Shareholder Voting

General Voter Rule

The record shareholder as of the record date may vote at the meeting

Record shareholder

the person shown as the owner in the corporate records

Record date

The voter eligibility cut-off date. It is fixed by the board of directors but may not be more than 70 days before the meeting. If no date was set, the record date is deemed to be the day the notice of the meeting is mailed to the shareholders.

Exceptions to General Voter Rule

Treasury Stock exception, Death of a Shareholder, and Voter by Proxy.

Treasury Stock Exception

If the corporation reacquires a share before the record date, it does not get to vote with that share

Voting by Proxy

A shareholder may vote in person or by proxy executed in writing. A proxy is: (1) a writing (fax and email OK); (2) signed by the record shareholder (email is fine if sender can be identified); (3) directed to the secretary of the corporation; (4) authorizing another to vote the shares.

Revocation of Proxy

A proxy is generally revocable by the shareholder and may be revoked: (1) by the shareholder attending the meeting to vote in person; (2) in writing to the corporate secretary; or (3) by subsequent appointment of another proxy

Irrevocable Proxies

A proxy will irrevocable only if it states that it is irrevocable and is coupled with an interest or given as security. This requires: (1) the proxy says it is irrevocable; and (2) the proxy holder has some interest in the shares other than voting

Statutory Proxy Control

The rules governing proxy solicitation provide that: (1) there must be full and fair disclosure of all material facts with regard to any management-submitted proposal upon which the shareholders are to vote; (2) material misstatements, omissions, and fraud in connection with the solicitation of proxies are prohibited; and (3) management must include certain shareholder proposals on issues other than election of directors and allow proponents to explain their position

Shareholder “block voting”

Shareholder block voting may be done by a voting trust or a voting agreement

Voting Trust

A voting trust is a written agreement of shareholders under which all of the shares owned by the parties to the agreement are transferred to a trustee, who votes the shares and distributes the dividends in accordance with the agreement. The trust is not valid for more than 10 years unless extended by agreement (this has been eliminated in the most recent MBCA).

Requirements of a Voting Trust

(1) a written trust agreement, controlling how the shares will be voted; (2) a copy of the agreement, including names and addresses of the beneficial owners of the trust, is given to the corporation; (3) legal title to the shares is transferred to the voting trustee; and (4) the original shareholders receive trust certificates and retain all shareholder rights except for voting

Requirements for Voting Agreements

Rather than a trust, shareholders can enter into a voting (or “pooling”) agreement so long as the agreement is (1) in writing and (2) signed. Only some states specifically enforce these agreements

Convening Shareholder Meetings

Shareholders usually take action at a meeting, or they can act by unanimous consent signed by the holders of all voting shares. The meeting need not be held in the state of incorporation. There are two kinds: annual meetings and special meetings.

Annual Meetings

Corporations must hold annual shareholders’ meetings. If the annual meeting is not held within the earlier of six months after the end of the corporation’s fiscal year, or 15 months after its last annual meeting, a shareholder can petition the court to order a meeting. Primarily, these are to elect directors

Special Shareholder Meetings

Special meetings may be called by: (1) the board of directors; (2) the president; (3) the holders of at least 10% of outstanding shares; or (4) anyone as authorized in the articles or bylaws

Shareholder Meeting Notice

Shareholders must be notified of meetings not fewer than 10 or more than 60 days in advance of the meeting. Notice must be in writing to every shareholder entitled to vote. Notice may be waived in writing or by attendance.

Contents of Notice to Shareholders

The notice must state: (1) the date; (2) the time; and (3) the place of the meeting. For special meetings; the notice must also state (4) the purpose of the meeting. Shareholders cannot do anything else at the special meeting that is not listed in the purpose

Consequences of Failure to Give Proper Notice

If proper notice is not given to all shareholders, whatever action was taken at the meeting is voidable (or maybe void) unless those who were not sent notice waive the defect. This waiver can occur in two ways: (1) express waiver, meaning in writing and signed anytime; or (2) implied waiver, meaning the shareholders attending the meeting without objecting at the outset

Things Shareholders get to vote on

(1) electing directors; (2) removing directors; (3) fundamental corporate changes; and (4) anything else the board asks for a shareholder vote on

Shareholder Quorum

A quorum must be represented at the meeting. Determination of a quorum focuses on the number of shares represented, not the number of shareholders. The general rule is that a quorum is the majority of outstanding shares entitled to vote, unless the articles or bylaws require a GREATER number. A quorum will not be lost if shareholders leave the meeting.

Shareholder Approval Threshold

If a quorum is present, generally the shareholders will be deemed to have approved a matter if the votes cast in favor exceed the votes cast against, unless the articles or bylaws require a greater proportion

Cumulative Voting Applicability

Tends to come up only in close corporations. It gives smaller shareholders a better chance of electing someone to the board of directors, and is only available when shareholders elect voters

Cumulative Voting Mechanics

There is one at-large election, and the top (however many) finishers are elected to the board. Shareholders get a number of votes equal to their number of voting shares times the number of directors to be elected. The total number may be divided among the candidates in any manner, including using all votes on the same candidate

Cumulative Voting Availability

Generally, there is no cumulative voting unless provided for in the articles of incorporation

Class Voting on Article Amendments

Whenever an amendment to the articles of incorporation will only affect a particular class of stock, that class had a right to vote on the action even if the class otherwise does not have voting rights

Shareholder Resolutions

Shareholders are permitted to submit resolutions or proposals for action at shareholder meetings. Shareholder resolutions that seek to bind the corporation or the board should involve a proper subject for shareholder action, such as seeking amendment of bylaws

Restricting Stock Transfers

Restrictions are valid if they are not an undue restraint on alienation. The right of first refusal is valid.

Enforcing Restrictions Against Transferees

If a restriction is reasonable and valid, it cannot be enforced against the transferee, a third party purchaser, unless: (1) the restriction is conspicuously noted on the stock certificate or is contained in the information statement for uncertificated shares; or (2) the transferee had actual knowledge of the restriction at the time of purchase

Shareholder Inspection Rights

A shareholder has the right, personally or by agent, to inspect (and copy) the books and records of the corporation. Generally, any shareholder can demand access.

Shareholder Unqualified Inspection Rights

Any shareholder may inspect the following records regardless of purpose: (1) the corporation’s articles and bylaws; (2) board resolutions regarding classification of shares; (3) minutes of shareholder meetings within the last three years; (4) communications sent by the corporation to shareholders in the last three years; (5) a list of names and business addresses of the corporation’s current directors and officers; and (6) a copy of the corporations most recent annual report. The shareholder must make a written demand at least five business days in advance

Shareholder Qualified Inspection Rights

For more controversial things, such as: (1) excerpts of the minutes of board meetings; (2) the corporation’s books, papers, and accounting records; and (3) shareholder records, the shareholder must state a proper purpose for the demand. A purpose is proper if it is reasonably related to the person’s interest as a shareholder. 5 days written notice is required. The shareholder may send an attorney, accountant, or other agent to do the inspection

Failure to Allow Proper Shareholder Inspection

If the corporation fails to allow proper inspection, the shareholder can seek a court order. If they win, they can recover costs and attorneys’ fees incurred in making the motion

Distributions, generally

Distributions are payments by the corporation to shareholders

Types of Distributions:

(1) dividends; (2) repurchase of shares; (3) redemption of shares; (4) distribution of assets upon liquidation, etc.

Rights to Distributions

At least one class of stock must have a right to receive the corporation’s net assets on dissolution. Beyond this, distributions are generally discretionary

Declaration Solely Within Board’s Discretion

Even if the articles authorize distributions, the decision whether to declare distributions is generally solely within the directors’ discretion, subject to solvency and any provisions to the contrary in a shareholders’ agreement or the articles. A shareholder has a “right” to a dividend or other distribution only when the board declares it

Compelling Distributions

The shareholders generally have no right to compel a distribution, and it is difficult to win a suit doing so. An action to compel a distribution is direct and not derivative. To win, the plaintiff must make a very strong showing of abuse of discretion. Ex: the corp consistently makes profits but the board refuses to declare a distribution while paying themselves a bonus

Preferred Stock

Preferred stock is paid before common stock is paid. The right to the preferred dividend may or may not accumulate if unpaid in a particular year, or may accumulate only if there are sufficient earnings. Preferred shares have no right to a share of the distributions made on common shares unless the preferred shares provide that they are “participating”

Shareholder Rights After Declaration

Once a distribution is lawfully declared, the shareholders generally are treated as creditors of the corporation and their claim for the distribution is equal in priority to the claims of other unsecured creditors. However, a distribution can be enjoined or revoked if it was declared in violation of the solvency limitations, the articles, or a superior preference right

Article Restrictions on Declaring Distributions

The articles may restrict the board’s right to declare, for instance by conditioning declarations on a certain amount of profits

Share Dividends

Distributions of a corporation’s own shares to its shareholders are excluded from the definition of distribution. Shares of one class or series may not be issued as a share dividend in respect of shares of another class or series unless: (1) the articles so authorize; (2) a majority of the votes entitled to be cast by the class or series approves the issue; or (3) there are no outstanding shares of the class or series to be issued

Funding Distributions: Traditional Rules

The distribution may be made from: (1) the earned surplus; and (2) the capital surplus, if shareholders are notified, but not the Stated Capital.

Earned Surplus

All Earnings minus all losses minus distributions previously paid

Stated Capital

This is generated by issuing stock, as is capital surplus. When the corp issues stock, it has to allocate between stated capital and capital surplus. Stated capital can never be used for distribution

Capital Surplus

Computed based on payments in excess of par plus amounts allocated in a no-par issuance. Can be used for distribution if you inform the shareholders

Modern Distribution Rule

A corporation cannot make a distribution if it is insolvent or the distribution would render it insolvent. This means that a distribution is not permitted if, after giving it effect, either: (1) the corporation would not be able to pay its debts as they become due in the usual course of business; or (2) the corporation’s total assets would be less than the sum of its total liabilities

Director Liability for Unlawful Distribution

Directors are jointly and severally liable if they agree or assent to an unlawful distribution. They are liable to the corporation for the amount of the distribution that exceeds what could have been properly distributed. A director is not liable for distributions approved in good faith: (1) based on reasonable financial statements; or (2) by relying on reasonable information from officers, employees, etc.

Unlawful Distribution: Director Contribution

A director who is held liable for an unlawful distribution is entitled to contribution from: (1) every other director who could be held liable for the distribution; and (2) each shareholder for the amount she accepted while knowing the distribution was improper