(1) CLOSE CORPORATIONS: AGREEMENTS RESTRICTING SHAREHOLDER ACTION
Agency
R.2d Agency § 118 à Revocation of Renunciation
Authority is terminable at will by either P or A.
R.2d Agency § 138 à Definition
A power given as security is a power to affect the legal relations of another.
R.2d Agency § 139 à Termination of Powers Given as Security
(1) Authority that is coupled with an interest is not terminable by:
(a) Manifestation by creator
(b) Manifestation by holder if held for the benefit of another person
(c) Loss of capacity by the creator or the holder
(d) Death of the holder
(2) Authority that is coupled with an interest is terminable only by:
The will of the beneficiary
Discharge of Obligation
Events that make execution illegal or impossible
R.3d Agency § 3.10 à Manifestation Terminating Actual Authority
(1) Authority is terminable at will by either P or A, effective upon notice.
(2) Authority that is coupled with an interest is not terminable at will by P.
R.3d Agency § 3.12 à Power Given as Security; Irrevocable Proxy
A power given as security is a power to affect the legal relations of another.
R.3d Agency § 3.13 à Termination of Power Given as Security or Irrevocable Proxy
(1) Authority that is coupled with an interest is terminable only by:
(a) Discharge of Obligation
(b) Events that make execution illegal or impossible
(c) The will of the beneficiary
(2) Authority that is coupled with an interest is not terminable by:
(a) Manifestation by creator
(b) Manifestation by holder if held for the benefit of another person
(c) Loss of capacity by the creator or the holder
(d) Death of the holder
(e) Death of the creator
Irrevocable Proxies
DGCL § 212(e)à Voting rights of stockholders; proxies; limitations
A proxy = irrevocable if:
It states that it is irrevocable, and
It is coupled with an interest (stock interest or general interest)
Proxy becomes revocable when the coupled interest is extinguished.
Voting Trusts & Pooling Ks
DGCL § 218à Voting trusts and other voting agreements
(a) Voting Trust Requirements:
In writing
Filing a copy of the agreement in the registered office of the corporation
Certificates of stock or un-certificated stock shall be issued to the voting trustee or trustees
In the certificate so issued it shall be stated that it is issued pursuant to such agreement
(b) Voting Trust Amendment Requirements:
In writing
Filing a copy of the agreement in the registered office of the corporation
(c) Pooling K Requirements:
In writing
Signed by the parties
(d) This section does not invalidate any voting agreement or irrevocable proxy that is not otherwise illegal.
RMBCA § 7.30à VOTING TRUSTS
(a) Voting Trust Requirements:
Signing
Transferring shares to the trustee
(b) Voting Trust Duration:
10 years from the date the shares subject to the trust are registered in the trustee’s name.
(c) Voting Trust Duration Extension:
10 years from the date the first shareholder signs the extension agreement
The voting trustee must deliver copies to the corporation’s principal office
An extension agreement binds only those parties signing it.
RMBCA § 7.31à VOTING AGREEMENTS
(a) A Pooling K is not subject to §7.30.
(b) A Pooling K is specifically enforceable.
Cumulative Voting
A – 300 shares and director
B – 300 shares and director
C – 300 shares and director
Total – 900 shares and 3 directors
FORMULA à X = [N * S] / [D + 1] + [1]
X = # shares needed to elect N directors
N = # directors client wants elected
S = Total # of shares voting
Z = Total # of directors to be elected
So à [1 * 900] / [3+1] + [1] = 226 out of 900 shares needed to elect 1 director out of 3
Ringling Bros.-Barnum & Bailey Combined Shows v. Ringling
[SEE SUPP 2]
Facts:
7-member BOD:
Ringling (A) – 315 shares
Haley (B) – 315 shares
North (C) – 370 shares
Total – 1000 shares
Therefore à [5 * 1000] / [7 + 1] + [1] = 626 out of 1000 shares needed to elect 5 directors out of 7
There is a voting K between A & B against C.
K provided for arbitration if the parties disagree.
B breaches against A with C. B argues for a VT in substance; since it did not comply with VT statute, the K is void.
A argues for Pooling K; remedy for breach is specific enforcement.
Validity of Ringling Pooling K:
A problem arises when
t comply with the VT statute to be valid)
IF NO à Pooling K
Conclusion à Can never have a Pooling K that is both valid and effective!
A Pooling K can be valid, but the remedy is not effective. (Ringling)
To get effective remedy, must put in an irrevocable proxy.
If it has a proxy, it is a VT in substance. (Abercrombie)
Does not address effectiveness/enforcement (Just like Ringling)
What if party wanted to make sure of its effectiveness by putting in proxy?
RULE = “VT in Substance” is invalid unless it complies with VT statute.
Options
Do a VT and comply with statute.
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!
Do a VT and make the SH a trustee.
Can make A and B and arbitrator trustees of the VT; arbitrator only involved as tie-breaker; perfectly legal under trust law.
It cannot be said with absolute certainty that pooling agreements with irrevocable proxies are valid or invalid. However, it can be said with absolute certainty that a voting trust that complies with the statute is valid.
Status of Abercrombie in Delaware (and Kansas):
DGCL §218(d) appears to leave door open for Abercrombie.
Oceanic – This case cites Abercrombie for definition of a voting trust.
Delaware courts do NOT think §218(d) overrules Abercrombie.
This is probably still an open issue in Delaware.
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?).
Result à If general agency rules were applied to a proxy pursuant to a pooling K, the proxy would be revocable notwithstanding the K, unless it is “coupled with an interest”.
RULE = Right of first refusal clause is considered an “interest”.
