Assignment:
Short Essay Analysis
Beta Investments Corporation ("Beta") is a New York corporation in the business of developing real estate. Arnold and Tom are all of the directors. Arnold is also the majority shareholder of Beta holding 85 shares of common stock out of a total of 100 shares issued and outstanding. Diana, who is neither an officer nor director, owns the other 15 shares of common stock. Margaret, the President of Beta, is not a director and owns no stock.
Arnold is also the sole shareholder of another corporation, Commercial Property, Inc. ("Commercial Property"). Commercial Property obtains an option on a piece of real estate that is suitable for development by paying $1,500 which if exercised allows Commercial Property to purchase the property for $50,000. As the majority shareholder and one of its directors, but without consulting Tom, Arnold orders Margaret to cause Beta to purchase the land from Commercial Property for $100,000. Arnold then has Commercial Property buy the land and sell it to Beta, and loan the money to Beta for the purchase at a 10 percent annual interest rate.
Diana complains to Beta's board about the arrangement, which takes no action. Diana files a shareholder's derivative suit against Arnold on Beta's behalf.
In no more than one double spaced typed page, discuss whether Diana should prevail in the lawsuit against Arnold, and if so, the remedy that should be awarded by the court, setting forth your reasons for any conclusions stated.
Roles Within the Corporation
i. Shareholders
A. Generally
• Owners of the corporation
• Elect the Board of Directors
• Amend the Certificate of Incorporation
• Responsible for approving mergers and the sale of substantially all of the assets of the corporation
B. Action By Shareholders
(1) Formal Meetings - required unless 100% consent in writing to an informal meeting
(2) Procedures for Formal Meetings
aa. Generally called by the Board
bb. Notice must be given
To those who are shareholders as of the record date
If anyone is not given notice, any transactions approved at the meeting may be invalidated
If notice is related to the election of directors, the election is void.
(3) Votes - Can be by
a. proxy
Must be written
It is revocable (even if it says it is irrevocable) unless (1) it says it is irrevocable, and (2) it is a proxy coupled with an interest.
Standard is one vote for each share owned, unless there is a provision for Cumulative Voting
The right to cumulative voting must be provided for in the Certificate of Incorporation
# of votes = # of shares x # of directors to be elected
Total votes can be cast in any manner (e.g. all for one director or spread out)
Allows minority shareholders to pool shares and vote for a representative to the Board.
b. Voting Trusts
Shareholders transfer shares to a trust for the purpose of conferring the right to vote (allows shareholders to pool votes)
Maximum period - 10 years
(4) Quorum
Definition - The number of shares which must be represented, either in person or by proxy, to have a valid meeting. Number is:
• Usually a majority of shares
• Can be lower (as low as 1/3) if provided for in the certificate or By-laws
• Can be increased above majority only by a provision contained in the certificate of incorporation
C. Fiduciary Duty - None
• Shareholders may sell their shares (barring restrictions) even if the sale is not in the best interest of the remaining shareholders
Board of Directors
A. Generally
• Manage the corporation
• Set dividends, compensation for officers.
Deductibility of compensation for publicly held corporations is limited to $1,000,000/year
• Serve as watch dog via audit committee required of all stock exchange corporations (Sarbanes-Oxley)
Made up of independent outside directors and at least one financial expert who have no contracts or former salary ties to the corporation
Job is to assure accuracy of financial reports issued.
• Elected by shareholders
B. Requirements
(1) Number
• Minimum of 1
(2) Minimum Age - 18
(3) Term - Until the next annual meeting and until a successor is validly elected
C. Removal
(1) For Cause - (e.g. misappropriation of funds) - Can be done by:
a. Shareholders; or
b. Board, but only if provided for in the (1) Certificate of Incorporation, or (2) By-Laws.
(2) Without Cause - Can be done by the shareholders but only if provided for in either the (1) Certificate of Incorporation or (2) By-Laws, adopted by the shareholders.
D. Actions By Directors
(1) Formal Meetings - required unless 100% consent in writing to an informal meeting
• Meetings via phone conferences or closed circuit T.V. - permitted unless restricted by the Certificate of Incorporation or By-Laws
Shareholder's Derivative Suit
A. What is it? One or more shareholders commence and pursue an action on behalf of the corporation. (Shareholder bring a law suit in the name of the corporation)
B. Rules - In order to commence an action on behalf of the corporation, shareholder must:
(1) Show continuous ownership between the time of the transaction through final judgment.
(2) Make a demand on the Board to commence the action, which the Board has denied, unless such a demand would be futile (e.g. The action is to be commenced against the members of the Board)
(3) No settlement permitted without court approval
(4) Post a bond to cover the cost of defense if the shareholders bringing the lawsuit own less than 5% of the stock or $50,000 in value
6. Share Transfer
a. General Rule - Law forbids unreasonable restraints on alienation of shares
• A prohibition is unreasonable
• A restriction is reasonable (e.g. must sell to the corporation or other shareholders before stock can be sold to an outsider)
• Restriction is valid only if one has actual knowledge or a reference is noted on the stock certificate
b. Method
• Sign on the reverse side of the stock certificate
• Use of a stock power
• Post a bond if certificate is lost (UCC §8-405)
7. Amendments
a. Rule - If an item would be legal in the original certificate of incorporation, it is a valid subject for amendment
b. Who Amends?
i. Board of Directors - can make certain changes (e.g. address, location)
ii. Board and Shareholders - required to make all other changes and amendments (e.g. change the name of the corporation, duration, purpose, increase/decrease number of shares, par value)
• Approval is by majority vote of the shares in each group
iii. Other Approvals Required - In addition to the Board and shareholders, the majority vote of the shares of any group adversely affected if the amendment will affect any of the following:
(1) Preference stock
(2) Preemptive rights
(3) Voting rights
(4) Redemption rights