Shareholders

Policy Behind S/H Derivative Suits

1. Avoid Multiple Lawsuits 2. Protect creditors or corporation 3. Protect s/h 4. Adequately compensate s/h by value of shares

Derivative Suit Litigation-Defenses

1. Corporation is named as the Defendant 2. Defenses: a. Substantive defenses that could have been raised against the corporation b. Plaintiff disqualification defensesn (g.g. BoD claim that S knew, assented to and benefitted from questioned activities of the corporation) c. Demand made and disinterested committee determination d. No demand made

Exceptions to General Shareholder Voting Rule

1. Death of a shareholder (executor can vote) 2. Proxies

Source and Nature of distributions

1. Dividends are to be paid from un-reserved and unrestricted earned surplus 2. Dividends may NOT be paid out of capital except in dissolution 3. Once declared, dividends constitute debt of the corporation on par with general, unsecured debts

Notice waiver

1. Express-In writing and signed at any time 2. Implied-Attend meeting without objection

Date of Distributions

1. The BoD may fix a record date, declaration date and payment date 2. Record date is set for determining eligible s/h for the dividend 3. If no record date is set, the sate the BoD authorizes the distribution is it

Determination of dividend

1. The BoD must determine the financial soundness of the corporation before making a distribution 2. A distribution may not be made if after giving it effect, the corporation is not able to pay debts in due course or total assets are less than the sum of liabilities plus preferred shareholders distribution rights 3. Directors approving distributions in violation of the solvency rule are personally liable to the corporation for the excess subject to BJR

Voting Agreement Requirements

1. Written agreement 2. Specifically enforceable.

Voting Trusts Requirements "Block Voting"

1. Written trust agreement controlling how the shares will be voted 2. Copy to the corporation with beneficiary list 3. Transfer title of shares to voting trustee 4. Original shareholders recieve trust certificates and retain all shareholder rights except voting 5. Generally irrevocable only for a maximum period of 10 years unless coupled with an interest

Proxy

A proxy is a writing, signed by record shareholder, directed to the secretary of a corporation authorizing another to vote the shares. Good for 11 months. Revocations must be in writing and are revocable unless coupled with an interest

Shareholder Voting General Rule

A record shareholder as of record date has the right to vote

Special Meeting

A special meeting can be called by 1. BoD 2. Person designated in art. or bylaws 3. Holders of at least 25% of voting shares if corporation has 50 or less shareholders

Requirements for Bringing a shareholder derivative suit

ATVD: 1. Adequate representative: The shareholder must fairly and adequately represent the interests of shareholders 2. Time-The person bringing suit must have owned stock at the time of claim arose or have gotten it by operation of law (inheritance) from someone who did and must own stock throughout the litigation 3. Verified-The person bringing suit must file a verified complaint 4. Demand-The person must also make a written demand on directors that the corporation bring suit unless demand would be futile

Consequence of improper notice

Action at the meeting is void unless those not sent notice waive the notice

Shareholder Management

BoD are the managers, not shareholders unless there are less than 50 shareholders.

Remedy for failure to supply

Court order for inspection and attorney fees

Piercing the Corporate Veil

Courts are reluctant to disregard corporate existence but will pierce the corporate veil where the corporate form is so ignored, or manipulated that it is the mere instrumentality of another and the misuse constitutes fraud or promotes injustice Burden is on party seeking to PCV Courts can read shareholders, officers, directors, parents, subsidiaries and sister corps

Shareholders using cumulative votine

Cumulative voting is only available for voting for directors and only if provided for in the articles. It is a device to give small shareholders a better chance of electing someone to the BoD. You multiply the number of shares owned by the number of BoD members to be elected.

Shareholder Distributions

Definition: Virtually any payment to shareholders other than salary, can be case, stock dividend, stock redemption or any other transfer of property for the benefit of shareholders The power to make distributions is within the discretion of the BoD. Any action to compel declaration of a distribution is tough to win. Can win only on a very strong showing of abuse and discretion established by bad faith or illegal and oppressive conduct.

Derivative Suit Litigation-Defense Exception "The American Rule"

Direct rather than derivative actions may be brought be a shareholder in a close corporation Direct action will be allowed if the court finds it will not: 1. Expose the corporation to multiple suits 2. Prejudice creditors 3. Interfere with a fair distribution among all of the parties

Notice requirememt for meetings

Must give written notice to every shareholder entitled to vote (can be electronic) 1. Contents: a. when b. where c. purpose-The purpose is the only business eligible for action

Majority shareholders and management

Notwithsatnding the fiduciary duty, majority shareholders of a corporation have the right to manage, operate and control the enterprise

Close Corporation

One that is not publicly traded, usually around 20-25 s/h

PCV Burden Test

PUFFICAP Public vs. close corporation (public NO PCV) Under capitalized Formalities of corp are disregarded Fraudulent misrepresentations Identity of the shareholder officers and directors (are they the same?) Comingling of personal and corporate funds Absence of corporate records Payment of individual obigations

Record Shareholder

Person shown as the owner in corporate records. The record date is the voter eligibility cut off

Consequences of a successful derivative suit

Recovery goes to the corporation if successful. The S/H who brought suit get attorney fees and costs

Shareholder Management in a Close Corporation

Shareholders in a close corporation owe eachother fiduciary duties under the standard of upmost good faith and loyalty-the same standard of officers and directors

Shareholder Derivative Suits

Shareholders of a corporation cannot maintain an action in their own name to address an injury to the corporation, there is a single derivative action that is required. In a derivative suite, a shareholder is suing to enforce the corporation's claim. Always ask: could the corporation have brought this suit, if so it is probably a derivative suit

Right of Shareholder to Inspect and Copy Corporate Records-MUST be delivered

Shareholders of a corporation have the right to inspect and copy certain records of the corporation. REMEMBER ABCs for records that MUST be delivered upon request Articles and Amendments Bylaws and Amendments Communications to s/h for last three years Directors and officers names and addresses Every s/h meeting minutes for last three years and director minutes dealing with stock rights Financial statements for last 3 years Secretary of state biannual report Must be maintained by corporation's principle office

Right of Shareholder to Inspect and Copy Corporate Records-Must be delivered if...

Shareholders of a corporation have the right to inspect and copy certain records of the corporation. Records that MUST be delivered upon request IF the request is made in good faith, proper purpose is shown ABCDs Accounting records Backholder minutes Committee records Director minutes Shareholder lists alphabetized by class Must be maintained at any reasonable location

Shareholder Annual Meeting

Shareholders vote at the annual meeting to elect directors. If not held, a shareholder can petition the court to order one after 6 months from the end of the fiscal year or 15 months from the last meeting

Consequences of an unsuccessful derivative suit

The S/H who brought suit DOES NOT get attorney fees and costs. Person may be liable to the corp for its attorneys fees if sued for no cause. Only one derivative action is allowed

Dividends Division

There are four classes of stock for dividend distribution purposes 1. Preferred-paid first 2. Participating 3. Cumulative 4. Common

How shareholders Vote

There are two ways that shareholders can take a valid corporate act: 1. Unanimous written consent of the holders of all voting shares or 2. A meeting at which quorum is presnt The determination of quorum focuses on the number of shares represented, not the number of shareholders. Generally, a quorum requires a majority of outstanding shares. The articles can change this if they want but can never be less than 1/3 If a quorum is present, a majority of shares present may act to bind the corporation unless the articles or the bylaws require a higher vote.

Stock Transfer restirctions, "Rights of First Refusal"

Valid unless unreasonable under the circumstance which means they are not an undue restraint on alienation Even if the restriction is reasonable and thus valid, it action cannot be invoked against the transferee unless conspiculously noted on the certificate or transferee had actual knowledge A restriction is valid and enforceable if it is authorized and its existence is conspiculously noted on the front or back of the certificate or information statement

Making Demand

When demand is made, the directors may establish a committee of three or more disinterested directors to review whether the claim should be pursued by the corporation 1. The determination of the committee is binding unless not disinterested or the determination was not in good faith 2. If the suit is brought, it will be dismissed if a committee of disinterested directors has determined in good faith not to pursue