closed corporations
- Few shareholders, stock not publicly traded
- Shareholders can manage the corporaiton in a close corporation
- Shareholders may be held liable thru piercing corporate veil
shareholder management agreement
MBCA allows shareholders to enter in agreement to dispsne with board and vest management powers in sharehodlers
Can be set up…
* in articles and approved by shareholders
* By unanimous written shareholder agreement
Fiduciary Duties in Closed Corp.
- Fiduciary duties b/w shareholders
- Duty to dislcose info to minority shareholders
- Cannot oppress mintory shareholders (thwards goals, no way out)
professional corporation
- Shareholders are professional practioners (lawyers, doctors, CPAs, etc.)
- Can hire non-professionals for non-professoinal jobs
- Personally liable for malpractice (tort)
piercing the corporate veil
Shareholders of closed corp may be held personally liable if
* shareholder abused privilige of incorporaiton
* Faireness requires
Common Scenarios
* Alter ego (indentity of interest)
* Undercapitalization
* Fraud, avoidance of existing obligations, or evasion of statutory privisions
Only available in closed corporations
Most easily pierced in tort cases
alter ego
- Ignore corporate formalities such that corporation may be seen as mere instrumentality of shareholder
- Some basic injustice results
- Particularly common when shareholders treat corproate assets as own, comingle assets, etc.
undecapitalization
Corporation is inadequately capitalizaed at the time of formation so as not to reasonably cover prospective liabilities
Who may be liable under piercing the corporate veil?
- Only shareholders who are active in operation of the business
- Joint and several liability
derivative suit
- Suit in which a shareholder is suing to enforce the corporation’s interest, not the shareholder’s own interests
- Ask: could the corporation have brought this suit?
- Remedy goes to corporation
Can a suing shareholder recovery anything in a deritvative suit?
If shareholder-plaintiff wins the derivative suit, may recover costs and attorney’s fees
If shareholder-plaintiff loses the derivative suit, she cannot recover costs and attorney fees
If court determines no reasonable cause or if improper purpose, may order shareholder-plaintiff to pay reasonable expenses of defendant
Requirements for Derivative Suit
Standing
* Shareholder at time claim arose
* Adequate representation
Demand Requirements
* Written demand to board
* Generally must wait 90 days unless (1) board rejects demand, (2) irreparable injury would occur
* Demand req. may be waived if would be futile
Corporation Joined as Defendant
* Can only be dismissed or settled with court approval
* Dismissal if based on reasonable investigation by indpt directors or panel, suit is not in corporation’s best interest
Burden after dismissal
* Shareholders must prove that dismissal decision not based on good faith after reasonable inquiry
* If maj of directors interested, corproation will have burden of dmeonstrating made in good faith after reasonable inquiry
record shareholder and record date
- Shareholders of record on the record date may vote at meeting
- Record date can be no more than 70 days before meeting
- Unless otherwise in articles, each outstanding share = 1 vote
Exceptions
* Treasury stock: no one votes it
* Death: estate may vote stock
* Proxy can vote in place of shareholder
voting by proxy
Proxy is (1) a writing (2) signed by the record shareholder (3) directed to the secretary of the corp. (4) authorizing another to vote the shares
Proxy is good for 11 months unless stated otherwise
Proxy can be revoked by (1) shareholder attending meeting, (2) in writing to corporate secretary, (3) subsequent appointment of another proxy
Proxy irrevocable if coupled with interest or given as security
statutory proxy control
- Full and fair disclosure of all material facts with regard to any management-submitted proposal to vote upon
- material miststaements, omissions, and fraud in solicitation are prohibited
- Management must include certain shareholders proposals on issues, allow explaination
voting trust
- Written agreement of sharehodlers under which all shares owned by party are transferred to trustee, who votes shares and distributes dividends in accordance with provisions
- Not valid for more than 10 years unless extended
Requirements for Voting Trust
- Written trust agreement, controlling how shares will be voted
- Copy of agreement given to corp.
- Legal title to shares transferred to trustee
- Original shareholders recieve trust certs and retain all rights except voting
Requirements for Voting Agreement
- In writing and signed
- Need not be filed with corporation
- Not subject to time limits
- Increasingly specifically enforceable (taking over voting trusts)
Methods of Exercising Shareholder Action
- At meeting
- Unanimous signed writing
shareholder meetings
Annual meeting
* Mandatory
* Elect directors
Special meetings
* Called by board, president, at least 10% of shareholders, anyone else authorized to do so in articles or bylaws
Notice for Shareholder Meetings
- Not fewer than 10 days or more than 50 days
- Must be in writing
- May be waived in writing or by attendance
- Contents: time, place, date, purpose (special meetings, can’t do anything else)
- Consequences of failure: actions are voidable
Numbers for Shareholder Meetings
Quorum: majority of outstanding shares (articles may req. higher number), cannot be lost
Approval: majority of outstanding shares
Special Matters Numbers
* Elect director: plurality
* Fundamental changee: majority entitled to vote
* Remove director: majority entitled to vote
* Other matters: majority to actually vote
cumulative voting
- One at-large elction to determine board
- No. of voting shares x No. of directors to be elected
Only allowed in closed corporations
stock transfer restriction
Restrictions must be reasonable
Can be enforced if
1. Conspicusouly noted on stock certificate
2. Transferee has actual knowledge of restriction at time of purchase
inspection rights
Right, personally or by agent, to inspect and copy books and records of corporaiton
