Shareholders and Officers

Question 1

Officers

Answer 1

Owe the same duty of loyalty and care

Are agents of the corporation, so can bind the corporation within their authority unilaterally

Question 2

Officers required

Answer 2

President and Secretary

One person can hold both positions

One person can be both plus the only director

Question 3

Officer selection and removal

Answer 3

officers are selected and removed by the board

the board also sets officer compensation

Question 4

Indemnification of Directors and officers

Answer 4

1) Corp. barred from indemnifying if person was adjudged liable on the basis of an improper financial benefit.
2) Corp. MUST indemnify person if she is “wholly” successful on the merits or otherwise in defending the suit AKA she wins a judgment on the entire case.
3) *Corp. MAY indemnify anything not satisfied by 1 or 2 (e.g. case settled)

Eligibility standard: must show the officer acted in good faith and w/ reasonable belief that her actions were in corporation’s best interest as determined by disinterested directors/disinterested shares/independent legal counsel.

Question 5

Who determines whether there will be reimbursement?

Answer 5

1) majority vote of the disinterested directors or the disinterested committee or the disinterested shares
2) independent legal counsel

Question 6

*Close corporation

Answer 6

a board of directors is not required, can be managed by the SH or by a single manager

will have few SH and stock is not publicly traded

Must state that it is a closed corporation in the certificate of formation

Question 7

Likely closed corporation on bar exam

Answer 7

Likely closed corporation on bar exam

Question 8

Shareholder Management Agreement

Answer 8

alternative way to manage a corporation in a close corporation

Can either by entered into in the certificate or bylaws and approved by all SH or written agreement of all SH

A copy of the SMA should be sent to all SH

SMA can be filed with the secretary of state - will give notice to all subsequent owners

Question 9

Stock certificates of a close corporation

Answer 9

should state on the face that it is a close corporation

Question 10

Close corporation duty of loyalty and care

Answer 10

The manager will owe the duty of loyalty and care

The SH will not owe to each other any duties but one can be found by the court

Question 11

*Piercing the Corporate Veil (PCV)

Answer 11

Can only be done in close corporations!!!!

to PCV and hold SH personally liable, two things must be true:

1. SH abused the privilege of incorporating; and
2. limited liability would be unfair

Will be done to:

1. SH abused privilege of incorporating
2. achieve equity

Question 12

Oppression

Answer 12

When you see a majority SH treating a minority SH unfairly. For oppression, we allow the harmed minority SH to sue because the minority SH in closely held corp has no way to cash out on her investment–not publicly traded.

Question 13

In what type of case is a court going to be more willing to PCV?

Answer 13

Say this on bar:
Courts may be more willing to PCV for a tort victim than for a contract claimant because unlike a contract claimant, a tort victim did not voluntarily choose to transact with the corporation and did not knowingly assume the risk of limited liability.

Question 14

Alter Ego (PCV)

Answer 14

SH was using the corporate assets as his own. Court might PCV if SH’s failure to respect the separate corporate entity harmed creditors.

Question 15

Undercapitalization (PCV)

Answer 15

SH failed to invest enough (or to get insurance) to cover the corporation’s reasonably foreseeable liabilities. Thus a court might PCV because the corporation was undercapitalized when formed.

Question 16

Can you PCV to go after a parent’s assets when corp is a subsidiary?

Answer 16

Yes–another corporation can be a SH. This is a big example when a parent corp forms a subsidiary to avoid its own obligations. Good set up for PCV

Question 17

PCV and failure to observe corporate formalities

Answer 17

Will never be enough by itself

Question 18

*Shareholder derivative suits

Answer 18

SH is suing to enforce the corporation’s cause of action, not her own personal claim. It’s a case where the corporation is not pursuing its own claim when it should, so SH steps in to challenge the corporation.

Always ask: could the corporation have brought this suit? If so, it’s a SH derivative suit.

Question 19

*Requirements to Bring Derivative Suit

Answer 19

1. Stock Ownership - when claim arose
2. Own stock throughout the litigation- shows that adequately representing the corporation’s interests
3. must have made a written demand on directors to bring the suit on behalf of the corp., setting forth the claims with particularity
4. corporation must be joined as a defendant
5. can only be settled or dismissed by court approval

Question 20

*Written demand on the board for Derivative Suit

Answer 20

After demand has been made the SH must wait 90 days to file suit unless demand is rejected before the 90 days or waiting 90 days would cause irreparable damage to the corporation

MUST ALWAYS MAKE DEMAND, NEVER EXCUSED

Question 21

*Stock ownership requirement for derivative suits

Answer 21

must have owned stock when the claim arose or have gotten it by operation of law from someone who did

*Inheritance or divorce decree (no stock that is bought)

Question 22

*What happens if SH wins derivative suit?

Answer 22

The money from the judgment goes to the corporation

SH can recover costs and attorney fees from the corporation

Question 23

What happens if SH loses derivative suit?

Answer 23

SH will not be able to recover costs and attorney fees

SH might be liable for the D’s attorney fees if sued for improper purpose or without a reasonable cause

Other SH are then barred from bringing the same suit

Question 24

• Corp’s options in responding to notice of derivative suit

Answer 24

• may move to dismiss based upon determination by majority of independent and disinterested directors (or a committee of these) after a finding that the suit is not in the best interest of the company
• alternatively, the decision may be made by one or more disinterested and independent person(s) appointed by the court

Question 25

*Court ruling on a motion to dismiss a derivative suit

Answer 25

the court must dismiss if it finds the determination made by the company was made in good faith by independent and disinterested directors

Question 26

SH voting - Who votes?

Answer 26

The record SH (person shown as owner in corp records) as of the record date (voter eligibility cut off date)

Question 27

Exceptions to the rule that record owner on record date votes

Answer 27

1) corp reacquires stock before the record date so it owns the treasury stock as of record date (corp does NOT vote this stock)
2) death of SH (executor can vote the shares)
3) proxies (writing signed by record SH directed to secretary of corp authorizing another to vote the shares)

Question 28

*Proxy voting

Answer 28

a grant of authority by a shareholder allowing another individual to vote his or her shares

• proxy assumed to be revocable at any time

Proxy can be revoked in writing to the corporate secretary or by attending the meeting and voting

Question 29

*Can a proxy be revoked?

Answer 29

Proxy can be revoked in writing to the corporate secretary or by attending the meeting and voting

Can revoke even if it says it is irrevocable unless coupled with interest

Question 30

*Can a SH revoke a proxy even though it states it is irrevocable?

Answer 30

Yes. The only way to have an irrevocable proxy is if a proxy is coupled with an interest. This requires:

1) proxy says it is irrevocable
2) proxyholder has some interest in the shares other than voting (e.g. S sells B her shares after record date and gives B proxy to vote the shares–now it is irrevocable)

Question 31

Voting Trust

Answer 31

Requires:

1. written trust agreement controlling how the shares will be voted
2. file a copy with the corporation
3. transfer legal title of shares to voting trustee
4. OG SH will revive trust certificates and retain all SH rights other than voting

Question 32

Pooled Voting Agreement

Answer 32

Requirements:

1. in writing
2. copy to the corporation

Will be enforceable against subsequent owners if they had notice or actual knowledge of the agreement - notice will be presumed if noted on the stock agreement

Question 33

Where do shareholders vote?

Answer 33

1) Unanimous written consent (email ok)

2) At the annual meeting

Question 34

*Annual SH meeting

Answer 34

must be held

If none is held within 13 months, a SH may petition the court to order one

Where directors are elected

Question 35

*Special SH meeting

Answer 35

can be called by 1) the board, 2) the president, 3) the holders of at least 10 percent of the shares entitled to vote, or 4) anyone else permitted in the certificate

Notice must state the purpose of the meeting - and only that stated purpose business can be conducted at the special meeting

Question 36

*Notice requirements for SH meetings

Answer 36

Written notice must be given to all SH entitled to vote between 10 and 60 days before the meeting (21 to 60 for fundamental change)

Notice can be given personally, by mail, or email with consent

Notice must include:

1. date
2. time
3. place of meeting

Question 37

What SH generally vote on

Answer 37

1. to elect directors
2. to remove directors
3. on fundamental corporate changes
4. on things like amending the bylaws

Question 38

*What is required for SH vote to be valid?

How do SHs vote?

Answer 38

General rule: a quorum requires a majority of outstanding shares

Once a quorum is established it cannot be lost

Question 39

How do SHs vote?

Answer 39

Must be a quorum (focuses on # of shares not number of shareholders). A quorum requires a majority of outstanding voting shares. If quorum is met, action will be deemed approved if the votes case in favor of the action exceed the votes cast against it.

Question 40

Number of shares to elect/remove directors

Answer 40

To remove directors: a majority of the shares entitled to vote

To elect directors: plurality vote by SH- the person who gets the most votes

Question 41

Cumulative voting

Answer 41

only allowed to elect directors

allows small SH to have a better chance of getting someone onto the board

Unlike in straight voting where a each share votes for each seat, in cumulative voting we multiply the number of shares a person owns times the number of directors to be elected and that person will have than many votes

Must be explicit in the certificate of formation

Question 42

Stock transfer restrictions

Answer 42

Sometimes people want to restrict transferability (especially in close corp) to keep outsiders out.

This is generally okay and restrictions will be upheld if they’re reasonable under the circumstances–cannot be an absolute prohibition on alienation/transferability.

To be enforceable against transferee:

1) restriction conspicuously noted on the face of the stock certificate, OR
2) transferee had actual knowledge of the restriction

Question 43

*Right of SH (personally or by agent) to inspect (and copy) the books and records of the corporation?

Answer 43

SHs have the right to inspect the books and records of the corporation at a convenient time if they state a proper purpose.

This right vests in the shareholder if he has owned the stock for at least 6 months prior to the request, or if he owns more than 5% of the corporation’s stocks.

If the shareholder does not state a proper purpose to the inspection, the corporation may deny his request

If corp fails to allow proper inspection, SH can seek a court order (and if she wins, recover costs and attorney fees).

Question 44

Do directors need to go through procedures to access corporate books and records?

Answer 44

No, they have unfettered access.

Question 45

Distributions

Answer 45

Payments by the corporation to shareholders

3 types:

1) dividends
2) repurchase of shareholder’s stock
3) redemption

All are made at the board’s discretion (there’s no RIGHT to a distribution); must meet a very high abuse of discretion standard to judicially compel a distribution.

Question 46

Which SHs get dividends?

Answer 46

Preferred = pay first
Preferred participating = pay again
Cumulative preferred = dividend accrues year-to-year (add them up)
Common (the rest)

Question 47

For any distribution, which funds can be used?

Answer 47

Traditional view:

1) earned surplus: generated by business activity and consists of all earnings minus all losses minus distributions previously paid (board IS allowed to use this for distributions)
2) stated capital: generated by issuing stock; on a par issuance, the par value goes to stated capital and excess goes the capital surplus, and on a no-par issuance, the board allocates proceeds between stated capital and capital surplus (board IS NEVER allowed to use stated capital for distributions)
3) capital surplus: generated by issuing stock; payments in excess of par plus amounts allocated in a no-par issuance (board IS allowed to use this for distributions IF SHs are informed)

Modern view:
Doesn’t look at funds, just says corp cannot make a distribution if it’s insolvent (meaning either (1) it can’t pay debts, or (2) total assets < total liabilities)

Question 48

Who is liable for improper distributions?

Answer 48

Directors are jointly and severally liable. However, they have a good faith reliance defense. SHs may be liable too, but ONLY if they knew the distribution was improper when it was received.

Question 49

*Fundamental corporate changes

Answer 49

Extraordinary changes (e.g. sell/purchase of all or substantially all of assets, incurring massive liabilities) the board cannot do alone–so important that SHs get managerial rights.
Four requirements:
1) board action adopting a resolution of fundamental change
2) board submits proposals to SHs w/ written notice
3) board gets SH approval (majority of shares entitled to vote)
4) usually delivering a document to the Sec. of State is required for most big changes

Question 50

Dissenting SH right of appraisal

Answer 50

The right to force corp to buy his stock for fair value.

BUT right isn’t available if stock is listed on national exchange or has 2,000+ SHs, AKA only available for SHs in a closely held corp

Question 51

*Actions that will trigger the right of appraisal

Answer 51

1. merger
2. sale of shares in a share exchange
3. transfer of substantially all assets; or
4. conversion

Question 52

Amendment to the certificate of formation

Answer 52

Need board of director action and written notice to SH

Need SH approval -2/3 of those entitled to vote

If approved, deliver the amended certificate to the Secretary of State for filing

Question 53

*If someone doesn’t meet the requirements for a SH derivative suit but they are a SH at time harm is happening, what can they do?

Answer 53

• can’t bring SH derivative suit, but can bring suits for breaches of duty of care, loyalty,

Question 54

• Rescheduling shareholder meeting

Answer 54

Annual shareholder’s meetings can be
rescheduled for various reasons,

However proper notice must be sent to each shareholder entitled to vote at that meeting as of the date of record (the date the corporation establishes who owns each share of stock for purposes of the upcoming meeting).

Each such shareholder is entitled to notice before every shareholder meeting, annual or special.

The annual shareholders meeting is not moveable, especially within a short period of time, without an approved change in the bylaws or by a majority of the
shareholders, and for an invalid reason.

Question 55

• If notice procedures are not followed but SHs still show up and vote, can those SHs complain about notice?

Answer 55

No. By showing up and voting they have waived notice.

Can also waive notice by sending a written waiver of notice to corporation’s secretary.

Question 56

• shareholder’s agreement

Answer 56

SHs of any corporation not listed on securities exchange may enter into agreements on how the company will be run (e.g. restricting the power of the board, vesting board power in certain individuals, etc.)

Agreement must be approved by all SHs when adopted and its existence must be conspicously noted on share certificates to be binding on subsequent SHs.

Question 57

*What terms can the SH agreement contain?

Answer 57

A shareholders’ agreement may limit the board’s powers and may even eliminate the board all together.

The agreement may also assign management to the shareholders or some or one of the shareholders according to the agreement.

The agreement is generally valid for 10 years, but the
shareholders may contract to the contrary.

Question 58

*What if person buys shares of corporation that has SH Agreement in place?

Answer 58

that person can rescind their stocks if they did not know about the SH Agreement at the time of purchase

Question 59

*SH Right of Appraisal

Answer 59

SHs who are dissatisfied with (i) the terms of the merger or share exchange, or (ii) the sale of all or substantially all of a company’s assets, are permitted to compel the company to buy their shares

Right to appraisal does not apply if:

(i) shares are listed on national securities exchange; or
(ii) held of record by more than 2,000 SH

Question 60

*Procedure for SH Right of Appraisal

Answer 60

1. Corporation notifies SH: if court is considering action that will give rise to appraisal rights, must notify the affected SHs of their right to dissent
2. SH makes demand and tenders shares: if SH wishes to exercise right of dissent, he must notify corporation of his intent and of his estimate of the value of his shares BEFORE vote is taken
3. Corporation responds: within 20 days of receiving demand, corporation must respond that it accepts amount or rejects it by countering.
4. if necessary, court appoints appraiser: if corporation and SH cannot agree on fair value, SH or corporation may file a petition in the court to have an appraiser determine fair value.