BLAW 441 4/19/17 Rights, Duties, and Liabilities of Shareholders

prima facie of being illegal therefore should return

What about dividend payments when corporation is insolvent?

1. something "wrong" must happen to corporation 2. shareholders must have presented their concerns to the board of directors 3. shareholders may sue 3rd party on behalf of the corporation only if the directors failed to correct the wrong or injury to the corporation, or failed to take appropriate action

What are 3 requirements of derivative lawsuit

Generally, a quorum exists when shareholders holding more than 50% outstanding shares are present, but state laws often permit the articles of incorporation to set high or lower quorum requirements.

What are quorum requirements?

merger consolidation dissolution

What are some examples of fundamental changes?

1. directors are deadlock - shareholders unable to break. If organization created for purpose and not meeting purpose 2. fraudulent and illegal conduct of directors - breaches of fiduciary duties of care 3. corporate assets being misapplied 4. shareholders deadlock and failed for 2 successive meetings to vote on new directors

What are some examples of when a shareholder may petition court for order of dissolution?

can be called to deal with urgent matters

What are special shareholder meetings?

1. shareholder voting agreements 2. voting trusts 3. cumulative voting allows minority shareholders to get a board member elected.

What are the methods of increasing minority shareholder power within the corporation?

rankings of how you can transfer shares Ex: Corporation has 1st choice to buyback shares

What is the right of first refusal?

state statutes - surplus, net profits, or RE

What is the source of revenue for dividends?

11 months unless the proxy agreement provides for a longer period

What is the typical duration for a proxy agreement?

30 days

What is the typical period that preemptive rights must be used?

members of the board of directors are elected and removed by a vote of the shareholders

What power do shareholders have over the board of directors?

Proxy

When a shareholder formally authorizes another to serve as his or her agent and vote his or her share in a certain matter. Usually accompanies by proposals for shareholder meeting.

1. illegal dividends distributed 2. a shareholder hasn't paid for stock pursuant to the subscription agreement 3. shareholder buys watered stock which is less than the fair market value of the stock 4. a court pierces the corporate veil

When can shareholder be personally liable?

This occurs when a single shareholder owns a sufficient number of shares to exercise de facto (actual) control over the corporation

When does fiduciary duty to minority shareholders occur?

- disruptive to everyday business - timing - confidential information that looks like trade secret - SE engaging in illegal conduct under corporation

When is the inspection of corporate records limited?

In state statutes or articles of incorporation

Where are preemptive rights found?

can be set out in the bylaws or in the shareholder agreement

Where can restrictions be found in regards to transferability of shares?

directors and officers

Who looks after the interests of the shareholders?

- maintain control - exercise voting power - financial state protected

Why are preemptive rights important to shareholders?

Example of derivative suits

Zeon Corporation is owned by 2 shareholders, each holding 50% of the corporate shares. One of the shareholders wants to sue the other for misusing corporate assets. In this situation, the plaintiff-shareholder will have to bring a shareholder's derivative suit because the alleged harm was suffered by Zeon, not by the plaintiff personally. Any damages awarded will go to the corporation, not to the plaintiff shareholder.

Dividend

___ is a distribution of corporate profits or income ordered by the directors and paid to the shareholders in proportion to their shares in the corporation

majority

___ shareholder owes fiduciary duty to minority shareholders.

Shareholder voting

♣ Shareholders exercise ownership control through the power of their votes ♣ Corporate business matters are presented in the form of resolutions, which shareholders vote to approve or disapprove ♣ Each common shareholder is entitled to one vote per share ♣ Owners of preferred stock usually are denied the right to vote ♣ For shareholders to act during a meeting, a quorum must be present

shareholder's derivative suit

♣ When the corporation is harmed by the actions of a third party, the directors can bring a lawsuit in the name of the corporation against that party ♣ If the corporate directors fail to bring a suit, shareholders can do so * a suit brought by shareholder to enforce a corporate cause of action against a 3rd party

subscription agreements

are written irrevocable contracts to purchase capital stock of a corporation prior to incorporation * failure to sell or buy shares is a breach of contract

Robbins v. Sanders example of oppressive conduct

- 50:50 owners - Mary & James Bailey and Pete Robbins - stock transfer to sell 2 shares per month - Bailey's die and Sanders in charge of estate - estate sued Robbins for breach of fiduciary duties and oppressive conduct. = Robbins used funds to invest in other business and personal property. He decided to sell Corridor Enterprises without approval. He didn't pay taxes. He failed to declare dividends. He paid himself a lot of business funds. - Court ordered to return funds to Corridor Enterprises that would go back to Bailey's estate

21000 = 3*7000 must distribute votes among 3 directors

- Corp. has 10,000 shares outstanding. - 4 candidates for 3 spots on the board - Minority = 3000 shares - majority = 7000 shares How many votes do majority shareholders have?

9000 votes = 3*3000

- Corp. has 10,000 shares outstanding. - 4 candidates for 3 spots on the board - Minority = 3000 shares - majority = 7000 shares How many votes do minority shareholders have?

cumulative voting

each shareholder is entitled to a total number of votes equal to the number of board members to be elected multiplied by the number of voting shares the shareholder owns * shareholder can cast all these votes for one candidate or split them among several

Yes because fundamental change issuing new shares

- Nittany Corp. authorizes 1000 shares - John buys 100; owns 10% of shares - Nittany Corp. shareholders authorized the issuance of another 1000 shares. Should articles of incorporation be amended?

100

- Nittany Corp. authorizes 1000 shares - John buys 100; owns 10% of shares - Nittany Corp. shareholders authorized the issuance of another 1000 shares. - capital stock of corporation increases to 2000 shares 1. How many shares of new stock is John permitted to buy?

200

- Nittany Corp. authorizes 1000 shares - John buys 100; owns 10% of shares - Nittany Corp. shareholders authorized the issuance of another 1000 shares. - capital stock of corporation increases to 2000 shares 2. How many total shares will John now own?

5%

- Nittany Corp. authorizes 1000 shares - John buys 100; owns 10% of shares - Nittany Corp. shareholders authorized the issuance of another 1000 shares. - capital stock of corporation increases to 2000 shares 3. If pre-emptive rights are not granted, what is John's ownership stake in the corporation?

no

- Nittany Rental, Inc. has 10,000 outstanding shares. Article of incorporation sets quorum at 50% of outstanding shares. - Majority of shares present is necessary to pass an ordinary resolution; 67% of all shares required for "fundamental change" resolution 4. Shares present at the meeting are 6000. Will a resolution on a fundamental change be passed at this meeting?

5,000

- Nittany Rental, Inc. has 10,000 outstanding shares. Article of incorporation sets quorum at 50% of outstanding shares. - Majority of shares present is necessary to pass an ordinary resolution; 67% of all shares required for "fundamental change" resolution 1. What is the number required for a quorum?

2501 --> majority

- Nittany Rental, Inc. has 10,000 outstanding shares. Article of incorporation sets quorum at 50% of outstanding shares. - Majority of shares present is necessary to pass an ordinary resolution; 67% of all shares required for "fundamental change" resolution 2. What is the minimum number of votes required to pass a resolution?

3,001 --> majority

- Nittany Rental, Inc. has 10,000 outstanding shares. Article of incorporation sets quorum at 50% of outstanding shares. - Majority of shares present is necessary to pass an ordinary resolution; 67% of all shares required for "fundamental change" resolution 3. Shares present at meeting are 6000. What minimum number is required to pass an ordinary resolution?

Shareholder proposals

- When shareholders want to change a company policy, they can put their idea up for a shareholder vote - They can do this by submitted a shareholder proposal to the board of directors and asking the board to include the proposal in the proxy materials that are sent of all the shareholders before meetings

Shareholder rights: dissolution of corporation

- assets distributed to shareholder in proportion to ownership percentage - distributed after outstanding debts and claims of creditors satisfied - shareholder may petition court for order of dissolution

special meetings

- notice and time of meetings must be sent in writing to each shareholder within at least 10 days but not more than 60 days before the meeting - notice must state reason for meeting and only deal with this matter

shareholders

- the acquisition of a share of stock makes a person an owner and shareholder in a corporation - shareholders thus own the corporation, but they generally are not responsible for its daily management

Shareholders rights

1. to vote 2. to have a stock certificate 3. to purchase newly issued shares 4. to dividends, when declared by board 5. to inspect corporate records 6. to transfer shares, with some expectations 7. to a proportionate share of corporate assets on dissolution 8. to file suit on behalf of corporation

shareholder

A ___ has an equitable ownership interest in a corporation.

oppressive conduct

A breach of fiduciary duties by those who control a close corporation normally constitutes what is known as ___.

Example of preemptive rights

Alisha, a shareholder who owns 10% of a company and who has preemptive rights, can buy 10% of any new issue. Thus, if the corporation issues 1000 more shares, Alisha can buy 100 of the new shares

voting trusts

Before a shareholders' meeting, a group of shareholders can agree in writing to vote their shares together in a specified manner

Example of breach of fiduciary duty by majority shareholder --> oppressive conduct

Brodie, Jordan, and Barbara form a close corporation to operate a machine shop. Brodie and Jordan own 75% of the shares in the company, but all 3 are directors. After disagreements arise, Brodie asks the company to purchase his shares, but his requests are refused. A few years later, Brodie dies, and his wife, Ella, inherits his shares. Jordan and Barbara refuse to perform a valuation of the company, deny Ella access to the corporate information she requests, do not declare any dividends, and refuse to elect Ella as a director. In this situation, the majority shareholders have violated their fiduciary duty to Ella.

Yes

Can directors be held personally liable for illegal dividends?

illegal

Dividends are ___ if they are improperly paid from an unauthorized account, or if their payment causes the corporation to become insolvent. *Shareholder must return only payment from unauthorized account if s/he knew they were illegal when received.

• Any damages recovered normally go into the corporation's treasury, not to the shareholders personally

Do shareholders get to personally keep damages if they win lawsuit?

No rights to manage

Do shareholders have the right to manage the daily affairs of the corporation?

No

Does a shareholder have legal title in property vested (owned) by the corporation?

stock certificates

• A certificate issued by a corporation evidencing the ownership of a specified number of shares in the corporation • Stock is intangible personal property, however, the ownership right exists independently of the certificate itself • In most states today and under RMBCA 6.26, boards of directors may provide that shares of stock will be uncertificated or paperless - that is, no physical stock certificates will be issued

personally liable

For oppressive conduct, how are majority shareholders liable?

cash, property, stock of the corporation that is paying dividends, or stock of other corporations

How can dividends be paid?

based on ratio of ownership

How does the board of directors figure out how much each shareholder should receive?

- When shares are transferred, a new entry is made in the corporate stock book to indicate the new owner - Until the corporation is notified and the entry is complete, all rights - including voting rights and the right to dividend distributions - remain with the currently recorded owner

How is the new owner of the shares recognized?

majority vote of the shares represented at the meeting usually is required to pass resolutions

How many votes is required to pass resolutions?

must occur at least once a year Special meetings can be called to deal with urgent matters

How often should shareholders' meetings occur?

sue for damages

If a majority shareholder breaches his or her fiduciary duty to a minority shareholder, what can the minority shareholder do?

Example of inspection rights

Leah, the majority shareholder of Market Mogul Inc., sells the firm's assets to herself and sets up another corporation, Nano Research. Leah then tells Market Mogul's minority shareholders that she is dissolving Market Mogul because it is failing financially. Kurt, a minority shareholder, asks to inspect the corporate records so that he can determine Market Mogul's financial condition, the value of its stock, and whether any misconduct has occurred. Kurt has expressed a proper purpose for the inspection and must be allowed to access Market Mogul's records.

sometimes can ask court to declare a dividend, but must not harm corporation long term and need to have a source *need to prove they breached fiduciary duty of care to shareholders

May stockholders compel the directors to declare a dividend?

written demand required

• Before shareholders can bring a derivative suit, they must submit a written demand to the corporation, asking the board of directors to take appropriate action • The directors then have 90 days in which to act • Only if they refuse to do so can the derivative suit go forward • In addition, a court will dismiss a derivative suit if the majority of directors or an independent panel determines in good faith that the lawsuit is not in the best interest of the corporation

Example of cumulative voting

Nak corporation has 10,000 shares issued and outstanding. The minority shareholders hold 3000 shares, and the majority shareholders hold the other 7000 shares. Three members of the board are to be elected. The majority shareholders' nominees are Acevado, Barkley, and Craycik. The Minority shareholders' nominee is Drake. Can Drake be elected by the minority shareholders? If cumulative voting is allowed, yes. Together, the minority shareholders have 9000 votes (3 directors to be elected times 3000 shares held by minority shareholders = 9000 votes). All of these votes can be cast to elect Drake. The majority shareholders have 21000 votes (3 times 7000 = 21000), but these votes have to be distributed among their 3 nominees. No matter how the majority shareholders cast their 21000 votes, they will not be able to elect all 3 directors if the minority shareholders cast all of their 9000 votes for Drake.

67% of all shares

Need a "super majority" ( ---) for fundamental changes.

1. amend the articles of incorporation and bylaws 2. approve a merger or the dissolution of the corporation 3. approve the sale of all or substantially all of the corporation's assets

Shareholders approve all fundamental changes to the corporation: 1. 2. 3.

Shareholders' meetings

Shareholders exercise ownership control of the corporation through voting on corporate business matters (or resolutions).

majority

Shareholders have the inherent power to remove a director from office for cause by a ___ vote. *Some state statutes permit removal of directors without cause by the vote of a majority of the holders of outstanding shares entitled to vote.

fundamental

Shareholders must approve ___ changes affecting the corporation before the change can be implemented.

Inspection rights

• The RMBCA provides that every shareholder is entitled to examine specified corporate records for a proper purpose, provided the request is made in advance • The shareholder can inspect in person, or can have an attorney, accountant, or other authorized agent do so • In some states, a shareholder must have held shares for a minimum period of time immediately preceding the demand to inspect or must hold a minimum number of outstanding shares • The power of inspection is fraught with potential abuses, and the corporation is allowed to protect itself from them

transfer of shares

• The law generally recognizes the right to transfer stock to another person unless there are valid restrictions on its transferability, such as frequently occur with close corporation stock • Restrictions must be reasonable and can be set out in the bylaws or in a shareholder agreement

Preemptive rights

• The right of a shareholder in a corporation to have the first opportunity to purchase a new issue of that corporation's stock in proportion to the amount of stock already owned by the shareholder • Sometimes, the articles of incorporation grant these rights to shareholders • This right allows each shareholder to maintain her or his proportionate control, voting power, and financial interest in the corporation • Without these rights, it would be possible for a shareholder to lose his or her proportionate control over the firm

Example of quorum requirements

Sink & Rise, Inc., had 84 shares of voting common stock outstanding. James Case owned 20 shares. In addition, he and his estranged wife, Shirley, jointly owned another 16 shares. There different individuals owned 16 shares each. During a shareholders' meeting, James was the only shareholder present. He elected himself and another shareholder to be directors, replacing Shirley as Sink & Rise's secretary. Shirley sued to set aside the election, claiming the 16 shares that she owned jointly with James should not have been counted for quorum purposes. A court, however, held that the shares Shirley owned jointly with James counted for purposes of quorum. The Wyoming Supreme court affirmed the lower court's judgement. Corporate bylaws required that, in determining a quorum, the shares had to be entitled to vote and represented in person or by proxy. Because the 16 shares that were jointly held were represented in person by James at the shareholders' meeting, they could be counted for quorum purposes. Consequently, the actions taken at the meeting were accomplished with authority, and Shirley was no longer the company's secretary.

$1000+

Special rule: Shareholders with ___ of stock may submit proposals regarding significant policy issues for inclusion with corporate proxy materials.