Shareholders -
Management and Liablity
Management and Liablity
What is the special fiduciary duty in close corporations?
Fiduciary duty (good faith) on shareholders owed to other shareholders. Because its run much like a partnership.
CONTROLLING SHAREHOLDERS CANNOT HURT MINORITY SHAREHOLDERS. breach of duty.
What is a derivative suit?
Shareholder is suing to enforce the corporations claim, NOT THEIR OWN.
Ask yourself could the corp have brought this? Yes= derivative suit.
What shareholders can vote?
What matters can they generally vote on?
Outstanding Stock and Record Shareholders.
Elect Directors, remove directors, fundamental corporate changes.
Rules on Alienation of stock?
Generally free to sell stock as you wish.
BUT corporations can put reasonable restrictions on alienation of stock, like Right of First Refusal.
What is the 3 step procedure when considering a fundamental change to the corp?
1) board adopting a resolution with a fundamental change
2) board submits proposal to shareholders
3) Shareholder approval (majority of shares entitled to vote)
What is a close corporation?
What option does it give to shareholders?
Close Corporation= few shareholders, stock not publicly traded.
Shareholders may run a close corporation directly without a board of directors.
Requirements to bring a Derivative Suit?
Who gets payoff if won?
Requirements: 1) you owned stock at the time of the wrong, 2) adequate representation.
CORPORATION GETS PAYOFF ITS A CLAIM ON THEIR BEHALF
What is a record date?
Board of Directors fix a date of record, those who own stock on that date may vote.
(may be up to 70 days before meeting)
When must a shareholder state the proper purpose of a demand for inspection?
- excerpts from board minutes
- corporations accounting records/books
- shareholder records.
Other things shareholders can demand to inspect with no stated purpose.
What is Cumulative Voting vs. Straight Voting?
Cumulative: (usually in close corporations) dont have voting for each open position, instead one giant vote and top receivers of votes get the positions.
Straight: vote position by position individually
Licensed professionals that incorporate as a "P.C." Professional Corporation or "P.A." Professional Association.
Professionals are personally liable for malpractice, NOT SHAREHOLDERS.
What is the Demand Requirement?
Shareholder must make a demand to the Board to bring the suit PRIOR to their ability to bring it on their own. 90 day wait time after demand in most states. UNLESS:
1) Shareholder previously notified corporation rejected demand.
2) 90 day wait would cause irreparable harm to corp.
Define Voting Trust and Voting Agreement?
Voting Agreement: Signed writing between shareholders to vote a certain way.
Who has the right to them?
Distributions = payments by the corporation to shareholders.
AT LEAST 1 class of stock MUST have rights to receive corporations assets upon dissolution.
What changes constitute Fundamental Corporate Changes?
What is a dissenting shareholders only option?
1) Amending the Articles of Incorporaiton
2) Merging or consolidating into another company
3) Transferring substantially all corporate assets
4) Converting to another form of business
5) Dissolving
APPRAISAL RIGHT/ I OBJECT BUY ME OUT
What is Piercing the Corporate Veil?
WHO may pierce the Corporate Veil?
Hold shareholders personally liable for the corporation.
Shareholders must have: abused privilege of incorporating, and fairness requires holding them liable.
Generally creditors (courts almost never pierce at request of shareholder)
Who must a shareholder join as a Defendant?
CORPORATION
What Notice is required for a meeting?
- Shareholders notified not less than 10/ not more than 60 days prior to meeting.
- time/place/date indicated. (Subject matter too if special meeting)
IF NO PROPER NOTICE ALL ACTION TAKEN IS VOIDABLE. Unless waiver of notice.
Who decides when distributions are made?
BOARD OF DIRECTORS.
Articles may restrict board ability to issue distributions.
Define Merger vs. Consolidation?
Merger- blending a corporation/corporations into an already existing corporation. (old corp dies)
Consolidation: 2 companies combining to form a new entity.
Name/Explain the 3 common scenarios that warrant piercing the corporate veil?
Alter Ego Doctrine- corporate formalities ignored, corporation is nothing more than an alter ego/ instrumentality of shareholders or another larger parent corporation.
Undercapitalization: corporation at formation DID NOT have enough capital to reasonably cover possible liabilities.
Fraud/avoidance of existing obligations- Cant use corp as fraud/avoid personal liabilities.
Requirements of getting a Derivative Suit Dismissed?
1) Independent investigation
2) Finds suit is not in best interest of corp
3) Independent investigation truly independent and fair.
What Quorum is required at a shareholder vote?
MUST HAVE QUORUM AT MEETING.
Majority of outstanding shares must be represented at the meeting to have quorum. (by-laws can required a greater #)
Who is liable?
CANNOT ALLOW DISTRIBUTION IF CORP INSOLVENT OR DISTRIBUTION WOULD RENDER IT INSOLVENT.
Directors are joint and severally liable for improper distributions
Shareholder are personally liable if they received a distribution and KNEW it was improper when received.
Voluntary Dissolution vs. Involuntary Dissolution?
Voluntary- deliver articles of dissolution to state, pay all debt, distribute remaining assets to shareholders.
Involuntary- Dissolution by act of the court. (Can be brought by Attorney General or Shareholders)