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Chapter 44 Shareholders' rights & liabiliites

by: Mina Riazi

Chapter 44 Shareholders' rights & liabiliites BLAW703

Marketplace > Kansas > Business > BLAW703 > Chapter 44 Shareholders rights liabiliites
Mina Riazi
GPA 3.53
Legal Aspects of Business Orginizations
Jamison Shipman

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About this Document

Chapter 44 discusses in detail the shareholders role in a corporation, their rights and liabilities. Shareholders in Nonprofits and For-profits corporations are compared.
Legal Aspects of Business Orginizations
Jamison Shipman
Class Notes
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This 7 page Class Notes was uploaded by Mina Riazi on Saturday March 7, 2015. The Class Notes belongs to BLAW703 at Kansas taught by Jamison Shipman in Fall. Since its upload, it has received 183 views. For similar materials see Legal Aspects of Business Orginizations in Business at Kansas.


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Date Created: 03/07/15
Chapter 43 review Duty of care 1 General BJR 2 Tender Offer BJR 3 Reasonable persondepends on the facts circumstances Duty of loyalty 1 Con icts of Interestintrinsic fairness test arms length 2 Usurping corporate opportunity 3 Oppression of minority of shareholders a Total fairness test b Business purpose test 4 Insider trading Chapter 44 Shareholders39 Riohts and Liabilities Shareholder39s role a Electing and removing directors b Voting on important decisions c Making sure the corporation39s managers are abiding by applicable state corporation statute articles of incorporation and the bylaws Shareholders39 Meetings a Annual meeting is held to elect new directors b Shareholders with 10 ownership can call a special meeting requires immediate action c Corporation must give notice of annual and special meetings Special v annual meeting notices a Special meetingsthe notice must list the purpose of the meeting b Annual meetingnotice need not include the purpose of the meeting uness shareholders have asked for an extraordinary corporate change 0 Only shareholders of record are entitled to vote at shareholders meetings Conduct of Meetings A quorum of outstanding shares must be represented at the meeting to conduct business at a meeting a Each class of shares must have a quorum majority of shares outstanding b Majority vote usually will decide issues Shareholder39s right to full participation includes the right to a offer resolutions b to express thoughts for and against a proposed resolution c ask questions of the of cers Shareholders are permitted to act without a meeting if all the shareholders entitled to vote consent to the action in writing Shareholder Control Devices a Voting trustsshareholders can transfer their shares to voting trustees and receive voting trust certi cates in exchange a Shareholders keep their rights to dividends b Voting trustees get to vote for directors and other matters c Supposed to control the corporation by have the voting power vested in participating shareholders d Ensures that the shareholders group will control the corporation despite the creation of differences e Usually last 10 years unless shareholders agree otherwise b Shareholder voting agreementsshareholders form an agreement about how they ll vote a Shareholder voting agreement must be written b Only the shareholders who have signed the agreement are bound by it c Unlike voting trusts they do not have to be led in the corporation39s of ces c Proxiesappointing a person to vote for their shares a Usually limited to 11 months unless stated otherwise b An ordinary proxy is revocable at any time c A proxy is irrevocable if it is coupled with an interest lrrevocable proxies are used with shareholder agreements Require shareholder action a Fundamental changes to the structure or business of a corporation b Amendments to the articles of incorporation c Merger and consolidations both companies39 shareholders must approve d Share exchange selling shareholders must approve e Dissolution requires shareholder approval 0 The shareholder approval of a surviving corporation isn39t required if the merger doesn39t change the business or reduce voting and dividend rights Dissenter rights a Dissenters do not agree with the majority of shareholders and can either sell their shares or remain shareholders b Dissenters39 rights of closely held corporations require corporations to pay the dissenting shareholders the fair value of their shares Dissenter shareholder must a Have the right to vote b Not vote in favor of the transaction Shareholders39 information and inspection rights a Most state corporation statutes speci cally grant shareholders inspection rights b MBCA grants absolute right to 1 Right to inspection of a listing of the shareholders entitled to notice of a meeting 2 Right to inspection of articles bylaws and minutes of shareholder meetings from the past three years 3 Right to receive information that is important to their voting and investing decisions nancial statements d The demand of inspection should be in a good faith and b proper purpose no adverse interest Preemptive Right a Issuance of additional shares leads to the shareholder39s shares lowering in value lower voting power dividend and liquidation rights b The corporation may give existing shareholders a percentage of the new shares so that their ownership doesn39t change Preemptive right c Does not exist unless its stated in the articles Distributions to shareholders Similarities between all distributions 1 corporate assets are transferred to shareholders 2 an asset transfer to shareholders may harm the corporation39s creditor s claims against assets 1 Dividends a Cash or property dividends i Declared by the BOD and paid on a speci c date ii Once a dividend is declared it becomes a debt of the corporation iii Only cash and property dividends have are considered iv Preferred dividendsthere39s a set dividend rate stated in the articles of incorporation If the dividend is not mandatory then BOD can determine when and what amount to pay the dividend v Cumulative preferred dividendsunpaid dividends cumulate into a liability that must be paid out before regular dividends are paid out b Two limits on paying dividends i Solvency testinsolvent corporations can39t pay debts in normal business can39t make dividends ii Balance sheet testcorporations may pay dividends to the extent it has excess assets that aren39t needed to cover liabilities c Share dividends and share splits i Corporations distribute more shares of the corporation to their shareholders keeps the cash in the corporation ii Share dividendsa speci ed percentage of outstanding shares is declared by the board of directors It may be revoked after its declared iii Share splitshareholders receive a speci ed number of shares in exchange for each share that they currently own Can also happen in reverse reverse sharesplit but it requires shareholder action to amend the articles iv Share dividends and share splits do not change the value of the corporation or the shareholder39s wealth d Share repurchasesrepurchasing shares from shareholders Two kinds 1 Redemptionright to force an involuntary sale by a shareholder at a xed price a Right of redemption must be stated in the articles b Unlike preferred shares common shares are not subject to redemption 2 Openmarket repurchasecorporation repurchases their shares on the open market voluntarily from a shareholder who is willing to sell them Ensuring a shareholder39s return on investment Minority shareholders in closelyheld corporations usually have a hard time getting dividends Ensuring a return a b A mandatory dividend Demand employment and a salary Shareholders39 Lawsuits a Shareholders39 individual lawsuitsshareholder sues in their own name to prevent a breach of the shareholder39s contract Reasons 1 to prevent the corporation from doing an ultra vires act 2 to enforce a right to inspection 3 enforce preemptive rights b Shareholder Class Action Suits a b if many shareholders have been affectedharmed then one of these shareholders may bring a class action on behalf of all shareholders a shareholder who successfully brings a class action must get reimbursed from the award for his reasonable expenses including attorney fees If a class action suit is unsuccessful and doesn39t have a reasonable foundation sometimes the court makes the suing shareholder pay the defendants reasonable litigation expenses and attorney fees c Shareholder derivative actions a General rule a shareholder doesn39t have the right to sue someone who harmed the corporation in his own name or recover damages for himself even though the value of the shareholder may be impaired Exceonns 1 Directors failed to pursue a corporate cause of action 2 Derivative actionderivative suit against the CEO on behalf of the corporation It can also be used to bring a corporate claim against an outsider If a derivative action is successful damages are awarded to the treasury for the bene t of the corporation and the suing shareholder only gets reimbursed for reasonable attorney fees Eligible shareholders 1 The person suing must be a shareholder who also had shares when the alleged wrong happened 2 Must fairly and adequately represent the interests of the shareholders in a similar situation Doublederivative suita shareholder of a subsidiary sues the parent corporation regularly permitted by the court Demand on directorsshareholders must make a demand to the BOD to bring a suit 1 Demandinforms the BOD that the corporation may have the right to sue someone 2 Once the demand is approved by the BOD and the board decides to bring the suit then the shareholder may institute a derivative suit 3 A shareholder can initiate a suit without a demand if the board is unable to make a disinterested decision if they should sue So if the BOD is interested in the transaction the demand is futile 4 Usually a BOD must approve of a demand because the decision to bring a lawsuit is an ordinary business decision business judgment rule applies Shareholder litigation committee SLCpurpose is to decide whether or not to sue Directors must 1 Not be defendants in the derivative suit 2 Not interested in the challenged action 3 Independent of the defendant39s directors 4 Preferably not directors at the time of wrongdoing SLCs decision to not to sue may prevent the shareholder from suing SLC members must be a independent b disinterested c make a reasonable investigation if the demand should be dismissed and d act in good faith 0 A court allows a shareholder that has a valid defense and gets refused by the directors to defend their breach of duciary duty to defend for the bene t of the corporation shareholders and creditors Shareholder Liability Shareholder liability for illegal distributionsdividends and distributions are received with the knowledge of their illegality 1 Liability falls primarily on the directors 2 Directors do get a contribution from shareholders who knew the share was a illegally made Shareholder liability for corporate debts 1 Defective attempts to incorporate and piercing the veil can make a shareholder liable for corporate debts beyond their contribution to the company Sale of a control block of shares 1 2 3 The per share value for a majority shareholder of a corporation is more that the per share value of the minority shareholder39s shares Shareholders who can sell their shares at a premium can39t be liable to the company unless the premium is coupled with wrongdoing Purchasers with shortterm interests a History of mismanagement and personal use of corporate assets b Lack of interest in the physical facilities c Their particular interest in the liquid assets Members39 Rights and Duties in Nonpro t Corporations 1 Members can use the facilities of the corporation or consume its output and are obligated to pay the corporation periodically with cash or labor 2 All members have equal rights and obligations for voting dissolution redemption of membership and transfer of membership unless stated otherwise in the articles Members39 meeting and voting rights Must have one annual meeting Members must have 5 ownershipvoting power to call a special meeting Members on record have one vote unless stated otherwise in the articles Must have a quorum to act 10 on the votes entitled to the matter lt13 of the voting power must be present to vote on matters not in the meeting notice Members have the right to remove directors without cause To approve of a matter 23rds of members or the majority of voting power need to approve by voting 8 For meetings about important matters mergers members need to have a fair and reasonable notice 9 Voting agreements can39t last more than 10 years 10Members can act without a meeting if 80 agree in writing P PWF gt191 Member inspection and information rights 1 Similar to forpro t corporations right to inspect with the demand being in good faith and proper purpose 2 Religious corporations can abolish or limit the right of a member to inspect any corporate record Resignation and Expulsion of members 1 A member can resign at any time but a member can39t sell or transfer their membership to another person 2 Nonpro ts can easily expel a member as long as they follow procedures that are fair reasonable and carried out in good faith Derivative Suits 1 A derivative action can be made by members with 5 voting power or 50 members 2 If the action is successful members will get reimbursed for legal fees Dissolution and termination of Corporations 1 A corporation can be dissolved by its directors or shareholders 2 Directors must adopt a dissolution resolution and the majority of shareholders must agree with dissolution 3 Need to le articles of dissolution to the secretary of state 4 The secretary of state can also dissolve a corporation if they ve a not led their annual report b not paid its annual franchise tax cappointed or maintained a registered of ce or agent in the state dthe corporation39s period of duration has expired must give the corporation 60 days to x their faults before the secretary can dissolve them Winding up and termination 1 A dissolved corporation can continue to exist but it can39t carry on business unless it39s neededappropriate when winding up its affairs 2 Winding upan orderly collection and disposal of assets and the distribution of the proceeds 3 Order of distribution of proceeds 1 Creditors 2 Preferred shareholders 3 Common shareholders Dissolution of nonpro t corporations is similar to forpro t dissolutions They may be dissolved voluntarily administratively orjudicially


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