#11686 - Close Corporations - Business Association (Duke Cox)

Type of corporation with characteristics similar to partnerships

1. Small number of shareholders; usually have large stake

2. Substantial majority shareholder participation in management, direction, and operation of corporation

3. Shares generally not traded in a securities market; transferability is difficult

Voting Trusts: presumed irrevocable, transfer shares to trustee, must report to corporation

1. MBCA 7.30

Voting Agreements

1. Voting agreements are contractual proxy agreements between shareholders to vote a certain way

2. Normally valid

3. MBCA § 7.31: Voting Agreements

   1. “Two or more shareholders may provide for the manner in which they will vote their shares by signing an agreement for that purpose. A voting agreement created under this section is not subject to the provisions of § 7.30. A voting agreement created under this section is specifically enforceable.”

4. MBCA §7.32 – authorizes shareholder’s agreements that govern the exercise of corporate powers or the management of the business and affairs of the corporation or the relationship among the shareholders, the directors, and the corporation.

5. MBCA §7.32(b) – Agreement is authorized if approved unanimously by shareholders in articles or bylaws

DE § 218: Voting Trusts and Other Voting Agreements

1. (c) An agreement between 2 or more stockholders, if in writing and signed by the parties thereto, may provide that in exercising any voting rights, the shares held by them shall be voted as provided by the agreement, or as the parties may agree, or as determined in accordance with a procedure agreed upon by them.

2. (d) Overcomes refusal to uphold secret voting trusts in Ringling

If the agreement harms minority shareholder or creditor interest, court may render it invalid

Irrevocable Proxies

1. Usually, proxies are revocable

2. Classic agency relationship—shareholder is the principal, and proxy holder is the agent

3. irrevocable if the agent, or power-holder, has an interest in the company (e.g. if the stock is pledged as collateral for a loan; or if someone purchase the shares after the record date, and the seller gives the buyer a proxy to vote)

General rule: MBCA § 8.01(b) requires that bd. make decisions w/o constraints of outside Ks.

In Closed corporations: director’s voting agreements will be treated as simple private ordering subject to normal contract law where: (1) all interested parties (probably SH) agree (2) there is no 3P (creditor) reliance.

Equal opportunity to sell shares: Donahue -in Massachusetts

1. Majority SH have a fiduciary duty to minority SH similar to the fiduciary duty between partners

2. equal opportunity must be given for all holders to sell their share

3. This equal opportunity rule is probably not recognized in Del. (see below)

   1. In Del: Nixon stands for the proposition that basic corporate law standards still apply in close corporations.

Rosenthal: specific fiduciary duties owed by the business associates in a close corporation to each other:

1. To act with that degree of diligence, care and skill which ordinarily prudent persons would exercise under similar circumstances in like positions;

2. To discharge the duties affecting their relationship in good faith with a view to furthering the interests of one another as to the matters within the scope of the relationship; (unique to close corporation)

3. To disclose and not withhold from one another relevant information affecting the status and affairs of the relationship;

4. To not use their position, influence or knowledge respecting the affairs and organization that are subject to the relationship to gain any special privilege or advantage over the other person or persons involved in the relationship.

Wilkes balancing test- fiduciary duty in CC

1. Burden of persuasion is on majority to articulate a legitimate business purpose for the action

2. Minority must then demonstrate that the same legitimate objective could have been achieved through an alternative course of action less harmful to the minority’s interest

3. Court must balance the legitimate objective against the practicality of the alternative.

Delaware law- no heightened duty.

1. Under Delaware law (Nixon v. Blackwell) fiduciary duty of a SH in close corporation is triggered only if majority SH cannot show any rational business justification for treating minority SH unequally.

§ 7.28(b) Shareholders do not have a right to cumulate their votes for directors unless the articles so provide.

7.27 (a) The articles of incorporation may provide for a greater quorum or voting requirement for shareholders (or voting groups of shareholders) than is provided by this Act.

1. (b) An amendment to the articles of incorporation that adds, changes, or deletes a greater quorum or voting requirement must meet the same quorum requirement and be adopted by the same vote and voting groups required to take action under the quorum and voting requirements then in effect or proposed to be adopted, whichever is greater

§ 8.24: Articles or bylaws may require a greater quorum of board than majority of fixed number or prescribed number, the default is majority vote.

Del.

1. §141(b): Majority of total number of directors is a quorum unless articles or bylaws provide for a greater number

2. §216: Articles or bylaws may specify number of shareholders for a quorum or voting requirement

Application

1. Wilkes could have prevented the board from refusing to reelect him by insisting that the articles of incorporation specifically provide for cumulative voting in the election of directors.

2. other shareholders could simply vote to abolish the cumulative voting provision

   1. Wilkes can use 7.27 to require a larger quorum to amend AoI

3. other shareholders could take board action against Wilkes by the vote of a simple majority.

   1. Wilkes can use 8.24 to require super quorum for board action

MCBA§6.27 (a) the articles of incorporation, bylaws, an agreement among SH, or an agreement between SH and the corporation may impose restrictions on the transfer or registration of transfer of share of the corporation.

1. A restriction does not affect the shares issued before the restriction was adopted UNLESS:

   1. the holders of the shares are parties to the restriction agreement, or

   2. [the holders of the shares] voted in favor of the restriction.

(b) Certificates must note conspicuously that shares are subject to transfer restrictions. Even if not conspicuous, transfer restrictions are enforceable against any transferee with knowledge.

1. Not enforceable against people without knowledge of the restrictions

(d) A restriction on the transfer or registration of transfer of shares may:

1. obligate the shareholder first to offer the corporation...