Shareholders: duties and liabilities

Question 1

Piercing the corporate veil

Answer 1

Although shareholders generally are not liable for corporate acts, courts may “pierce the veil” and hold shareholders personally liable if it finds that the shareholders are abusing the protections of the corporation.

Question 2

Piercing the corporate veil: factors

Answer 2

In deciding whether to pierce, a court considers the totality of circumstances, including the following factors:

(1) Undercapitalization of the corporation at the time of formation;
(2) Disregard of corporate formalities—e.g, failure to hold annual meetings or votes;
(3) Intermingling of corporate and shareholder assets;
(4) Self-dealing with the corporation;
(5) Siphoning or stripping of corporate funds and assets.

Question 3

Controlling shareholders

Answer 3

A controlling shareholder is one who either:

(1) Owns more than 50 percent of a corporation; or
(2) Otherwise controls voting power based on the nature of the company’s ownership structure.

Question 4

Controlling shareholders: fiduciary duties

Answer 4

Controlling shareholders have a duty not to abuse their power to disadvantage minority shareholders.

Controlling shareholders may be liable if they:

(1) Sell stock to an outsider intent on looting or destroying the company;
(2) Seek to eliminate other shareholders from the corporation; or
(3) Transact with the corporation in breach of the duty of loyalty: receiving a special distribution or otherwise conducting major business transactions to her own benefit

Question 5

Controlling shareholders: disclosures

Answer 5

A controlling shareholder has a duty to disclose to the minority shareholder any information that it knew or should have known if it is information that a reasonable person would consider important in deciding how to vote on a transaction:

• A controlling shareholder breaches her fiduciary duty to the minority shareholders if nondisclosure causes a loss to the minority shareholders.
• A loss includes being deprived of a state remedy that would otherwise have been available.

Question 6

Controlling shareholders: squeeze outs

Answer 6

When a majority shareholder purchases the interest of the minority, it has a fiduciary duty of fair dealing.

The controlling shareholder bears the burden of demonstrating:

• that the process she employed was fair and
• that the price she selected was fair.