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Business Associations II
University of Kansas School of Law
Hecker Jr., Edwin W.

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 comply with the statute.
b. B/c the K contained the express proxy, it is a voting trust in substance and must comply with the v.t. statute to be valid!
e. Distinction b/t Pooling K and Voting Trust?
1. Not a v.t. if:
a. no proxies to vote other’s shares
b. no specific enforcement
c. if court’s remedy is only to throw out the breaching party’s votes.
2. Is a v.t. if:
a. provides for judicial enforcement
b. contains irrevocable proxies
2. Voting Trusts.
a. Real live trust designed to sever the voting rights from beneficial ownership in stock. Elements:
1. A and B transfer stock to Voting Trustee
2. stock held in the name of Trustee
3. A and B beneficiaries
4. corp. has new s/h –> the Trustee
5. Trustee gets authority/power from trust agreement
6. Trustee votes the stock per the agreement
7. dividends flow through the Trustee to the beneficiaries (A and B)
8. legal only when state statute authorizes
b. Abercrombie: 4 Critical Elements in v

te.
a. Delaware.
1. § 218(d): appears to leave door open for Abercrombie.
2. Oceanic cites Abercrombie for definition of a voting trust.
3. obviously Delaware courts do not think§ 218(d) overrules Abercrombie.
4. still an open issue in DE.
b. RMBCA
1. §7.30 – Voting Trusts
a. One or more s/h may create a voting trust, by signing the agreement, and transferring their shares to the trustee.
b. Effective on the date the shares are registered in the trustee’s name, but not valid for more than 10 years.
c. To extend it for more than 10 years, an extension may be signed, and must obtain trustee’s written consent. Only binds the parties signing it.
2. §7.31 – Pooling Agreements
a. s/h pooling K’s valid and not subject to the provisions of the v.t. statute (7.30).
b. s/h voting K is specifically enforceable.
c. does not follow Abercrombie.
3. §7.22(d) – Proxies
a. A proxy is irrevocable if coupled with an interest.
7. If Abercrombie is dead in your jurisdiction, how do you draft the pooling K to make the proxy irrevocable? (i.e., is it irrevocable just b/c it expressly says so in the K?).
a. Generally a P can terminate an A’s authority at will, even if the termination is in breach of K. (Agency law)
b. Exception to general rule: Where A holds a “power coupled with an interest or given as security.” Rst. of Agency § 138.
c. If general agency rules are applied to a proxy pursuant to a pooling K, the proxy would be revocable notwithstanding the K, unless it is “coupled with an interest”.
1. Right of first refusal – a clause in the K that says B must first offer his shares to A before selling to C. This kind of clause may be considered an “interest”.