Download Chapter 44: Shareholders` Rights and Liabilities

CHAPTER 44: SHAREHOLDERS’ RIGHTS AND LIABILITIES
I.
II.
Shareholders’ Meetings
A. Types
1. Annual: to elect new directors and conduct other necessary
business
2. Special: may be held whenever a corporate matter arises, requiring
immediate shareholder attention
B. Notice
1. MBCA requires for shareholders entitled to vote who are
shareholders of record
2. Notice of special meeting: must list purpose
3. Notice of annual meeting: need not include the purpose unless
extraordinary
C. Conduct of Meetings
1. A quorum of outstanding shares must be represented
2. Majority vote rules unless articles state otherwise
3. Shareholders have a right of full participation
a. Right to offer resolutions
b. Right to speak for and against proposed resolutions
c. Right to ask questions
D. Action Without Meeting
1. Generally, shareholders can only act at a properly called meeting
2. MBCA: permits shareholders to act without a meeting if all
shareholders entitled to vote consent in writing
Shareholders’ Election of Directors
A. Straight Voting: each share has one vote for each new director
B. Cumulative Voting:
1. Number of directors to be elected X the shareholder’s number of
shares
2. May aggregate one’s votes in favor of fewer candidates than there
are slots available
3. Example: S owns 100 shares. There are 3 board slots. S may cast
all of her 300 votes for 1 candidate
4. Makes it more likely that a minority shareholder will be able to
obtain at least one seat on the board
III.
C. Classes of Shares
1. Such as common v. preferred
2. Corporation may have several classes
3. Each class may be entitled to elect one or more directors
D. Control Devices
1. Voting trusts
a. Shareholders transfer shares to trustees and receive
certificates
b. Retain rights, such as the right to receive dividends, but the
voting trustee votes for the directors and other matters
c. Purpose is to control the corporation through the
concentration of shareholder voting
d. MBCA
i.
Limits duration to 10 years
ii.
Requires agreements to be made public
2. Shareholder Voting Agreements
a. May agree with other shareholders how they will vote
b. Must be written
c. Only those who sign are bound
d. Advantages
i.
Duration may be perpetual
ii.
May be kept secret
3. Proxies
a. Someone appointed to vote by shareholder
b. MBCA limits duration to 11 months ordinarily
c. Generally revocable at any time unless coupled with an
interest, such as a buy and sell agreement
d. Eliason v. Englehart: proxy was revocable where the word
“irrevocable” only appeared in the acknowledgement and
not in the proxy itself
Fundamental Corporate Changes
A. Shareholders must approve
1. Most amendments to the articles of incorporation
2. Mergers, generally
3. Consolidation (two old corporations go out of existence and a new
corporation takes the business)
4. Share exchange (selling shareholders only): one corporation
becomes the shareholder of all the outstanding shares of a second
corporation
5. Sale of all or substantially all of the assets
6. Dissolution
B. Procedures Required
1. Approval of the board of directors
2. Notice to all of the shareholders whether entitled to vote or not
3. Majority approval
C. Dissenters’ Rights
IV.
V.
VI.
1. Corporation is required to pay dissenting shareholders the fair
value of their shares
2. Covers
a. Mergers
b. Short-form mergers (between parent and subsidiary)
c. Share exchanges
d. Significant amendments to the articles of incorporation
e. Sale of all or substantially all of the assets except in the
ordinary course of business
3. Dissenter must
a. Have the right to vote (unless a short-form merger); and
b. Not vote in favor of the transaction
4. Fair value determined by
a. Delaware Block Method: weighted average of several
valuation techniques
b. MBCA: uses customary and current valuation concepts and
techniques generally employed for similar businesses
5. Montgomery Cellular Holding Co., Inc. v. Dobler
Shareholders’ Inspection and Information Rights
A. MBCA: as to inspection
1. Absolute right of inspection of
a. An alphabetical listing of the shareholders entitled to notice
of a meeting
b. Articles
c. Bylaws
d. Minutes of shareholder meetings within the past 3 years
2. Qualified right of inspection of
a. Other records, such as
i.
Accounting records
ii.
Board and committee minutes
iii.
Shareholder minutes more than 3 years old
b. If
i.
Good faith; and
ii.
Proper purpose
B. Information
1. Right to receive corporate information that is important to voting
and investing decisions
2. MBCA requires corporations to furnish financial statements
Preemptive Right
A. An option to subscribe to a new issuance of shares in proportion to the
shareholder’s current interest in the corporation
B. MBCA: does not exist except to the extent indicated in the articles
Distributions to Shareholders
A. Dividends
1. Cash or Property
VII.
a. Once declared, are debts to the corporation, which
shareholders may sue to enforce
b. Declaration is protected by the business judgment rule
c. Dodge v. Ford Motor Co.: company had a large surplus of
profits that directors were required to distribute to the
stockholders
d. Tests
i.
Solvency: distribution of dividend may not
make a corporation unable to pay its debts
ii.
Balance Sheet: may pay a dividend to the extent
that a corporation has excess assets
2. Share Dividends and Share Splits
a. Share Dividends
i.
Specified percentage of outstanding shares
declared by the directors
ii.
Paid on outstanding shares only
iii.
May be revoked by the board
b. Share Splits
i.
Receipt of a specified number of shares in
exchange for each share currently owned
ii.
Like share dividends, may be made merely by
action of the directors because does not affect the
value of a corporation or shareholders’ wealth
c. Reverse Share Split
i.
Decrease in the number of shares in a class
ii.
Increases the market value of shares
B. Share Repurchases
1. Redemption
a. Right of the corporation to force an involuntary sale by a
shareholder at a fixed price
b. MBCA: must appear in the articles of incorporation
2. On the Open Market
a. Purchase of shares from a shareholder willing to sell
b. Must meet the tests for cash and property dividends
Shareholders’ Lawsuits
A. Individual: shareholders have the right to sue in their own names
B. Class Action Suits
1. By one shareholder on behalf of several similarly affected
shareholders
2. Recovery prorated to all members of the class
3. Successful shareholder is entitled to reimbursement for reasonable
expenses
C. Derivative Actions
1. Generally no right to sue in own name when someone’s actions
have harmed the corporation
VIII.
2. Can bring an action for the benefit of the corporation in some
circumstances where the directors have failed to pursue
3. Suing shareholder, if successful, is entitled to reimbursement of
reasonable attorney’s fees
4. Eligible shareholders
a. Must be a current shareholder who held shares at the time
of the wrongdoing
b. Exception: double derivative suit – brought by shareholders
of a parent corporation on behalf of a subsidiary
5. Demand on Directors
a. Shareholder must first ask directors to bring suit unless
i.
Useless or futile
ii.
Determined if board is unable to make a
disinterested decision
b. If directors refuse, generally the shareholder cannot
continue the action
i.
Protected by the business judgment rule
ii.
Unless action accuses the board of harming the
corporation – conflict of interest
6. Shareholder Litigation Committees
a. Purpose is to decide whether to sue
b. Should consist of disinterested, non-defendant directors
c. Zapata test:
i.
Good faith and reasonable investigation; and
ii.
The best interests of the corporation are served
7. Litigation Expenses
a. If successful: entitled to reimbursement of reasonable
litigation expenses
b. If unsuccessful and brought without reasonable cause:
required to pay defendant’s expenses
D. Defense of a Corporation by Shareholder
1. Shareholder permitted to defend for the benefit of corporation if
a. Corporation has a valid defense; and
b. Failure of directors to defend is a breach of fiduciary duties
Shareholder Liability
A. Illegal Distributions
1. Primary liability placed on the directors
2. Shareholder liable if received distribution knowing it was illegally
made
B. Corporate Debts
1. Ordinarily no personal liability
2. Some states impose personal liability for wages owed to corporate
employees
C. Sale of a Control Block of Shares
1. Majority or controlling shareholders who sell block at a premium
are generally not liable
IX.
2. Have been liable for amount of premium or damages if
accompanied by wrongdoing, such as:
a. Reasonable suspicion that purchaser would mismanage or
loot corporation
b. Purchaser’s history of mismanagement and personal use of
corporation’s assets
c. Premium is unduly high
d. Usurping a corporate opportunity
D. As Fiduciaries: duty to be impartial
Members’ Rights and Duties in Nonprofit Corporations
A. MNCA: all members have equal rights and obligations with respect to
1. Voting
2. Dissolution
3. Redemption of Membership
4. Transfer of membership
B. Members’ Meeting and Voting Rights
1. Must hold an annual meeting for members
2. All members have one vote
3. Must be a quorum (10% of votes entitled to be cast per MNCA)
4. May elect directors by straight, cumulative and class voting
5. Right to vote on most amendments to articles, bylaws, merger, sale
of all or substantially all of the assets, and dissolution
6. Members must have fair and reasonable notice
C. Member Inspection and Information Rights
1. Absolute right to inspect and copy
a. Articles
b. Bylaws
c. Board resolutions
d. Meeting minutes
2. Qualified right to inspect and copy
a. A list of members
b. Minutes of board meetings and records of action
3. Board is required to maintain appropriate accounting records
D. Distribution of Assets
1. Generally prohibited
2. Mutual benefit corporation may distribute if able to pay its
currently maturing obligations and has assets at least equal to
liabilities
E. Resignation and Expulsion
1. Members may resign at any time
2. Member of a mutual benefit corporation may transfer interest to a
buyer
F. Derivative Suit
1. May be brought by members having at least 5% of the voting
power or by 50 members, whichever is less
2. Must make a demand on the directors or establish it is futile
X.
Dissolution and Termination of Corporations
A. Voluntary
1. May be dissolved by action of directors and shareholders
2. Must file articles with the secretary of state
B. Without consent by
1. Administrative action of the secretary of state
2. Judicial action by a court
C. Winding Up and Termination
1. Creditors paid first
2. Then preferred shareholders
3. Then common shareholders