Shareholders Flashcards
Who runs the company in a Close Corporation?
The shareholders.
The shareholders can agree to their own management of a Close Corp, without a Board, why doing one of what two actions?
Stated in the articles and approved by all SH
OR
Agreement by unanimous Shareholder Management Agreement
In a Close Corporation, who owes the duty of care and of loyalty?
Whomever manages the company.
What special fiduciary duty is owed in a Close Corporation?
The duty of shareholders to other shareholders (e.g. oppression of minority SH)
Who can incorporate professional corporations? And what must the name include in the title?
Licensed professionals.
P.C. or P.A.
What should be articles of a professional corporation state?
That that purpose of the company is to practice a particular profession.
Generally speaking, are SH liable for corporate debts of the company?
No because of the corporate veil.
In which circumstance can a court pierce the corporate veil and hold the SH personally liable?
Only in Close Corporations.
Typically cases involving:
— SH abuse/fraud
— corporate formalities ignored and it is fair to hold SH liable.
A fact pattern involves a SH abusing a Close Corporation by using it as an alter ego. What steps will you need to work through on the exam to analyse this scenario?
- State general rule that SH aren’t personally liable for corporate debts
- State PVC exception for Close Corps
- Ask whether the SH abuser the company by treating corporate assets as their own
- Would it be fair to hold SH liable?
If the corporate veil is pierced, are both culpable and non-culpable SH personally liable?
No, you only go after the wrongdoer.
A fact pattern involves a SH undercapitalising a Close Corporation when it’s set up. What steps will you need to work through on the exam to analyse this scenario?
- State general rule that SH aren’t personally liable for corporate debts
- State PCV exception for Close Corps
- State that a court MIGHT pierce because Corporation was undercapitalised when formed. Apply to facts.
- State that courts may be more willing to PCV for a tort victims than a contract claim.
Can the court PCV only for human SH or also for corporate parents?
Either
What is a Direct Action?
SH brings an action against a D/O personally because they were damaged by the breach.
What is a Derivative Suit?
SH is suing to enforce the company’s claim, not their own.
A SH or a Close Corporation sues the Board for breaching the Duty of care and loyalty? Is this a derivative suit or a direct suit?
Derivative because the breach harms the company
SH sues the Board of C Corp for using new stock without honouring their preemptive rights. Is this a derivative suit or a direct suit?
Direct because the SH was wronged.
SH wants to sue the company to force them to declare a dividend. Is this a derivative suit or a direct suit?
Direct
In a Close Corporation, SH 1 sues SH2 for oppression. Is this a derivative suit or a direct suit?
Direct, because there was a breach of duty owed to the individual SH and only they were harmed.
If a SH wins their suit, who gets paid the damages and costs?
Company gets damages and SH can recover their costs.
If a SH loses their derivative suit, can they recover costs?
No, and they could even be liable for the other side’s costs if they brought the suit without reasonable cause.
What are the requirements for a SH to bring a derivative suit?
- STOCK OWNERSHIP when the claim arose
- SH would provide ADEQUATE REPRESENTATION of the corporate’s interest
- SH must make a WRITTEN DEMAND ON CORPORATE, asking the company to bring suit.
- Corporation is JOINED as a Defendant, even though the suit asserts the corporate’s claim.
- Once filed, parties can only settle or finish the suit with COURT APPROVAL.
When can a Corporation move to dismiss a derivative suit?
After it’s filed
Based on an independent investigation
Which concluded that the suit was not in the company’s best interests
Court can rule in favour of the company on their motion to dismiss the derivative suit in which circumstances?
The investigative body’s recommendation to dismiss was independent
AND
The investigative body made a reasonable investigation.
What is authorised stock?
The number of shares that a company may issue.
What is issued stock?
The number of shares the company sold.
What are authorised but unissued shares?
Ones that the company issued and but then reacquired or redeemed.
Does an outstanding share have any voting rights attached?
Use, it has one vote. But you must be the RECORD SHAREHOLDER of the stock as of the RECORD DATE.
What is a SH proxy?
— A writing
— Signed by the record shareholder
— Directed to the Secretary of the company
— Authorising another to vote on their share
What is the lifespan of a SH proxy?
11 months, unless it states otherwise?
How can the SH revoke their proxy?
Write to the company secretary
OR
Attend the meeting and vote
Can a SH revoke an irrevocable proxy?
Yes, unless the proxy is coupled with an interest. This requires:
- Proxy must state it’s irrevocable; AND
- The holder has some interest in the shares other than voting (e.g. holder has option to buy stock)
What is a Voting Trust?
And what are the 4 requirements for creating a voting trusts?
This is an agreement between SH in which they transfer their voting rights to a trustee, who then votes on the stock in accordance with the agreement
It requires:
— Written trust Agreement, controlling how the shares will be voted
— a copy must be sent to the company
— Transfer Legal title to the voting trustees
— Original SH receives trust certificate and retains all rights, except voting
What are the 2 requirements for SH pooling their voting? And do the SH need to create a voting trust?
— SH must enter into a voting agreement
— Agreement must be written and signed
No need to create a voting trust
Where do SH vote?
At a meeting, but can also act by unanimous written agreement, signed by holders of all voting shares.
How often must a company have an annual meeting and if the corporation fails to do this, what action can a SH take?
Must hold annual meeting at least once every 15 months.
SH may petition the court to order it, if corporation fails to hold one.
What percentage of SH do you need to agree a Special Meeting?
10%
State the notice requirements for what must be provided to the SH?
Notice must be:
— written
— delivered no less than 10 and no more than 60 days before the meeting
— given to every SH that’s entitled to vote
— Annual Meeting = also stage date, time and place
— Special Meeting = state Purpose of Meeting
The company fails to give proper notice to SH of a meeting. This means that any action taken at the meeting will be…?
VOIDABLE
Unless those who did not receive proper notice waive the defect
What changes/actions does a SH get to vote on?
- Election of Directors
- Removal of Directors
- Fundamental corporate change
Define the quorum needed for a SH vote?
Majority of the outstanding shares
Can SH quorum be lost once the meeting begins?
No, unlike Director quorum
Generally, what SH vote is required to pass an action?
The votes cast in favour of the action must exceed the votes cast against the action.
What voting rules apply to (1) electing directors, (2) removing a director, and (3) other matters on which a SH is able to vote?
Electing = plurality
Removal = majority of the shares entitled to vote
Other matters = majority of the shares that actually vote on the issue
For which action/decision is cumulative voting available?
Electing director
How do you determine cumulative voting power for a SH?
No. of shares held by each SH
X
No. of directors to be elected
In what circumstances can the transfer of stock be restricted?
Only if reasonable, meaning it cannot create an undue restraint on alienation
If the stock transfer restriction is valid, against whom can it be enforced against?
The transferee, provided that:
— restriction is clearly noted on the stock certificate, OR
— they had actual knowledge of the restriction
A SH wants access to the company books and records, what procedure must they follow for non-controversial access?
Make a written demand to the company
At least 5 business days in advance
Need not state a purpose for their request
A SH wants access to the company Bylaws, Articles, minutes of recent SH meetings and the names and addresses of current directors, plus the most recent company annual report. Are these records controversial?
No, these are all examples of non-controversial records
A SH wants access to the company books and records, what procedure must they follow for CONTROVERSIAL access?
Make a written demand to the company
At least 5 business days in advance
Demand must state a proper purpose, meaning it’s related to the SH’s interest
SH wants to see copies of Board meetings and accounting records, plus records of SHs. These would be an example of what type of books and records?
Controversial
The Board refuses the SH access to books and records after the SH makes a proper request. What action can the SH take?
Seek a court order
What are the three types of Distributions?
Dividend
Repurchase of SH stock
Redemption (forced sale of stock to corporation at a price stated in the articles)
Do SH have a right to distributions?
Only once the board declares it because it’s in their discretion.
Company A has 30,000 Ordinary SH with common stock at $2 and 10,000 preferred stockholders which have a $4 preference. If the Board and declares a dividend of $200k, who gets paid what?
The preferred shareholders get paid first, not more. So they would be entitled to 10,000 x $2 = $20,000 is allocated to them first.
$200k (less) $20k paid to preferred SH leaves $180,000 for the common stock holder. Divide the remaining sum by the no. of ordinary SH (180,000 divided by 30,000 = $6 per share).
If a preferred stockholder has a cumulative interest, what does that mean?
Their interest accrues year to year from when the last distribution was paid.
Under the modern view, when can a Corporation not make a distribution (of any kind)?
When it’s insolvent. Meaning it cannot pay its debts as they come due and its total assets are less than total liabilities.
Under the traditional view of distributions, from where does “earned surplus” come from and can it be used by the company to pay distributions (of any kind)?
Generated from Business Activity, made up of all earnings minus losses and distributions already paid.
It can be used for paying distributions
Under the traditional view of distributions, from where does “Stated Capital” come from and can it be used by the company to pay distributions (of any kind)?
Generates by Issuing Stock.
It can NEVER be used to pay distributions
Under the traditional view of distributions, from where does “Capital Surplus” come from and can it be used by the company to pay distributions (of any kind)?
Comes from Issuing Stock, but it’s the above par value portion of the stock price.
It may be used for distributions if SH are informed
Who is liable for improper distributions?
Directors are jointly and severally liable.
SH only liable if they knew if was an improper distribution when they received it.
