4: SHAREHOLDERS Flashcards
I. DO SHAREHOLDERS GET TO MANAGE THE CORPORATION?
general rule?
exception?
C. How do we change the management structure in a close corporation?
what actions does not affect its validity?
Once the corporation starts operating under the shareholders’ agreement, it may?
no, the board manages
But in a close corporation (it has few shareholders, and its stock is not publicly traded), management can be set up differently from that in an “ordinary” corporation. A close corporation can have a board of directors. BUT there need not be a board of directors! Instead, shareholders can take over management, or management can be vested in a single manager, and the company can be run very informally.
C. You need a shareholders’ agreement authorizing the change (e.g., abolishing the board, making management much less formal than an ordinary corporation).
enter agreement:
1, in the certificate or bylaws, and approved by all shareholders, or
2, written agreement of all sharesholders
– Stock certificates should note close corporation status and that shareholders are to manage; The corporation should deliver to each shareholder a copy of the agreement, but failure to do so does not affect its validity.
– Once the corporation starts operating under the shareholders’ agreement, it may deliver a Statement of Operation to the Secretary of State for filing. It makes the manner of operation a matter of public record.
– Once the Statement of Operation is filed, the agreement is binding on all shareholders and transferees. Is this true even if a transferee does not have knowledge of the agreement?
yes; filing is notice to all
ARE SHAREHOLDERS LIABLE FOR THE ACTS OF THE CORPORATION?
exception
no; because Corp. is liable
in close corp only: But a court might pierce the corporate veil (PCV) and hold shareholders personally liable if (1) they have abused the privilege of incorporating and (2) limited liability would be unfair.
a court might PCV to prevent fraud or to achieve equity
*PCV is never automatic. Make the argument.
PCV answer template
– X and Y are the only shareholders of Corp. X commingles personal and corporate funds, uses the corporate car as his own, and uses the corporate credit card to pay for personal purchases. In the meantime, corporate creditors are not being paid. Can Creditor (unable to collect its claim from the corporation) collect from X or Y?
Classic fact pattern: Alter ego theory (not available for mere failure to observe corporate formalities, such as failure to select officers and hold meetings).
– Start with general rule (shareholders not liable for acts or debts of corporation). Then PCV standard. Make the argument for PCV (never sure how a court will rule, though).
1. Did a shareholder abuse the corporation?
yes; treated corp assets like his own
2. Would limited liability for X be unfair?
arguably yes, because creditors are not being paid
If PCV, only X would be liable. Y did nothing wrong.
D. Whenever the shareholders manage the close corporation, who owes the duties of care and loyalty to the corporation?
E. What about duties of shareholders to each other?
the managing shareholders
In a Texas close corporation, shareholders do not owe each other fiduciary duties as a matter of law. But a court may find a fiduciary duty depending on the facts of a given case.
make an argument of breach of fiduciary duty
PCV answer template
– S is a shareholder of Glowco, Inc., a corporation that hauls and disposes of nuclear waste. Glowco does not carry insurance. Glowco has an initial capitalization of $1,000. V is injured when one of Glowco’s trucks melts down. Can V sue S?
Another classic fact pattern: Undercapitalization theory.
- Start with general rule (shareholders are not liable for what the corporation does), then PCV standard. Here a court MIGHT PCV because the corporation is undercapitalized. Shareholders failed to invest enough to cover prospective liabilities.
argue: this is a dangerous business, there is no insuance, and they only invested 1k
- Start with general rule (shareholders are not liable for what the corporation does), then PCV standard. Here a court MIGHT PCV because the corporation is undercapitalized. Shareholders failed to invest enough to cover prospective liabilities.
D. In what kinds of cases is PCV most likely?
fraud?
a parent corporation forms a subsidiary to avoid its obligations.
more likely in tort than in contract (can see the corp. book)
– So we cannot PCV for a contract claim based on fraud unless the shareholder made the corporation commit fraud for his own personal benefit.
– Remember, PCV allows imposition of liability on a shareholder. That shareholder might be another corporation.
The court might pierce through the sub and hold the parent liable just as it would if the shareholder were a human.
III. SHAREHOLDER DERIVATIVE SUITS (SHAREHOLDER AS PLAINTIFF)
A. definition
S sues the board of directors of C Corp. for breaching the duty of care or the duty of loyalty.
S sues board of directors of C Corp. for issuing new stock without honoring her preemptive rights.
B. If the shareholder plaintiff (S) wins the derivative suit, what happens?
Who gets the money from the judgment?
What does S receive?
A. In a derivative suit, a shareholder is suing to enforce the corporation’s claim, not her personal claim.
always ask: could the corp have brought this suit, if yes then it is derivative
yes; they r derivative, because the duties r owed to corp.
no; this is a direct suit, to vindicate S’s personal claim.
the corp
recover cost and attorney’s fees from the corp (After all, S conferred a benefit on the corporation by suing and winning.)
C. If the shareholder plaintiff (S) loses in derivative, what happens?
- Can S still recover her costs and attorney fees?
- Is S liable to the defendant he sued for the defendant’s attorney fees?
- Can other shareholders later sue that defendant on the same transaction?
no
Yes, if the court finds that S sued without reasonable cause or for an improper purpose.
no; already asserted
D. What are the requirements for bringing a shareholder derivative suit?
- Stock ownership.
To bring a derivative suit, one must have owned stock when the claim arose or have gotten it by “operation of law” (inheritance and divorce decree) from someone who did. - Must also fairly and adequately represent the corporation’s interests. This may mean, among other things, that she own stock throughout the litigation.
- Must also make a written demand on directors that the corporation bring suit.
Shareholder cannot file a derivative suit until 90 days after demand unless demand is rejected before that or waiting 90 days would cause irreparable damage to the corporation.
must demand can’t be excused even if it’d be futile
The demand must set forth the nature of the claim with particularity. - Corporation must be joined as a defendant (even though we are asserting the corporation’s claim) because it did not sue on its own.
Can the parties settle or dismiss a derivative suit?
- Corporation may move to dismiss based upon?
In ruling on the motion to dismiss, what is the standard?
when might the court treat a derivative suit as a direct action
only with court approval
If the proposed settlement or dismissal may substantially affect shareholders, the court may require notice to those shareholders.
- Corporation may move to dismiss based upon determination by independent and disinterested directors (or a committee of two or more such directors). the basis of the motion to dismiss: that suit is not in the corp’s best interest
the court must dismiss if it finds the determination was made in good faith by independent and disinterested directors
- In a close corporation of 35 or fewer shareholders, the court might treat a derivative suit as a direct action so the various requirements don’t have to be met. Treating it as a direct suit means the recovery would go to the plaintiff, not the corporation.
SHAREHOLDER VOTING
A. Who votes?
C Corp. sets its annual meeting for July 7 and record date for June 8. S sells B her C Corp. stock on June 25. Who is entitled to vote the shares at the meeting, S or B?
General rule: you vote if you are the record shareholder as of the record date.
1. The record shareholder is the person shown as the owner in the corporate records. The record date is a voter eligibility cut-off set no more than 60 days before the meeting.
S, because she owned it on the record day
Exceptions to the general rule that record owner on record date votes.
a. Corporation reacquires stock from shareholders before the record date. So the corporation is the record owner of this “treasury” stock. Does it vote the treasury stock?
no; not outstanding
b. Death of shareholder: S’s executor vote the shares
c. Proxies.
A proxy is a (i) writing (fax and e-mail are OK), (ii) signed by record shareholder (fax and e-mail are OK), (iii) directed to secretary of corporation, (iv) authorizing another to vote the shares.
agency
SHAREHOLDER VOTING
A. Who votes?
proxies
– On March 2, 2015, S sends a signed letter to secretary of C Corp. authorizing Joe to vote her shares. Can Joe vote S’s shares at the 2015 annual meeting in July?
– Can Joe vote S’s shares at the 2016 annual meeting in July 2016?
– What if, before the 2015 meeting, S writes to the secretary of C Corp. that she now wants Courtney to vote her shares at the 2015 meeting?
– Can S revoke her proxy even though it states that it is irrevocable?
***Can we ever have an irrevocable proxy?
c. Proxies.
A proxy is a (i) writing (fax and e-mail are OK), (ii) signed by record shareholder (fax and e-mail are OK), (iii) directed to secretary of corporation, (iv) authorizing another to vote the shares.
agency
yes
no; good for 11 months unless says otherwise
ok; revoke and change
yes!!!!!!!!!!
Yes if it is a “proxy coupled with an interest.” This requires: (1) the proxy says irrevocable and (2) the proxyholder has some interest in the shares other than voting.
Example: S gives B an option (interest in the stock) to buy her stock. Then S gives B a proxy to vote her shares at the upcoming annual meeting. The proxy says it’s irrevocable.
SHAREHOLDER VOTING
X, Y, and Z own relatively few shares of C Corp. They ask for your advice on how they can pool their voting power.
Is it OK for shareholders to agree to vote shares to elect each other as directors?
shareholders agree on what they will do once they become directors. Is that OK?
You tell them about two things:
A. Requirements for voting trust (no time limit imposed by corporate law)
1) written trust agreement controlling how the shares will be voted;
2) file a copy with the corporation;
3) transfer legal title of shares to voting trustee;
4) original shareholders receive trust certificates and retain all shareholder rights other than voting.
B. Requirements for voting (pooling) agreement (no time limit imposed by corporate law)
in writing and copy to the corp
Are voting agreements specifically enforceable against transferees? Yes if the affected stock certificates conspicuously note the agreement.
Voting trusts and agreements must be for a proper shareholder purpose. It is OK for shareholders to agree to vote shares to elect each other as directors.
no; voting agreement for directors action is void
B. Where do shareholders vote?
- There are two ways shareholders can take a valid corporate act:
- There are two kinds of shareholder meetings.
– Suppose ten percent of the shares call a special meeting for the purpose of removing an officer. Is this OK?
What if the purpose of the meeting was to remove a director. Would that be OK?
- There are two ways shareholders can take a valid corporate act: (1) unanimous consent in writing and signed or by electronic transmission of holders of all voting shares, or (2) a meeting that satisfies quorum and voting rules.
- There are two kinds of shareholder meetings. They can be held anywhere.
a. Annual meeting (elect directors) must be held. If none is held within 13 months, a shareholder may petition the court to order one.
b. Special meeting can be called by (1) the Board, (2) the president, (3) the holders of at least 10 percent of the shares entitled to vote, or (4) anyone else permitted in certificate.
no, shareholders cant remove officers
yes
B. Where do shareholders vote?
3. Notice requirement
Why does the stated purpose of the meeting matter?
Consequence of failure to give proper notice to all shareholders entitled to vote:
meetings notice requirement
- Notice requirement—must give written notice to every shareholder entitled to vote, for every meeting (annual or special) between 10 and 60 days before the meeting (21 to 60 days if the meeting is to consider a fundamental change).
a. Notice is given personally or by mail or, if the shareholder consents, by e- mail.
b. Contents of the notice: must always state (1) when, (2) where, and (3) why (the purpose of the meeting).
because they can’t do anything else
Consequence of failure to give proper notice to all shareholders entitled to vote: any action taken at the meeting is void unless those not sent notice (or those who got defective notice) waive the notice defect. How does waiver occur?
- Express: in writing anytime; or
- Implied: attend meeting without objection.
