BA II- Professor Lovitch Spring 2007
I. Completion of BA I
a. Close corporations: agreements restricting shareholder action
i. Voting agreements
1. Ringling- the contract was valid- S/H pooling agreements were valid, but they decided that Mr. Loos did not have the authority to vote the shares (no implied proxy like the trial court said). So it was not enforceable. No one voted the shares, they simply weren’t counted.
2. Who won? The Ringling’s but they didn’t prevail on enforceability. If the Haley’s don’t vote, then the North’s are in control for the rest of the agreement. The prevailing party in law actually loses the case.
3. When can the Ringling’s case occur? The prevailing party comes out on the short end of it. In a 3 shareholder context this will happen when the non-party has more shares than the abiding party. The abiding party can then be outvoted by the non-party. That’s when this effect can occur in a 3 shareholder party context.
4. But at the minimum there is a serious question of the enforceability of S/H agreements.
ii. Proxies- a s/h who won’t be at a s/h meeting can give someone else the right to vote his shares.
1. an agency relationship is created- the person receiving that right is the agent for the person given it, who is the principal.
2. these proxies can be created, so that they are irrevocable. basic agency law review- an agency power is generally revocable at will by the principal even if it is in writing.
3. the exception- an agency power can be irrevocable in fact if the agent has described in the jargon (an agency power coupled with the interest or an agency power given as a security).
4. under the caselaw there is a split of authority as to whether an interest in the corporation generally is sufficient to be able to conclude that a proxy said to irrevocable is a proxy coupled with an interest.
5. In a split of authority in DE law, an interest in a corporation generally is not enough of an interest. It’s very difficult to predict the outcome.
6. Haft v. Haft-
a. Father(CEO) had 57% of the shares and transferred them to his son, who gave him a promissory note and a lifetime proxy, to ensure that he would always be elected to the board and be the CEO. Son revoked.
b. Court found that the father’s interest was enough to satisfy an interest in the corporation generally for 212(e) purposes, so it was in fact irrevocable.
iii. Voting trusts- majority case law rule is that a voting trust is invalid if it fails to meet the statutory requirements.
1. sign a written agreement. Following that, they would then physically transfer their certificates to the voting trustee. The voting trustee would then transfer the shares to the corporation, who would cancel those certificates and make a new one for the voting trustee. Anyone looking at the stock record would see that they were held by the voting trustee. It would be filed in the office of the corporation for everyone to see.
2. The Ringling Hypo- Haley’s and Ringlings are friends again and want to vote together. Loos adds an express proxy to himself as the dispute resolver. It says that Loos always votes the shares.They deliver their shares to Loos. But they didn’t cancel the certificates and issue new ones making it not secret.
3. Abercrombie v. Davies- The P claimed that the voting agreement included the express proxies was invalid b/c it was in effect a voting trust, which if it doesn’t satisfy the statute it is invalid.DE SC concluded that Ringliing was distinguishable and addressed on the merits the validity of an arrangement like the Ringling hypo. Not all pooling agreements are lawful.
iv. Caselaw summary- if you draft a voting agreement w/o proxies, you have a valid agreement but you have real enforcement problems. You know that if you add the proxies to a S/H agreement and don’t do it as a statutory voting trust, that arrangement is simply invalid.
v. there have been a statutory shot at this since the two cases. 218(c) and (d), but it wasn’t very effective.
vi. In practice you should just use a statutory voting trust.
b. Close Corporations: Agreements restricting Director Action
i. McQuade v. Stoneham- 3 directors agreed to keep their positions and maintain their salaries. They kick P out as Treasurer. The contract is void b/c they can’t agree to do what they did b/c It precluded the directors from exercising their discretion as to all those things that directors normally do.
ii. Clark v. Dodge- The court backed away from McQuade and said the rule is only applicable when the contract sterilizes the board. Here you have all the s/hs party to the agreement, whereas that wasn’t the case in McQuade.
iii. you should put something in the COI to authorize it. “it shall be permissible for s/h and directors to enter into binding agreements that allow them to limi
hen they are in writing and its noted conspicuously on the COI or a notice of the restriction is given 202(a). The term “noted conspicuously” means they have to be of larger type or of a different color. If not on there, then the person has to know.
iv. Restrictions can’t be imposed unless all the holders agree.
v. 202(d) says to maintain subchapter S tax status or for maintaining any other statutory provision is presumed to be reasonable.
vi. you have a split of case law whether there is a reasonable purpose requirement in 202(c)(3).
e. Close Corporations: Statutory Close Corporations (not on exam)
Fiduciary Duties of Directors And Controlling Shareholders
I. Nature of Derivative Cause of Action
a. derivative lawsuit- procedure by which a minority s/h can bring an action on behalf of a corp when those in control won’t do so. Can only be brought by someone who was a s/h at the time of the wrong and have to maintain ownership throughout litigation.
i. Ex. An action against directors for damages for issuing shares for too low of a price. That would be derivative. The corp was harmed b/c they were sold for too little and all of the s/hs would be indirectly harmed.
b. Direct actions- one who is a s/h believes he/she has been harmed as a s/h directly, not b/c the corp has been harmed, but b/c some right of that person as a s/h has arguably been directly imposed upon.\
i. Ex. Ringling case- an action for a breach of a s/h agreement, brought by mrs. Ringling against the Haley’s. It was direct b/c there was no indication that the corp was harmed.
Tooley- Control of DLJ was acquired by Credit Suisse by AXA, who had owned 71% of DLJ. Second transaction was from Credit Suisse as a cash tender offer and the rest of DLJ held by the other 29% s/hs of DLJ.The Ps are former minority s/hs of DLJ who either were selling in the cash tender offer or would have to give them up in the merger, none of them