Shareholders
Define Disinterested and Independent?
Disinterested- No financial stake
Independent- Not under the thumb
Why is this perferred by the directors?
Derivative claims are subject to procedural requirements.
What are the 3 bjr prongs?
1) informed basis
2) in good faith
3) in honest belief in the corporations best interest
List contractual agreements between the shareholders?
1) Shareholder Voting
2) Shareholder Agreement
3) voting trust
4) irrevocable proxy
5) Share transfer agreement
What is piercing the veil?
an exception to limited liability. based on the circumstances, the court should not treat the corporation as a separate entity.
when the courts allow creditors to disregard the entity and recover directly from equity holders.
only in extraordinary circumstances.
what claim can a shareholder bring if they were personally injured?
Direct Suit
Explain exculpation and when it can be applied?
When directors breached their duty of care and negligently caused harm to the company but they aren't required to pay for the damages.
True, the board is entitled to exercise their honest business judgment on information they had before them. If they acted within their corporate powers, it is the shareholders burden to prove fraud, oppression, breach of trust.
it provides an exit and contractually makes company buy back your shares if you are being wronged.
1) Triggering Event (death)
2) Who Buys (corporation?)
3) Valuation Agreement (how much you will get paid when you leave)
- Important when you have close-corp with family/friends
commingling of funds, failure to maintain formalities, failure to maintain corporate minutes or records, failure to adequately capitalize the corporation, sole ownership of all stock by one individual...
Why do shareholders prefer direct suits?
Direct suits avoids hurdles because they do not have to show injury, demand or breach of duty. Easy to prove their rights were impacted.
- mislead, lied to, not given right to vote or buy stock
When can you bring a derivative suit?
The shareholders bring a derivative suit if there has been an injury or breach of duty to the corporation. The harm/injury must be quantifiable (loss of $$ or conflict of interest)
- must usually fiduciary duty claims
- on that date, at that time a harm occured
What steps should you take to apply the business judgment rule?
1) determine whether it is a corporate setting
2) determine whether there was a decision made
What does Fallone think courts should look for when evaluating shareholder agreements?
What was in the minds of the parties.
- Intent
- Actual Language
Who is veil piercing up to?
What are the 5 fundamental shareholder decisions?
2) amending the articles
3) approving a merger
4) approving a dissolution
5) selling the company
when are the three times you cannot exculpate?
1) intentional harm
2) violating the law
3) duty of loyalty
What are the main two ways to challenge business judgment?
Say it wasn't informed OR say it was made in bad faith.
What agreement does Fallone thing is easiest and why?
Voting Trust
- severs the right to vote, give it to a trustee with a description of how to vote.
- that way the trustee has to follow what is in the contract
- it makes it easier for courts to uphold a breach of the contractual agreement
What test should you use if the corporation was set up to fail?
Undercapitalization at formation PLUS _____
important but never enough... must prove fraud.
Why does Fallone think shareholder litigation important?
Explain the difference between Delaware derivative claims and other jurisdictions?
Delaware:
1st Step- Determine whether there is demand futility, 2nd Step- Zuckerberg (interested, independent, exculpation), 3rd Step- SLC (disinterested and independent), 4th step- Zapata (verify SLC and apply judgment)
Wisconsin:
1st step- doesn't allow demand futility, 2nd step- court defers to BJR (informed, good faith, honest belief), burden is on shareholders to prove, 3rd step- SLC (disinterested & independent), 4th step - BJR
What does the business judgment not protect?
1) Failures to act and
2) Duty of loyalty
Explain the two ways minority shareholders can seek justice?
1) Tort for minority oppression
must prove the injury could have been prevented
- Delaware doesn't follow this
2) file for dissolution
judges discretion to determine, unlikely they will order dissolution because of the loss of jobs and how it affects community.
- "only remedy short of dissolution" is to order majority to buy minority out (fair $ value).
How does veil piercing work in Wisconsin?
Wisconsin follows the Alter Ego test but under the instrumentality definition. It is how the owners use the business (does the owner exercise domination and control to accomplish objectives that are wrongful?). The corporations formality has been disrespected and the control of the business is being used to shield those in control.