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Business Associations II
University of Kansas School of Law
Hecker, Edwin Webb

 
BUSINESS ASSOCIATIONS
HECKER
SPRING 2014
 
 
 
 
I.                  CLOSE CORPORATIONS
 
–          Statutory Close Corporations
v  Defined/Requirements
§  DGCL § 342(a) – A close corporation is a corporation organized under this chapter whose COI contains the provisions required by §102 of this title and, in addition, provides that:
·         (1). Not exceeding 30 shareholders; and
·         (2). One or more restrictions on the transfer of stock from §202
·         (3). No public offering
§  DGCL §343 – Formation
·         The Certificate of Incorporation must state that it is a close corporation and abide by the provisions in §342
§  DGCL §344 – Election of existing corporations to become a close corporation requires a vote of the holders of record of at least 2/3 of the shares of each class of stock of the corporation that are outstanding
§  DGCL §354 – Allows a close corporation to act as a partnership, based on voting per capita
·         If a corporation is not a statutory close corporation, then the court will not afford all of the remedies afforded to shareholders of statutory close corporations
–          Cumulative Voting – DGCL § 214
v  Not restricted to close corporations – available to other types of corporations
v  Formula
§ 
 
v  Example:
§  A – 300 shares and director
§  B – 300 shares and director
§  C – 300 shares and director
·        
·        
v  Quorum for Shareholder Meeting – DGCL §141(b)
§  Generally, a majority of all directors
§  Vote required if 3 present – 2
§  Voted required if 2 present – 2, because 1 in this case is not a majority
v  Votes Needed for Action
§  Generally, it is a majority of shares present, as long as there is a quorum
§  Vote required if 900 present – 451
§  Vote required if 451 present – 226
 
1.     AGREEMENTS RESTRICTING SHAREHOLDER ACTION
v  Voting Trusts
·         A process by which shareholders separate voting rights and legal title from beneficial interest in stock
·         DGCL §218(a)
o   One shareholder, or two or more shareholders may, by agreement, transfer stock to a trustee, who may be designated voting trustee, and given the right to vote for any period of time determined by such agreement
o   Must be written, filed, open to inspection, and contain a ledger on the stock naming the trustee
·         Elements
§  (1). A and B transfer stock to voting trustee (can be an arbitratory if it is irrevocable)
§  (2). Stock held in the name of the trustee
§  (3). A and B are beneficiaries
§  (4). Corporation has a new shareholder, namely, the trustee
§  (5). Trustee gets authority/power from the trust agreement
§  (6). Trustee votes the stock per the agreement
§  (7). Dividends flow through the trustee to the beneficiaries
§  (8). Legal only when the state authorizes it; and in accordance with the statutory requirements
§  (9). Contains an irrevocable proxy – §212(e)
·         Must state 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 will it be deemed an irrevocable proxy
o   A general interest in the corporation is sufficient to make the proxy irrevocable; or
o   Right of first refusal will suffice
§  (10). Provides for judicial enforcement
§  Beneficial Interest
·         The shareholder retains the beneficial interest in the stock
·         However, the dividends will be paid to the trustee to distribute to the shareholder
·         The most definitive feature of a voting trust is the separation of the legal title and voting rights from the beneficial interest
§  Coalitions
·         The purpose of voting trusts is normally to create a coalition that can control the company.  The trustee will agree to vote a certain way for all shareholders
§  The Typical Voting Trust
·         (1). It takes two or more shareholders to create the coalition
·         (2). Transfer their legal and voting rights
·         (3). Retain the beneficial interest
·         (4). By written agreement between the shareholders and the trustees
·         (5). For a set period of time
§  Common Restrictions on Voting Trusts
·         (1). The time limit on the trust
o   The most common time limit is 10 years
·         (2). Filing and open record
o   Some states require that the trust agreements be filed with the corporation and the record be open to inspection
§  Voting Trustees Generally
·         (1). No 3rd Party Requirement
o   The trustee can be, but is not required to be a non-shareholder 3rd party
o   One of the shareholders transferring title and voting rights may be the trustee
·         (2). Creditors
o   A creditor may require that the shareholder put his shares in a trust with creditor as the trustee
o   In this situation, the voting trust may, and likely will, contain only one shareholder.
v  Delaware Voting Trust Statute – DGCL §218
§  Formal Requirements – §218(a)
·         (1). Filing
o   A copy of the agreement must be filed in the state office and open to inspection by any stockholder or beneficiary of the trust
·         (2). Transfer in Corporate Ledger
o   A corporate ledger must indicate that the trustee is the legal owner of stock, and that the shares are part of a voting trust
·         (3). Indication on Stock Certificate
o   New stock certificates must be issued indicating that the stocks are part of a voting trust
·         (4). Liability of Trustee

nt Between 2 Shareholders
o   Agreement between A and B so vote their shares as a block to keep power away from C
o   The agreement provided that a deadlock goes to arbitration (If A & B do not agree)
o   No self-enforcement mechanism in the agreement stated what happened if the agreement was breached
o   The agreement was breached by B when he voted for C’s candidates
·         Validity
o   B (Haley’s) argument – The breaching party agrees the agreement was a voting trust in substance, but since there was no compliance with the voting trust statute, this voting trust should be void
o   Supreme Court ruled that the agreement was not a voting trust, but only a pooling agreement.  In general, pooling agreements are valid.  It is only a problem if the agreement equals a voting trust in substance.  An agreement equals a voting trust in substance if it complies with the voting trust statute.  This did not comply because:
§  (1). Voting trust needs a trustee
§  (2). Arbitrator is not a trustee because:
·         (a). He is only involved if the parties disagree on how to vote; and
·         (b). He cannot enforce his arbitration decision; i.e. the parties can ignore his decision and vote how they choose
·         Result (Decision)
o   When one shareholder violated a pooling agreement by not voting in the agreed upon way, the court found that an arbitrator did not have the authority to actually vote the dissenting shareholders shares, thus the director seat remained open
o   The Supreme Court denied to imply an irrevocable proxy in the hands of an arbitrator, but suggested that an irrevocable proxy provision in the agreement could have been enforced
§  Abercrombie
·         The Court found that an irrevocable proxy in the pooling agreement separated the beneficial interest turning the agreement into an unenforceable trust because it did not comply with the statute
§  Proxies
·         Common Law
§  A proxy is always an agent and thus the proxy is always revocable because an agency relationship is always revocable
o   Power Coupled With an Interest/Irrevocable Proxy
§  For a proxy to be irrevocable it had to be coupled with an interest sufficient to make it so