Twomey & Jennings BUSINESS LAW

1. Twomey & JenningsBUSINESS LAW Chapter 44 Shareholder Rights in Corporations

2. Nature of Stock • The ownership of a corporation is evidenced by a holder’s shares of stock that have been issued by the corporation. • Stock may be common stock or preferred stock. • Par Value is the value of the stock. • Book Value is based on the company’s assets. • Market Value is based on how much the stock is sold for in the open market.

3. Common Stock • Common stock is ordinary stock that has no preferences but entitles the holder to: • (1) participate in the control of the corporation by exercising one vote per share of record, • (2) share in the profits in the form of dividends, and • (3) participate, upon dissolution, in the distribution of net assets after the satisfaction of all creditors (including bondholders).

4. Preferred Stock • Preferred stock has priority over common stock with regard to distribution of dividends and/or assets upon liquidation. • Shares may be acquired by subscription of an original issue or by transfer of existing shares.

5. Bonds • Bonds are debt securities, and a bondholder is a creditor rather than an owner of the corporation. • Bondholders’ interests are represented by an indenture trustee, who is responsible for ensuring that the corporation complies with the terms of the bond indenture. • Debenture: unsecured bonds.

6. Acquisition of Shares • Shares may be acquired: • From the Corporation by subscription (before or after incorporation), or • Transfer of existing shares from shareholder. • Subscriptions: contract to buy shares.

7. A sold to B on May 31. A receives the cash dividend. B receives the cash dividend. B receives the stock dividend. Transfer of Shares 1. If corporation declared cash dividend payable to shareholders of record on May 15. Cash distributed on June 5. 2. If corporation declared cash dividend on May 20 to be paid to those who will be holders on June 15. 3. If corporation declared stock dividend on May 10. Stock distributed on June 10.

8. Shoaf v Warlick (1989) Did the majority shareholder have the right to sell his stock? Rights of Shareholders • Shareholders control the corporation indirectly by electing directors through their voting rights. • Preemptive rights, if they exist, allow shareholders to maintain their voting percentages when the corporation issues additional shares of stock.

9. Security First v U.S. Die Casting (1997) Did the stockholder have the right to inspect the books? Rights of Shareholders • Shareholders have the right to inspect the books of the corporation unless it would be harmful to the corporation. • Cumulative Voting for Directors: designed to give proportional representation. • Right to Inspect books.

10. Rights of Shareholders • Shareholders also have the right to receive dividends when declared at the discretion of the directors. • Shareholders may bring a derivative action on behalf of the corporation for damages to the corporation. • Shareholders are ordinarily protected from liability for the acts of the corporation.

11. Hubbard v Tomlinson (2001) Can an individual shareholder bring a lawsuit in his own name? Rights of Shareholders • Shareholders have the right to bring a derivative suit against the corporation or management. • Occurs when the corporation itself fails to do so.

12. Liability of Shareholders • Limited Liability. • ‘Piercing the Corporate Veil.’ Factors: • Failure to maintain adequate corporate records. • Commingling of assets. • Grossly inadequate capitalization. • Formation of the corporation to avoid existing obligations or commit fraud. 

13. K.C. Roofing Center v On Top Roofing, Inc. (1991) Did Nugent create the corporation to avoid liability? Liability of Shareholders • Piercing the Veil (cont’d). • Determination that injustice would result if the corporate entity were recognized.

14. Liability of Shareholders • Wage Claims. • Unpaid Subscriptions. • Unauthorized Dividends. • Professional Corporation. • Cannot create to avoid liability. • Liability for malpractice of associate.