Chapter 44- Shareholder Rights In Corporations
Case Summary: When Shareholders Investigate Bribery and a Corporate Cover-Up, Even Privileged Documents Must Be Produced
Parties: Wal-Mex, Shareholder IBEW (Electrical Workers Pension Trust), Wal-Mart Issue: In April 2012, the New York Times ran a story about bribery at WalMex, a Mexican subsidiary of Wal-Mart. The article described a scheme of illegal bribery payments made to Mexican officials at the direction of WalMex CEO, Eduardo Castro-Wright, between 2002 and 2005. The article stated that WalMex received benefits such as zoning changes and rapid and favorable processing of permits and licenses for new stores in exchange for bribes. The NYT article stated that Wal-Mart executives were aware of the conduct no later than September 2005. A stockholder of Wal-Mart, the Electrical Workers Pension Trust Fund IBEW (IBEW), demanded to inspect the books and records of the corporation with the purpose of investigating the bribery allegations and breaches of fiduciary duty by Wal-Mart or WalMex executives in connection with the bribery allegations. Wal-Mart produced approximately 3,000 documents, including documents regarding its compliance with the Foreign Corrupt Practices Act and minutes and materials referencing the WalMex Allegations. Wal-Mart declined to provide documents that it believed were not necessary and essential to the stated purposes or that were protected by the attorney-client privilege and work-product doctrine. The Court of Chancery held that Wal-Mart had to produce these additional documents because they were "necessary and essential to achieve a "proper purpose," as required by Section 220 of the Delaware Code. According to Section 220, documents are "necessary and essential" if they address the "crux of the shareholder's purpose" and if that information "is unavailable from another source. Decision: Judgement for the Shareholder IBEW. Exception to the attorney-client privilege's when a corporation is in a suit against its stockholders and is potentially acting against shareholder interests, they may show why privilege should not be invoked. Section 220 of the Delaware Code requires that shareholders demonstrate that the corporate documents they request are "necessary and essential" for a legitimate shareholder purpose record showed that IBEW's purpose in seeking the information was to investigate the handling of the WalMex Investigation, whether a cover-up took place, and what details were shared with the Wal-Mart Board. Good cause existed in this case because the stockholders had a "colorable claim" based on Wal-Mart's public statements about alleged illegalities in Mexico. The fact that the information would be difficult to obtain from another source also supported a good cause finding.
Case Summary: Curb Your Enthusiasm, Defendants Greenberg and Smith Argue
Parties: Plaintiff Stockholders, CEO Maurice Greenberg, CFO Howard Smith Issue: Plaintiff stockholders sue Greenberg, Smith, and other former officers of American Insurance Group's (AIG's) board of directors. Plaintiff took action on behalf of the corporation for damages caused by officers by having the corporation engage in illegal acts. example: the plaintiffs asserted that AIG created a fictional reinsurance business transaction with General Reinsurance Corp. to inflate loss reserves, thus making AIG appear to be a healthier company than it actually was and inflate AIG's stock price SLC investigated all matters and decided to join this action as a direct plaintiff on behalf of the corporation, asserting breach of fiduciary duty and indemnification claims against former CEO Greenberg and former CFO Smith Defendants contended that the stockholder plaintiffs had to make a demand on the full board, and also asserted that under procedural law, board of directors should not be bypassed by derivative plaintiffs. Decision: Judgement for Stockholder Plaintiffs. Corporation law seeks to ensure that boards aren't bypassed by derivative plaintiffs and not allowed to usurp the board's right to manage affairs of the corporation. The SLC chose to have AIG sue Greenberg and Smith itself, to seek dismissal of certain defendants, and to otherwise take no position on the plaintiffs' claims. The board gave the SLC full authority to make this decision Plaintiffs are free to proceed against the defendants.
Rights of Shareholders
Shareholder control over the corporation is indirect. Periodically (ordinarily once a year) the shareholders elect directors and by this means control the corporation. At other times, however, the shareholders have no right or power to control corporate activity so long as it is conducted within lawful channels.
Participating Preferred Stock
When preferred stock is given the right of participation, in which the common shares receive dividend or capital distribution made equal to the first received by preferredstocks Both kinds participate or share equally in the balance.
When is a restriction of the right of a certificate's purchaser to transfer stock valid?
When the restriction is conspicuously noted on the certificate or the transferee had actual knowledge of the restriction
1978 Version Article 8
a contract for the sale of corporate shares must be evidenced by a writing, or it cannot be enforced. No writing is required for a contract by which a broker agrees with a customer to buy or sell securities for the customer. That is an agency agreement, not a sale made between the customer and the broker.
Straight Voting
a procedure in which a shareholder may cast all votes for each member of the board of directors each shareholder is entitled to one vote on each matter to be voted.
A Shareholder has the right to receive?
a proportion of dividends as they are declared, subject to the relative rights of other shareholders to preferences, accumulation of dividends, and participation.
What happens in a derivative action when a corporation has failed to enforce a right?
a shareholder bringing such a suit must show that a demand was made on the directors to enforce the right in question Must Show: - that the directors refused to enforce the right28 -that a demand that the directors enforce the right is excused because the directors are deemed incapable of making an impartial decision regarding the pursuit of the litigation.
Certificate
authentic evidence of the stockholder's ownership of shares.
voting by proxy
authorizing someone else to vote the shares owned by the shareholder.
Registered Bonds
bonds held by owners whose names and addresses are registered on the books of the corporation to ensure proper payment.
stock subscription
contract or agreement to buy a specific number and kind of shares when they are issued by the corporation. Agreement to subscribe shares of a corporation may be avoided for fraud
Wasting Assets Corporations
corporation designed to exhaust or use up the assets of the corporation, such as by extracting oil, coal, iron, and other ores.
Maturity Date
date that a corporation is required to repay a loan to a bondholder
Bond
debt investment; a loan to a corporation or government entity usually for a defined period of time at a fixed interest rate. Instrument promising to repay a loan of money to a corporation, and obligates the corporation pay the bondholder the amount of the loan (principal)
Certificate of Stock/ Share Certificate
document evidencing a shareholder's ownership of stock issued by a corporation. Corporations issue this as evidence of the shareholder's ownership of a stock.
Sinking fund
fixed amount of money set aside each year by the borrowing corporation toward the ultimate
When are dividend payments prohibited?
if the corporation is insolvent or would be rendered insolvent by the payment of the dividend
Why is limited Liability important to our economy?
it encourages investors to make investments in high-risk ventures
preincorporation subscription
offer to purchase capital stock in a corporation yet to be formed RMBCA provides that "a subscription for shares entered into before incorporation is irrevocable for six months unless the subscription agreement provides a longer or shorter period or all the subscribers agree to revocation"
Who are entitled to vote among shareholders?
only shareholders of record—those common shareholders in whose name the stock appears on the books of the corporation—are entitled to vote.
Market Value
price at which a share of stock can be voluntarily bought or sold in the open market
derivative (secondary) action
secondary action for damages or breach of contract brought by one or more corporate shareholders against directors, officers, or third persons. When the corporation has the right to sue its directors, officers, or third persons for damages caused by them to the corporation or for breach of contract, one or more shareholders may bring such action if the corporation refuses to do so.
limited liability of Shareholder
shareholder is not personally liable for the debts and liabilities of the corporation. The capital contributed by shareholders may be exhausted by the claims of creditors, but there is no personal liability for any unpaid balance
Preemptive Right
shareholder's right upon the increase of a corporation's capital stock to be allowed to subscribe to such a percentage of the new shares as the shareholder's old shares bore to the former total capital stock.
What happens upon dissolution of a corporation?
shareholders are entitled to receive any balance of the corporate assets that remains after the payment of all creditors.
par value
specified monetary amount assigned by an issuing corporation for each share of its stock. The person subscribing to the stock and acquiring it from the corporation must pay that amount.
preffered stock
stock that has a priority or preference as to payment of dividends or upon liquidation or both Priority over common stock, which may be in respect to either dividends or the distribution of capital, or both, and is ordinarily nonvoting.
Common Stock
stock that has no right or priority over any other stock of the corporation as to dividends or distribution of assets upon dissolution. Shares usually entails holder to have one vote, receive shares of the profits in the form of dividends when declared, and to participate in the distribution of capital upon dissolution of the corporation.
Cumulative Voting
system of voting for directors in which each shareholder has as many votes as the number of voting shares owned multiplied by the number of directors to be elected, and such votes can be distributed for the various candidates as desired. designed to give proportional representation on the board of directors to minority shareholders each shareholder has as many votes as the number of shares owned multiplied by the number of directors to be elected.
Declaration Date
the date on which the board of directors officially approves a cash or property dividend
record date
the date when the company determines ownership of outstanding shares for dividend purposes
Another right shareholders have is?
the right to inspect the books of the shareholder's corporation. In some states, there are no limitations on this right. In most states, the inspection must be made in good faith, for proper motives, and at a reasonable time and place
Right to vote for Shareholders
the right to vote at shareholders' meetings for the election of directors and on other special matters that shareholders must vote on.
Voting Trust
transfer by two or more persons of their shares of stock of a corporation to a trustee who is to vote the shares and act for such shareholders created when by agreement a group of shareholders or all of the shareholders transfer their shares in trust to one or more persons as trustees. The trustees are authorized to vote the stock during the life of the trust agreement.
Acceptance
unqualified assent to the act or proposal of another; as the acceptance of a draft (bill of exchange), of an offer to make a contract, of goods delivered by the seller, or of a gift or deed. subscriber immediately becomes a shareholder with all the rights, privileges, and liabilities of a shareholder even though she has not paid any of the purchase price
Debenture
unsecured bond of a corporation, with no specific corporate assets pledged as security for payment.
Indenture Trustee
usually a commercial banking institution, to represent the interests of the bondholders and ensure that the terms and covenants of the bond issue are met by the corporation.
Book Value
value found by dividing the value of the corporate assets by the number of shares outstanding.
When is inspection refused?
when it was sought merely from idle curiosity or for "speculative purposes." was sought merely to obtain a mailing list of persons who would be solicited to buy products of another enterprise. when the object of the shareholder was to advance political or social beliefs without regard to the welfare of the corporation.
Proxy
written authorization by a shareholder to another person to vote the stock owned by the shareholder; the person who is the holder of such a written authorization.
How can shares of stock be acquired?
-from the corporation by subscription, either before or after the corporation is organized - by transfer of existing shares from a shareholder or from the corporation
"Alter Ego" Theory
A corporation is a separate and distinct person from the person or persons who own the corporation. However, when a corporation is so dominated and controlled by a shareholder(s), officer(s), or director(s) that the separate personalities of the individual and the corporation no longer exist and there is a wrongful use of that control, the courts will disregard the corporate entity so as not to sanction a fraud or injustice.
Deed
Instrument by which the grantor (owner of land) conveys or transfers the title to a grantee.
Capital
Net assets of a corporation
Case Summary: Restrictions on Transfer of Stock are Legal, Morris
Parties: Brad Morris, Billy Fought Issue: In 1974 Billy Fought, Brady Morris, Clayton Strong, and John Peyton organized Vicksburg Mold and Die, Inc., for the purpose of designing and manufacturing plastic and metal products. Each individual was issued 25 shares of stock. The shareholders entered into a stock redemption agreement requiring a stockholder wishing to sell his stock to offer proportionate shares to each stockholder. Morris was elected president and Fought vice president, and all four individuals worked at the plant. Strong retired in 1979 and sold his shares in accordance with the stock redemption plan. In 1983, Peyton decided to sell his shares and agreed to sell them all to Morris, thus giving Morris control of the corporation. Fought sued Morris for breach of his fiduciary duty to Fought and for the value of Fought's pro rata share of Peyton's stock. Decision: Judgement for Fought. Section 2 of Stock Redemption Agreement designed to maintain a balance of power in the four-person close corporation Before stocks can be sold to others, it must be offered to all shareholders on a pro rata basis Each person had an opportunity to maintain the balance of power, and by Morris purchasing all of Peyton's stocks, he bought control of the corporation, and violated the stock redemption agreement, and breached his fiduciary duty as director, officer, and share holder.
Case Summary: You've Got to Pay for Your Stock, Silly
Parties: Hanewald's Dry good store, and Keith/ Joan Bryan Issue: Keith and Joan Bryan incorporated Bryan's Inc. The corporation was authorized to issue 100 shares of stock with a par value of$1,000 per share. The corporation issued 50 shares to Keith and 50 shares to Joan, although it did not receive any payment in labor, services, money, or property for the stock. On August 30, 1984, Bryan's Inc. bought Hanewald's dry goods store, giving Hanewald a promissory note for part of the purchase price. The business was not successful, and after four months, Keith and Joan Bryan decided to close the store. They disbursed all of the corporation's funds in payment of all bills except for the debt owed Hanewald. No corporate funds were available to pay this debt. Hanewald sued the Bryans individually for the amount owed. The Bryans contended that they were not personally liable for the corporation's debts. Decision: Judgement for Hanewald. Organizing a corporation to avoid personal liability is legitimate and a primary advantage to doing business in the corporate form. But proper capitalization is the principal prerequisite for this limited liability. Keith and Joan Bryan's failure to pay for their stock makes them liable to Hanewald, the corporate creditor, to the extent that the stock was not paid for. Because the debt to Hanewald, $36,000, was less than the par value of their stock, $100,000, the Bryans are personally liable for the entire corporate debt owed to Hanewald.
Case Summary: It's the Real Thing, Controlling Shares in Coke-Anderson, and You have to pay a premium
Parties: Paul Warlick, and Wayne Shoaf Issue: Paul Warlick, Jr., was the president and chief executive officer and a stockholder of Coca-Cola Bottling Company of Anderson, S.C. (Coke-Anderson). He controlled a majority of the shares of stock of the company. Warlick agreed to sell this controlling interest in Coke-Anderson to Coke-Asheville for a price greater than the market value of the shares. Wayne Shoaf, a minority shareholder, brought suit against Warlick, contending that Warlick had violated his fiduciary duty to the corporation by receiving an unlawful premium for the sale of the majority interest in Coke-Anderson. Decision: Judgement for Warlick; paying or receiving a premium for controlling shares of stock in a corporation is not unlawful. A majority shareholder who's a director and officer is under no duty to minority shareholders to refrain from receiving a premium on sales of the controlling stock.
Case Summary: Its Not Good Retailing to Publicly Tout "Low Cost Manufacturing - High Retail Pricing" on Wall Street: Wall Street Abuts Main Street
Parties: Shareholders of Abercrombie & Fitch Co., Officers/ Directors Issue: Shareholders of Abercrombie & Fitch Co. filed a derivative suit on behalf of the company against several officers and directors alleging that the defendants caused Abercrombie to make misleading public statements between June 2 and August 18, 2005, which caused stock prices to rise and then fall once the falsity of the statements were revealed. According to the complaint, Abercrombie adopted a business model of selling products with a low manufacturing cost at high retail prices, resulting in a high per-unit margin. The company sought to create such a desired brand that it could "train" its customers to not expect a sale or markdowns and instead just pay the high price. This approach manifested itself most particularly in Abercrombie's denim products. Abercrombie issued reports indicating that its denim sales were strong and that its high gross margin business strategy was working. The shareholders allege that these statements were misleading because company insiders knew that Abercrombie was amassing a large surplus of inventory such that there would have to be dramatic markdowns to clear out the inventory, causing a negative correction in the company's stock price. The stock price eventually did fall, which kicked off a spate of lawsuits and regulatory investigations. During this time, when the insiders are alleged to have known that the price would soon fall, five of the defendants—Singer, Jeffries, Bachmann, Kessler, and Griffin—sold a large number of their shares of Stock The corporation formed an SLC, consisting of board members Allan Tuttle and Lauren Brisky. During the investigation Mr. Tuttle recused himself from considering claims against Mr. Singer, Abercrombie's president, COO, and CFO, due to a prior relationship at the Gucci company. The SLC recommended that the corporation seek dismissal of the suit, and the district court granted a motion to dismiss in which the shareholders appealed Decision: The court of appeals reversed the district court, having serious doubts about Mr. Tuttle's independence because he recused himself from considering the claims against the person at the very center of the alleged improper activity. When Tuttle recused himself from considering the claims against Singer, he essentially launched a signal flare that he was not independent. Mr. Singer, as the COO, appears to have been heavily involved in the strategy of touting the success of the business model to the market. He was also alleged to have engaged in insider trading. Without a demonstration that its SLC was independent, the corporation's motion to dismiss based on the SLC's recommendation could not be granted.
What can secure a bond?
A mortgage or Lien on corporate property
What else is a shareholder entitled to?
A shareholder is entitled to inspect the books to obtain information needed for a lawsuit against the corporation or its directors or officers, to organize the other shareholders into an "opposition" party to remove the board of directors at the next election, or to buy the shares of other shareholders
retained earnings
Earnings surplus that consists of the accumulated profits earned by the corporation since its formation less prior dividend distributions.
Factors of Piercing the corporate veil
Factors that may lead to piercing the corporate veil and imposing liability on its owners (the shareholders) are - the failure to maintain adequate corporate records and the commingling of corporate and other funds - grossly inadequate capitalization, shareholders of corporate funds or assets -the formation of the corporation to evade an existing obligation - the formation of the corporation to perpetrate a fraud or conceal illegality - a determination that injustice and inequitable consequences would result if the corporate entity were recognized
Share
Property of shareholder
What eliminates the concept of par value?
RMBCA
Cummulative Preferred Stock
Right to receive dividends depending on declaration of dividends by the board of directors for a period of time. Absence of statement that the right to dividends in noncumulative, courts frequently hold that preferred stock has the right to accumulate dividends for each year in which there was a surplus available for dividend payment but dividends were not declared.
Outstanding
Shares that have been issued to holders. name for shares of a company that have been issued to stockholders.
Piercing the Corporate Veil
The action of a court to disregard the corporate entity and hold the shareholders personally liable for corporate debts and obligations.
capital stock
The value received by the corporation for its outstanding stock. declared money value of the outstanding stock of the corporation
Negotiability of transfer of shares
Under common law, the transferee of shares of stock had no greater right than the transferor because the certificate and the shares represented by the certificate were nonnegotiable
Bond indenture
agreement setting forth the contractual terms of a particular bond issue.
