Close Corporations

A. Close Corporations: Special or Non-Special Area

1. 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

B. SH Voting Arrangements

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

   1. MBCA 7.30

2. 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

3. 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

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

5. 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)

C. Directors’ Voting Agreements

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

2. 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.

D. Fiduciary Obligations in Close Corporations

1. 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.

2. 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.

3. 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.

4. 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.

E. Supervoting and Super Quorum Provisions

1. § 7.28(b) Shareholders do not have a right to cumulate their votes for...

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