Transfer of Stock by Shareholder

Question 1

Where are stock transfer restrictions set?

Answer 1

1. In the Certificate;
2. In the Bylaws; OR
3. By agreement

Question 2

What are the requirements for stock transfer restrictions to be valid?

Answer 2

Stock transfers will be valid if they are not an undue restraint on alienation

(right of first refusal is valid, so long as price is reasonable)

(buyback can be required at death or retirement)

Question 3

What is the exception to enforcement of otherwise valid transfer restrictions?

Answer 3

Even if the restriction is valid, it cannot be invoked against the transferee unless:

1. It is conspicuously noted on the stock certificate OR
2. The transferee had actual knowledge of the restriction

Question 4

Who can demand access to minutes of shareholder proceedings and the record of shareholders?

Answer 4

1. Any shareholders may access minutes and the record, provided five days written demand

(NOTE: The corporation may demand an affidavit that your purpose is not other than in the interest of the corporation AND you haven’t sold a list of shareholders in the last 5 years)

(corp can’t demand more; s/h can’t refuse)

Question 5

What are the rules for demanding a list of current directors or officers?

Answer 5

1. Any shareholder can demand on 2 days written notice
2. Corp cannot demand an affidavit

Question 6

What are the rules for annual balance sheet, profit and loss stmt, and interim statements distributed to shareholders or public?

Answer 6

Any shareholder can make written demand

Corp can respond by mail

Question 7

What is the common law rule for inspection of records?

Answer 7

1. All shareholders have right to inspect records at a reasonable time and proper place
2. Inspection must be for a proper purpose, which means something related to your role as a shareholder (scope unclear)

Question 8

What are the rules for director inspection of books and records?

Answer 8

Directors have unfettered access to books and records

Question 9

What are the three types of distributions?

Answer 9

1. Dividend
2. Payment to repurchase (voluntary)
3. Redemption

Question 10

When will a court require a dividend?

Answer 10

Only on showing of bad faith or dishonest purpose

Question 11

What is the shareholder waterfall for dividend distributions?

Answer 11

1. First, give out dividends to Preferred shareholders, to extent of preference; THEN
2. All remaining dividends go pro rata to common shareholders

(If preferred shares are also “participating,” include with common so that they get paid a second time)

Question 12

What funds may be used for distributions?

Answer 12

Surplus

Surplus = Assets - Liabilities - Stated Capital

(Stated capital can NEVER be used for distributions)

Question 13

How is surplus computed for distributions?

Answer 13

Assets – Liabilities – Stated Capital

Question 14

How is stated capital computed for distributions?

Answer 14

Total issued par value

If no-par: within 60 days bd can allocate any part, but not all, to surplus; Remainder to stated capital

Question 15

When are distributions prohibited?

Answer 15

If:

1. Corporation is insolvent OR
2. Distribution would make the corporation insolvent

Question 16

What constitutes insolvency for purposes of distributions?

Answer 16

Corporation is unable to pay its debts as they come due in the ordinary course of business

Question 17

Who is liable for unlawful distributions?

Answer 17

1. Directors are personally liable (but see good faith reliance on an accountant)
2. Shareholders who knew the distribution was unlawful when they received it are personally liable (recovery would be a derivative claim)

Question 18

What are the rules for redemptions?

Answer 18

Set in certificate

Must be done proportionately within each class

Question 19

What are the rules for repurchases?

Answer 19

By agreement

Corporation may discriminate against shareholders in repurchases EXCEPT close corps have to give equal opportunity