Lemon Squeezy!
Preemptive rights are designed to protect shareholders against this.
What is the dilution of their proportional ownership and voting power when new shares are issued.
A shareholder owns 40 shares in a corporation with 100 outstanding shares. The corporation issues 100 new shares to another investor. What percentage does the original shareholder now own?
What is 20% -> still owns 40 shares, but there are now 200 outstanding shares.
Under Wilkes v. Springside, what must the controlling shareholders demonstrate to justify an action that harms a minority shareholder, and what opportunity does the minority shareholder then have?
What is a legitimate business purpose. (The minority shareholder may then show that the same objective could have been achieved through a less harmful alternative. The court weighs the business purpose against the practicability of the alternative.)
True or False:Under Delaware law and the Model Business Corporation Act, shareholders automatically have preemptive rights.
False. Preemptive rights must be provided for in the corporation's certificate or articles of incorporation.
In Kimberlin v. Ciena Corporation, the court enforced the waiver of the investors' contractual rights of first refusal because...
What is, the requirements were satisfied. (The agreement expressly permitted waiver with the company's consent and approval from holders of at least 67% of investor shares.)
A corporation issues new shares, reducing an existing shareholder's ownership percentage from 40% to 20%. This is the corporate phenomenon that preemptive rights are designed to prevent.
What is shareholder dilution
A situation in which shareholders or directors are so divided that they cannot make necessary corporate decisions or elect directors
What is corporate deadlock
Under Donahue v. Rodd Electrotype, what heightened fiduciary duty do shareholders in Massachusetts closely held corporations owe one another?
What is the duty of utmost good faith and loyalty
In Kimberlin v. Ciena, the court held that these two sources of evidence could not alter the unambiguous terms of the investors' agreement.
What are trade usage and course of dealing
The reason it is particularly difficult for minority shareholders to leave a closely held corporation
What is no public market to sell their shares
Under DGCL ยง 226, what type of court-appointed official may intervene when corporate deadlock meets the statutory requirements?
What is a custodian
In Leslie v. Boston Software Collaborative, the court distinguished legitimate compensation for work performed from payments functioning as this type of distribution, which Leslie was also entitled to share in.
What are dividends?
The takeaway in Shawe v. Elting (Delaware case involving two former romantic partners)...
A profitable corporation can still suffer irreparable harm from governance dysfunction, such as deadlock. (Don't go 50/50!)
The key difference between Massachusetts' and Delaware's approaches to protecting minority shareholders in closely held corporations?
What is, MA recognizes heightened fiduciary duties between shareholders, while DE generally emphasizes protections negotiated through contracts and corporate governing documents rather than automatically imposing special close-corporation protections.
In the Classic Games hypothetical, these types of financing arrangements could have allowed the corporation to raise money without issuing additional shares and diluting the founders' ownership.
What are loans or debt financing