What is the Common Law rule regarding shareholder direct control of a corporation?
At common law, shareholders have no right to directly control the day-to-day management of their corporation. Instead, the right to manage is vested in the board of directors, who usually delegate their day- to-day management duties to officers.
What is the MBCA rule/approach to direct shareholder control of a corporation?
MBCA still follows the general rule of no direct control. However, the MBCA also allows shareholders to enter into shareholder management agreements, including an agreement to vest the powers that the board would ordinarily have in one or more shareholders.
- This applies when dealing with a close corporation
How do shareholders have indirect control?
Even absent a shareholder agreement vesting direct control of the corporation in shareholders, shareholders have indirect control over their corporation through their power to elect directors, amend the bylaws, and approve fundamental changes to the corporation.
What are the requirements for piercing the corporate veil and holding shareholders (who are generally not personally liable) personally liable for what the corporation did?
To pierce the corporate veil and hold shareholders personally liable:
- The shareholders must have abused the privilege of incorporating; and
- Fairness must require holding them liable.
Normally, only shareholders who are active in the operation of the business will be personally liable. Liability is joint and several.
What are the three main situations where the corporate veil is pierced?
- Alter Ego (Identity of Interests): If the shareholders ignore corporate formalities such that the corporation may be considered the alter ego or a mere instrumentality of the shareholders or another corporation, and some basic injustice results, a court might pierce the corporate veil.
- Undercapitalization: The corporate veil may be pierced where the corporation is inadequately capitalized, so that at the time of the corporation’s formation there is not enough unencumbered capital to reasonably cover prospective liabilities.
- Fraud, Avoidance of Existing Obligations, or Evasion of Statutory Provisions: The corporate veil may be pierced where necessary to prevent fraud or to prevent an individual shareholder from using the entity to avoid his existing personal obligations. But the mere fact that an individual chooses to adopt the corporate form of business to avoid future personal liability is not itself a reason to pierce the corporate veil.
Who may pierce the corporate veil generally?
Generally, creditors may be allowed to pierce the corporate veil. Courts almost never pierce the veil at the request of a shareholder.
What is a derivative suit?
Shareholder sue to enforce the right of the corporation, and recovery generally goes to the corporation (rather than the shareholder bringing the action)
What are the requirement for a derivative suit?
- Standing: To commence and maintain a derivative proceeding, a shareholder must have been a shareholder at the time the claim arose or must have become a shareholder through transfer by operation of law from someone who did own stock at the time the claim arose.The shareholder must also fairly and adequately represent the corporation’s interest.
- Demand Requirements: The shareholder must make a written demand on the corporation (usually, that means the board) to take suitable action. A derivative suit may not be commended until 90 days after the date of the demand, unless: (1) the shareholder has earlier been notified that the corporation has rejected the demand; or (2) irreparable injury to the corporation would result by waiting for the 90 days to pass.
The corporation must be joined to the suit as a defendant. Even though the suit asserts the corporation’s claim, since the corporation did not do so, it is joined as a defendant.
May a corporation move to dismiss a derivative suit?
Yes, the corporation may move to dismiss a derivative suit. The corporation must show that an independent investigation was conducted that concluded that the suit is not in the corporation’s best interest
What are the two main types of shareholders meetings?
- Annual Meetings: Corporations must hold annual shareholders’ meetings. If the annual meeting is not held within the earlier of six months after the end of the corporation’s fiscal year or 15 months after its last annual meeting, a shareholder can petition the court to order one to be held.
- Special Meetings: Special meetings may be called by (1) the board of directors, (2) the president, (3) the holders of at least 10 percent of the outstanding shares, or (4) anyone else authorized to do so in the articles or bylaws.
What are the main notice requirements for shareholder meetings notices?
- Shareholders must be notified of meetings not less than 10 OR more than 60 days before the meeting.
- Notice must be in writing (fax or email is fine) to every shareholder entitled to vote. Notice may be waived in writing or by attendance.
What contents must a shareholders meeting notice contain?
The notice must state:
- the date,
- time, and
- place of the meeting.
Special Meetings — The notice must also state the purpose of the meeting.
True or False: If proper notice is not given to all shareholders, whatever action was taken at the meeting is voidable (maybe void).
True, unless those who were not sent notice waive the notice defect.
Waiver can occur in two ways:
- Express waiver, meaning in writing and signed any time (fax or email are fine)
- Implied waiver, meaning the shareholder(s) attend the meeting without objecting at the outset
Which shareholders are eligible to vote?
Unless the articles provide otherwise, each outstanding share is entitled to one vote.
- Record Shareholder and Record Date: Shareholders of record on the record date may vote at the meeting. The record date is fixed by the board of directors but MAY NOT be more than 70 days before the meeting.
2 main exceptions to the general rule that the record owner on the record date is who votes:
- Treasury Stock: The corporation reacquires stock before the record date, so that the corporation is the owner of this treasury stock as of the record. In this case, the corporation does not vote this stock.
- Death of Shareholder
What is a proxy, and how are proxies involved with shareholder voting?
A shareholder may vote her shares in person or by proxy executed in writing.
A proxy is:
- A writing (fax and email are fine),
- Signed by the record shareholder (email is fine if the sender can be identified)
- Directed to the secretary of the corporation,
- Authorizing another to vote the shares.
Are proxies generally revocable or irrevocable?
Proxy is generally revocable and may be revoked by:
- Writing to corporate secretary OR
- Subsequent appointment of another proxy.
A proxy will be irrevocable only if:
- The proxy says it’s irrevocable
- The proxy holder has some interest in the shares other than voting.
What are the two main methods that shareholders might use to pool their voting powers?
- Voting Trust: A voting trust is a written agreement of shareholders under which all of the shares owned by the parties to the agreement are transferred to a trustee, who votes the shares and distributes the dividends in accordance with the provisions of the voting trust agreement.
- Voting Agreement: Shareholders can enter into voting (or “pooling”) agreements providing for how they’ll vote their shares.
What are the requirements for a voting trust?
The requirements are:
- A written trust agreement, controlling how the shares will be voted
- A copy of the agreement is given to corporation
- Legal title to the shares is transferred to the voting trustee
- The original shareholders receive trust certificates and retain all shareholder rights except for voting.
What are the requirements for a voting agreement?
The agreement must be: 1) In Writing AND 2) Signed
What are the two main things that shareholders get to vote on?
- To elect or remove directors AND
- Fundamental Corporate Changes
How is quorum calculated with shareholder meetings?
Determination of a quorum focuses on the number of shares represented, NOT the number of shareholders.
- KEY DIFFERENCE FROM DIRECTOR MTGS — A shareholder quorum will NOT be lost if people leave the meeting.
Does the election of a director require a majority or plurality of shareholder votes?
The election of a director only requires a plurality of shareholder votes
Are shareholders allowed to restrict the transferability of their stocks?
Yes, but restrictions are valid if they are not an undue restraint on alienation
Enforcing Restriction Against Transferee — A permitted stock transfer restriction is enforceable against the holder of the stock or a transferee of the holder only if:
- The restriction’s existence is noted conspicuously on the certificate (or is contained in the information statement, if the shares are uncertificated)
- The holder or transferee had knowledge of the restriction.
What are Shareholders’ Inspection Rights?
Shareholders’ Inspection Rights: A shareholder has the right, personally or by an agent, to inspect (and copy) the books and records of the corporation.
- Standing: Any shareholder can demand access
- Procedure: Under the MBCA, the procedure followed depends on whether it is non-controversial or controversial things
