Shareholders
What are the quorum requirements for a valid shareholder voter meeting?
(1) A majority of outstanding shares represented at the meeting (2) quorum is determined at the start of the meeting, (not each time a vote is taken.)
When will a court pierce the corporate veil?
(1) ALTER EGO ("OTHER SELF") LIABILITY (2) CORP. HAS A GROSS UNDER-CAPITALIZATION FOR ITS BUSINESS (3) "DEEP ROCK" DOCTRINE
Where/when do shareholders vote?
(1) Actions without meeting (2) Annual meeting (3) Special meeting
What are the exceptions to the record shareholder vote rule?
(1) DEATH: The record owner's executor may vote the shares. (2) PROXY: The record owner may appoint another person to vote the shares (a "proxy") by sending the corporation's secretary a signed, written authorization.
What are the types of distributions that a corporation may make?
(1) Dividend (2) Repurchase (3) Redemption
You own 1,000 shares of C Corp. stock. Nine directors are to be elected. You think Bradley Cooper should be a director. Under straight voting, how many votes can you cast for Bradley?
1,000 votes. You can cast 1,000 votes for each of 9 candidates, but you can't add them up.
Who bears liability for unlawful distributions?
1. DIRECTORS [but remember the defense of good faith reliance] 2. SHAREHOLDERS: Directors can get contribution only from shareholders who knew the distribution was unlawful, but the corporation can recover from shareholders whether they knew the distribution was unlawful or not.
X Corp. has 120,000 shares outstanding owned by 700 shareholders. Who or what is a quorum?
60,001 shares
You own 1,000 shares of C Corp. stock. Nine directors are to be elected. You think Bradley Cooper should be a director. Under cumulative voting, how many votes can you cast for Bradley?
9,000 (9 x 1,000). You can distribute the votes however you like: 9,000 for Bradley; 4,500 for Bradley & 4,500 for Zendaya; etc.
N Co. has cumulative voting, 9 directors, and 1,000 shares outstanding. How many shares are needed to elect 1 director if 800 shares are voting and 3 directors are to be elected at the meeting?
> S/(D + 1) = > 800/4 = 200 More than 200 shares needed to elect one director.
A and B form AB Corp. Each buys shares for $100 and loans the firm $49,900. After a year, AB Corp. owes its suppliers $750,000, but has only $250,000 in assets. Aware of this sticky situation, A and B have the corporation repay their loans. What recourse do the other creditors have?
A & B invested almost no money & loaned a lot, so court can make them wait until the other creditors are paid (i.e., make them take a "back seat").
When can corporation make distributions (tests)?
A corporation may make a "distribution" only if it can satisfy two tests designed to protect creditors against excessive distributions to shareholders. (1) Insolvency Test (2) Balance Sheet Test
When will a judge require a plaintiff to pay defendant's expenses in a derivative suit?
A judge may require plaintiff to pay defendant's reasonable expenses if she finds the suit was commenced without reasonable cause.
How are matters other than electing directors approved/denied during shareholder vote meeting?
A matter is approved if the votes cast for it exceed the votes cast against it, unless the articles require a greater number of affirmative votes.
Is a proxy revocable?
A proxy appointment is usually revocable whether or not it is stated to be irrevocable unless it is tied to an interest.
What is a shareholder derivative suit?
A shareholder is suing to enforce the rights of the corporation. If the corporation could have brought the suit, it is a derivative suit.
What is straight voting at board of directors shareholder vote?
A shareholder may vote the number of shares he owns for as many persons as there are directors to be elected.
What are the requirements for a derivative suit?
A shareholder must have: (1) owned stock when the claim arose or acquired it by operation of law from someone who did. (e.g., by inheritance or divorce, not via gift or purchase) (2) been a shareholder at the time the suit is commenced and (3) made a demand on the board that the corp. bring suit UNLESS such demand would be futile (ex: when the existing directors are the wrong-doers)
What is a voting trust?
An agreement where all the participating shareholders decide to transfer their shares to a trustee, who votes the shares & makes distributions (according to trust instructions)
Who may inspect corporation books and records?
Any shareholder may inspect corporate books and records [no minimum stake or holding period required as in many other states].
S is a shareholder of C Corp. Which of the following involves a shareholder derivative suit? a. S sues X for breaching its contract with C Corp. b. S sues C Corp's directors for violating their duty of care to C Corp. c. S sues C Corp's directors for not honoring her preemptive rights. d. Both a. and b.
Both a. and b.
S is a shareholder of G Corp., which hauls nuclear waste. G Corp. has an initial capitalization of $1,000 and carries no insurance. V is injured when a G Corp. truck melts down. Is S liable to V?
Corporation had very little money when formed & no insurance. Its business is very dangerous too. Therefore, S is personally liable to V. It's only fair.
S Corp. is electing 3 directors. 3,000 shares (a quorum) are represented at the meeting. Adam gets 1,400 votes; Betty 2,600; Carol 800; David 3,000; and Ed 1,200. Who was elected to the board?
David, Betty and Adam, the top vote-getters. It doesn't matter that Adam didn't get a majority; a plurality is enough.
When is quorum decided for a shareholder meeting?
Determined at the start of the meeting, not each time a vote is taken.
Can the corporation move to dismiss a derivative suit?
Disinterested directors (or a committee of them) can move to dismiss if they find after reasonable investigation that the suit is not in the corporation's best interests. Corporation has the burden to show the decision-makers' independence/good faith.
What happens if an improper or defective notice of shareholder meeting is sent out?
Meeting is void unless: (1) the defect is waived in a signed writing (express) or (2) by attending the meeting (in person or by proxy) without objecting to the meeting being held (implied).
What is cumulative voting at board of directors shareholder vote?
Multiply the number of shares owned by the number of directors to be elected. A shareholder may then cast the product for one candidate or divide it up among several. Note: Cumulative voting applies only to the election of directors.
C Corp's board sets its annual shareholder meeting for June 7 and a record date of May 6. Munch sells Benson his C Corp. stock on May 25. Who is entitled to vote the shares at the meeting?
Munch, because he owned the shares on the record date. From the corporation's perspective, he still owns them. The corporation makes a list available to shareholders 10 days before the meeting.
How much notice is required for shareholder voter meeting?
Must give: (1) written notice to every shareholder entitled to vote (2) no fewer than 10 days, nor more than 60 days, (3) before the meeting date.
What are the requirements for creating a voting trust?
Need: (1) written trust document (copy to corporation) and (2) transfer of legal title to trustee.
When does a shareholder not need a "proper purpose" for inspecting books/records?
No proper purpose is needed to inspect: (1) articles, (2) bylaws, (3) minutes of shareholder meetings, (4) written communications to all shareholders for past 3 years, (5) a list of current directors, and/or (6) the most recent annual report.
Do shareholders have the right/option to vote via cumulative vote for director election?
No right to cumulative voting unless the right is provided in the articles.
Angelina bought Brad Co. shares from Jen on February 12, 2017. Jen had owned the shares since 2012. May Angelina bring a shareholder derivative suit against Brad Co. directors for breaching their duty of loyalty to Brad Co. in 2016?
No! Jen owned the shares in 2016, when the alleged breach occurred. The problem is that Angie didn't acquire them "by operation of law"—she bought them. Therefore, she can't bring the derivative suit.
Is a corporation required to make distributions to shareholders?
No. A court won't compel a dividend absent an abuse of discretion.
Does Florida count absentions in shareholder vote?
No. In Florida, ignore abstentions!
Can the shareholder dismiss or settle a derivative suit on his own?
No. Only with court approval (like a class action).
What is the balance sheet test?
One of two test that determine whether a corp. can make distributions to shareholders. TEST - Total assets will be equal to or greater than total liabilities + (unless articles permit otherwise) dissolution preferences [if the examiners tell you they exist, subtract them from the assets, too!)
What is the insolvency test?
One of two test that determine whether a corp. can make distributions to shareholders. TEST: The corporation will be able to pay its debts as they become due in the ordinary course of its future business. Usually not a problem; the corporation will pay its debts with cash the business generates.
The board of C Corp. decides to distribute dividends totaling $400,000. Who receives dividends if the outstanding stock is 100,000 shares of common and 20,000 shares of $2 preferred/participating?
Preferred shareholders get a $2/share dividend off the top ($40,000 total). Then common shareholders split the balance for a dividend of $3.60/share ($400,000 - $40,000 = $360,000) -- ($360,000/100,000 shares = $3.60/share) If the preferred shares were participating, the preferred shareholders would get their $2/share dividend preference, then share in the distribution of the $360,000 balance. In other words, the $360,000 balance is divided by 120,000 shares ($360,000/120,000= $3 per share). So preferred get a total of $5/share & common get $3/share.
The board of C Corp. decides to distribute dividends totaling $400,000. Who receives dividends if the outstanding stock is 100,000 shares of common and 20,000 shares of $2 preferred?
Preferred shareholders get a $2/share dividend off the top ($40,000 total). Then common shareholders split the balance for a dividend of $3.60/share ($400,000 - $40,000 = $360,000) -- ($360,000/100,000 shares = $3.60/share). Common gets a larger dividend than preferred, but that's OK since preferred means "pay first," not "pay more."
How long is proxy authorization to vote good for (when does the authorization expire)?
Proxy is only good for 11 months unless it says otherwise.
Who votes in shareholder voting?
RECORD OWNER ON RECORD DATE Record date may not be more than 70 days before a meeting. If no record date is set, it is the close of business the day before the first notice of meeting is delivered to shareholders.
What should you say if examiners question you about the power of the shareholders to run day-to-day affairs of their corp.?
Response: Shareholders have no such power; that power is vested in the board of directors, and the shareholders have the power to elect the board. However, shareholders may agree to dispense with the board or restrict the board's power by a shareholder agreement.
What remedy if a voting agreement is violated?
SPECIFIC PERFORMANCE is available.
What happens if corp. improperly refuses to allow shareholder to inspect books/records?
Shareholder can get a court order, costs, and attorneys' fees.
What is the procedure for shareholder requesting to inspect books and records?
Shareholder must: (1) make a written demand at least 5 business days in advance and (2) state a proper purpose—i.e., related to being a shareholder.
Do shareholders have authority over day to day business of a corporation?
Shareholders normally do no have power to control the day-to-day management of a corporation. However, shareholders may be given management powers if: (1) stated in the articles or (2) pursuant to a unanimous shareholder agreement if the corporation's shares are not publicly traded.
Batman and Wonder Woman are the only shareholders of Marvel Comics, Inc. Their agreement states that they may sell or transfer their stock only to a superhero. Is this restriction valid?
Sure. They want to control their business associates.
Bio Co. has $500,000 in assets and $250,000 in liabilities. If Bio Co. dissolved today, it would have to pay dissolution preferences of $50,000. What is the maximum dividend allowed by law?
TEST - Total assets will be equal to or greater than total liabilities + (unless articles permit otherwise) dissolution preferences $500k assets - $250k liabilities - $50k in dissolution preferences leaves $200k for distribution under the balance sheet test.
How does the board determine which shareholders are eligible for a distribution?
The board sets a record date to determine who's entitled to a distribution. If not, the record date is the date the board authorizes the distribution
Is the corporation a part of the derivative suit?
The corporation is joined as a nominal defendant aka a defendant included in a lawsuit because of a technical connection with the matter in dispute. Court finds them necessary for the court to decide all issues and make a proper judgment, but places no responsibility, no fault and no right to recovery on the nominal defendant.
Who is awarded the recovery in a derivative suit?
The corporation, but plaintiff gets attorneys' fees and expenses.
What is the record date?
The cutoff to determine who a record shareholder is. Record date may not be more than 70 days prior to an annual or special meeting.
Which shareholders get dividends?
The owner of the stock when the dividend is declared. Preferred means pay first. Participating means pay first, then pay w/everyone else. Cumulative means pay for every year that no dividend was paid.
Can the articles of X Corp. provide that 75% of the outstanding shares must be represented at a meeting in order to have a quorum? 100%? 40%? 25%?
The quorum can be moved up or down in the articles, but it can never be < 1/3 of the shares entitled to vote.
How does election of directors work during shareholder meeting?
The top vote-getters are elected unless otherwise provided in the articles of any corporation or in a bylaw of a public corporation that fixes a greater voting requirement.
How many shares are needed to elect a director with cumulative voting?
To elect one director, you need more than S/(D+1) shares S= the number of shares voting D= the number of directors to be elected at that meeting.
How does a voting trust work?
Trustee gets irrevocable right to vote the shares, but the shareholders retain other rights of ownership.
What is the notice of shareholder vote meeting required to include?
When and where. For a special meeting, must also disclose the purpose, since you can only do what is in the notice.
When is a proxy irrevocable?
When it is coupled with an interest. EX: Munch sells his shares to Benson after the record date, but before the annual meeting, and gives her a proxy stating that it is irrevocable. Can Munch revoke this proxy? No, because this irrevocable proxy is coupled with an interest: as buyer, Benson has her very own interest in the shares.
X Corp. has 120,000 shares outstanding. 62,000 shares are represented at the meeting. 30,000 shares vote in favor of a proposal, 25,000 shares vote against, and 7,000 shares abstain. X Corp.'s articles and bylaws are silent on quorum/voting requirements. Has the proposal been approved?
Yes, because the number of votes in favor exceeded the number of votes against. In Florida, ignore abstentions!
Batman and Wonder Woman are the only shareholders of Marvel Comics, Inc. Their agreement states that they may sell or transfer their stock only to a superhero. If Batman sells his stock to Lois Lane, is the restriction enforceable against Lois?
Yes, if: (1) she knew about the restriction or (2) if the restriction was conspicuously noted on shares.
On October 8, 2016, Munch sends a letter to the secretary of C Corp. authorizing Benson to vote his shares. Can Benson vote Munch's shares at the August 2017 annual meeting?
Yes, proxy voting by shareholders is allowed.
Are Stock Transfer Restrictions allowed?
Yes, so long as restraint is reasonable. Can be enforced against Transferee if conspicuously noted on stock certificate or took with knowledge of restriction
S (shareholder) owns 100 shares of $4 par value C Corp. stock. Can S sell her shares for less than $4 a share?
Yes. Remember: par value applies only to corporations, not shareholders.
Are shareholders allowed to vote via voting agreement?
Yes. Unlike directors, shareholders can agree in advance how they will vote as long as they do so in a signed writing.
What are examples of stock transfer restrictions that are not allowed?
can't sell shares at all
What are examples of stock transfer restrictions that are allowed?
right of first refusal, prohibition on selling to a particular party, right of the corporation to approve the sale
X and Y are the shareholders of C Corp. X commingled personal and corporate funds and used C Corp.'s credit card to make personal purchases. Can a C Corp. creditor collect from X or Y?
From X, because X treated the corporation's assets as his own. Y didn't do anything wrong, so Y is not personally liable. Shareholder-by-shareholder determination.
What is the "Deep Rock" Doctrine?
If a shareholder uses a corp. as: (1) a planned and fraudulent scheme, (2) to prevent creditors from reaching debts owed, = then the corp. will be held liable for the shareholder's debts.
The board of C Corp. decides to distribute dividends totaling $400,000. Who receives dividends if the outstanding stock is 100,000 shares of common and 20,000 shares of $2 preferred/participating? What if the C Corp. preferred shares were cumulative, too?
If the corporation did not pay any dividends last year, then the $2/share dividend preference would carry forward to this year & would also have to be paid first.
