Shareholders

Question 1

Do SHs get to manage the corp?

Answer 1

Generally, no because the board manages. BUT, SHs can run the corp directly in a close corp.

Question 2

Close Corporation Characteristics

Answer 2

1) Few SHs
2) Stock is not publicly traded

If the corp’s stock is not traded on a national exchange, SHs can eliminate the board and run the corp. directly. To do this, it must be in the articles and approved by all SHs OR by unanimous written SH agreement

Question 3

Professional Corporation

Answer 3

Licensed professionals, including lawyers, medical professions, and CPAs, may incorporate as a professional corp. or professional association. The name must have one of those phrases or “P.C” or “P.A.” The articles must state that the purpose is to practice in a particular profession.

SHs are generally not liable for corp. obligations or for other professional malpractice

Question 4

Can SHs be held liable for the acts or debts of the corp?

Answer 4

Generally, no because the corp is liable for what it does. BUT, a SH might be personally liable for what the corp did if the court pierces the corporate veil (PCV). This can only happen in close corporations.

Question 5

Piercing the Corporate Veil

Answer 5

To PCV and hold SHs personally liable (for what should be a corporate debt):

1) they must have abused the privilege of incorporating, and
2) Fairness must require holding them liable
3) must be a close corporation

Question 6

Classic Fact Patterns for Piercing the Corporate Veil

Answer 6

1) Alter ego (identity of interests)

2) Undercapitalization when formed

Question 7

SH Derivative Suits

Answer 7

In a derivative suite, a SH is suing to enforce the corp’s claim, not her own personal claim. If the corp could have brought this suit instead of a SH, then it can be a derivative suit.

If the SH wins the suit, the corp gets the money. SH plaintiff can gets costs and attorney’s fees

If SH losses the derivative suit, cannot recover costs and attorneys’ fees and may be liable to defendant corp if sued without reasonable cause

Question 8

Requirements for bringing a SH derivative suit

Answer 8

1) Stock ownership when the claim arose and throughout the suit
2) Adequate Representation of the corp’s interest
3) Must make a written demand on the corp that the corp bring the suit
4) The corp must be joined, but as a defendant.
5) Parties can settle or dismiss the suit only with court approval

Question 9

When demand is excused

Answer 9

When demand is futile (if the directors will be the defendants in the case)

Question 10

SH voting: who votes?

Answer 10

General rule: the record SH as of the record date has the right to vote

Question 11

Record SH

Answer 11

The person shown as the owner in the corp records.

Question 12

Record Date

Answer 12

Voter eligibility cut-off

Question 13

Exceptions to general rule on SH voting

Answer 13

1) The corp re-acquires stock before the record date, so it is the owner of this “treasury stock” as of the record date. Nobody votes this stock
2) Death of SH ->SH’s executor can vote the shares
3) Proxies

Question 14

Proxy

Answer 14

A writing signed by record SH directed to secretary of corp authorizing another to vote the shares. Proxy is good for 11 months unless it says otherwise

Question 15

Revoking a proxy

Answer 15

A proxy can be revoked in writing OR by attending a meeting and voting. The ONLY way to have an irrevocable proxy is if it is a proxy coupled with an interest.

Question 16

Requirements for a voting trust

Answer 16

SHs pool their voting power by
1) written trust agreement, controlling how the shares will be voted,
2) copy to the corp
3) transfer legal title to the voting trustee
4) original SHs receive trust certificates and retain all SH rights except for voting
(10 year maximum)

Question 17

Requirements for voting agreement (pooling)

Answer 17

1) In writing and signed

2) Some states will not specifically enforce voting agreements. In these states, a voting trust is preferable

Question 18

Where do SHs vote?

Answer 18

SHs usually take action at a meeting. They can also act by unanimous written consent signed by holders of all voting shares

Question 19

Two Kinds of SH Meetings:

Answer 19

1) Annual Meeting: Purpose is to elect directors. If no annual meeting is held within 15 months, a shareholder can petition the court to order one.
2) Special Meeting: can be called by the board, the president, or the holders of at least 10 percent of the voting shares, or anyone else authorized in the bylaws

Question 20

Notice Requirement for Meetings

Answer 20

Must give written notice to every SH entitled to vote. Deliver it between 10-60 days before the meeting. Notice must state the time and purpose of the meeting.

For special meeting, the notice must also state the purpose of the meeting.

Question 21

Consequence of Failure to Give Proper Notice for Meetings

Answer 21

Action taken at the meeting is void unless those not sent notice waive the notice defect.

Question 22

How can waiver occur?

Answer 22

1) Express - in writing and signed anytime, OR

2) Implied - attend the meeting without objection

Question 23

How do SHs vote?

Answer 23

SHs generally get to vote on:

1) to elect directors,
2) to remove directors, and
3) on fundamental corporate changes.

Question 24

Quorum

Answer 24

Every time the SHs vote, there must be a quorum represented at the meeting. General rule: a quorum requires a majority of outstanding shares.

A SH quorum cannot be lost if people leave the meeting (different from directors)

Question 25

What vote is required to:

1) elect a director,
2) remove a director,
3) approve a fundamental corporate change,
4) other matters

Answer 25

1) plurality (the person who gets more votes for that seat on the board than anyone else)
2) traditionally, majority of the shares entitled to vote,
3) majority of shares entitled to vote
4) majority of shares that actually vote on the issue

Question 26

Cumulative Voting

Answer 26

Available only when SHs elect directors. Multiply number of shares times number of directors to be elected.

Question 27

Stock Transfer Restrictions

Answer 27

Stock transfer restrictions are ok if they are reasonable - no undue restraint on alienation

Question 28

If the restriction is valid, can it be enforced against the transferee?

Answer 28

Yes, if the restriction is conspicuously noted on the stock certificate or the transferee had actual knowledge of the restriction

Question 29

Right of SHs to Inspect the Books and Records of the Corp

Answer 29

1) Any SH on 5 days written demand can request access to corp. books
2) SH must make a written demand stating the documents desired and a proper purpose (related to interest as SH) for inspection
3) If the corp fails to allow proper inspection, SH seeks a court order.
4) Directors do not have to go through this procedure - they have unfettered access to the books

Question 30

Distributions

Answer 30

Payments by the corp to SHs. Three types:

1) Dividends
2) Repurchase SH’s stock
3) Redemption (a forced sale to corp. at price set in articles)

Question 31

At what point does a SH have a “right” to a dividend or other distribution?

Answer 31

When the board declares it. Distributions are in the board’s discretion.

Question 32

Preferred Shares

Answer 32

Pay first

Question 33

Cumulative Dividend

Answer 33

Accrues year to year

Question 34

For distribution, which funds can be used?

Answer 34

1) Earned surplus (generated by business activity) - CAN be used for distribution
2) Stated capital (generated by issuing stock) - CANNOT be used for distributions
3) Capital Surplus (generated by issuing stock - payments in excess of par plus amounts) - CAN if SHs are informed

Question 35

Par Issuance

Answer 35

Par value goes to stated capital

Question 36

No-par Issuance

Answer 36

Board allocates the consideration between the state capital and capital surplus.

Question 37

Liability for Improper Distributions

Answer 37

1) Directors are jointly and severally liable for improper distributions.
2) SHs are personally liable ONLY if they knew the distribution was improper when they received it.