Shareholders

Question 1

Shareholders Managing the Corporation

Answer 1

• Generally, shareholders DO NOT manage the day-to-day operation of the corporation (The Board of Directors does)
• Shareholders can run the corporation directly in a close corporation. (Few shareholders, not public)

GA - If stocks not traded in national exchange, shareholders can authorize elimination of the board and run the corporation. (Authorization should be noted on the stock certificates (front AND back). Can be in bylaws or unanimous written shareholder agreement.

Question 2

2 Forms to Authorize elimination of board (Can’t be publicly traded company)

Answer 2

1. In the articles or bylaws and approved by all shareholders, or
2. Unanimous written shareholder agreement. It should be conspicuously noted on the front and back of stock cerificates.
   - Time limit on these agreements is 20 years

Question 3

Shareholder Liability

Answer 3

• In a close corporations, it may be a duty not to oppress fellow shareholders, and therefore may be liable to other shareholder if board eliminated.
• If shareholders eliminate board and take over management, they owe duties of care and loyalty.
• Controlling shareholders cannot oppress minority shareholders

Question 4

Statutory Close Corp

Answer 4

• 50 or fewer shareholders
• Shares not publicly traded
• No board required
• Managing shareholders owe duties of loyalty/care
• Preemptive Rights

Question 5

Professional corporation

Answer 5

• Where professionals incorporate based on their profession. Articles must state the purpose of their corporation.
• Shareholders must be licensed professionals and generally may practice only in one profession.
• Can employ non-professionals
• Can be liable for own malpractice
• BUT, professional is not liable for other’s malpractice or for the professional corporation’s liabilities
• In general, general corporation laws apply

Question 6

What happens to shareholder’s stock in a PC when he dies or retires?

Answer 6

Generally, the Corp must purchase it within 6 months

Question 7

Piercing the Corporate Veil

Answer 7

CLASSIC CASES: Alter Ego (Identity of Interests); undercapitalization

*CAN ONLY HAPPEN IN CLOSE CORPORATIONS!

Holding a shareholder liable for what the corporation did.

• *****Requirements:
  1. They must’ve abused the privilege of incorporating, and
  2. Fairness must require holding them liable.
• GA courts may PCV to avoid fraud or evasion of contract or tort responsibility or public policy.
• GA courts more willing to PCV for a tort victim than for a K claim. A K claimant cannot use undercapitilization to PCV if it could have determined that the corp was undercapitalized

Question 8

Shareholder Derivative Suits

Answer 8

SHAREHOLDER AS PLAINTIFF

• A shareholder is suing to enforce the corporation’s claim, not her own. (Always ask: Could the corporation have brought the suit? Yes? Probably a derivative suit)
• If Shareholder wins, might get attorney fees
• Winnings go to Corporation.

Question 9

Motion to Dismiss Derivative Suit by Corporation

Answer 9

• Must show that independent investigation showed the suit was NOT in the corporation’s best interest.
  (ex. Low chance of success or expense would exceed recovery.)

-Investigation must be made by independent directors or a court-appointed panel of 1 or more independent persons

Question 10

Shareholders - Who Votes?

Answer 10

Generally, the “record shareholder” as of the “record date” has the right to vote.

• Record shareholder is the person shown as the owner in the corporate records.
• The record date is a voter eligibility cut-off date

Question 11

Shareholder voting exceptions

Answer 11

1. The corporation re-acquires the stok before the record date, so it is the owner as of the record date ;
2. Death of shareholder
3. Proxies

Question 12

Proxies

Answer 12

A proxy is a:

1. writing (fax and email okay)
2. Signed by record shareholder (email okay)
3. Directed to secretary of corporation
4. Authorizing another to vote the shares

-Good for 11 months unless it says otherwise

Directors cannot vote by proxy!

Question 13

Irrevocable Proxy

Answer 13

Only way to have irrevocable proxy is to attach an interest in it:

1. The proxy says it’s irrevocable AND
2. The proxy holder has some interest in the shares other than voting

Question 14

Voting Trust

Answer 14

Requirements:

1. Written agreement controlling how shares will be voted;
2. Transfer legal title of shares to trustee;
3. Transfer of title to voting shares recorded with corporation; and
4. Original shareholders receive trust certificates and retain all shareholder rights except for voting

**Lasts 10 years, but is renewable

Question 15

Shareholder Meetings

Answer 15

Where shareholders usually take action. Meetings are effective when there’s a quorum or there’s unanimous written consent of all voting shares.

Can be held anywhere.

2 types of meetings:

1. Annual to elect board of directors;
2. Special meetings (can be called by the board OR 25% of the voting shares) - Must give notice 10-60 days before.

Question 16

Notice requirements for Shareholders Meeting

Answer 16

Must be delivered 10-60 days before the meeting and the contents of notice must contain:

1. When
2. Where
3. Why

Must give statement of purpose because that is the only biz that can be transacted at meeting. (Not true for director meetings)

Question 17

What happens is corp fails to give notice to one of its shareholders of shareholder meeting?

Answer 17

Any act is void unless the shareholder not given notice waive the defect.

Can waive by:

1. Express - in writing and signed anytime (fax and email are ok)
2. Implied - attend meeting without objection

Question 18

How shareholders vote

Answer 18

There must be a quorum at the meeting (majority of outstanding shares).

• The quorum focuses the shares, not the amount of people/shareholders there!
• Shareholder quorum not lost if people leave the meeting (different from directors)
• If quorum met, majority means a majority of the votes actually casts on a proposal, not necessarily majority of all shares present

Question 19

Cumulative Voting

Answer 19

Must be stated in the Articles. Can only be used to elect directors.

Ex: Multiply number of shares by nuber of directors to be elected. You own 1,000, corporation has 9 positions open. - SH has 9,000 votes to cast any which way.

Question 20

Test for whether a stock transfer restriction valid?

Answer 20

Cannot be an undue restraint on alienation

Question 21

Right of first refusal

Answer 21

Valid as long as corp pays reasonable price for stock

Question 22

Distributions

Answer 22

Payment by the corporation to shareholders:

• Dividends
• To repurchase stocks
• Redemption (forced sale of stock by corporation)

Question 23

Which shareholders get dividends?

Answer 23

Ex. BOD of Corp decides to declare dividends of 400k. Who receives dividends if the outstanding stock is:

1. 100,000 shares of common stock? 4 per share
2. 100,000 of common and 20 K preferred with $2 preference? Preferred means pay first, 20k preferred multipled by 2 equals 40k. So 40 k to preferred and 360k to the 100,000 common shares
3. 100,000 shares of common and 20,00 shares of $2 preferred participating? Participating means pay again. Preferred is pay first. Here total stock gets divided by 120,000 k so your preferred participating get paid 2 per share for preferred status and 3 per share for participating status total of $5. Common stock get $3 per share.

Question 24

Requirements to Bring Shareholder Derivative Suit

Answer 24

Requirements to bring suit:

1. Stock ownership when claim arose (might be through divorce or inheritance);
2. Adequate representation of Corporation’s interest;
3. Must make written demand that Corporation bring suit;
4. The corporation must be joined as Defendant (initially)

*SH may dismiss derivative suit BUT ONLY with court approval

Question 25

Right of Shareholder to Inspect Books and Record of Corp

Answer 25

• Routine Stuff: Demand must be in writing at least 5 business days before inspection
• More Sensitive Stuff: accounting records, mintues of dir. meetings - Can make a written demand at least 5 biz days in advance and must:
  1. Describe Documents, and
  2. State a Purpose.

-If corp fails to allow proper inspection Superior Court has power to compel production

Question 26

When Can Corp Make Distribution

Answer 26

• Can make even if lost money previous year
• Cannot make them if insolvent, meaning:
  
  1. Unable to pay debts as they come due; or
  2. Total Assets are less than total liabilities

Question 27

Liability for improper distribution?

Answer 27

• Director - If declaring it was negligent, reckless, or intentional.
• No S/L
• Shareholder - if they knew the distribution was improper when they received it