Corporations: Shareholders

Front 1

Shareholders generally don't manage, unless it's a close corp (few shareholders, stock not publicly traded). Shareholders in close corp can abolish board and take over management:

1) Cert provides it's close corp and cert or unanimous shareholder agreement provide for shareholder management
2) If unlisted on national market or exchange, cert/blaws or unanimous shareholder agreement can govern almost any aspect of corp powers

Back 1

In TX close corp, shareholders don't owe each other fid. duties. Court may find fiduciary duty depending on facts.

Watch for minority shareholders OR selling control w/o rea. investig. to one who loots company OR selling corporate asset.

Front 2

Shareholders gen not liable for acts/debts of corporation. Court might "pierce the corporate veil" (PCV) and hold liable if:

1) Abused privilege of incoporating and
2) Fairness requires shareholders be held liable

PCV never automatic. Watch for PCV in related corp situation (parent corp forms subsidiary to avoid obligations)

Back 2

1) Alter ego theory (not for failure to observe corp formalities)
- gen rule is that shareholders not liable
- PCV std- failure to respect separate corp entity harmed creditors

2) Undercapitalization theory
- gen rule shareholders not liable
- might PCV if corp undercapitalized (failed to invest to cover liabilities)
- TX courts generally willing to PCV for tort (No PCV for fraud contract claim unless sh made corp commit fraud for own personal benefit)

Front 3

Shareholder Derivative Suit (suing to enforce corp claim): Could corporation have brought this suit?

Standing:
- Stock ownership when claim arose or via operation of law
- Fairly and adequately rep corp interests
- Written demand on directors for suit (particularity)- can't file until 90 days post-demand, or if waiting would cause irreparable harm

Back 3

If Shareholder plaintiff(s) wins, generally corp gets judgment and S receives costs/attorney fee

If S loses, can't recover costs/fees. May be liable if sued w/o reasonable cause. Other S can't later sue on same transaction.

Front 4

Shareholder derivative suits: corp must be joined as party (as D) Parties can settle/dismiss only w/court approval --> if proposed settlement/dismissal may substantially affect shareholders, court may require notice to shareholders

Corp may move to dismiss based upon det by indep/disint directors (or committee of 2 or more such directors) if suit not in corp best interest

Back 4

Must dismiss corp's determination in good faith by disinterested directors

In close corp of 35 or fewer, might treat as a direct action--> recovery to plaintiff

Front 5

"Record shareholder" as of "record date" (voter eligibility cut-off no more than 60 days before mtg) can vote

Exceptions to rule:
- Corporation reacquires stock from shareholders before record date (corp is record owner of "treasury" stock but doesn't vote)
- Shareholder dies, Executor votes
- Proxies: in writing, signed by record shareholder, directed to sec of corp, authorizing another to vote (11 mos UOA)

Back 5

Proxy can be revoked tho it says irrevocable

Proxy irrevocable if it is a "proxy coupled with an interest":
1) Proxy says it's irrevocable and
2) Proxyholder has interest in shares other than voting

Front 6

"Block Voting": no time limit

- written trust agreement controlling how shares voted
- transfer legal title of shares to voting trustee
- orig shareholders receive trust certificates and retain all shareholders rights other than voting

Back 6

Voting ("pooling") Agreement: no time limit

- shareholders, not directors, for proper shareholder purpose
- must be in writing
- specifically enforceable against transferee if affected stock certificates conspicuously note the agreement

Front 7

Shareholders can take valid corporate act:

1) unanimous written consent signed or by elec transmission of holders of all voting shares or
2) mtg satisfying quorum and voting rules

Back 7

1) Annual meeting required (if none w/in 13 mos or no unanimous consent in lieu of, may petition court)
2) Special mtg [Board, president, holders of at least 10% shares entitled to vote, or anyone else permitted in certificate]

- For proper shareholder purpose
- Written notice stating when/where/why to all sh entitled to vote
- If fail to give proper notice (unless waived), action at mtg is void

Front 8

Shareholder voting requires quorum [majority of outstanding shares]

Once quorum established, not lost if ppl leave. A majority of all votes CAST acts to bind.

Back 8

Cumulative voting: only in voting for directors.

Multiple # of shares x number of directors to be elected. Cast votes however you want. If certificate of formation silent as to cumulative voting, look at corp formation date. If before 9/1/03, can; if on/after, then can't.

With cum voting, at least one sh must give written notice of intent to cumulate no later than day before mtg; then all can vote cumulatively.

Front 9

Stock Transfer Restrictions

Upheld if reasonable under circumstances (not undue restraint on alienation). Right of first refusal okay, assuming corporation offers a reasonable price. Restriction can cause automatic sale of shares.

Back 9

Can't be invoked against transferee unless 1) it's conspicuously noted on stock certificate or 2) transferee had actual knowledge of restriction.

Front 10

Any shareholder who has (1) owned stock (or voting trust certificate) for at least 6 mos OR (2) owns at least 5% of outstanding shares are eligible to inspect/copy books and records.

Written demand, stating proper purpose (shareholder interest-related)

Back 10

Shareholder can get court order for inspection; recover expenses/fees.

At least 10 days before a mtg, officer must prepare list of shareholders entitled to vote. Can inspect during regular business hours, on elec network, at the meeting. Directors have unfettered access.

Front 11

Distributions to shareholders: dividend, to repurchase shares, or to redeem shares (forced sale to corporation at price set in certificate)

**Distributions declared in board's discretion. Strong showing of abuse of discretion to force.

Back 11

Calculating dividends if

1) Common stock only. Divide by # shares.
2) Preferred stock. # shares x preference amount = total preference. Paid first!
3) Participating means pay again. So, shares get paid once as preferred, and again because they are participating.

Front 12

- Surplus can be used for distributions.
- State capital can't be used for distributions: it is the par value of the issuance, excess over par goes into surplus
- On a no-par issuance, w/in 60 days of issuance, board can allocate any part, but not all, to surplus

Back 12

Corp can make distribution though it lost money. Can't make distrib if insolvent [unable to pay due debts] or would render it insolvent or if distrib would exceed surplus.

Directors are jointly and severally liable for unlawful distribution. Seek contribution from approving directors and shareholders who knew it was unlawful when they received it