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21 Cards in this Set
- Front
- Back
- 3rd side (hint)
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CLOSE CORPORATION
3 Elements |
i. Small number of SH’s
ii. No ready market for the corp stock iii. Substantial majority stockholder participation in the management, direction and operations of the corp |
Small,market,majority s/h in position
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CLOSE CORPORATION
Fiduciary Duty Generally |
Stockholders of close corporations owe one another substantially the same fiduciary duty that partners owe to one another
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CLOSE CORPORATION
Fiduciary Duty Generally |
Must act with utmost good faith and loyalty
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CLOSE CORPORATION
Fiduciary Duty Right to Sell Back Shares |
If controlling SH’s of close corp causes corp to buy back shares from one, corp must offer each SH an equal opportunity to sell a proportional amt of shares to the corp at same price
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CLOSE CORPORATION
Donahue v. Rodd Electrotype Co. |
-main SH, retired and sell shares back to the corp
-minority SH also wanted to sell, but corp wouldn’t buy -Issue was whether SH of close corp owe each other a fiduciary duty of the utmost good faith and loyalty, similar to the duty that partners in a partnership owe each other -Court rules= a fiduciary duty, similar to that owed in partnerships, is owed to stockholders in close corps -If majority SH’s force a buy back, other SH’s are allowed to sell back their shares pro rata -Reason = small market, needs equal opportunity for all SH’s |
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CLOSE CORPORATION
Shareholder Voting Agreements (Voting Trusts) Definition = |
A written agreement between participating SH’s and the trustee that transfers to the trustee, for a specified period, the SH’s stock certificates and the legal title to their stock
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CLOSE CORPORATION
Shareholder Voting Agreements (Voting Trusts) Rule = |
SH’s in a close corp may contract to vote their shares in the future in such a way as they, or a majority of their group, from time to time determine
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CLOSE CORPORATION
Ringling Bros.-Barnum & Bailey Combined Shows v. Ringling |
SH sued to enforce the terms of a vote pooling agreement entered into with another SH who had refused to vote according the terms of the agreement
Ruling = SH’s may enter into an K’s to vote their shares jointly |
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CLOSE CORPORATION
Classified Stock |
1. method of control that may be disproportionate to a SH equity stake = create different classes of stock with different voting rights and equity stakes
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CLOSE CORPORATION
Shareholder Control of the Board (Classical Rule) |
SH’s may not, by agreement among themselves, control the directors in the exercise of the judgment vested in them by virtue of their office to elect officers and fix salaries (McQuade v. Stoneham)
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CLOSE CORPORATION
Shareholder Control of the Board McQuade v. Stoneham |
a. close corp owned the Giants
b. McQuade voted off BOD & removed as officer for always antagonizing the president c. Ruling = that an agreement among SH’s of a corp to restrict their discretion as directors of a corp is invalid and unenforceable as against public policy |
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CLOSE CORPORATIONS
Shareholder Control of the Board Modern Rule |
CC SH’s may agree to any arrangements re corp management, e.g. binding board to select particular indivs for offices & to pay them certain salaries, & to pay SH’s a particular dividend
Requirements a. No min SH prejudiced b. Neither corp creditors nor the public injured c. No statute is violated by enforcement |
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CLOSE CORPORATIONS
Shareholder Control of the Board Galler v. Galler |
1.Issue = whether in some instances a SH agreement can limit discretion of BOA of CC.
2.Rule = SH agreement limiting discretion of the BOD of CC upheld where no minority SH is prejudiced, neither corp creditors nor public injured and, no clearly prohibitory statutory language violated |
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CLOSE CORPORATIONS
Shareholder Control of the Board Shareholder Liability |
If CC SH’s restrict discretion of BOD, SH automatically relieve BOD of liability & impose that liability on themselves for managerial acts or omissions imposed on BOD
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CLOSE CORPORATIONS
Shareholder’s Fiduciary Obligations |
Rule = Where alleged wrongdoer can show a legit busin purpose, no liability will result unless wronged SH shows that the proffered legitimate objective could have been achieved through a less harmful, reasonably practicable, alternative mode of action
Burden Shifting Test 1st burden – Minority must show a breach of fiduciary duties 2nd burden – Majority must come up w/ legitimate business purpose 3rd burden – Minority must show less harmful reasonable alternative |
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CLOSE CORPORATIONS
Share Restrictions |
A restriction on transfer of stock enforceable if reasonable & buyer acquired such stock with notice of restriction
To be invalid, a restriction must effectively prohibit, not merely restrict, transferability |
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CLOSE CORPORATIONS
Share Restrictions (Notice) |
A valid restriction must be some noted on the certificate of the shares
If not, restriction isn’t binding |
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CLOSE CORPORATIONS
Deadlock |
When there is no supermajority or majority to get something accomplished in business.
3 possibilities:(Dissolution, Court appoints provisional board member, Custodian appointed as dictator) |
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CLOSE CORPORATIONS
Remedies for Oppressive Conduct |
Dissolution is available when the controlling SH engages in illegal fraudulent or oppressive conduct
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CLOSE CORPORATIONS
Oppressive Conduct = |
Conduct that substantially defeats the reasonable expectations of minority SH’s in committing their capital to the particular enterprise
Majority SH’s must either have known or should’ve known of expectations. An dissolution must be conditioned on permitting any SH to elect to purchase complaining SH’s stock at fair value. |
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CLOSE CORPORATIONS
Dissolution v. Mandatory Buyout |
Mandatory Buyout
1. Profitable corps can continue 2. Alleviates extortion effect 3. Courts less reluctant to grant some relief 4. Minority can get cash for stock 5. Majority can continue running business Dissolution 1. Valuation is difficult; public sales are preferable, but auction sales are essentially “fire sales” |
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