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

BA II Outline – Spring 2009
Professor Hecker
 
Close Corporations
Agreements restricting S/H action
Voting Trust agreement
                                                               i.      A Voting Trust requires:
1.       Execution of a written trust agreement between participating S/H and voting trustees
2.       A transfer to the trustee, for a specified period, of the S/H stock certificates and legal title to the stock
3.       The trust separates legal title (right to vote) from economic rights
a.       If dividends paid out, they are paid to the trustee. But, trustee must transfer them to beneficiary.
                                                             ii.      Ringling Bros.
1.       Ringling’s and Haley’s had a voting agreement. There was a disagreement and Haley’s breached.
2.       This was a “pooling agreement” instead of a voting trust
a.       Why not a voting trust? Because there was no power to “enforce” the agreement. 
b.       As such, it didn’t have to comply with voting trust statute
3.       To enforce the agreement, there should have been express irrevocable proxies. Court won’t imply them.
                                                           iii.      Abercrombie
1.       3 S/H (A,B, and C corp) appoint an agent to represent their shares. Agree the shares will be voted IAW majority of the group with irrevocable proxies
2.       But, court held it to be voting trust and invalid b/c it didn’t comply with statute
3.       Court elevates substance over form
                                                            iv.      Proxies
1.       S/H can vote by proxy.
2.       But, directors are fiduciaries and can’t give away discretion to vote.
3.       To make a proxy irrevocable, it must be “coupled with an interest”
4.       DGCL § 212(e)
a.       Proxy shall be irrevocable if:
                                                                                                                                       i.      It states it is irrevocable AND
                                                                                                                                      ii.      It is coupled with an interest
b.       The interest may be in the stock itself or in the corp generally
§ 218 – Voting trusts
                                                               i.      (a) May enter into a voting agreement and give a trustee the right to vote for any period of time
1.       Filing
a.       Must file with the state
b.       “Open to inspection of any S/H”
2.       Stock certificates shall state they are subject to a voting agreement
3.       Manner of voting the stock shall be determined by a majority of the trustees
a.       If equally divided, vote can be equally divided
4.       Purpose of filing
a.       To ensure other S/H know the trust exists
                                                                                                                                       i.      “Open to inspection of any S/H”
b.       If there is a stock certificate, it shall say it is subject to a voting trust
                                                              ii.      (c) An agreement between S/H
1.       If in writing and signed, may provide
2.       The shares shall be voted IAW the agreement
3.       Or as parties agree
4.       Or as IAW a procedure agreed upon by them
a.       This is the holding of Ringling
                                                            iii.      (d) This section won’t invalidate any other voting agreement or irrevocable proxy among S/H that is not otherwise illegal   
1.       Intended to overrule Abercrombie
2.       Infers you don’t have to comply with the voting trust statute
Agreements restricting BOD action
Case law
                                                               i.      McQuade v. Stoneham (NY 1934)
1.       2500 outstanding shares in the NY Giants. Stoneham has 1306.
2.       Stoneham agrees to sell McGraw and McQuade 70 shares each. His shares reduced to 1166.
3.       Agreement:
a.       To vote each other as directors
b.       To elect each other as officers
c.        To pay each other salaries
d.       There shall be no changes without unanimous consent
4.       The agreement to vote each other as directors ok, but agreement invalid to elect each other as officers and pay each other salaries
a.       Agreements for S/H functions okay
b.       Agreements to control BOD functions NOT okay
c.        Manice v. Powell
                                                                                                                                       i.      BOD power is original and undelegated. S/H can’t control the judgment of the BOD.
d.       § 141(a) BOD shall manage the company
e.        It’s a breach of a director’s fiduciary duty to contract away his discretion
                                                              ii.      Clark v. Dodge (NY 1936)
1.       Clark (25% stock) knew secret formula of drug company. Dodge (75%) got him to tell the secret in return for always getting 25% salary and no unreasonable salaries to other employees
2.       Agreement valid
a.       There were no minority S/H who were not parties to the agreement
                                                                                                                                       i.      That was the problem in McQuade
                                                            iii.      Galler v. Galler (Ill 1964)
1.       2 brothers run a close corporation. Agreement called for salary continuation if one brother died in order to take care of surviving spouse
2.       Agreement held valid
a.       So long as there is no complaining minority interest, no prejudice to creditors, no public injury, it doesn’t have to follow corporate code
3.       In a close corporation, it’s identical personnel at the S/H and director level
a.       The only real protection you have in a close corp is a detailed S/H agreement
KS case law
                                                               i.      In KS and Del, you can completely sterilize the BOD so long as 100% of S/H agree
1.       Even if they don’t agree, might be ok so long as the S/H aren’t complaining
                                                              ii.      KS Supreme Court has said parties who enter into an agreement waive strict application of the corporate code
1.       Because the corp code strictly applies to corps and not the general public, can waive your right to strictly apply it
2.       If there are minority S/H involved, but they don’t complain, they are waiving their right to strictly apply the code
DGCL limits to restrictions on BOD
                                                               i.      142(b)
1.       Officers chosen according to by-laws or by BOD
a.       By-laws could make this a S/H function
b.       S/H could then make a voting agreement with irrevocable proxies
                                                                                                                                       i.      Probably want to have a supermajority vote for by-law amendments so no one changes it behind your back and fires you
                                                              ii.      141(a)
1.       Business and affairs under BOD, EXCEPT as provided in this chapter or COI
a.       This is permission to take functions away from BOD and make them S/H functions (like issuing dividends and stock)
                                                                                                                                       i.      To prevent others from issuing stock and diluting your power, make it a S/H function and then make a voting agreement with irrevocable proxies.
b.       Note: Might be able to entirely abolish the BOD
Close corporation restrictions
                                                               i.      §341
1.       (a) This chapter only applies to statutory close corporations
2.       (b) All other provisions apply too so long as they are not inconsistent with this subchapter
                                                              ii.      § 342
1.       (a)(1) Must be less than 30 S/H
2.       (2) All stock subject to transfer restrictions of § 202
3.       (3) There can be no “public offerings” of stock
                                                            iii.      § 344
1.       Can become a close corporation by amending COI, must be approved by 2/3 of each class of outstanding stock
                                                            iv.      § 350 – Agreements restricting BOD
1.       Agreements among S/H are not invalid as between the parties on the grounds that it restricts the discretion of the BOD
a.       If all S/H are parties, then no one can challenge it
2.       The agreement

g business) [RMBCA 14.30(b)???]                                                                i.      § 352 – Appointment of custodian
1.       (a)Standing
a.       Upon application of any S/H,
2.       (a) Grounds for appointment
a.       In addition to 226 reasons, court may appoint a custodian when:
                                                                                                                                       i.      (1) Business is managed by S/H, they are deadlocked, irreparable injury is occurring, and remedies provided in the COI or by-laws have failed, or
                                                                                                                                      ii.      (2) Petitioning S/H has the right to dissolution under the COI
3.       (b) Instead of appointing a custodian (the more drastic remedy), court may appoint a provisional director (the less drastic remedy) under §353
                                                              ii.      § 353 – Appointment of provisional director
1.       (a) Grounds for appointment
a.       BOD divided, vote required for action can’t be obtained, business can’t be conducted to the advantage of the S/H
2.       (b) Standing
a.       Application for relief may be filed by
                                                                                                                                       i.      (1) ½ of directors, or
                                                                                                                                      ii.      (2) at least 1/3 of S/H, or
                                                                                                                                    iii.      (3) >2/3 of any class of stock if there are multiple classes entitled to vote for directors.
                                                                                                                                    iv.      COI may provide for lesser numbers
3.       (c) Provisional director
a.       Shall be impartial. Not a receiver. 
b.       Not the same power as a custodian. Same power as any other director.
c.        On the BOD until removed by court, majority of all shares vote to remove, 2/3 of any class which voted to appoint him vote to remove
4.       (d) If note enough votes under this section to appoint, court may appoint under § 352(b)
Transfer restrictions
DGCL § 202
                                                               i.      (a) Enforceability
1.       Two devices authorized
a.       Restrictions on transfer
b.       Ceiling on ownership
                                                                                                                                       i.      “Restriction on the amount of …securities that may be owned by any person or group”
2.       Requirements
a.       Written
b.       Permitted by subsections (c-e)
c.        Noted conspicuously
                                                                                                                                       i.      Unless actual knowledge
1.       If not noted conspicuously, it’s still effective against a person with actual knowledge
                                                                                                                                      ii.      Conspicuously – different colors or different size print
                                                              ii.      (b) Imposition
1.       May be written in: