Shares/Shareholders

Question 1

how are corps funded

Answer 1

Corps get funding through issuing securities, of which there are two main types: debt and equity

Question 2

what are debt securities

Answer 2

Debt securities (bonds) — corp borrows funds from an outside creditor and promises to repay creditor
- Holders of debt securities have no ownership interest

Question 3

what are equity securities

Answer 3

instrument that represents investment in the corp; holders (i.e., shareholders) become part owners of the corp

Question 4

what are authorized shares

Answer 4

max number of shares the corp may issue, as prescribed in the articles of incorporation

Question 5

what are issued and outstanding shares

Answer 5

Issued Shares - the total number of shares that a corporation has issued (i.e., sold) to date.

Outstanding Shares - the total number of shares circulating in the market that are held by investors of the company.

Ex: if a Corp is authorized to sell 10 shares, and Corp sells 10 shares to Ryan and Matt, there are 10 shares issued and outstanding.

BUT, if the Corp repurchases 1 share each from both Ryan and Matt, now we have 10 issued shares, and 8 outstanding shares.

Question 6

what are reacquired shares

Answer 6

(i.e., those that the corp buys back) revert from being issued/outstanding to authorized

Question 7

what are classes of shares and how are they authorized

Answer 7

corps may choose to issue different classes of stock shares; each class of shares can have different series within a class

Articles must authorize each class and set forth:
- Number of shares of each class;
- Name or distinguishing designation for each class; and
- Describe the rights, preferences, and/or limitations afforded to each class of shares

Question 8

what are the common differentiations between classes of shares

Answer 8

Articles can define almost any kind of differentiation between share classes; differences between share classes often involve:
- Rights to distributions and/or dividends
- Nature of voting rights
- Preference with regard to distributions

Question 9

what is a preemptive right of a stockholder

Answer 9

right of a SH to maintain their percentgage of ownership in the company by having the right to buy stock whenever there is a new issuance for money

Question 10

what are distribution rights

Answer 10

corp can distribute assets in the form of:
- dividends
- redemption of shares, or
- liquidating distributions upon dissolution

Note: At least one class of shares must be entitled to receive the corp’s net assets upon dissolution

Question 11

what is board discretion in regard to distribution rights

Answer 11

Board discretion — decision as to whether or not to declare a distribution is within the BoD’s sole discretion, even where the articles authorize distributions
- Shareholders have no general right to demand a distribution

Question 12

what type of consideration is required for shares

Answer 12

shares can be issued by the corp in exchange for any tangible or intangible property or benefit to the corp

Eg., in some states, corp can issue shares in exchange for anything of value, whether payment or services

Question 13

what type of authority do the shareholders have

Answer 13

shareholders exert control over the corp through their power to:
- elect directors,
- amend bylaws, and
- approve fundamental changes

Question 14

what authority do SHs have over directors

Answer 14

shareholders can remove and elect directors

Question 15

what authority do SHs have over the bylaws

Answer 15

shareholders can adopt, amend, or repeal bylaws

Question 16

what authority do the SHs have over fundamental changes to the corp

Answer 16

shareholders must approve of fundamental changes to the corp structure, which includes:
- Mergers
- Sale of assets outside ordinary business
- Dissolution

Question 17

what are SH inspection rights

Answer 17

shareholders may inspect the corp’s books and records for any proper purpose upon written notice

Question 18

what is a proper purpose for SHs to inspect corp books/recoard

Answer 18

purpose is proper if reasonably related to a person’s interest as a shareholder

Question 19

what’s involved in the written notice SHs must give to inspect corp books/records

Answer 19

five days’ written notice must be provided to the corp
Notice must state the proper purpose

Question 20

what types of records do SHs not need a proper purpose to inspect

Answer 20

certain records may be inspected by shareholders regardless of proper purpose, including:
- Articles and bylaws
- Annual reports
- Meeting minutes
- BoD resolutions regarding share classifications
- Corp communications to shareholders

Question 21

what is an annual SH meeting

Answer 21

corp must hold annual meetings for electing directors and other special matters

Question 22

what is a special SH meeting and what’s required to hold one

Answer 22

may be called to conduct business requiring shareholder approval
- Notice required — notice of a meeting must be sent to shareholders eligible to vote

Question 23

how many votes do SHs get

Answer 23

unless the articles provide otherwise, each issued share is entitled to one vote

Question 24

what is a quorum for SH meetings

Answer 24

must have a quorum present for a vote to be had

Question 25

how does SH voting work for BoD elections

Answer 25

directors are elected by plurality; cumulative voting may be used if allowed by the articles

Question 26

what is cumulative voting for BoD elections

Answer 26

Cumulative voting = each share can cast as many votes as there are BoD vacancies
- multiple votes can be cast for one seat (e.g., if five vacancies exist, each share gets five votes)

Question 27

how do proxies vote for SH meetings/voting

Answer 27

shareholders can vote their shares via proxy executed in writing (i.e., allowing someone else to take their vote)

Question 28

are proxies revocable?

Answer 28

Revocability — appointment of a proxy is generally revocable
Exception — proxy appt is irrevocable if:
- it is coupled with an interest and
- clearly states that it is irrevocable

Question 29

what is a direct suit

Answer 29

rare, but can occur where a corp, its officer, or director caused harm to, or breached a duty owed to, a particular shareholder

Note — if the duty breached is owed to the corp, as opposed to an individual shareholder, the proper avenue is a derivative suit
Recovery is for the benefit of the shareholder or shareholder class

Question 30

what is a derivative suit

Answer 30

shareholder sues to enforce the corp’s rights when the corp has a cause of action but fails to pursue it (i.e., suit brought by shareholder, on behalf of the corp, against the corp)

Often arises where a director or officer breaches a duty owed to corp, but corp has not taken action

Question 31

how does a person have standing to bring a derivative suit

Answer 31

shareholders bringing suit must have been shareholders at the time of the alleged wrong and held it throughout the dispute

Question 32

who recovers any damages in a successful derivative suit

Answer 32

goes to corp, but shareholders may recoup legal expenses

Question 33

what is required before a SH can bring a derivative suit

Answer 33

shareholder must make a written demand on the corp and wait 90 days before filing suit, unless:
- Corp has already rejected shareholder’s demand, or
- Irreparable injury to corp will result by waiting the full 90 days

Question 34

what is a close corporation

Answer 34

SHs run the corporation, stock is not publicly traded
- Unlike regular corps, here SHs owe a fiduciary duty to other SHs because they manage corp