Shareholders: Management and Liability

Question 1

Do SHs get to manage corp?

Answer 1

• short answer = no
• power generally in the board of dirs-> no direct control of SHs in management of corp business

Question 2

SHs + Fiduciary Duties

Answer 2

• can act in own interests
• generally NO fiduciary duty to corp or fellow SHs
• note though that if SHs set themselves up as managers though, they would have duties

Question 3

SHs + Corp Liability

Answer 3

• generally limited to liabilities for unpaid stock, pierced corp veil, or absence of de facto corp

Question 4

Close Corporations - Basic Characteristics

Answer 4

• few SHs
• stock not publicly traded

Question 5

Close Corps - SH Management

Answer 5

• SHs can run corp directly
• have option to have BOD
  -> but could also eliminate board instead + have SHs run business, appoint manager, etc

Question 6

Close Corps - SH Management Agreements

Answer 6

• set up alt management for close corp
• can enter into agreement to dispense w/ board + vest management power in SHs
• if articles don’t include such provision, SHs exercise only indirect control of corp through voting power
  -> can elect + remove dirs, adopt + modify bylaws, + approve fundamental changes in corp structure
• should be conspicuously noted on front + back of stock certificates

Question 7

Ways to Set Up SH Management Agreement

Answer 7

• in articles + approved by all SHs OR
• by unanimous written SH agreement
• note that agreement should be conspicuously noted on front + back of stock certs

Question 8

Exam Tip - General Reminder for SH Power

Answer 8

• if asked about power of SHs to run day-to-day affairs of corp, unless q says the articles or SH agreement provide otherwise, generally respond that:
  -> SHs have no such power
  -> power is vested in BOD AND
  -> SHs have power to elect board

Question 9

Close Corps - Special Fiduciary Duty

Answer 9

• b/c close corp looks more like a partnership, courts in many states impose fiduciary duty on SHs owed to other SHs
  -> fiduciary duty of utmost good faith

Question 10

Duties of Controlling SHs to Minority SHs

Answer 10

• controlling SHs can’t use their power to benefit at the expense of minority SHs
  -> ex: parent corp shouldn’t use domination of subsidiary corp to receive something to detriment of subsidiary’s minority SHs
• also duty to disclose material info to minority SHs
• note that controlling SH can be a corp

Question 11

Oppression of Minority SHs

Answer 11

• if there’s oppression of minority SHs in close corp, they can sue controlling SHs who oppress them for breach of fiduciary duty
  -> allowed to sue b/c oppression thwarts legitimate investing goals + they have no way out

Question 12

Examples of Oppression of Minority SHs

Answer 12

• controlling SHs deny minority of any voice in corp affairs
• fire them from employment
• refuse to declare dividends
• refuse to buy minority’s stock (so minority gets no return on investment)

Question 13

Professional Corporations

Answer 13

• licensed pros, including lawyers, med pros, + CPAs, may incorporate as a “professional corp” or “professional assoc”
• name must include one of those phrases or PC or PA
• articles must state that the purpose is to practice in a particular profession

Question 14

Can SHs be Held Liable for Corp Debts?

Answer 14

• generally CAN’T be held liable for corp debts
  -exception: if court pierces corporate veil
  -> ONLY in close corporations

Question 15

Requirements for Piercing the Corporate Veil

Answer 15

• SHs must have abused the privilege of incorporating AND
• fairness must require holding them liable
  -> cts may piece to avoid fraud or unfairness by SHs in close corp
  -> BUT sloppy admin not enough

Question 16

Common Scenarios for Piercing

Answer 16

• alter ego (identity of interests)
• undercapitalization
• fraud, avoidance of existing obs, or evasion of statutory provisions

Question 17

Piercing - Alter Ego

Answer 17

• happens if SHs ignore corp formalities such that corp may be considered “alter ego” or “mere instrumentality” of SHs or another corp
  -> AND some basic injustice results
• may arise when SHs treat corp assets as own, commingle their $ w/ corp $, etc.

Question 18

Piercing - Undercapitalization

Answer 18

• where corp is inadequately capitalized, so that at t of formation there’s not enough unencumbered capital to reasonably cover prospective liabilities

Question 19

Piercing - Fraud, Avoidance of Existing Obs, or Evasion of Statutory Provisions

Answer 19

• corp veil may be pierced where necessary to prevent fraud or prevent indiv SH from using the entity to avoid existing personal obs
• BUT mere fact that indiv chooses to adopt corp form of business to avoid future personal liability is not itself a reason to pierce the corporate veil

Question 20

Piercing - Who is Liable

Answer 20

• normally, only SHs active in op of business personally liable
• joint + several liability
• SH held liable might be another corp

Question 21

Piercing - Types of Liability

Answer 21

• veil easily pierced in torts
• BUT not in contract (parties in K cases had opp to investigate stability of corp)
• where corp insolvent, claims of SH-creditors may be subordinated to outside creditors’ claims if equity so requires

Question 22

Who May Pierce

Answer 22

• generally, creditors may be allowed to do so
• courts almost never pierce at request of SH