Corporations Chapter 10

What is a buy-sell agreement?

A buy-sell agreement is an agreement that provides for the purchase (by the corp) and the sale (by the shareholder) at a predetermined price. A buy-sell agreement is often used as a planning tool for the contingency of the death of a large shareholder. Absent such agreement, the estate of the deceased would become the owner of the stock. Since there is no market for the stock, the estate may not be able to sell it, and the surviving shareholders might not want a new owner, even if there is a market. The buy-sell agreement addresses both of those concerns.

What is the rule in McQuade v. Stoneham?

A contract is void if it requires directors of a corporation to refrain from changing officers, salaries, or policies or retaining individuals in office without consent of the contracting parties.

What is the rule in Gearing v. Kelly?

A court may order a new election for corporate directors as justice may require.

What is the rule in Blount v. Taft?

A set of bylaws constitutes a shareholders' agreement if adopted by a unanimous vote of the shareholders.

What is the rule in Lehrman v. Cohen?

A voting trust exists where: (1) the stock's voting rights are separated from other attributes of stock ownership; (2) the voting rights are irrevocable for a definite period of time; and (3) the principle purpose of granting voting rights is to acquire voting control in the corporation.

What is an alternative to a voting trust?

As an alternative to a voting trust or a vote pooling agreement, a shareholder may give another shareholder an irrevocable proxy to vote her shares

What is the rule in Ringling Bros.-Barnum & Bailey Combined Shows, Inc. v. Ringling?

An agreement between two shareholders in a closely held corporation to vote jointly is binding and enforceable as a contract.

What are the elements of a closely held corp?

CHC is typified by: (1) a small number of stockholders; (2) no ready market for the corp stock; and (3) substantial majority stockholder participation in the management, direction and operation of the corp

What is Delaware cts approach to closely held corps?

Delaware's approach is more stringent. Delaware cts have not recognized in CHC that shareholders owe heightened fiduciary duties as a matter of c/l and has refused to enact an oppression statute. If a Delaware corp wants special treatment then must elect to be treated as a close corp under §344 of the Delaware Corp Act.

What is the rule in Ringling v. Ringling Bros.-Barnum & Bailey Combined Shows, Inc?

Generally, agreements and combinations to vote stock or control corporate action and policy are valid, if they seek without fraud to accomplish only what the parties might do as stockholders and do not attempt it by illegal proxies, trusts, or other means in contravention of statutes or law.

What is the rule in Clark v. Dodge?

If the enforcement of a contract between directors that are the sole stockholders in a corporation damages no one, not even the public, it is not illegal.

What is the rule in Galler v. Galler?

In a close corporation, an agreement as to the management of the corporation agreed to by the directors must be valid where there is no complaining minority interest, no fraud or apparent injury to the public or creditors, and no violation of clearly prohibitory statutory language.

What is the rule in St Louis Union Trust Co. v. Merrill Lynch, Pierce, Fenner & Smith Inc?

Purpose of Delaware statute allowing stock transfer restriction obligating holder to offer to corporation or others designated prior opportunity to acquire restricted securities was to broaden, not to limit, circumstances in which such restrictions would be enforced, in order to clear up pre-existing uncertainties of common law.

What is the rule in McLaughlin v. Schenk?

Relying on (1) the resemblance between close corps and partnerships, (2) the need for trust and confidence in such companies, and (3) the inherent risk of loss due to shareholders' inability to recoup their investments, the Massachusetts ct imposed on close corp shareholders the same duties owed by partners—utmost good faith and loyalty to all shareholders of the corp.

What is the rule in Ronnen v. Ajax Elec. Motor Corp?

Shareholder agreements should be interpreted to give meaning and effect to each provision.

What are voting agreements?

Shareholders entering into agreements as between themselves—ks made by and among the shareholders re their conduct in relation to the corp; e.g. agree to vote a certain way

What is the rule in Donahue v. Rodd Electrotype Co. of New England?

Stockholders in close corporations owe one another strict duties of care and loyalty, similar to the duties owed among partners in a partnership.

What is the rule in Baur v. Baur Farms, Inc.?

The court held that majority shareholders act oppressively when, having the corp financial resources to do so, they fail to satisfy the reasonable expectations of a minority shareholder by paying no return on shareholder equity while declining the minority shareholder's repeated offers to sell shares for a fair value

What is the rule in Somers v. AAA Temporary Services, Inc?

Two sole shareholders of close corporation did not have power to amend by-laws so as to reduce number of directors from three to two where such power had not been reserved to shareholders by articles of incorporation

What is an approval right?

a corp may require that the corp, its shareholders, or some other person approve any transfer of the shares; it is enforceable only if it is NOT manifestly unreasonable

What are voting trusts?

a device whereby two or more persons owning stock with voting powers, divorce the voting rights thereof from the ownership, retaining to all intents and purposes the latter in themselves and transferring the former to trustees whom the voting rights of all depositors in the trust are pooled

What is an right of redemption or a buy-sell agreement?

a restriction may obligate the corp or another shareholder to purchase the shares

What is an option agreement?

a restriction may require the shareholder to first offer to sell the shares to the corp or to another shareholder at a predetermined price. In some situations, the requirement that a shareholder first offer to sell the shares to the corp takes the form of a right of first refusal

What is the rule in Meiselman v. Meiselman?

a. In determining the REASONABLE EXPECTATIONS, these are to be ascertained by examining the entire history of the participants' relationship. b. In order for P's expectations to be reasonable, they MUST BE KNOWN to or ASSUMED BY the other shareholders and concurred in by them.

4 types of restrictions that may be imposed upon the transfer of shares

option agreement; right of redemption or a buy-sell agreement; approval right; transfer prohibition

What is a transfer prohibition?

the corp may prohibit altogether the transfer of stock to a designated person or class of persons; only enforceable if it is NOT manifestly unreasonable

MBCA §14.30(a)(2)(i) provides that a ct may order a corp dissolved if?

the directors are deadlocked in the management of the corp affairs, the shareholders are unable to break the deadlock, and irreparable injury to the corp is threatened or being suffered, or the biz and affairs of the corp can no longer be conducted to the advantage of the shareholders generally, because of the deadlock.

Under the MBCA §6.27(c), the transfer restrictions are valid and enforceable if used to

to (1) maintain the corp's status when it is dependent upon the number or identity of shareholders, (2) to preserve any relevant exemptions under the securities laws, or (3) for any other reasonable purpose. Any such restriction MUST be conspicuously noted on the front or back of the share certificate. MBCA §6.27(b)