Shareholders/Fundamental Corp Changes

Question 1

**

Shareholders

Answer 1

Power to manage generally vested in BOD. Generally, SHs have no direct control in management of corp’s business. They may act in own personal interests and have no fiduciary duty to corp or fellow SHs.
- SHs may bring direct (redress personal injuries) and derivative actions (redress corp’s injuries)

Question 2

Close Corporations

Answer 2

Corp owned by only a few persons. SHs can rule corp directly in close corp.
Characteristics:
- few SHs,
- not publicly traded
- can have BOD like regular corp or have SHs run business.
- Special fiduciary duty for SHs owed to other SHs.
- Controlling SHs cannot use power to benefit at expense of minority SHs (cannot oppress)

Question 3

Shareholder Liability

Answer 3

SHs generally cannot be held liable for corp debts bc corp is liable and SHs have limited liability. But SH may be personally liable for corp if the court pierces the corporate veil (common in close corps)

Question 4

Piercing the Corporate Veil

Answer 4

Courts may pierce to avoid fraud or unfairness. To pierce:
1. the SHs must have abused the privilege of incorporating AND
2. Fairness requires holding them liable

Question 5

Piercing: Alter Ego (Identity of Interests)

Answer 5

If SHs ignore corp formalities such that corp may be considered alter ego or mere instrumentality of SH, and some basic injustice results, court may pierce.
- SHs treat corp assets as their own and commingle money.

Question 6

Piercing: Undercapitalization

Answer 6

May pierce where corp is inadequately capitalized, so that at time of formation there is not enough unencumbered capital to reaosnably cover prospective liabilities.

Question 7

Piercing: Fraud

Answer 7

May pierce where necessary to prevent fraud or prevent SH from using enttiy to avoid existing (not future) personal obligations.

Question 8

Derivative Suits

Answer 8

SH is suing to enforce corp’s claim, not their personal claim, because corp is not pursuing its own claim so SH steps in to prosecute it for the corp.
- Recovery goes to corp (but they may pay SH’s expenses)
- may not be brought until 90 days after demand is made unless SH is notifiedearlier
- if majority of disinterested directors find in GF that suit is not in best interest after reasonable inquiry, suit cannot be brought.

Question 9

Shareholder Voting

Answer 9

As a general rule, the record SH as of the record date may vote.
- Record SH: person shown as owner in corp records
- Record date: vote eligibility cut-off date (may not be more than 70 days before meeting)

Question 10

Exceptions to SH Voting General Rule

Answer 10

1. Treasury stock: corp is owner of treasury stock as of record date (no one votes)
2. Death of SH (executor can vote)
3. Voting by Proxy

Question 11

Shareholder Proxy Voting

Answer 11

SH may vote their shares by proxy with (1) signed writing (2) directed to the corp’s secretary (4) authorizing another to vote the shares.
- proxy is generally revocable and may be revoked by SH attending meeting, writing to secretary, or by subsequent proxy appointment.
- Proxy will be irrevocable if (1) it states it’s irrevocable and is coupled with interest or given as security

Question 12

Shareholder Voting Trust

Answer 12

Writting agreement of SHs under which all shares are transferred to trustee, who votes in accordance with agreement.
- Trust is not valid more than 10 years unless extended by agreement

Requirements:
1. written trust agreement
2. copy give to corp
3. legal title to shares is transferred to voting trustee AND
4. original SHs receive trust certificates and retail all SH rights except voting

Question 13

Shareholder Voting Agreement

Answer 13

Rather than creating a trust, SHs can enter in voting agreements providing how they’ll vote.
Requirements:
1. signed writing
2. need not be filed with corp and no subject to time limit

Question 14

Shareholder Meetings

Answer 14

SHs usually take action at meeting (or unanimous written consent) to (1) elect/remove directors or (2) fundamental corp changes. There must be quorum (based on shares not SHs).
- Annual meetings: Corps must hold annual meetings, if not within 15 months SH can petition court to order one
- Special Meetings: may be called by BOD, president, or 10%+ SHs, or anyone else authorized

Question 15

Shareholder Meeting Notice

Answer 15

SHs must be notified between 10 and 60 days before meeting in writing to every SH entitled to vote.
- Notice may be waived in writing or by attendance
- Notice must state date, time, and place of meeting (and purpose for special meetings)
- If proper notice not given to all SHs, action may be voidable, unless absent SHS waive notice defect

Question 16

Shareholder Inspection Rights

Answer 16

SH has right to inspect books and records of corp. However, for controversial things their right of access is qualified and the must state a proper purpose (one related to person’s interest as SH) and written notice
Controverisal things:
1. excerpts of board meeting minutes
2. corp’s books, papers, records
3. SH records

Question 17

Shareholder Distributions

Answer 17

Can take form of dividends, repurchases/redemption of shares, distribution of assets, and so on. Distributions are solely within directors’ discretion.
- SHs have no right to compel unless they make very strong showing of abuse of discretion
- Cannot distribute if insolvent or will be insolvent bc of distribution
- Directors are jointly and severally liable for unlawful distributions (SHs liable if they knew)

1. Earned Surplus: generated by bsiness activity (earnings - losses). Board may use this
2. Stated Capital: generated by issuing stock. Can never be used
3. Capital Surplus: generated by issuing stock (payments in excess of par + amounts allocated in no-par issuance), can be used if SHs informed

Question 18

Procedure for Fundamental Corp Changes

Answer 18

FCCs are extraordinary, so Board cannot do them alone. They need:
1. board action adopting resolution
2. board submits proposal to SHs with written notice, and
3. SH approval (majority of quorum)
4. Probably need to delivery document to secretary of state

Question 19

FCC: Dissenting SH Right of Appraisal

Answer 19

If corp approves FCC, SHs who did not vote may have appraisal rights to force corp to buy their stock for fair value. This right exists unless company’s stock is listed on national exchange or company has more than 2,000 SHs and shares value at least $20 mil
Applies to:
1. merging/consolidating
2. transfer of substantially all assets not in ordinary course of business
3. transfer of shares in share exchange
4. converting to another form of business

Question 20

FCC: Perfecting Right of Appraisal

Answer 20

For a SH to perfect:
- If proposed action will create dissenters’ rights, notice must state that SHs will beentitled to exercise dissenting rights
- Before vote, SH must file with corp a written notice of objection and intent to demand payment
- SH must abstain or vote against
- If action approved, corp must notify all SHs to filed intent to demand payment
- SH must make written demand to be boughtout and deposit stock with corp, and
- Corp must pay dissenters the fair value

Question 21

Amendments to AOI

Answer 21

Corp can amend its AOI by following FCC procedures.
1. board action adopting resolution
2. board submits proposal to SHs with written notice, and
3. SH approval (majority of quorum)
4. Probably need to delivery document to secretary of state

Question 22

Mergers and Conslidations

Answer 22

Merger involves blending of one or more corps into another, and latter corp survives while merging corps cease to exist.
Consolidation invovles 2 corps combining to form new entity.

Successor Liability: Surviving corp succeeds to all rights and liabilities of the constituents.

Question 23

Voluntary Dissolution

Answer 23

Dissolution by majority of incorporators or initial directors allowed if shares have not yet been issued or business has not commenced.
Dissolution by Corporate act: approved under FCC procedure

Effect: corp that has been dissolved continues its corp existence to wind up but not any other business.

May undo voluntary idssolution by same procedure that approved it.

Question 24

Involuntary (Judicial) Dissolution

Answer 24

Happens by court order, different players can ask:
- SHs: may petition bc of director abuse, waste, misconduct or directors/SHs deadlocked and will cause irreparable injury
- Creditors: if corp is insolvent and creditor’s claim has been reduced to judgment or corp has admitted claim is due
- Attorney General: corp fraudulently obtained AOI or corp exceeding/abusing authority

Question 25

Winding Up

Answer 25

Dissolution begins process of ending corp existince. Corp can still sue and be sued. It cannot start new business must wind up (liquidate).
Steps:
- written notice to known creditors and public notice of dissolution
- Gather all assets
- convert assets to cash
- pay creditors
- distribute remaining to SHs (pro-rata)

Question 26

Derivative Suit Requirements

Answer 26

1. Stock ownership at time claim arose (and remains one throughout)
2. SH fairly and adequately represents corp’s interest
3. SH makes written demand to corp (unless futile in some jdxs) and waits 90 days after to proceed
4. Corp joined as defendant (only can dismiss with court’s approval)