16 terms

Corporations Review

Involuntary Dissolution
Involuntary dissolution may be initiated by one-half or more of the directors. The directors (or whoever is initiating the action) must have grounds for involuntary dissolution. In this case, there are no grounds for involuntary dissolution of RKI. In California, there are several grounds for involuntary dissolution, including situations where the corporation has abandoned its business for more than one year.

The fact that the corporation has not earned profits in a year is not grounds for an involuntary dissolution. Moreover, the facts indicate that RKI has just ceased doing business; since it has not abandoned its business for more than one year, and no other grounds for involuntary dismissal exist, there are no grounds for involuntary dissolution.
Compensating Directors
The corporation is empowered to compensate its directors, and the bylaws or shareholders' resolutions usually provide for compensation. Here, Rita and Fred have set their own earnings in the shareholder agreement, without any input from the shareholders.

Thus, the fact that the compensation was set by Rita and Fred themselves in the shareholder agreement is highly relevant to the issue of whether the compensation clause is valid. The fact that the agreement also appointed Rita and Fred as permanent officers is not highly relevant to the determination as to whether their compensation was appropriate.
Issuing Stock
A corporation may issue stock as payment for services already received by the corporation. However, a corporation cannot issue stock as payment for future services.

A promise to perform future services does not furnish consideration for issuance or re-issuance of shares in California and most other states. Therefore, shares as payment for future legal services is invalid, and Art may not receive shares of the corporation's stock as payment for his retainer.
Amendment By Supermajority
California has special requirements for amendments to the articles that would require greater than a majority vote--a supermajority--for specified corporate actions in corporations with 300 or more shareholders.

Any amendment that includes a supermajority vote requirement must be approved by at least as large a proportion of the outstanding shares as would be required under the amendment for the specified corporate action.

Here, the facts indicate that Web has over 300 shareholders; therefore, it falls within this rule. Any amendment that includes a supermajority vote requirement must be approved by at least as large a proportion of the outstanding shares as would be required under the amendment for the specified corporate action. In this instance, since the vote requirement is 80%, this means that 80% of the outstanding shareholders must vote in favor of the provision.
The board of directors continues to act as the board and has the power to wind up and settle the corporation's affairs during the dissolution proceedings.

Once commencement of the dissolution proceedings has begun, the board of directors has certain powers and duties, including the power to act on behalf of the corporation to elect officers and employ agents and attorneys to liquidate or wind up its affairs.
Selling of Closely Held Shares
That fact that Ruth is the only other shareholder is relevant to the discussion that Dryco is a closely held corporation. Closely held corporations have no secondary market for their shares and therefore, it can be difficult to transfer the shares. If Molly and Ruth are the only shareholders of Dryco, this will likely impact Molly's ability to transfer her shares upon her retirement.

The fact that Molly is a corporate founder is the least important point for the discussion of the sale of her stock. Molly's status as a corporate founder has no legal relevance regarding her retirement and sale of the stock.
Statutory Close Corporation v. Closely Held Corporation
A corporation must elect status as a statutory close corporation. To do so, the corporation must have 35 or fewer shareholders and must file articles of incorporation indicating that it is a closed corporation, and include in the name the words "incorporated," "corporation," or "limited" (as must any corporation).

Although Dryco was a closely held corporation, it was not a statutory close corporation. Status as a "closely held corporation" results from there being no secondary market for the stock. A statutory close corporation, on the other hand, must be formed by an addition to the articles of incorporation indicating this status. Without further action, Dryco is a closely held corporation but is not a statutory close corporation.Thus, Molly and Ruth needed to include in the articles of incorporation that Dryco, Inc. is a closed corporation,
Statutory Close Corp. Mgmt.
In a statutory close corporation, with a small number of shareholders, it makes little sense to appoint a separate board of directors. Thus, such corporations are usually managed by the shareholders themselves rather than a separate board.

A close corporation may be involuntarily dissolved if a shareholder can show to a court that liquidation is reasonably necessary to protect the rights of the shareholder. Thus, just as any other corporation, a statutory close corporation may be involuntarily dissolved.
BOD-Delegation of Powers
The board of directors may delegate its powers to committees, and may generally delegate any power except for enumerated powers that may not be delegated. The power to appoint officers is not one of the powers for which delegation is prohibited, and thus it is a properly delegable power.
Involuntary Dissolution-AG Action
Involuntary dissolution may be sought by the Attorney General where the corporation has fraudulently abused or usurped its corporate privileges or powers. Note that the Attorney General must give at least 30 days written notice to the corporation and the corporation must fail to correct its actions within the 30 days in order for the dissolution to proceed.

Violation of a law that is a ground for forfeiture of corporate existence may result in involuntary dissolution. However, the mere fact that a corporation has violated a law is not sufficient if the law is not a certain type of law (e.g., a corporation may violate a minor regulatory law without being subject to involuntary dissolution).
Shareholder Right to Information
Shareholders have a right to certain information of the corporation according to California law. Accounting books and records and minutes of shareholder and director meetings must be open to shareholder inspection so long as the purpose is reasonably related to the shareholder's interest in the corporation.

Assessing the value of one's investment is related to a shareholders interest in the corporation. Moreover, the fact that the shareholder owned only two percent of the stock is irrelevant, as every shareholder is entitled to this information.
Revocability of Proxies
Proxies are generally freely revocable. In this case, the shareholder revoked his proxy by explaining that he did not want to vote on the merger. Although a proxy may only be created in writing, proxies are freely revocable either orally or in writing. Thus, an oral revocation of the proxy in this case was valid.

Note that a proxy is only irrevocable if it is coupled with an interest in the shares or if the proxy instrument specifically states it is irrevocable. Here, the facts do not indicate that the proxy was irrevocable. Therefore, the proxy vote was not valid at the time the vote was cast as it had already been revoked by the shareholder.
Cumulative Voting
In cumulative voting, the number of shares to be voted are multiplied by the number of positions to be elected. A shareholder may use all of his cumulative votes to elect one or more directors. The proper formula to use is: shares required = [(number of shares voting) x (directors to be elected)] / [(directors to be elected) + 1] +1. In this case, it is (300 x 1)/(3+1)) +1 = 76. As such, one director may be elected by 76 shares.
Amending Articles of Incorp. w/out SH Approval
Although amendment of the articles of incorporation generally requires shareholder approval, a corporation may make minor amendments such as deleting the names and addresses of the initial directors without approval of the shareholders.

But generally, a majority of the outstanding shares must approve the amendment, not a majority present at the meeting. Thus, for example, if there are 1,000 outstanding shares and the holders of 501 shares vote upon the amendment, all 501, rather than 251, must approve the amendment.
In a merger, one corporation is absorbed into another corporation, which survives. For example, A Corporation and B Corporation merge, with A Corporation surviving. California law specifically provides that a corporation may merge with another form of business entity, such as a limited partnership.

It is true that in California, a corporation is permitted to merge with another form of business entity, such as a limited partnership. However, it is not because California law is silent on the subject.
Sale of All Assets
Instead of merging with another corporation, a corporation may choose to acquire the other corporation by buying all its assets. While the board of directors generally may dispose of corporate property without shareholder approval, a sale of all or substantially all of the corporation's assets requires the approval of both the boards of directors and, if not made in the regular course of business, by a majority of the outstanding voting shares.