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Terms in this set (76)
• General Characteristics of close corps
o There are few shareholders
o The shares of a close corporation are not publicly traded, that is, there is no secondary market of stock in a close corporation
o The shareholders often participate in the management of the corporation
Most shareholders are members of the board of the directors or officers
Most shareholder expect to make money in a close corporation through salaries from employment
in close corps, what can SH do wrt the BOD
unanimously agree to eliminate the BOD
close corp SH have ___ liability
do corps need to be small to be closely held?
o In close corporations, decisions are generally made by the ___
is close corp stock publicly traded?
o The concepts of ___ and ___exist exclusively in close corporations
(1) cumulative voting and (2) shareholder voting agreements
typical process in which each member of the board of directors is separately elected; each shareholder gets one vote per share for each election and can use her shares in the way that she desires in each of the separate election
how are directors elected in straight voting?
by a plurality, rather than a majority
each director is elected in one-at large election in which the shareholders cast votes the top vote getters are elected to the board
cumulative voting default rule
no cumulative voting unless the articles of incorporation provide for it
what is the AIC are silent about cumulative voting?
then there is no cumulative voting
o ____ voting is ultimately not very effective in giving minority shareholders a voice
Default rule about removing a director
a majority vote is required to remove a director
What happens if there is cumulative voting in removing a director?
removal is not allowed if the amount of shares opposing the removal exceeds the amount that would elect that director in the first place
govern how close corporations will be run
SH management agreements
o Amendments to the shareholder management agreement must be agreed to ___
o Shares of stock must clearly indicate
that the corporation has a shareholder management agreement
SH management agreements must be __ to be valid
what do SH management agreements allow?
allow the corp to be run like a partnership
o Requirements for Shareholder Management Agreements
Unanimous vote by the shareholders (avoids scams/oppression of minority shareholders)
Can only occur in close corporations (not general corporations)
Needs to be in writing
shareholders may wish to enter into agreements so as to pool their voting power so that they can be more influential in the management of the business
• Shareholder Voting Agreements
o Voting agreements are
contracts that require shareholders to vote in a particular way
___cannot enter into voting agreement because they owe non-delegable fiduciary duties to the corporation
Directors of a close corporation
When Sh want to pool their voting power, they must establish a ...
What is a voting trust?
o Legal title to the stock of the participants is transferred to the voting trustee
Once SH establish a voting trust, what rights do they end up with?
all their rights except the right to vote
Who votes once the trust is formed?
the voting trustee
How Close Corporations Stay Closely Held
• Preemptive Rights
• Stock Transfer Restrictions
• Buy-Sell Agreements
o Close corporations can give their existing shareholders ___ to protect them from the issuance of new shares by the corporation
the right to purchase the number of shares of any new issuance of shares that will enable the shareholder to maintain their percentage of ownership
MBCa and preemptive rights
o Under the MBCA, corporations must opt in for preemptive rights, though other states have preemptive rights as the default and have opt provisions
o A shareholder's preemptive right to acquire proportional amounts of the corporation's unissued shares is not triggered when:
Shares are issued as compensation to directors, officers, employees, or agents of the corporation
Shares are sold for consideration other than cash
Shares are authorized in the articles of incorporation and issued within six months of the effective date of incorporation
do preemptive rights apply shares sold on the secondary market/existing shares?
What if corp goes public?
then it has to offer the new shares to the shareholders with preemptive rights
what price does the SH with preemptive rights get to purchase the shares at?
o A shareholder with preemptive rights gets to purchase the shares at the price at which the corporation is issuing the shares to everyone else
Does a SH have to purchase the shares if she has a preemptive right?
No- she just has the option :)
o The stock transfer restriction is valid and enforceable if
its existence is noted conspicuously on the front and back of the stock certificate
o Stock transfer restrictions are not enforceable against
persons without knowledge of the restriction
What are stock transfer restrictions?
o Restrictions on who SH can sell stock to
o Manifestly unreasonable restrictions may include things like
setting an extremely low price; the price has to be reasonable to make the shareholder sell her shares to the corporation
o Restricts the transfer of stock to a third party
contracts that require the corporation or the majority SH of the close corporation to purchase shares in specified situations at a specified price
How do you waive buy-sell agreements?
it must be agreed to by all parties to the agreement
Rationale for buy-sell agreements
protects minority SH who want to leave a close corporation by ensuring that they will receive a fair price for their shares
What does the agreement specify?
how the price is to be calculated, though it will likely be a formula or the average of some financial metrics
o Buy-sell agreements may be triggered by
death or disability
If a buy-sell agreement restricts the right of a SH to sell to third parties, the restriction is not enforceable unless
(1) the buyer knows of the restriction and (2)its existence is noted conspicuously on the front and back of the stock certificate
o Threats to the Minority Shareholder
dilution and economic harm
occurs when a shareholder's ownership interest is decreased through the issuance of new shares, which may limit the shareholder's influence over the corporation
occurs when the close corporation acts in a manner that may negatively impact the shareholder by decreasing the value of the shareholder's shares, entitling them to lower profits
protections of threats to the minority SH
1. Substantial Par Value
2. Preemptive rights
3. buy-sell agreement
traditional rule about fiduciary duties in a close corp
shareholders of close and general corporations have no fiduciary duties to the corporation or to other shareholders
is there reason to recognize special fiduciary duties that protect minority shareholders of closely-held corporations
shareholders of a close corporation have fiduciary duties to the corporation and to the other shareholders
o Equal Access Rule/Equal Opportunity Rule
Close corporations may not discriminate between majority and minority shareholders in repurchasing shares
o Duty of Disclosure
The corporation and majority shareholders owe the minority shareholders a duty to disclose to them material facts regarding the corporation
• Shareholders expect to make money in a close corporation through ___;
why do SH in close not want dividends?
o Shareholders in close corporations cannot realize profits through capital gains because there is no ready, public market for their shares
o There is a large incentive for corporations to pay their shareholders salaries that are high as possible, because ...
these shareholders can be deducted as a business expense from the corporation's taxable income
o There is a danger of paying shareholders salaries that are too high in close corporations, because
the shareholders receiving salaries are likely the same officers and directors making salary decisions
test used to determine whether a salary is reasonable
o Indirect Market Test
what is the indirect market test?
The higher the rate of return that an executive can generate, the greater the salary he can command
• Oppression of Minority Shareholders Through Manipulation of Salaries
Oppression by Depriving the Minority Shareholders of their Salary and Employment
Oppression of Minority Shareholders by Giving Majority Shareholder Too High a Salary
• Forces minority shareholders to sell their shares at a lower price
freeze out occurs when the majority shareholder:
o Causes the minority shareholder to be fired
o Causes the corporation not to give out dividends
o Refuses to hire the minority shareholder
• Occurs when, through a merger transaction, the majority shareholders make it so the minority shareholders are no longer shareholders
What is the Burden of Proof Test used to show?
Oppression by Depriving the Minority Shareholders of their Salary and Employment and is used in states that recognize that corporations and majority shareholders owe fiduciary duties to minority shareholders
What should courts look to in order to determine if conduct was oppressive?
what the majority shareholders knew or should have known about the minority shareholder's expectations
How can minority SH protect themselves involving salaries?
through shareholder management agreements or contracts and states that have protections for minority SH
does Delaware protect minority SH?
• Remedies for Breach of these Duty of Utmost Good Faith
right to sue for damages
Involuntary dissolution of the corporation
in close corps, can courts dissolve corporations in a proceeding brought by a shareholder ?
What does the MBCA allow for in lieu of involuntary judicial dissolution?
allows for the corporation or its shareholders to purchase the shares of an oppressed minority shareholder
• At common law, the remedy for minority shareholder oppression was not dissolution, but instead, ___
Under MBCa, when can court dissolve a close corp?
1. if directors are deadlocked
2. business of corp can't continue b/c of he deadlock
3. directors/ those that control are acting/ have acted in a manner that is illegal, oppressive, or fraudulent
THIS SET IS OFTEN IN FOLDERS WITH...
Intro into business forms
Intro into Corps
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