Shareholder Suits

Question 1

Kinds of shareholder suits

Answer 1

Direct suits
Derivative suits

Question 2

Direct suit usage

Answer 2

Used when the wrong or harm is caused directly to the SHs

Question 3

Power to declare dividends

Answer 3

The Board has the sole power to declare dividends (unless otherwise provided in Articles).

To compel payment of dividends, a SH must prove the Director’s refusal amounted to fraud, bad faith, or an abuse of discretion

Question 4

Factors to prove bad faith in refusing dividends

Answer 4

• Intense hostility by controlling SHs against minority SHs
• Excluding minority SHs from employment by the corp.
• High salaries, bonuses, or corporate loans made to the controlling officers
• If the majority SHs may be subject to high personal-income taxes if substantial dividends are paid
• Whether the controlling directors desire to buy the minority stock interests as cheaply as possible

Question 5

Derivative shareholder suits

Answer 5

Equitable action brought by SHs on behalf of the corp. and for the corp.’s benefit (i.e., the damages are paid to the corp., not the SHs bringing suit)

Question 6

Requirements for bringing derivative suit

Answer 6

Before bringing suit, the SH must:

o make a written demand of the directors to enforce the rights of a corp., and
o allow at least 90 days to pass, unless irreparable injury would result by waiting 90 days

Question 7

Dismissal of derivative suits

Answer 7

The board can seek dismissal when a majority of disinterested directors, in good faith, and after conducting a reasonable inquiry find that continuance of the suit would not be in the best interests of the corp.

Question 8

Duty of good faith for controlling SHs

Answer 8

Controlling SHs must refrain from exercising control in a way that disproportionately benefits them over the minority SHs

Question 9

Shareholder liability

Answer 9

Generally, SHs are not personally liable for debts of the corp.

Question 10

Exception where shareholder personally liable

Answer 10

Piercing the corporate veil

Question 11

Factors for piercing the corporate veil

Answer 11

o Corp. is undercapitalized
o Corporate formalities have not been followed
o Commingling of corporate and personal funds
o Corp. is an alter ego of its SHs

Question 12

What P must prove to pierce the corporate veil

Answer 12

o SH control that effectively renders corporate form a façade (alter ego);
o Use of corporate form to obtain an improper or fraudulent purpose; and
o Injury or unjust loss resulting from wrongful use of corporate form