Chapter 44

Shareholders' Derivative Actions

AKA derivative suit - damages ordinarily go to the corp. treasury for benefit of the corp. - used when corp. has been harmed by the actions of another person - the right to sue belongs to the corp. and any damages awarded belong to the corp.

Distribution to Shareholders

Corporate assets transferred to shareholders - asset transfer to shareholders may harm corp. creditors and others with claims against corp. assets.

Straight Voting

Most important: right to elect directors | each share has one vote for each new director to be elected | shareholder may vote for as many nominees as there are directors to be elected; may cast for each such nominee as vote as she has shares | nominees with most votes are elected - allows majority shareholder to elect entire BoD | Problem in close corp.: no shareholder individually controls the corp.

Shareholder Class Action Suits

an action seeking a dividend payment that has been brought by a preferred shareholder for all of the preferred shareholders - any recovery is prorated

Preemptive Right

an option to subscribe to a new issuance of shares in proportion to the shareholder's current interest in the corp.

Procedures Required

approval of BoD, notice all shareholders whether or not they're entitled to vote & majority approval of votes held by shareholders entitled to vote under statute, articles or bylaws

Classes of Shares

cleanest way to allocate among shareholders the power to elect directors as well as allocate equity ownership of the corp.

Common shares

close corp. two or more classes with diff. voting rights

Cumulative Voting

corp. allows shareholder to cumulate votes by multiplying number of directors to be elected by shareholder's number of shares - can allocate votes for fewer nominees

Defense of Corporation by Shareholder

corp. has valid defense to the suit and the refusal or failure of the directors to defend is breach of fiduciary duty to the corp. courts will permit shareholder to defend for benefit of the corp. shareholders and creditors

Balance Sheet Test

corp. may have to pay dividend to the extent it has excess assets - don't need to cover its liabilities and liquidation preferences of shareholders having a priority in liquidation over shareholders receiving dividends - protects creditors and also preferred shareholders

Share Repurchases

declaring cash or property dividend only one of the ways in which corp. may distribute its assets. - also can distribute assets by repurchasing shares from shareholders

Reverse Share Split

decrease in the number of shares of a class such that two shares become one share - may also be used to freeze out minority shareholders

Shareholder Liability for Corporate Debts

defective attempts to incorporate and piercing the corporate veil are grounds which a shareholder may be held liable for corporate debts beyond capital contribution

Litigation Expenses

deter strike suits by punishing shareholders who litigate in bad faith

Cash or Property Dividends

dividends usually paid in cash | declared by the BoD and paid by the corp. on date stated by the directors

Amendment of articles of incorporation

embody the basic contract between a corp. and its shareholders - shareholders must approve most amendments of article of incorp.

Shareholders as Fiduciaries

few courts have recognized a fiduciary duty of controlling shareholders to use their ability to control the corp. in a fair just and equitable manner that benefits all shareholders evenly | freeze outs - wrongful because of its oppression of minority shareholders - occurs in close corp. when controlling shareholders pay themselves high salaries while not employing/paying dividends to no controlling shareholders

Dissolution

first step in termination of corp. business - shareholder approval needed

right of appraisal

for shareholders who disagree with specified fundamental corporate transactions

Members' Rights and Duties in Nonprofit Corporations

for-profit: shareholders rights to elect directors and to receive dividends are their most important rights | shareholders rights to receive dividends are most important rights

Sale of a Control Block of Shares

greater than the per share value of the shares of minority shareholder | Majority ownership not always required for control of corp. Close Corp: required but publicly held corp. widely dispersed

Dividends

important objective of business corp. is to make a PROFIT

Shareholder Litigation Committees

independent investigation committee - whose purpose is to decide whether to sue - consist of directors who aren't defendant directors - SLC has independent legal counsel that assists its determination whether to sue

strike suits

lawsuits brought to gain out-of-court settlements for the complaining shareholders personally or to earn large attorney fees rather than to obtain a recovery for the corp.

Solvency Test

liquidity that doesn't need to pay its currently maturing obligation - protects creditors

Dissenters' Rights

little recourse | either remain shareholders or sell their states | corp. shareholders there's no choice

Proxies

may be appointed by shareholder to vote shares | limited duration | revocable at any time - no guarantee that control agreements survive future shareholder disputes

Member Inspection and Information Rights

may not be able to exercise voting and other rights unless informed | members have absolute right to inspect and copy articles bylaws board resolutions and minutes of member meetings | qualified rights to inspect and copy a list of members | nonprofit corp. required to maintain

Resignation and Expulsion of Members

may resign at any time from a nonprofit corp. generally member may not sell or transfer membership to another person - mutual benefit corp. may transfer interest to a buyer if articles of bylaws permit | MNCA doesn't require corp. to have proper purpose to expel or terminate member but only to follow proper procedures

Derivative Suits

members of nonprofit corp. have limited right to bring derivative actions on behalf of the corp. may be brought by members having 5% of voting power by 40 members (whichever is less)

Demand on Directors

must first demand that board that the corp. may have a right of action against a person that the board in its business judgment may decide to pursue - futile - therefore excused (proved when all of directors are interested in challenged transaction)

Distributions of Assets

nonprofit corp. doesn't pay dividends to members - prohibited from making any distribution of its assets to its members - mutual benefit corp. may purchase membership and distribute assets to the selling member only if corp. is able to pay currently maturing obligations and assets at least equal to liabilities

Members' Meeting and Voting Rights

nonprofit corp. must hold annual meeting of members and hold meetings at other times | members may elect directors by straight/cumulative voting and by class voting members have the right to vote on most amendments

Members' Rights and Duties in Nonprofit Corporations

nonprofit: members rights and duties especially in mutual benefit corp. defined by ability of members to use the facilities or the corp.

Winding Up and Termination

orderly collection and disposal of the corps. Assets and distribution of the proceeds of the sale of assets - claims of creditors will be paid first - liquidation preferences of preferred shareholders will be paid - common shareholders receive any proceeds that remain

Shareholder Liability for Illegal Distributions

recovered on behalf of the corp. MCA - primary liability is placed on the directors who failing to comply with the business judgment rule - authorized the unlawful distribution

Shareholders' Individual Lawsuits

right to sue in own name to prevent or redress a breach of shareholder's contract

Voting Trusts

shareholders transfer their shares to one or more voting trustees and receive voting trust certifications in exchange - retain many of rights (receive dividends) | Purpose: to control corp. through the concentration of shareholder voting power | ensures that shareholder group will control the corp. despite emergence of differences

Shareholders' Inspection and Information Rights

sometimes essential to exercise a shareholder's rights | MBCA grants shareholders an absolute right of inspection | right to receive from corp. info. That is important to their voting and investing decisions

Share Dividends & Share Splits

specified percentage of outstanding shares declared by BoD | results in shareholders receiving specified number of shares in exchange for each share that they currently own

Derivative Suits

successful = court may require corp. to pay suing members reasonable expenses

Eligible Shareholders

suing wrongdoing officers and directors - also susceptible to abuse

double derivative suit

suit brought by shareholder of a parent corp. on behalf of subsidiary corp. owned by the parent - regularly permitted by court

Merger

transaction in which one corp. merges into a second corp. - first corp. usually dissolves - second corp. takes all business and assets of both corp. and becomes liable for the debts of both corp. - dissolved corp becomes shareholders of surviving corp.

Share Exchange

transaction which one corp. becomes owner of all of the outstanding shares of second corp. through compulsory exchange of shares

Derivative Suits

unsuccessful = been commenced frivolously or in bad faith - court may require suing members to pay other party's expenses

Right of redemption

usually a right of corp. to force involuntary sale by shareholder at fixed price | repurchase may harm creditors and other shareholders - must meet tests (same as cash and property dividend rules)