Fiduciary Duties for Shareholders of a C-corp
What duties do shareholders in a c-corp hold?
Majority shareholders hold a strict fiduciary duty of utmost good faith and loyalty. A shareholder violates this duty if the shareholder's conduct frustrates another shareholder's reasonable investment exceptions in the corp.
Reason: Minority shareholders in a close corp are more vulnerable than if the entity were a publicly traded corp or a partnership (because they could dissociate).
Do shareholders have a fiduciary duty to disclose material information regarding the corporation?
Yes. Shareholders in a c-corp owe a fiduciary duty to one another that requires a disclosure of material information regarding the corp. To determine materiality, use the probability-magnitude test. This is the determined by balancing the probability that an event will happen against the potential magnitude of the event in light of the totality of the company activity.
What is a dividend?
What four corporate changes require shareholder approval?
2. Dissolution
3. Merger
4. Sale of Substantially all the Assets.
What is the rule of Equal Opportunity?
This rule requires close corp to offer an opportunity for minority shareholders to sell shares back to the corp on equal terms as a controlling shareholder.
Can shareholders earn salaries from c-corp?
Shareholders can earn salaries from the c-corp if they are employed by the corporation.
What is insider trading?
(another violation of Rule 10(b)(5). This is when someone privy to confidential business (an insider) uses it (or perhaps passes it along to another) to trade in securities of that business (or perhaps another business).
GR: A tippee's liability is derivative of a tipper's breach of fiduciary duty + that the tipper breaches the duty only if the tipper received personal benefit from sharing the information. The tipper is liable only if the tippee knew/should have known of the tipper's breach.
Why do corporations pay dividends?
The corporation should not pay a dividend if the returns that it earns with the money are higher than the returns that the shareholder could earn if the money were distributed to them.
To amend, the BoD (quorum + majority of the quorum) and the shareholders (quorum + majority of quorum) must vote.
What is book value?
The value at which assets are carried on the balance sheet.
What are the types of involuntary dissolution of a C-corp?
1. A court may dissolve a corporation by a proceeding brought by a shareholder who shows that the directors are deadlocked in the management of the corporation, the shareholders can't break the deadlock, and irreparable injury to the corp is threatened or being suffered; (2) the business can no longer be conducted because of the deadlock; (30 the directors in control of the corp have acted or acting or will act in a manner that violates their fiduciary duty.
What is the misappropriation theory?
This liability premises liability on an insider trader who trades on the basis of material, nonpublic information and gains his advantage through deception. He deceives the source of the information and simultaneously harms members of the investing public.
When MUST & MAY a dividend be paid?
A board of directors may authorize and the corporation may make distributions to its shareholders subject to restriction by the articles of incorporation and the limitation in subsection. No distribution may be made if, the corporation would not be able to pay its debts as they become due in the usual course of business; or the corporation's total assets would be less than its total liabilities.
A shareholder may be liable to the extent that a shareholder was paid by a corporation before a creditor was at the time of the dissolution.
The price the assets would fetch if they were sold off, outside the ordinary course of business.
What is the Rule 10(b)(5)?
This is a remedy for investors to sue someone who commits fraud in relations to securities transactions. Rule 10(b)(5) is a a securities transaction that is a false statement/omission of material fact made with scienter (mental state-intent to deceive or defraud) (not negligence) upon with the P justifiably relied which proximately caused P's injuries.
For essay purposes: acknowledge common law fraud.
Who is a brazen misappropriation and do they violate Rule §10b-5?
A brazen misappropriation commits no crime under §10b6. If the fiduciary tells the source that he plans to trade on the nonpublic information, there is no "deceptive device" and this is not a 10b5 violation.
Can a court intervene in a corporation's dividends decision?
Generally, a court can't intervene in corporation dividends decisions if they are made in good faith and are based on a legitimate business corporation. however, the court's intervention is appropriate when then complaining party shows fraud, breach of fiduciary duty, bad faith, or abuse of discretion.
What is a merger and how does it affect shareholders?
A merger is two or more business's entities combining into a business entity. Mergee=disappearing corporation. Merger=surviving corporation.
When a merger becomes effective: (1) whatever property + K owned by the disappearing corporation belongs to the surviving corporation. (2) Whatever debts of disappearing corporation is not the debt of the surviving corporation. (3) The surviving corporation gets disappearing corporation rights, duties, franchises, and immunities. (4) Surviving corporation keeps all his belongings.
What are some solutions for minority shareholders in a c-corp who want to be able to sell their shares?
1. Equal opportunity
2. Cumulative voting
3. Contractual obligation at the outset.
What are the legal duties relating to buying, selling, and reselling stocks and bonds?
Reliance and Materiality.
The court held that materiality depends on the significance the reasonable investor would place on the withheld or misrepresented information.
Reliance - provides the requisite casual connection between a D's misrepresentation and a P's injury. (For class actions, fraud on the market theory is a rebuttable presumption to show that the class members relied on a material statement.)
Materiality- depends on the significance the reasonable investor would place on the withheld or misrepresented information.
What is short-swing trading? How can a principal stockholder, director, or officer an insider trader claim is filed against them?
Section 16(b) requires them to be: (1) a director/officer or principal stockholder that owned 10% at the time of acquisition and at the time of sale), or a director or officer. (2) the sale and purchase was made within a 6 month period. If these elements are met, then the corporation gets the profit from those positions.
What is the order of dividends paid?
Preferred - first takers.
Participating - take again and share the remaining with common stock.
Cumulative stock - they take back pay declared by the directors before the common stockholders.
Common - they take the remaining.
How can a shareholder be protected from harms from a merger?
1. Vote against the merger;
2. Assert the dissenting shareholder's right of appraisal. Here, a minority discount may not be applied in determining the fair value of a dissenter's shares when two corporation's merge. To determine the fair market value, there are numerous factors including evidence of unfair dealing that concern valuation.
3. Sue the directors who approved the merger alleging a breach of common law or statutory duty of care.
4. Sue the directors who approved the merger alleging a breach of common law or statutory duty of loyalty. (GR: majority shareholders owe fiduciary duties to minority shareholders to act for legitimate corporate purposes, thus majority shareholders must prove that mergers were fair and legal. The entire fairness test of a merger is comprised of fair dealing and fair price.