proxy is a written agreement by a shareholder to allow a person (can be another shareholder or a representative of the original shareholder) to vote for them. The proxy is valid for 11 months unless otherwise stated and is generally revocable. To be irrevocable, the proxy must state it is irrevocable and the person who is receiving the shareholder’s right to vote must provide something of value in exchange to the shareholder.

Question 3

Shareholders - Shareholder Agreement & Shareholder Derivative Action

Answer 3

• Shareholder Agreements (Not frequently tested)
  
  • Shareholders may enter into a binding voting agreement which governs how they will vote their shares. The agreement is a contract and may be enforced; there is no time limit.
• Shareholder Derivative Action (Not frequently tested)
  
  • In a derivative action against a corporation, a shareholder is suing (usually a director or officer) on behalf of the corporation for a harm suffered by the corporation. The recovery goes to the corporation. See outline for more information.

Question 4

Shareholders - Liability

Answer 4

Liability – Piercing the Corporate Veil (Frequently tested)

o Generally, shareholders are not personally liable for corporate acts. However, courts may allow a plaintiff to “pierce the corporate veil” and sue a shareholder(s) individually. This issue is likely to arise when there is a closely held corporation with only a few shareholders.

o To determine whether to pierce the corporate veil, the court will look at the totality of the circumstances, including:

• Undercapitalization of the corporation at the time of formation
• Disregard of corporate formalities (not holding annual meetings or holding votes) ▪ Use of corporate assets as a shareholder’s own assets
• Self-dealing with the corporation
• Siphoning corporate funds or stripping assets

Exam Tip #1: Piercing the corporate veil is triggered by facts involving a third party plaintiff who is seeking to recover money from a corporation. If the shareholders were using the corporation as a shield to avoid personal liability, failing to follow corporate formalities, or treating the corporation like a personal bank account, a court is likely to pierce the veil.

Question 5

Shareholders - Fiduciary Duty

Answer 5

Controlling shareholders’ fiduciary duties

Controlling shareholder: Anyone with more than 50% of a corporation’s shares is a controlling shareholder. If a shareholder otherwise holds enough shares to enact changes through the voting process, s/he will be considered a controlling shareholder.

Fiduciary Duty

A controlling shareholder owes a fiduciary duty to minority shareholders to not use his/her power in a way to disadvantage them.