Shareholders Flashcards
Can shareholders manage the corporation?
NO. The Board of Directors manages.
Exception: Closely-Held Corporations
What is a closely-held corporation?
A corporation with just a few shareholders and the stock is not publicly traded
What are the requirements for shareholder management in a closely-held corporation?
- There must be a provision in the certificate
- All incorporators or shareholders must approve
- It’s noted clearly on front and back of all shares
- All subsequent shareholders have notice; and
- Shares are not listed on any exchange
What duties are owed by managing shareholders in a closely-held corporation?
Same as the duties owed by the Board of Directors: loyalty and care.
Are there duties between shareholders in a closely-held corporation?
They have a duty of utmost good faith. Not quite a fiduciary duty, but close.
What are the requirements for a professional services corporation?
All directors, shareholders, and officers must be licensed professionals (lawyers, doctors, etc)
What are professionals liable for in a professional services corporation?
Only their own malpractice
Are professional in a professional services corporation liable for contracts entered into by the entity or rent due on the lease in the PCs name?
No. Again, they are liable for their own malpractice only.
In a professional services corp., what happens when a shareholder dies or loses his license?
The PC must buy back his shares
Are shareholders liable for corporate actions?
NO - the corporation itself is liable
Exception: Court can pierce the corporate veil
What is piercing the corporate veil?
The court will hold a shareholder liable for the actions of the corporation.
Shareholder may be another corporation.
If multiple shareholders, likely only the abusive one will be liable
When is piercing the corporate veil an option?
Generally, only with close corporations
What are the requirements for piercing the veil?
- Abuse of the privilege of incorporating
2. Fairness requires holding SH liable
What are the requirements to pierce the veil in an “alter ego” fact pattern?
NY requires that the SH must exercise complete domination over the company to perpetrate fraud or injustice against the plaintiff
Look for D using corporate assets for personal use
What are the requirements to pierce the veil in an undercapitalization fact pattern?
- The SHs will fail to invest enough to cover prospective liabilities
- New York also requires complete domination and fraud / injustice
What is the liability of close corp SH’s with regards to wages?
The 10 largest SH’s are personally liable for the wages and benefits of the company’s employees
What is a shareholder derivative suit?
A lawsuit by a shareholder on behalf of the corporation
What claims may be brought derivatively?
Breach of duty of care
Breach of duty of loyalty
Examples: Failure to declare a dividend, waste of corporate assets
What happens when a SH wins a derivative suit?
- The corp gets the recovery
- SH gets costs and attorneys’ fees
- SH can recover damages if recovery by the corporation would return money to “bad guys”
What happens with a SH loses a derivative suit?
- No SH recovery of costs and fees
- SH liable to defendants for costs
- Other SHs cannot sue on same transaction
What are the requirements for a derivative suit?
- P must have stock ownership (can result by operation of law) when claim arose and must maintain ownership throughout the action
- Must adequately represent interests of SHs and Corp
- Post bond for D’s costs (unless owns 5% / $50,000 worth of stock)
- Must make demand on BoD unless futile
- Corporation must be joined as a defendant
- Special pleading requirement
When is a demand on the board of directors to sue on behalf of the corporation futile?
- Majority of the board is interested or under control of interested directors
- Board didn’t perform due diligence
- Transaction was so egregious on its face that it could not be result of sound business judgment
What is the special pleading requirement for derivative suits?
P must plead with particularity her efforts to to get the board to sue or why such a demand would have been futile
What happens if a demand to sue is made on the Board and the Board refuses?
SH can bring suit only if she can show:
- A majority of the board is interested; or
- Board’s procedure was incomplete or inadequate
Can the corporation make a motion to dismiss a SH derivative suit?
A committee may make a motion to dismiss if it determines that the suit is not the in the corporations best interests
When is a SH derivative suit not in the corporation’s best interest?
- Low chance of recovery
2. Cost will exceed recovery
What factors will be considered by the court in deciding a corporate motion to dismiss?
- Independence of those making the investigation
2. Sufficiency of the investigation
How is a SH derivative suit settled?
Requires court permission. May require notice to the shareholders
In New York, can a Director or Office sue another Director or Officer?
Yes. One may sue another to compel an accounting for violation of duties. The suit is brought in the name of the D/O, but recovery is by the corporation. The requirements for a derivative suit need not be met.
What are the requirements for SH voting?
SH must be the record owner as of the record date
What is the record date?
It is a cutoff for voting eligibility. It must be no fewer than 10 days or more than 60 days before the meeting.
May an executor vote for a deceased shareholder?
Yes, if the SH could have voted if alive.
Can proxies be used for shareholder voting?
Yes
What is a proxy?
A writing (Fax / Email OK) signed by the SH or agent directed to corporate secretary authorizing another to vote the shares
How long are proxies valid?
11 months, unless it states otherwise
How are proxies revoked?
Either in writing or by attending the meeting and voting.
Death revokes only when notice reaches the corporate secretary
What are the requirements for an irrevocable proxy?
- It states that it is irrevocable; and
2. The proxy-holder has some interest in the stock other than voting
What are the five requirements for a voting trust?
- Written agreement
- Copy given to corporation
- Title of shares transferred to trustee
- Original SHs receive voting trust certificates and retain all rights except for voting
- 10 year limit, renewal w/in 6 months of expiration
What are the rules and requirements for a voting agreement?
- Cannot be used by directors; SHs only
- Must be in writing and signed
- Proxy is irrevocable if it says so
- Not specifically enforceable in NY
How doe shareholders vote?
Two ways - written consent of all voting shares or by holding a meeting
What is the main purpose of the annual meeting?
To elect directors (highest vote-getter for each seat)
Who can call a special meeting?
The Board or anyone provided in the Certificate or Bylaws
What are the notice requirements for SH meetings?
Must give written notice to every SH entitled to vote between 10 and 60 days before the meeting
What must be in the notice of SH meeting?
- Time and place
- If special, who called it and why
- Must note if it involves appraisal rights
What if notice for a SH meeting is not properly given?
Any action taken at the meeting is void
Can improper notice be waived?
Yes, in two ways.
- Written waiver by those who did not receive
- Attend the meeting without objection
What are the SH voting quorum requirements?
Majority of outstanding shares (not shareholders)
Can the quorum requirements be reduced?
Yes, in the bylaws or Certificate, but never below 1/3rd of outstanding shares.
Can the quorum requirements be increased?
Yes, but ONLY in the Certificate.
What are the voting requirements to approve an action?
Majority of shares voting (abstentions do not count)
Can the majority approval requirement be reduced?
No.
Can a SH quorum be lost if SHs leave?
No. Once obtained, it remains valid.
Can the majority approval requirement be increased?
Yes, but ONLY in the certificate
When may cumulative voting be used by SHs?
Only when voting to elect directors (if Certificate allows)
What is the formula for cumulative voting?
100 / (X+1), where X is the number of directors being elected
Where are stock transfer restrictions set?
In the Certificate, bylaws, or by agreement
When are transfer restrictions valid?
If they are not an undue restraint on alienation
Examples:
- Corp approval probably undue restraint
- Right of first refusal - OK (if price reasonable)
- Buy-Back provisions - OK
Even if valid, a transfer restriction cannot be invoked against a transferee unless either:
- The restriction is clearly noted on stock; or
2. The transferee had actual knowledge of the restriction
What are the requirements for inspecting the minutes of SH proceedings and the record of SHs?
- 5 days written notice
- Corp can require affidavit that SH purpose is not other than in the interest of the corp and that the SH has not tried to sell SH list in last 3 years
What are the requirements for inspecting the list of current directors and officers?
2 days written notice by SH
What are the requirements for inspecting the corporations latest balance sheets, profit and loss statements, and interim statements?
Any SH may request and Corp must provide
What are the requirements for Director inspection of corporate books?
Directors have unfettered access
How are dividends declared?
At the board’s discretion. A court will only interfere if there is a showing of bad faith or dishonest purpose
What are the four share classes entitled to dividends?
Common, preferred, preferred (participating) and preferred (cumulative)
How are dividends distributed when there is only common stock?
Amount of dividend / number of common shares = dividend per share
How are dividends distributed when there is common and preferred stock?
Preferred take their cut first. Remaining dividend amount / number of common shares.
How are dividends distributed when there is common and preferred participating stock?
Preferred take their cut first. Remaining dividend amount / number of common + preferred shares
Participating preferred take from BOTH
How are dividends distributed when there is common and preferred cumulative stock?
- Amount of dividend x number of years since last dividend paid (includes this year)
- Remaining dividend amount / number of common shares
Which funds may be used to pay dividends?
Only surplus, which is Assets less stated capital less liabilities
What is stated capital?
Par value of the stock issuance
Note: If issuance raises more than par value, excess goes to surplus
If there is no par value for an issuance, what may be allocated to surplus?
Within 60 days, the board may allocate any amount (but not all) to surplus
When can a corporation make a distribution?
At any time (even if they took a loss in previous year); but cannot if insolvent or distribution would result in insolvency
Who is liable for an unlawful distribution?
Directors are personally liable (subject to defense of good faith reliance)
Shareholders will be liable if they knew it was unlawful when they received it
Who sues when there has been an unlawful distribution?
The corporation (can be derivative action)
What are the requirements for stock redemption?
Will be provided in the Certificate and must be done proportionately within each class of stock
