Last update by Shanal on 10/24/2013
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Direct Shareholder Action/Suit

Shareholders can directly sue corporate executives for

- breach of specific contracts to shareholders(e.g. preemptive rights)


- denying shareholders specifically granted statutory rights (e.g. right to inspect records/books)

*** minority sh's of a close corp suing for oppression can bring a direct suit against the majority

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  • Kara
    Answered in Corporations
    Shareholder Derivative Action
    Shareholder brings suit to enforce a claim that is actually the corporation's claim. (shareholder derives standing from corp ownership).

    If successful, the award goes to the corporation and the sh who brought the action is entitled to reasonable expenses. Any settlement must be approved by the court.
  • Kara
    Answered in Corporations
    Most claims against DIRECTORS or OFFICERS, for BREACH of fiduciary duty, MUST be brought as DERIVATIVE claims.

    What is the basic test to determine this?
    Test to determine if there can be a derivative action-

    Could the corporation have brought the suit itself?
    If yes, the suit should be brought through derivative action.

    *note- most derivative actions are against dir's or officers, but a sh could bring a derivative claim to try to get the corp to bring an action against a 3rd party, where the BoD has declined to bring the action.
  • Kara
    Answered in Corporations
    Procedural Requirements for bringing a derivative action (3)
    1. P must have owned the shares at the time of the injury to the corp.

    2. P must adequately represent the interests of the shareholders as a whole.

    3. P must plead futility OR make a pre-suit demand.
    *OHIO- P must make a written pre-suit demand that corp bring action itself.

  • Kara
    Answered in Corporations
    For a derivative action, shareholders can avoid making a demand on the corp, by pleading...
    The excuse of futility, with particularity.

    Demand is futile where...

    1. A demand would be served on the wrongdoers, or
    2. A demand would be served on those under the influence of the wrongdoers.

    *note- sh's should always plead futility bc a written demand and then refusal by BoD is protected by BJR.
  • Kara
    Answered in Corporations
    Action without a meeting
    Shareholders may act without a meeting if there is unanimous consent to take particular action. A written documentation of consent must be signed by each shareholder.
  • Kara
    Answered in Corporations
    Share Transfer Restrictions
    - Corporate shares, unless otherwise indicated, may be freely sold at any time to third parties. However, some corporations, particularly closely held firms, will try to preserve control arrangements by restricting the transfer of shares. A typical stock transfer restriction would require a shareholder to offer the shares for sale to the corporation before selling to a third party.

    - To determine if a restriction is valid, ask "Is it reasonable under the circumstances?"

    -The typical right of first refusal is likely valid and reasonable under most imaginable circumstances. By contrast, a total bar on transfer is likely unreasonable, as is a requirement that all shareholders consent before a shareholder can sell her shares to a third party.

    -Enforceability vis-à-vis third parties: To prevent a third party from effectively acquiring ownership of a share, the transfer restriction must be noted conspicuously on the share certificate, or the transferee must have had knowledge of the transfer restriction.
  • Kara
    Answered in Corporations
    Inspection Rights
    - Shareholders are entitled to inspect the books, records, minutes, voting trust agreements, and shareholder records (names, addresses, share ownership), for corporations in which they own shares upon written notice and for a proper purpose.

    - Ohio: No minimum ownership requirement for this right, unlike in some other states. The right to inspect includes the right to make copies but does NOT apply to the holders of voting trust certificates – only the voting trust trustee has a right to inspect.
  • Kara
    Answered in Corporations
    Shareholder Financial Rights - Distributions to Shareholders (3 Types)
    1.) Dividends: Payments to shareholders, typically on a per-share basis. Money is distributed from corporate treasury, to individual shareholders, in exchange for nothing

    2.)Repurchases: Shareholder offered chance to sell share to the corporation; board sets offer price; shareholders who wish can turn over stock and get money.

    3.) Redemptions: If provided in the Articles, the Board can “redeem” shares – in effect, forcing shareholders to sell the shares back to the corporation according to a price set by some method as spelled out in the articles. Like a repurchase, money is distributed to shareholders, who hand over their shares.
  • Kara
    Answered in Corporations
    Shareholders have no right to a dividend or other distribution The only ways to sue are:
    1.) Breach of a specific promise to pay a dividend (contract/promissory estoppel - but this begs the question why make such a promise when you have no obligation to do so? )

    2.) Non-payment of dividend as part of denial of equal opportunity under minority oppression.
  • Kara
    Answered in Corporations
    Limitations on Dividends and Other Distributions
    - The corporation cannot pay a dividend or make another of distribution if doing so would make the corporation insolvent (i.e. unable to pay its bills as they ordinarily come due.) A corporation can pay a dividend even if it is losing money, so long as it is solvent.

    - In addition, the rule of “legal capital” prohibits payments of such an amount that the “stated capital” of the corporation will be impaired.
    * Stated capital equals the sum of par value of shares of outstanding stock. (In addition, other amounts can be allocated to “stated capital” by the BoD).
    * A corporation can only pay a distribution out of surplus, which is the difference between (Assets minus Liabilities) and (Stated Capital). Surplus can result from earnings, or from money received from the issuance of stock which exceeds the par value of the stock.

    - Remember: In Ohio, “no-par” stock can be issued, so it would be possible for a corporation to have a stated capital of zero.