Shareholders Flashcards
SHs as managers
generally NO direct management privileges unless this is a close corp (few shareholders, and non-public)
**remember management duties trigger fiduciary duties
»> for close corps, you also have HORIZONTAL FDs (i.e. you can’t deny rights to minority SHs)
SH liability for corporate debts & PTCV
- general rule - NOT PERSONALLY LIABLE, UNLESS you are a close corp, which triggers PIERCING THE CORPORATE VEIL:
> > > SH’s have abused the privilege of incorporating, AND
> > > fairness requires holding them personally liable
- 2 common PTCV fact patterns:
> > > alter ego (treating corp assets as your own/commingle)
> > > undercapitalization (@ time of formation, there is not enough unencumbered capital to reasonably cover liabilities)
> > > avoidance of obligations by using a subsidiary
- result of PTCV: ONLY THAT shareholder liable
SH derivative suits:
what are they
remedies
result of lost suit
standing
settlement/dismissal
SH is suing to enforce CORPORATION’S claim (not her own)
»> i.e. if the corp could have brought this suit, it will be validly derivative (like a suit for BOFD owed to the corp)
remedies: money from judgment goes to the CORP; costs and fees go to the SH if she WINS
if SH loses, other SHs CANNOT sue same defendant on the same T/O
standing:
»> SH must have owned stock WHEN CLAIM AROSE (or got it by OPERATION OF LAW when THAT PERSON owned stock at the time the claim arose),
»> must adequately rep corp’s interests, AND
»> serve WRITTEN DEMAND on corp to sue first (unless FUTILE - i.e. directors themselves are the defendants)
settlement/dismissal must be COURT approved
SH voting - who votes? (general rules as to which stocks get which rights & what you can vote on)
**measured as of RECORD date
record shareholders & outstanding shares: presumption that each has one vote
treasury shares: no vote
what you vote on:
»> electing/removing DIRECTORS
»> fundamental corporate changes
4 types of stock
authorized: maxed numbers the corp can sell
issued stock: number of shares corp actually sells
outstanding stock: issued shares that have not been reacquired
»> including that owned by one’s estate
treasury stock: reacquired stock
SH voting - who votes? (proxy rules)
proxies: writing that authorizes another to vote the shares
> > > generally good for 11 months
> > > can revoke in writing or by attending the meeting yourself
> > > proxies only irrevocable when expressly stated AND proxy holder has some other valid interest in the shares
SH voting - who votes? (voting trusts & agreements)
VOTING TRUST:
(1) written agreement,
(2) give copy to corp,
(3) transfer legal title to trustee, AND
(4) OG shareholders receive trust certificates
VOTING (POOLING) AGREEMENT: simply must be in writing & signed (literally just a contract)
SH voting - where do you vote? meeting formalities; notice requirements
either at a meeting OR by unanimous written consent (just like directors)
can be held ANYWHERE
ANNUAL (regular) meeting required
»> primarily for the election of directors
SPECIAL meeting
»> may be called by BOD; president; holder of at least 10% of outstanding shares; or somewhere else expressly authorized
»> MUST be for a proper purpose - i.e. SH’s can’t call a meeting to remove an officer b/c only directors can remove officers
NOTICE requirement: in writing to EVERY SH entitled to vote
»> at least 10 days in advance
»> only need to state purpose of meetings for SPECIAL meetings
SH voting - how to vote? (who must be present, how many must voting depending on what you are voting on, cumulative voting)
- to MEET, must have a quorum (majority) as to number of SHARES (not people)
- electing a director: PLURALITY VOTE
- removing a director: majority of the shares ACTUALLY VOTING on that issue
- FCC: majority of shares ENTITLED TO VOTE (minority rule says majority actually voting)
- cumulative voting: gives small shareholders a leg up for director ELECTION
»> AOI must EXPRESSLY allow
»> one at-large election, instead of seat by seat
»> voting power is number of shares X number of directors to be elected
stock transfer restrictions
- must be reasonable (not an undue restraint on alienation)
- most common: right of first refusal
- can be enforced against purchaser/receiver if restriction noted on stock certificate or purchaser had actual notice
SH inspection rights & Director inspection rights
SHs:
- standing given to any SH at all
- requires written demand (5 days in advance), but need not state purpose **unless you want more controversial things, like minutes of board meetings & accounting records
»> proper purpose simply means it is reasonably related to your SH interest
IN CONTRAST, directors have unfettered rights
distributions (what are they; 3 types; restriction & liability)
- these are payments by the corp to the SHs. can take 3 forms:
(1) dividends
»> common stock split evenly
»> preferred stock (“pay first” stock): multiply preferred shares by # preference, the rest goes to the common shares
(2) repurchase
(3) redemption: forced sale to corp
***BOD has EXCLUSIVE DISCRETION over when to distribute (hard for SH to overcome)
only restriction: corp cannot make distributions if insolvent, or such distribution would cause insolvency
»> “insolvency”: assets insufficient to cover debts/liabilities
»> BOD jointly and severally liable unless good faith defense
»> SHs only liable if they new distribution was improper WHEN THEY RECEIVED IT
five fundamental corporate changes & what it means
what it means: BOD generally cannot do these on their own
(1) amending the articles
(2) mergers & consolidations
(3) transfer of all/substantially all assets (at least 75%)
»> the rules only apply to the SELLING company
(4) voluntary dissolution
(5) conversion into a new form of business
FCC requirements
(1) board action,
(2) written notice to SHs,
(3) shareholder approval, AND
»> majority of shares ENTITLED TO vote (minority says majority of shares that ACTUALLY vote)
(4) deliver document to SOS
FCC - dissenting shareholder’s right of appraisal
what it is: right to force corp to buyout your stock at fair value when you disagree with a FCC
procedure: file written notice of rejection before vote; abstain or vote against; AND subsequent written demand to be bought out
ONLY applies to: merger/consolidation, transfer of substantially all assets, stock acquired in a share exchange, or conversion (i.e. not a simple change in the AOI or voluntary dissolution)
LIMITATION: you can NEVER exercise this right if company is publicly traded OR has 2k or more shareHOLDERS
»> so ONLY exists in close corps (cause in public corps, you could just sell off your stock on the market)
