Топик: Rights of shareholders

1.ACTIONS ENTIRELY IN SHAREHOLDER CAPACITY--a controlling sh must NOT act to benefit himself at the expense of the minority shs; i.e., in a transaction where control of the corp is material, he must act with good faith and inherent fairness toward the minority.

2.OBLIGATIONS OF SHAREHOLDERS IN CLOSE CORPORATIONS--both majority and minority shs owe each other an even stricter duty (utmost good faith and loyalty) than is owed by controlling shs in publicly held corps. This duty has been interpreted to mean that there must be equal treatment of all shs, i.e., they must be afforded equal opportunities.

3.DISCLOSURE--a controlling sh must make full disclosure when dealing with minority shs.

4.SALE OF CONTROL--in most jurisdictions, a controlling sh is permitted to sell his stock at a premium, i.e, a price not available to other shs. Exceptions to these rule include a bare sale of office (invalid), the corporate action theory, sales involving fraud or nondisclosure, and knowing sales to transferees who plan to loot or deal unfairly with the corp.

E.SHAREHOLDER SUITS

1.DIRECT (INDIVIDUAL) SUITS--a direct suit may be brought by a sh on his own behalf for injuries to sh interests. If the injury affects a number of shs, the suit may be brought as a class action.

2.DERIVATIVE SUITS--if a duty owed to the corp has been abridged, suit may be brought by a sh on behalf of the corp.

a)Distinguish Direct From Derivative Suits --the test is whether the injury was suffered by the corp directly or by the sh, and to whom the D’s duty was owed

1)Close corporations --in some cases, minority shs have been allowed to bring a direct action against controlling shs for breach of fiduciary duty

b)Prerequisite to Suit--Exhaustion of Corporate Remedies --the P-sh must specifically plead and prove that he exhausted his remedies within the corporate structure

1)Demand on directors --the P-sh must make a demand on the dirs to remedy the wrong, unless such demand would have been futile. Note that in the absence of negligence, self-interest, or bias, the fact that a majority of dirs approved the transaction does NOT itself excuse the demand.

I)Model statutes --under both model statutes, demand should be excused only if it is shown that irreparable injury to the corp would result;

ii)Effect of rejection of demand --if the matter complained of does not involve wrongdoing by the dirs, the board’s good faith refusal to sue bars the action, unless the P-sh can raise a reasonable doubt that the board exercised reasonable business judgment in declining to sue. If the suit alleges wrongdoing by a majority of dirs, the board’s decision not to sue will NOT prevent the derivative suit.

2)Demand on shareholders --in most states, the p-sh must also make a demand on shs unless excused (e.g., the alleged wrongdoing is beyond the power of the shs to ratify). Where demand on shs is required, a good faith refusal to sue by the majority of disinterested shs will preclude the suit.

c)Qualifications of Plaintiff --a few states require the P to be a registered sh; most states also allow a beneficial owner of shares to bring suit. Also, a sh of a parent corp can bring a derivative suit on a subsidiary’s cause of action. Shs cannot complain of wrongs committed before they purchased their shares except:

1)where the P acquires shares by operation of law;

2)in section 16(b) violations;

3)where serious injustice will result;

4)where the wrong is continuing in nature.

The P must fairly and adequately represent the interests of all shs

d)Securities For Expenses --in a number of states, the P, under certain circumstances, must post a bond to indemnify the corp against certain of its litigation expenses, including attorney’s fees, in the event the P loses the suit. a p-sh who loses may also be liable for the court costs incurred by the parties.

e)Defenses --defenses to derivative suit include the SOL and equitable defenses (laches, unclean hands, etc);

f)Settlement And Recovery --any settlement or judgment belongs to the corp, absent special circumstances. Settlement or dismissal of the suit is generally subject to court approval after notice to all shs.

g)Reimbursement to Plaintiff --a victorious plaintiff may be entitled to reimbursement from the corp for litigation expenses;

h)Indemnification of Officers And Directors --indemnification issues arise when officers and dirs are sued for conduct undertaken in their official capacity. If the officer or dir wins on the merits, he may be indemnified. Most statutes also authorize the corp to advance (not pay) expenses in defending against the claim. Statutes vary where the officer or dir settles or loses; they are most liberal concerning indemnification in a third-party suit as opposed to a derivative suit.

I)Liability Insurance --in most states, a corp can obtain liability insurance for its indemnification costs and for any liability incurred by its officers in serving the corporation.