BUSINESS ASSOCIATIONS II
Hecker
I. CLOSE CORPORATIONS
A. Introduction
1. A – 300 shares and director
B – 300 shares and director
C – 300 shares and director
( 1 * 900) + 1 = 226 to elect 1 director
3+1
B. Shareholder Voting Agreements and Voting Trusts (Agreements Restricting S/H Action)
1. Contract voting arrangements b/t S/H’s.
a. 2 questions, unanswered at present:
1. is the K legal (valid)? If so,
2. is it effective?
a. self-enforcing mechanism in K?
b. if none, what will court do?
b. Ringling.
1. Facts:
A – 315 shares *7 = 2205 votes
B – 315 shares *7 = 2205 votes
C – 370 shares *7 = 2590 votes
1000
(5/8 * 1000) + 1 = 626
Together A & B can elect 5 of 7 officers. If 5 to 2, the minority can never take action. The worst scenario is a 2 to 2 deadlock.
a. Pooling K b/t 2 s/h’s.
1. K b/t A & B to vote shares as a block to keep power away from C.
b. K provided deadlock goes to arbitration (If A and B don’t agree)
c. No self-enforcement mechanism in the K stating what happens if K breached
d. K breached by B; voted for C’s candidates.
2. Validity:
a. breaching party argues the K was a voting trust in substance; since no compliance w/ v.t. statute, this v.t should be void.
b. SCt: K was not a v.t. It was a pooling K only. In general, pooling K’s are valid. Only a problem if the K equals a v.t. in substance. A K equals a v.t. in substance if it complies with the v.t. statute. This did not comply because:
1. v.t. needs trustee.
2. arbitrator is not a trustee b/c:
a. only involved if the parties disagree on how to vote, and
b. cannot enforce his arbitration decision – ie, the parties can ignore his decision and vote how they choose.
3. Effectiveness/Relief.
a. TCt: (This is wrong) if 1 willing to follow the arbitrator’s decision and the other is not, the good one can vote both of their shares; this is an irrevocable proxy b/c given as security coupled w/an interest.
b. SCt: No express or implied proxy in the K. Not the function of a court to re-write K’s after the fact to imply a proxy that the parties never thought about bargaining for.
1. Relief:
a. no specific enforcement
b. throw out the breaching party’s votes!
1. not effective relief b/c the stock is not voted as a block
c. Relief not effective — meaningless.
1. B (breaching party) can make a deal w/ C that in exchange for C voting B onto the BOD, B will breach his K with A. (A doesn’t have enough votes)
2. since all the court will do is throw out B’s votes, B still gets on the BOD and C gets majority.
3. A wins battle but loses the war!
A 315 (4/8 * 685)+1 = 343
B
C 370
685
d. Attempt to Remedy Ineffective Relief w/ Drafting:
1. Make self-enforcing — Put the proxy expressly in the K!
a. if disagreement, to arbitration
b. if 1 not willing to follow arbitrator’s decision, the other can vote all the shares.
2. Abercrombie – Same kind of case as Ringling, but it contained a proxy agreement (irrevocable). S/h’s appointed agents. Shares were voted how a majority of the agents decided. However, the agents had to vote how the s/h told them to.
a. Court – invalid agreement. It is essentially a v.t., but the agreement doesn’t com
. to comply w/ the statute so no longer a secret combination.
b. Del. §218(a): Authorized voting agreements. Formal requirements:
1. in writing
2. file copy of K w/ the corp.
3. stock transferred to trustee on corp books
c. Del. §218(b): formal requirements to amend of a v.t:
1. in writing
2. file copy of K w/ the corp.
d. Del. § 218(c): speaks to pooling K’s.
1. valid
2. in writing and signed
3. there is no requirement that it be filed with the corp.
4. does not address effectiveness/enforcement (Just like Ringling)
a. What if party wanted to make sure of its effectiveness by putting in proxy?
1. Del. § 218(d): section will not invalidate voting or other agreement or any irrevocable proxy not otherwise illegal.
2. Shoots you straight to Abercrombie (v.t. in substance is illegal unless comply w/ statute).
a. 218 (c) and (d) were designed to overrule Abercrombie, but instead, they seem to support it.
5. Options.
a. Do a v.t. and comply with statute.
1. consider if want to give up control of voting rights b/c irrevocable proxy; cannot breach b/c actually no longer have the right to vote!
b. Do a v.t. and make the s/h himself a trustee.
1. can make both A and B and arbitrator trustees of the v.t.; arbitrator only involved as tie-breaker; perfectly legal under trust law.
