Business

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

*

Shareholders

Owning shares grants an equitable ownership interest in a corporation.

Shareholders generally have no right to manage the daily affairs of the corporation, but do so indirectly by electing directors.

Shareholders are generally protected from personal liability by the corporate veil of limited liability.

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

*

Shareholders’ Powers

Approving all fundamental changes to the corporation.

Amending articles of incorporation or bylaws.

Approval of mergers or acquisition.

Sale of all corporate assets or dissolution.

Shareholders also elect and remove the board of directors

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

*

Shareholders’ Meetings

Shareholders’ meetings must occur at least annually. Voting requirements and procedures are:

Shareholders may appoint a proxy to vote on their behalf if they cannot attend the meeting.

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

*

Shareholder Voting

• Common shareholder entitled to one vote per share.
• Articles and by-laws can exclude or limit voting rights of certain classes of stock.
• Quorum must be present -- shareholders representing more than 50% of outstanding shares must be present.

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

*

Rights of Shareholders

Shareholders have the right:

To vote.

To have a stock certificate.

To purchase newly issued stock.

To dividends, when declared by board.

To inspect corporate records.

To transfer shares, with some exceptions.

To a proportionate share of corporate assets on dissolution.

To file suit on behalf of corporation.

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

*

Rights of Shareholders continued… Preemptive Rights

Common law concept which is a preference to existing shareholders to purchase newly-issued stock within a certain period of time. Also knows as “rights of first refusal”.

Provided for in the articles of incorporation.

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

*

Rights of Shareholders continued…
Stock Certificates

Certificate which evidences ownership in a certain number of shares in the corporation given to person of record (regardless of who has certificate) gets notices, dividends & reports.

Corporate ownership is intangible personal property.

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

*

Rights of Shareholders continued…
Dividends

Distribution of corporate profits or income.

Only as ordered by the Board.

Can be stock, cash, property, stock of other corporations.

State laws control the sources of revenues for dividends, which may be paid from retained earnings, net profits and surplus.

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

*

Rights of Shareholders continued…
Directors’ Failure to Declare Dividends

When directors fail to declare a dividend, shareholders can sue.

Directors do not have to declare if they have a rational basis for withholding a dividend (a bona fide purpose).

Often, profits are retained for expansion, research or upgrades.

Courts are reluctant to interfere with corporate operations and will not compel directors to declare dividends unless abuse of discretion is clearly shown.

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

*

Rights of Shareholders continued…
Inspection Rights

Shareholders can inspect books for a proper purpose.

But corporation can protect trade secrets & other confidential information.

All shareholders can see list of other shareholders of record.

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

*

Rights of Shareholders continued…
Transfer of Shares

Shares are freely transferable unless restricted by articles and noted on the stock certificate.

New shareholder must be recorded on corporate books.

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

*

Rights of Shareholders continued…
Rights on Dissolution

Shareholders have right to pro-rata share of assets upon liquidation.

Shareholder may petition the court for dissolution of the corporation for following reasons:

Board mishandling corporate assets.

Board deadlocked and irreparable injury will result.

Acts of directors are illegal, oppressive, or fraudulent.

Shareholders are deadlocked for two meetings and can’t elect directors.

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

*

Rights of Shareholders continued…
Shareholder’s Derivative Suit

Shareholders can sue a 3rd party on behalf of the corporation if the Directors fail or refuse to correct the wrong or injury.

Directors may refuse to take action because they might be personally liable.

Any damages recovered go to corporation’s treasury.

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

*

Duties and Liabilities of Shareholders

Shareholders are generally not liable for the contracts or torts of the corporation.

If the corporation fails, shareholders cannot lose more than their investment.

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

*

Majority shareholders own enough shares to exercise de facto (actual) control over the corporation.

Majority shareholders owe a fiduciary duty to corporation and the minority shareholders and creditors when they sell their shares because of the possibility of transfer of control.

Duties and Liabilities of Shareholders
Continued…