Shareholders

Suppose S makes the demand and the board refuses to have the corporation sue. Can S now bring the derivative suit anyway?

Only if she can show that a majority of the board is interested or its procedure was incomplete or inadequate.

Will a court interfere with the Board's discretion and order a distribution?

Only on a showing of bad faith or dishonest purpose.

What if S gives P a proxy and then S dies. Does that revoke the proxy?

Only when written notice of death is received by the corporate secretary.

Can the parties dismiss or settle a derivative suit?

Only with court approval and the court might require notice to shareholders to get their feedback

PCV can only happen in what kind of corporation?

Close corporations. In NY bar, almost every corporation is a close corporation

What are the requirements for a voting trust?

(1) Written trust agreement controlling how the shares will be voted; (2) Copy to corporation; (3) Transfer legal title of shares to voting trustee; and (4) Original shareholders receive voting trust certificates and retain all shareholder rights except for voting.

What are distributions?

these are payments by the corporation to shareholders

Special meeting: Who can call one?

1) board or 2) anyone provided in the certificate or bylaws.

What are the three types of distributions?

1) dividend or 2) payment to repurchase shares or 3) to redeem shares (forced sale to corporation at price set in certificate).

Even if the restriction on sale of shares is valid, it cannot be invoked against the transferee unless either:

1) it is conspicuously noted on the stock certificate or 2) the transferee had actual knowledge of the restriction.

You can have an irrevocable proxy if:

1) it says irrevocable and (2) the proxy-holder has some interest in the stock other than voting. This is called a proxy coupled with an interest.

What must be met for PCV and holding shareholders personally liable?

1) they must have abused the privilege of incorporating and 2) fairness must require holding them liable.

If you want to have shareholder management in a close corp., you have a provision in the certificate restricting or transferring board power to shareholders (or others). What else do you need?

1. All incorporators or shareholders (voting and nonvoting) approve it, 2. It is conspicuously noted on front and back of all shares, 3. All subsequent shareholders have notice and 4. Shares are not listed on an exchange or regularly quoted over the counter.

What are exceptions to the general rule that record owner on record date votes?

1. Corporation reacquires stock on January 10. The record date is January 15. Does the corporation itself get to vote this "treasury stock"? No, because it is not outstanding. 2. Death of shareholder: S owns stock in C Corp.; S is the record owner. After the record date, S dies. Can S's executor vote the shares? Yes 3. Proxies. OK for shareholder voting. No OK for director voting!

How and when do shareholders use cumulative voting?

1. Cumulative voting is only available when shareholders are voting to elect directors. It is a device to help small shareholders get representation on the board. 2. Multiply number of shares times number of directors to be elected.

What is the most important stuff in fact pattern 4?

1. Derivative suits, (34-39) 2. PCV (32-34), 3. Inspection rights (45 - 46), 4. Hypo at bottom of pg. 40, 5. Legality of distribution (48-49)

What are reasonable expectations of most people who invest in a close corp.?

1. Employment, 2. Return on Investment, 3. A voice in management.

What are the requirements for bringing a shareholder derivative suit?

1. Stock ownership when claim arose 2. Plaintiff must adequately represent the interests of the corporation and shareholders. 3. S can be required to post a bond for the defendant's costs. She does not have to, though, if she owns five percent or more of the stock or her stock is worth more than $50,000. 4. S must make a demand on directors that the corporation sue (unless it can show it is futile to do so).

Is there a time limit on voting trusts?

10 year max. But within 6 months of expiration, can extend for another term of up to 10 years.

If we just have to have a formula, here's one. Percentage of shares required to elect one director if cumulative voting is in place. You need one share more than this percentage: 100/X plus 1 (X is number of directors being elected). So if 9 directors are being elected, what would you need to elect one director?

10% you need one share more than 10%, enabling you to elect one director.

How is stated capital computed? C Corp. issues 10,000 shares of $2 par stock for $50,000. How is that $50,000 allocated?

20,000 is stated capital and 30,000 is surplus. Why does 20000 go to stated capital? Because it is the par value of the issuance. Why does 30000 go to surplus? It is the consideration received in excess of par.

Which shareholders get dividends? For each hypo, the board of directors of C Corp. declares a dividend of $400,000. Who receives what if the outstanding stock is: 100000 shares of common stock?

4 per share

You own 1,000 shares of stock in C Corp. C Corp. has nine directorships open for election. You believe that Napoleon Dynamite should be a director of C Corp. Under cumulative voting, how many votes can you cast for Napoleon?

9000. Shares times directorship positions. Instead of nine separate elections, in which you would have 1,000 votes each, with cumulative voting there is one at-large election, with the top nine finishers being elected.

If the annual shareholder meeting is not held, what happens?

A court can order one.

What is a proxy?

A proxy is a 1) writing, 2) signed by record shareholder or authorized agent, 3) directed to secretary of corporation, 4) authorizing another to vote the shares

What is a stock split?

A stock split gives a shareholder more shares than she now has but reduces the value of each share. For example, say Sally owns 100 shares of XYZ Inc. The shares are selling at $40 per share. If the stock splits 2-for-1, Sally will end up with 200 shares, worth $20 per share. So the economic effect is nothing - she still has $4,000 worth of stock.

What rights of inspection do shareholders have at common law?

All shareholders also have a common law right to inspect records at a reasonable time and proper place. Inspection must be for a proper purpose, which means something related to your role as a shareholder.

S sues regarding waste of corporate assets. Derivative?

Always

What are the contents of shareholder notice?

Always state the time and place. If action proposed at the meeting is something on which shareholders would have appraisal rights, the notice must say so and tell why (and even include the statute about appraisal rights). And notice of a special meeting must state who called it and the purpose of the meeting, which is important because the shareholders cannot do anything else at that meeting which was not stated in the notice.

What happens if the corporation does not give notice to everyone entitled to vote?

Any action at the meeting is void. BUT the action could be upheld if those not given notice waive the notice defect.

Regarding the list of the current directors and officers, who can demand them?

Any shareholder can demand that on two day's written demand.

Regarding the corporation's latest (1) annual balance sheet, (2) profit and loss statement and (3) interim statements distributed to shareholders or public, who can demand it?

Any shareholder can make a written request, and the corporation must provide the documents; can do so by mail.

Are voting agreements specifically enforceable?

Apparently not

Is undercapitalization enough to pierce the corporate veil in NY?

Apparently not by itself. We need complete domination and control to perpetrate fraud and injustice.

X Corp. has 120,000 shares outstanding. 62,000 shares are represented at the meeting, but only 50,000 shares vote on a particular proposal. How many shares must vote for the proposal for it to be accepted by the shareholders?

At least 25,001. All you need is a majority of the ones that voted.

Stock transfer restrictions. Sometimes, we want to impose restrictions on transfer (especially in the close corporation - to keep outsiders out). Sometimes we require the corporation to buy back stock when a shareholder retires or dies. Where are such restrictions set?

Certificate or bylaws or by agreement.

What does a shareholder in a derivative suit receive?

Costs and attorney's fees, usually from the judgment won for the corporation. After all, she conferred a benefit on the corporation by suing and winning.

What must you always ask in a shareholder derivative suit?

Could the corporation have brought this suit? The shareholder is suing in the right of the corporation.

Which shareholders get dividends? For each hypo, the board of directors of C Corp. declares a dividend of $400,000. Who receives what if the outstanding stock is: 100,000 shares of common and 20,000 shares of $2 preferred that is cumulative (and no dividends have been paid in the three prior years)?

Cumulative means add them up -- for the years in which no dividend was paid, the cumulative holders' dividend is adding up. So the corporation owes these cumulative holders for the three prior years (because there have been no dividends over those years) PLUS there's this year, the year the dividend is declared. So the corporation owes the cumulative holders for four years of their $2 preference. Four years time 2 dollar preference equals 8 dollars. 20000 times 8 dollars equal 160,000 dollars. We pay that first. Leaves us with 240,000 dollars which goes to the commons. Thus 2.4 a share for the common.

We know that a shareholder can bring a derivative suit if she meets the requirements. Can a director or officer do so?

Director or Officer can sue another director or officer to compel her to account for violation of duties or misappropriation of assets.

How does a shareholder waiver occur?

Express: in writing and signed anytime; or Implied: by attending the meeting without objection.

Are shareholders liable for what the corporation does?

General answer must be no because the corporation is liable for what it does. But a shareholder might be personally liable for what the corporation did if the court pierces the corporate veil (PCV)

Who votes in shareholder voting?

General rule is that record owner as of record date has the right to vote.

As a general rule, do we expect PCV more readily in tort or contract cases?

Generally in tort

Which of the three demand exceptions is most likely?

If majority of the board is interested. If these very same directors would be sitting as defendants.

How much shareholder vote is required to bind the corporation in a resolution?

If quorum is met, a majority may act to bind the corporation. Majority means majority of the shares actually voting in favor or against the proposal. (Abstentions don't count.)

Why might fairness require PCV?

If the shareholder exercises complete domination and control over the corporation to perpetrate fraud or injustice. This is an additional requirement in New York.

When might a demand be futile?

If: 1) majority of the board is interested or under the control of interested directors; or 2) the board did not inform itself of the transaction to the extent reasonable under the circumstances; or 3) the transaction is so egregious on its face that it could not be the result of sound business judgment.

What is happening in a shareholder derivative suit?

In a derivative suit, a shareholder is suing to enforce the corporation's claim, not her own personal claim. It's a case in which the corporation is not pursuing its own claim, so a shareholder steps in to prosecute the claim.

What is a close corporation?

It has a few shareholders and the stock is not publicly traded. Almost every corporation in the exam will be closely held. In a close corporation, you do not need to have shareholder management. You can have a board of directors.

Regarding (1) minutes of shareholder proceedings and (2) the record of shareholders. Who can demand access to these?

It is any shareholder on five days written demand. As to these two things, the corporation can demand that the shareholder give an affidavit that his purpose is not other than in the interest of the corporation and he has not within 5 years tried to sell any list of shareholders. The corporation cannot demand more detail in the affidavit.

How is surplus computed?

It is assets minus liabilities minus stated capital.

What's special about a proxy given subject to a voting agreement?

It is irrevocable

What documents does the common law right of inspection cover?

It is unclear how broad it is. Always state the common law right as well.

Close Corp. has three shareholders, each of whom owns one-third of the shares and participates in management. One breaches the duty of loyalty by engaging in a competing venture. In a derivative suit, the corporation wins a judgment to recover the bad guy's profits. But giving the recovery to the corporation returns one-third of it to the bad guy. What might the court do?

It might let the other shareholders recover directly. This was an issue in the July exam.

In a close corp. run by shareholders, who owes the duties of care and loyalty?

Managing shareholders.

We know the damages generally go to the corporation. But can a shareholder ever recover the damages directly in a derivative suit?

Maybe if recovery by the corporation would return money to the bad directors.

Can the corporation require Kardashian to get its approval to sell her stock?

Maybe not, because the company could refuse for no reason which is arbitrary and may be an undue restraint.

What is the shareholder notice requirement?

Must give written notice (e-mail is OK) to every shareholder entitled to vote, for every meeting (annual or special) between 10 and 60 days before the meeting

X Corp. has 120,000 shares outstanding. X Corp. has 700 shareholders. What's a quorum?

Need at least 60,001 shares.

What happens if S loses the derivative suit? Can S still recover costs and expenses?

No

Suppose a proper person calls a special meeting of the shareholders, and the stated purpose of the meeting is to remove a particular officer?

No good, because shareholders do not remove officers. Must be for a proper shareholder purpose. If it was for removing directors, but not officers.

Once a quorum is established at a shareholders' meeting, can it be lost if people leave the meeting?

No, a shareholder quorum is never lost.

S gives P an option to buy her stock. Then S gives P a proxy to vote at an upcoming meeting. The proxy says "irrevocable." Can S revoke this proxy?

No, because it says irrevocable and the proxy holder has an interest in the stock other than voting.

Based on the Feb. 2, 2014 proxy, could Joey vote S's shares at the 2015 annual meeting in July 2015?

No, it is good for 11 months unless it says otherwise.

Can stated capital be used for distributions?

No, never.

When a director or officer brings an SDS, does she have to meet the requirements for a derivative suit?

No, sues in her own name but the recovery is by the corporation.

Can other shareholders later sue the same defendants on same transaction in a SDS that was lost?

No, that claim has been already asserted.

Are professionals liable for contracts entered by the entity or for rent due on leases in the P.C.'s name?

No, the entity is liable.

S sues board of directors of C Corp. for issuing new stock without honoring her preemptive rights. Derivative suit?

No, this is a "direct suit" for S's personal claim.

If the certificate says nothing about cumulative voting, do the shareholder get to use cumulative voting?

No, we have it only if the certificate says so.

There are two kinds of shareholder meetings: annual and special. Must these meetings be held in New York? What do we do at the annual meeting?

No. Elect directors

Which shareholders get dividends? For each hypo, the board of directors of C Corp. declares a dividend of $400,000. Who receives what if the outstanding stock is: 100,000 shares of common and 20,000 shares of $2 preferred that is participating?

Participating means pay again. So these 20,000 shares get paid twice -- once as preferred and again because they are participating. Do the preferred exactly as in hypo 2. 20,000 shares multiplied by $2 preference equals $40,000 (just like in hypo 2). Pay that first, because it's preferred (just like in hypo 2). That leaves $360,000 (just like in hypo 2). But here, the $360,000 gets divided by 120,000 shares. Because it is the 100000 plus the 20000 preferred participating.

What is the special pleading requirement in SDS?

Plaintiff must plead with particularity her efforts to get the board to sue or why demand was futile.

Which shareholders get dividends? For each hypo, the board of directors of C Corp. declares a dividend of $400,000. Who receives what if the outstanding stock is: 100,000 shares of common and 20,000 shares of preferred with $2 dividend preference?

Preferred means pay first. So those 20,000 preferred shares must be paid their $2 preference first, before the common shares get anything. 20,000 shares multiplied by $2 equals a total preference of $40,000. So we skim off $40,000 and pay that to the preferred holders first. That leaves $360,000. Where does that $360,000 go? $3.6 per share

S sues to compel declaration of dividend. Derivative?

Probably not, because it seeks to benefit S, not the corporation. Maybe, though, if it could be arguably based upon a breach of duty to the corporation. It might be derivative if it is part of mismanagement by the directors.

Is S liable to the defendants for their costs if she loses the SDS?

Probably, because the winner usually recovers costs from the loser.

C Corp. sets the annual meeting for July 7 and record date for June 6. S sells B her C Corp. stock on June 25. Who is entitled to vote the shares at the meeting, S or B?

S because she owned it on June 6

What if, before the 2014 meeting, S writes to the secretary of C Corp. that she now wants Peggy Olson to vote her shares at the 2014 meeting instead of her proxy Joey?

She can revoke Joey's proxy in writing or by attending the meeting and voting.

What is required for voting agreements

Signed writing

Which funds may be used for any distribution?

Surplus

Two shareholders agree to vote to elect each other as directors. That's OK, because electing directors is something shareholders do. But what if they then agree about what actions they will take once they are directors?

That is void, there are no voting agreements for director voting.

In general, the P.C. is governed by rules of the business corporation. Certificate must meet the general corporation requirements except for the use of "P.C." and must indicate the profession to be practiced and include the names and addresses of the original shareholders, directors, and officers. There must also be certification that each shareholder, director, and officer is licensed to practice the profession. What happens if a shareholder in a P.C. dies or is disqualified from practice?

The P.C. must buy his shares

What is the standard for owning stock when the claim arose?

The person bringing suit must have owned stock at the time the claim arose or have gotten it by operation of law from someone who owned the stock when the claim arose. What are examples of operation of law? Inheritance and divorce decrees. In addition, she must own stock when the action is brought through entry of judgment.

What happens if the shareholder wins the derivative suit? Generally, who gets the recovery in a successful derivative suit?

The corporation

What happens if the shareholder refuses to furnish such an affidavit for inspection of minutes or record of shareholders after the corporation demands it?

The corporation can deny access.

Corporation can make distributions even though it lost money last year; corporation cannot make distributions if it is insolvent or if the distribution would render it insolvent. What does "insolvent" mean?

The corporation is unable to pay its debts as they come do in the ordinary course of business.

Must the litigation be joined in the litigation in a SDS?

The corporation must be joined in the litigation - as a defendant. That makes no sense, because it is the corporation's claim, but that's the rule.

Can shareholders manage the corp.?

The general answer must be no because the board manages but shareholders can manage the business directly in a close (or closely held) corporation.

How are directors elected by shareholders?

The highest vote-getter for each seat on the board wins, even if she did not get a majority of the votes. All she needs is a plurality, not a majority, of the votes.

Suppose S brings a derivative suit. The corporation can move to dismiss. The motion is based on a finding by independent directors (or a committee of independent directors, sometimes called a "special litigation committee") that the suit is not in the corporation's best interests. Examples of such instances are that the case has a low chance of recovery or that the cost of suit will exceed recovery). What does the court look at in deciding whether to dismiss?

The independence of those making the investigation and the sufficiency of the investigation.

Who is the record owner?

The record owner is the person shown as the owner in the corporate records. The record date is a voter eligibility cut-off, set no fewer than 10 and no more than 60 days before the meeting.

How do shareholders vote?

There must be a quorum represented at the meeting. Determination of a quorum focuses on the number of shares represented, not the number of shareholders. Generally, a quorum requires a majority of outstanding shares.

Kardashian is a shareholder of Famous For No Reason, Inc. Her stock is subject to a stock transfer restriction that requires her to offer it first to the corporation. This is a "right of first refusal." Kardashian sells the stock to Third Party in violation of the agreement. Stock transfer restrictions are valid if:

They are not an undue restraint on alienation. (A right of first refusal is valid so long as the price offered is reasonable. For example, if the corporation offered to match Third Party's offer.)

C, M and L each own a third of stock in XYZ Corp, a close corp. All three have jobs with XYZ. After a disagreement, C and M fire L from his job. They kick L off the corporate premises. They refuse to pay dividends or to repurchase L's stock. They have XYZ purchase supplies at exorbitant prices from another corp., which C and M own. Have they breached a duty?

They have breached the duty of utmost good faith to L. in a close corp., we owe each other a duty of utmost good faith. This is a freeze out.

Directors are personally liable for unlawful distributions. So are shareholders who knew the distribution was unlawful when they received it. Who would sue to recover here.

This is a corporate claim so it could be derivative. Remember, however, directors' possible defense of good faith reliance.

X and Y are the shareholders of C Corp. X commingles personal and corporate funds, uses the corporate car as her own, and uses the corporate credit card for personal purchases. Can a creditor of the corporation who has been unable to collect its claim from the corporation collect from either X or Y?

This is the alter ego form of PCV. State the general rule (about shareholders generally are not liable for debts or acts of corporation), and state the PCV standard and explain PCV. Then: 1) Did shareholders abuse the corporation? Yes, X treated corporate assets as his own but it is not clear if there is complete domination and control. 2) Does fairness require PCV? Creditors are not being paid but it is not clear if we have enough domination and control to perpetrate fraud or injustice. If a court did PCV here, who would be liable - X or Y or both? Probably only X

S is a shareholder of Glowco, Inc., G, a corporation that hauls and disposes of nuclear waste. G does not carry insurance. G has an initial capitalization of $1,000. V is injured when one of G's trucks melts down. Can V sue S?

This is the undercapitalization form of PCV. State the general rule that shareholders are not liable for corporate debts and PCV standard and explain PCV. Here, the corporation was clearly undercapitalized when formed. Why? The shareholders failed to invest enough to cover prospective liability

In a close corp. there is a trend toward imposing fiduciary duties on shareholders in their dealings with each other. Especially, controlling shareholders cannot use their power for personal gain at the expense of minority shareholders or the corporation or to oppress minority shareholders or the corporation. They owe a duty of utmost good faith. Why do courts protect minority shareholders in a close corp. ?

To give them a remedy for behavior that defeats their reasonable expectations for investing.

Why do we PCV?

To impose liability on a shareholder. That shareholder might be another corporation. So if a parent corporation forms a subsidiary to avoid its obligations, and totally dominates the subsidiary, the court might PCV to hold the parent liable.

In a close corporation, the ten largest shareholders are personally liable for what?

Wages and benefits to the company's employees.

Distributions are declared in the Board's discretion. So when do shareholders have a right to a distribution?

When the board declares it.

If there were a no-par issuance, how would the consideration be allocated?

Within 60 days after issuance, the board can allocate any part but not all to surplus.

What are the only two ways the shareholders can take a valid act?

Written consent of the holders of all voting shares or a meeting.

Can a surplus be used for distributions?

Yes

Can shareholders enter into voting agreements?

Yes

Is a fax or e-mail considered a writing for purposes of a proxy?

Yes

S sues the board of directors of C Corp. for breaching the duty of care or the duty of loyalty. Is this a derivative suit?

Yes, always. Those duties are owed to the corporation

Is it possible to impose a requirement that a supermajority (e.g., 90%) of the shares entitled to vote to be present at the meeting to constitute a quorum?

Yes, but in the certificate only, not the bylaws.

Is it possible to impose a requirement that resolutions at a meeting must be approved by a supermajority (say 2/3 of the shares)?

Yes, but in the certificate, not the bylaws.

Redemptions are set in certificate, and must be done proportionately within each class of stock. Repurchases are individually negotiated. Can the corporation discriminate in repurchases (i.e., repurchase some shareholder's stock and not another's)?

Yes, but it might have to give equal opportunity to all shareholders in a close corporation.

Can the certificate or bylaws reduce a quorum to less than a majority?

Yes, but never fewer than 1/3 of the shares entitled to vote. But we can never reduce the requirement of majority approval.

Are professional liable for their own malpractice?

Yes, but not for that others.

Members of a licensed profession, like doctors and lawyers, cannot practice the profession through a general business corp. But they can form a professional service corp. usually abbreviated P.C. . Must shareholders, officers, and directors in a P.C. be licensed professionals?

Yes, but they can hire non-professionals as employees.

Can S revoke her proxy even though it states that it is irrevocable?

Yes, can still be revoked

The foregoing was about a shareholder's right to inspect. What about a director - can she inspect corporate books and records?

Yes, has unfettered access because they are managers.

On February 2, 2014, S sends letter to secretary of C Corp. authorizing Joey to vote her shares. Can Joey vote S's shares at the 2014 annual meeting in July, 2014?

Yes, it is a proxy, All it is is an agency.

One nice thing about the corporation is transferability of the ownership interest. S has 100 shares of $4 par, C Corp. stock. Can S sell her shares for less than $4 a share?

Yes, par is an issuance rule. Not relevant when you or I sell.

Can we have a restriction requiring a sale of one's stock to the corporation when the shareholder dies or retires from working for the company?

Yes, this is a buyback. Very common in the close corporation.