SHAREHOLDERS Flashcards
(10 cards)
Annual/Special Meetings
A meeting of the shareholders must be held annually, on a date fixed by or under the bylaws (annual meeting).
Elect Directors at annual meeting.
Notice of special meetings must be provided to ALL shareholders at least 10 days prior, but no more than 60 days prior to the meeting. Failure to give proper notice voids all decisions carried out at the meeting. The notice must also describe what will be discussed at the meeting. {Time, Place, Purpose (Special)} Notice can be waived expressly (signed writing) or impliedly (attend the meeting without objection).
Voting
A record owner as of the record date has the right to vote. At death, Executors can vote.
Corp does NOT get to vote on treasury stock!
SHs may take action by written consent of all SHs entitled to vote (w/ no meeting), OR in a meeting. Must be a QUORUM which is a majority of outstanding shares entitled to vote, unless the Articles or bylaws say otherwise. (based on NUMBER OF SHARES represented, not the number of SHs). AOI/ bylaws can reduce a quorum to less than MAJ, but NEVER be less than 1/3 of the shares. Can NEVER reduce the requirement of Maj APPROVAL.
Cumulative voting is allowed when electing directors – multiply the number of shares x listed number of Directors to be elected.
QUORUM
A majority of outstanding shares entitled to vote, unless the Articles or bylaws say otherwise. (based on NUMBER OF SHARES represented, not the number of SHs).
QUORUM EXCEPTIONS
Proxies, voting agreements, and death of shareholder.
1. Proxies. SH may vote her shares in person or by proxy executed in writing. Proxies allow a SH to authorize another person to vote her shares. The proxy holder must act in accordance with any agreement between the parties. A valid proxy cannot last longer than 11 months. Every appointment of a proxy shall be revocable UNLESS it is coupled with an interest OR given as security. Can be revoked by attending the meeting to vote himself, or by subsequent appointment of another proxy.
2. SH Voting Trusts/Voting Agreements. SH may enter into a voting trust or a voting agreement to vote her shares as a block in order to increase her influence.
- A voting trust: {4} requires:
(1) written trust agreement (which transfers all shares to the trustee) controlling how shares are voted;
(2) a copy given to the corporation (must include names and addresses of the beneficial owners of the trust);
(3) transfer of legal title in the shares to the voting trustee;
(4) original SH must receive a trust certification and retains all other SH rights except voting. The maximum duration for a voting trust is 10 years (can be renewed).
- A voting agreement requires only a signed writing that provides for the specific manner in which they will vote their shares. Unless the agreement states otherwise, it will be specifically enforceable. Do not have to file with Corp and can be perpetual.
Management
Close Corp
SHs can manage the business directly in a CLOSE or CLOSELY HELD corp. A close corp is one that is held by a limited number of shareholders and is not publicly traded and is run by the SHs. Must have
(1) provision in AOI restricting or transferring BOD power to SHs AND
(2) all incorporators or SHs approve,
(3) conspicuously noted on front/back of shares,
(4) all subsequent SHs have notice AND
(5) not listed on exchange or regularly quoted.
In a Close Corp. the 10 largest SHs are personally liable for wages and benefits to corporate employees.
Generally, power to manage corp is vested with Directors and SHs have no direct control in management.
Right to Inspect Corp Records
{TPP}
All SH have right to inspect records (books, papers, accounting records, SH records) at a reasonable Time and Place, upon 5 days written notice stating a proper Purpose related to role as SH.
Must make:
(1) written demand stating the documents desired (Minutes/Mtgs records - within 5 days, list of D/O – 2 days), and
(2) the demand must state a proper purpose (related to the role of a shareholder).
PIERCING THE CORPORATE VEIL
The general rule is that a SH is not personally liable for the debts and obligations of the corporation, however the court will “pierce the corporate veil” and hold the SH personally liable to avoid fraud or injustice (only in close corporation)(if they abused the priv of Inc AND fairness requires holding them liable).
Courts are inclined to pierce the corp veil in three situations:
(1) where the SH is acting as the ALTER EGO (mere instrumentality) of the corporation & some basic injustice results (failure to adhere to corporate formalities/commingling of personal and corp assets/using corp funds for personal expenses);
(2) Inadequate capitalization at time of formation (SH started the corp that was grossly undercapitalized at formation and is completely dominated by SH, OR
(3) Fraud, avoidance of existing obligations or evasion of statutory provisions. [Applies to Parent-Subsidiary]. Liability will be Joint and several.
{ALTER EGO | UNDERCAPITALIZATION | FRAUD}
A close corporation is a corporation which is held by a limited number of shareholders and is not publicly traded.
Direct Actions
May be brought by SH for breach of a fiduciary duty owed to the SH by an officer or Director. Director or Officer will be directly liable to the SH.
- Controlling Shareholder Liability. A controlling SH owes a duty of loyalty and utmost good faith to Minority SHs not to use his control to unduly prejudice their interests. Thus, a controlling SH may sell her stock for more than its value, but she may NOT:
(1) sell to looters,
(2) sell corporate assets; or
(3) sell board positions.
DERIVATIVE SUITS
{5 Reqs}
In a derivative suit, a SH is suing to enforce a claim on behalf of the corporation, not individually. To bring a derivative suit, the SH must meet the following requirements:
(1) must own stock with the corporation at the time the COA arose,
(2) fairly & adequately represent the interests of the corp.,
(3) make a written demand upon the board to take suitable action or establish why such demand would futile,
(4) may also be required to post a bond, AND
(5) must plead with particularity (special pleading requirement).
The BOD may file a motion to dismiss the suit where a majority of disinterested directors determines in good faith after reasonable inquiry that the suit would not be in the best interests of the corp.
Damages are paid to the corp., but the shareholder can recover costs and attorney’s fees.
DERIVATIVE SUITS TIMING
Must wait 90 days from date of demand unless
(1) corp rejects demand before 90 days is up, OR
(2) corp would be irreparably injured if forced to wait 90 days.
- When is demand FUTILE?
(1) Majority of BOD is interested or under control of interested Ds,
(2) BOD did not inform himself of the transaction to the extent reasonable under the circumstances,
(3) the transaction is so egregious on its face that it could not be the result of sound business judgment.
If Demand made & DENIED? SH can only proceed with suit if they can prove a majority of BOD was interested OR if the decision was NOT made in good faith after reasonable inquiry. (procedure was incomplete and inadequate)
