Twomey & Jennings BUSINESS LAW

© 2004 West Legal Studies in BusinessA Division of Thomson Learning

BUSINESS LAW BUSINESS LAW Twomey • Jennings 1stEd.Twomey • Jennings 1stEd.

Twomey & JenningsTwomey & Jennings

BUSINESS LAWBUSINESS LAWTwomey & JenningsTwomey & Jennings

BUSINESS LAWBUSINESS LAW

Chapter 44Shareholder Rights

in Corporations

Chapter 44Shareholder Rights

in Corporations

2© 2004 West Legal Studies in BusinessA Division of Thomson Learning


Nature of StockNature of StockNature of StockNature 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.

• 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.



Common StockCommon StockCommon StockCommon 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).

• 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).



Preferred StockPreferred StockPreferred StockPreferred 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.

• 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.



BondsBondsBondsBonds

• 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.

• 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.



Acquisition of SharesAcquisition of SharesAcquisition of SharesAcquisition 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.

• 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.



A receives the cash dividend.

A receives the cash dividend.

B receives the cash dividend.

B receives the cash dividend.

B receives the stock dividend.

B receives the stock dividend.

Transfer of SharesTransfer of SharesTransfer of SharesTransfer of SharesA sold to B on May 31.

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.



Rights of ShareholdersRights of ShareholdersRights of ShareholdersRights 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.

• 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.

Shoaf v Warlick (1989) Did the majority shareholder have the right to sell his stock?

Shoaf v Warlick (1989) Did the majority shareholder have the right to sell his stock?



Rights of ShareholdersRights of ShareholdersRights of ShareholdersRights 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.

• 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.

Security First v U.S. Die Casting (1997) Did the stockholder have the right to inspect the books?

Security First v U.S. Die Casting (1997) Did the stockholder have the right to inspect the books?




• 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.

• 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.




• Shareholders have the right to bring a derivative suit against the corporation or management.– Occurs when the corporation itself fails to do

so.

• Shareholders have the right to bring a derivative suit against the corporation or management.– Occurs when the corporation itself fails to do

so.

Hubbard v Tomlinson (2001) Can an individual shareholder bring a lawsuit in his own name?

Hubbard v Tomlinson (2001) Can an individual shareholder bring a lawsuit in his own name?



Liability of Liability of Shareholders Shareholders

Liability of Liability of Shareholders 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.

• 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.



Liability of Liability of ShareholdersShareholders


• Piercing the Veil (cont’d).– Determination that injustice would result if the

corporate entity were recognized.

• Piercing the Veil (cont’d).– Determination that injustice would result if the

corporate entity were recognized.

K.C. Roofing Center v On Top Roofing, Inc. (1991) Did Nugent create the corporation to avoid liability?

K.C. Roofing Center v On Top Roofing, Inc. (1991) Did Nugent create the corporation to avoid liability?





• Wage Claims.

• Unpaid Subscriptions.

• Unauthorized Dividends.

• Professional Corporation.– Cannot create to avoid liability.– Liability for malpractice of associate.

• Wage Claims.

• Unpaid Subscriptions.

• Unauthorized Dividends.

• Professional Corporation.– Cannot create to avoid liability.– Liability for malpractice of associate.

Documents

Twomey & Jennings BUSINESS LAW