Business Association II
I. CLOSED CORPORATIONS: AGREEMENTS RESTRICTING SHAREHOLDER ACTION – Assignment 35
A. Special Voting Arrangement at the S/H level
1. Voting Arrangements
a. Voting Agreements
(1) Voting agreements: A “shareholder voting agreement” is an agreement in which two or more shareholders agree to vote together as a unit on certain or all matters. Some voting agreements expressly provide how votes will be cast. Other agreements merely commit the parties to vote together (without specifying how the vote is to go, so that the parties must reach future agreement).
(a) Generally valid: Shareholder agreements are generally valid today.
(b) Enforcement: There are two ways that a voting agreement may be enforced:
i. Proxy: First, the agreement may require each signatory to give to a third person an irrevocable proxy to vote the signer’s shares in accordance with the agreement. Usually this irrevocable proxy arrangement will be enforced today.
ii. Specific performance: Second, most courts today will grant specific performance of the terms of the voting agreement. See, e.g., RMBCA § 7.31(b).
b. Voting Trust
(1) Voting trust: In a voting trust, the shareholders who are part of the arrangement convey legal title to their shares to one or more voting trustees, under the terms of a voting trust agreement. The shareholders become “beneficial owners” — they receive a “voting trust certificate” representing their beneficial interest, and get dividends and sale proceeds. But they no longer have voting power.
(a) Validity; requirements: Most states enforce voting trusts, if they conform with statutory requirements. Usually, these requirements include the following:
i. Maximum term: There is almost always a maximum term for the voting trust (usually ten years).
ii. Disclosure: Usually the trust’s terms must be publicly disclosed (at least to the shareholders who are not part of the agreement).
iii. Writing: The trust must generally be in writing, and must be implemented by a formal transfer of the shares on the transfer records of the corporation.
(b) Strict compliance: These requirements must be strictly adhered to. If not, the court is likely to hold the entire agreement unenforceable.
c. Irrevocable Proxy
B. Voting Agreements
1. Ringling Case
a. See Handout for Share Distribution
b. Corporation had 7 seats on the BOD
(1) Cumulative Voting
(a) See calculation in handout for minimum cumulative vote requirements
(b) Any two combination of the 3 S/H could elect a max of 5 directors
(2) Voting Agreement
(a) Agree and vote together
(b) If the parties (Ringling and Haley) cannot agree – Loos (their lawyer) would decide for them how to vote
(c) OK for several years
(3) Ringling and Haley Disagree in 1947
(4) Loos directed them how to vote (see handout)
(5) Ringling’s voted this way, but Haley voted differently
(6) Ringling brought this case
(a) Wanted to have the court direct the vote of Haley
(7) Why did the Haley’s not just vote the way Loos directed – Haley/North new partnership would still have a 4 to 3 majority
(a) Super majority requirement
(b) Much better to be in control 5 to 2
The execution of a written trust agreement between participating s/h’s and the voting trustees
(2) A transfer to the trustee, for a specified period, of the s/h’s stock certificates and the legal title to their stock
c. A proxy is someone who the S/H gives the right to vote his shares
(1) An agency relationship is developed
(2) Can this relationship be created to be irrevocable?
(a) General Rule: Agency power is revocable at will!
i. Exceptions: If Agent, that has agent power with interest or security – it is irrevocable
ii. Split between the Case law and Statute:
a. It is revocable – Chilson: Interest in a company alone is not enough to make irrevocable (case law)
b. DGCL §212(e) – Proxy can be made irrevocable regardless of interest
(i) If it is made irrevocable in an agreement it is irrevocable
2. Statutory Voting Trust §218(a)
S/H A: → Certificates → Voting Trust → Corp → (Corp. cancels the certificates and issues new certificates to voting trustee)
S/H B: → Certificates → Voting Trust → Corp → (Corp. cancels the certificates and issues new certificates to voting trustee)
*****Corp change in certificates are kept on file at the corporation for all to see
*****C, D & E are not kept in the dark on the voting trust