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Business Associations II
University of Kansas School of Law
Lovitch, Fred B.

Business Associations II                        Lovitch             Spring 2007                  
Completion of BA I
I.                    Close Corporations
A.     BA I Review of S/H Voting
1.       Straight Voting – x only has 100 shares and can only vote up to 100 votes per candidate. Min s/h will never elect a bod member.
X = Min # of shares needed
S = # of Votes at meeting
N = # of Directors desired to elect
D = # of Bod to be elected
Cumulative Voting – x’s votes = (x’s shares) * (number of bod positions available.) X can distribute these to as many or as few candidates as x wants.
3.       Formula for Cumulative Voting.
 X = (S*N)       
                                                         D + 1                                         
Or alternatively
                                 N= X(D=1)
a.       If the formula yields a fraction round down, unless there are fractional shares.
1.       Mandatory Cumulative voting can be rendered meaningless if the bod is classified. E.g. 6 on bod. 2 are elected every 2 years.
2.       Director Removal – Cumulative Voting would be meaningless if min bod candidates could merely be voted off by a simple majority. Some States give the min bod a veto over there own removal.
B.     Voting Agreements
                                           1.      Ringling Bros. v. Ringling was a case that addressed the validity of vote pooling agreements and their enforceability.
                                           2.      Validity – In general, shareholder voting agreements are valid if they relate to a matter on which shareholders may vote. (Holding in Ringling and now by stat.)
a.       Voting agreements are governed by regular contracting rules.
i.         The consideration for the voting agreement contract comes from the parties’ mutual promises.
b.       They are distinguished from voting trusts
c.       They may be for an indefinite duration
d.       They are subject to change only by agreement of all the parties;
e.       They may not be for some illegal end; and they may not be fraudulent as to other shareholders and/or creditors.
                                           3.      Voting – If the agreement relates to matters beyond shareholder power – such as the board’s management discretion – the agreement may be invalid.
a.       McQuade v. Stoneham –
i.         Directors had a voting agreement that included a provision to maintain one another in their positions.
ii.       Court held that while there is no problem with the voting agreement per se, but the restrictions on directorial discretion were invalid as a matter of public policy and invalidated the entire agreement, including the non-severable vote-pooling provisions.
                                           4.      Enforcement – There are tremendous enforcement problems with voting agreements. Drafting and enforcement of voting agreements should be approached with caution. 
a.       Specific Enforcement:
i.         Courts are split as to whether specific enforcement is an app

enter into voting agreements can obtain an irrevocable proxy to ensure that the shares in which they have an interest are voted as they want.
a.       Agency power coupled with an interest: This exception is applicable to arrangements in which it is understood that the ‘agent’ or power-holder has an interest in the subject-matter to which the power relates, and it therefore not expected to execute the power solely on the power-giver’s behalf – the crux of the normal agency relationship – but on his own behalf as well. 
b.       The irrevocable proxy terminates or becomes revocable when the qualifying interest is extinguished. 
c.       What kind of interest supports an irrevocable proxy? 
§212(e) A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally.
Interest in stock: The most widely recognized interest is when the proxy holder himself has an interest in the stock – e.g., when the proxy holder has an option to buy the stock or