Corporations:
A Contemporary Approach
Chapter 16
Slide 1
Public Shareholder Activism
of 65
Family-owned Pensione Bencistá, Fiesole, Italy (overlooking Florence)
Module X – Close Corporations
Chapter 29
Planning in CHC
Bar
exam
Corporate
practice
Law
profession
Citizen of
world
Corporations:
A Contemporary Approach
• Overview
– Dilemma – incorporated partnership
– Nature of CHC
• Shareholder voting arrangements
– Types: cumulative voting, class voting,
voting trust, Irrevocable proxy, votepooling agreement, transfer restrictions
– Lawyer as director
• What if agreement –
– deviates from model? Compare
shareholder and management Ks
– does not comply with statute? Fiduciary
duties of minority shareholders
Chapter 29
Planning in CHC
Slide 2
of 59
1.
Fundamentals
–
–
2.
Corporations and policy
–
–
–
3.
Chapter 29
Planning in Close Corporation
Sale of control
Antitakeover devices
Deal protection
Close corporations
–
–
Corporations:
A Contemporary Approach
Securities markets
Planning
Securities fraud class actions
Oppression
Insider trading
Corporate deals
–
–
–
10.
Shareholder litigation
Board decision making
Board oversight
Director conflicts
Executive compensation
Corporate groups
Stock corporations
trading
Close
–
–
–
9.
Shareholder voting
Shareholder information rights
Public shareholder activism
Fiduciary duties
–
–
–
–
–
–
8.
10.
Piercing corporate veil
Corporate environmental liability
Corporate criminal liability
Corporate governance
–
–
–
7.
Numeracy for corporate lawyers
Capital structure
Corporate externalities
–
–
–
6.
Organizational choices
Incorporation
Locating corporate authority
Corporate finance
–
–
5.
Corporate federalism
Corporate social responsibility
Corporate political action
Corporate form
–
–
–
4.
Introduction to firm
Corporate basics
Planning
Oppression
Slide 3
of 59
Corporation – Traditional Model
Shareholders
Board of
directors
Management role
• Manage / supervise
business
• control cash flow
• delegate authority
• Initiate fundamental
changes
Corporations:
A Contemporary Approach
Corporation
Chapter 29
Planning in CHC
Shareholder role
• Vote (and voice)
• elect board
• veto fundamental
changes
• amend bylaws, adopt
resolutions
• Sue (BJR)
• Sell (liquidity)
Slide 4
of 59
Partnership – Traditional Model
Partnership
Corporations:
A Contemporary Approach
Partners’ role
• Vote
• Fundamental changes (all)
• Approve new partners (all)
• Sue (accounting)
• Heightened duties
• No BJR
• Sell  withdraw
• Management
• Bind partnership (each P)
• Day-to-day business (equal)
• Information rights
Chapter 29
Planning in CHC
Slide 5
of 59
1. In a partnership, a partner who
wants out:
a. Must get approval of all
partners
b. Must get approval of majority
of partners
c. Simply withdraws and gets pro
rata cash
2. In a CHC, a shareholder who
wants out:
a. Must get approval of all
shareholders
b. Must get approval of board
c. Is stuck
3. In a partnership, a partner …
a. Can block major decisions
b. Must accept majority’s will
c. Must get approval to bind
partnership
4. In a CHC, a shareholder …
a. Can veto fundamental
transactions
b. Must accept majority’s will (board
action)
c. Can bind the corporation
5. In a partnership, profits …
a. Flow to the partners
b. Must be claimed in an
accounting
c. Are shared on majority action
6. In a CHC, profits …
a. Create a right to shareholder
dividends
b. Must be claimed in an
accounting
c. Are shared based on majority
(board) action
Answers:
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 6
of 59
The close corporation
What do they want?
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 7
of 59
Close Corporation
(incorporated partnership)
Shareholders
Board of
Directors
Close Corporation
Corporations:
A Contemporary Approach
Shareholder-level arrangements
• Voting
• Cumulative voting
• Class voting
• Voting trust
• Irrevocable proxy
• Vote-pooling agreement
• Liquidity
• Transfer restrictions
• Buy-sell rights
Board-level arrangements
• Delegation
• Specify functions / positions
• Decisions
• Salaries
• Dividends
• Fundamental transactions
Chapter 29
Planning in CHC
Slide 8
of 59
Shareholder voting …
Straight (plurality) voting
Cumulative voting
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 9
of 59
Straight (plurality) voting
Justin
(400)
Kathy
(400)
Lorenzo
(200)
How many directors does
each elect with straight
(plurality) voting?
Who are the top 4 votegetters?
4
directors
Widget Inc
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 10
of 59
Straight (plurality) voting
Candidate
Justin
(400)
Kathy
(400)
Lorenzo
(200)
Kathy’s
Slate
4
directors
Widget Inc
Corporations:
A Contemporary Approach
Justin’s
Slate
Lorenzo’s
slate
Chapter 29
Planning in CHC
Votes
J1
400
J2
400
J3
400
J4
400
K1
400
K2
400
K3
400
K4
400
L1
200
L2
200
L3
200
L4
200
Slide 11
of 59
Straight (plurality) voting
Candidate
Justin
(400)
Kathy
(400)
Lorenzo
(200)
Justin’s
Slate
Kathy’s
Slate
4
directors
Votes
J1
400
J2
400
J3
400
J4
400
K1
600
K2
600
K3
600
K4
600
L1
Widget Inc
Lorenzo’s
slate
L2
L3
L4
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 12
of 59
Alternatives to traditional
shareholder voting …
•
•
•
•
•
Corporations:
A Contemporary Approach
Cumulative voting
Class voting
Voting trust
Vote-pooling agreement
“Tie breaker” director
Chapter 29
Planning in CHC
Slide 13
of 59
Cumulative voting
Justin
(400)
Kathy
(400)
Lorenzo
(200)
What is cumulative
voting?
• How many directors for
each shareholder?
• Possible to circumvent?
4
directors
Widget Inc
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 14
of 59
MBCA § 7.28
Voting for Directors; Cumulative Voting
(a) Unless otherwise provided in the articles of
incorporation, directors are elected by a plurality of the
votes cast by the shares entitled to vote in the election
at a meeting at which a quorum is present.
(b) Shareholders do not have a right to cumulate their
votes for directors unless the articles of incorporation
so provide.
(c) A statement included in the articles of incorporation
that "[all] [a designated voting group of] shareholders
are entitled to cumulate their votes for directors" (or
words of similar import) means that the shareholders
designated are entitled to multiply the number of votes
they are entitled to cast by the number of directors for
whom they are entitled to vote and cast the product for
a single candidate or distribute the product among two
or more candidates.
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 15
of 59
Cumulative voting
Assume a corporation with two
shareholders, A (30 shares)
and B (70 shares). They
choose cumulative voting.
The board has 4 directors.
• How many votes can A and B
cast for directors?
A
30
B
70
4 directors
A = 30 shares * 4 directors
= 120 votes
B = 70 shares * 4 directors
= 280 votes
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 16
of 59
Cumulative voting
Assume a corporation with two
shareholders, A (30 shares)
and B (70 shares). They
choose cumulative voting.
The board has 4 directors.
• How many votes can A and B
cast for directors?
• Can A cast all her votes for her
board candidate and be
assured of election?
A
30
B
70
4 directors
A A1 (120 votes)
B B1, B2, B3 (with 280 votes,
cannot give all three more
than 120)
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 17
of 59
Cumulative voting
Assume a corporation with two
shareholders, A (30 shares)
and B (70 shares). They
choose cumulative voting.
The board has 4 directors.
• How many votes can A and B
cast for directors?
• Can A cast all her votes for her
board candidate and be
assured of election?
• Can A split her votes and be
assured of electing two board
candidates?
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
A
30
B
70
4 directors
A A1 (60 votes), A2 (60 votes)
B B1 (70 votes), B2 (70 votes),
B3 (70 votes), B4 (70 votes)
Slide 18
of 59
Cumulative voting
Widget Inc has cumulative voting.
How many shares does Lorenzo
need to get X directors on board?
Directors
wanted
Formula
Shares
needed
1
1000*1/5
+ fraction
201 shs
2
1000*2/5
+ fraction
401 shs
3
1000*3/5
+ fraction
601 shs
4
1000*4/5
+ fraction
801 shs
Assume 1000 shares outstanding.
Four directors on board
Formula:
X = S * d / (D + 1) + fraction
Where
X = # shares required
S = # shares at meeting
d = # directors wanted
D = # directors to elect
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 19
of 59
Alternatives to traditional
shareholder voting …
•
•
•
•
•
Corporations:
A Contemporary Approach
Cumulative voting
Class voting
Voting trust
Vote-pooling agreement
“Tie breaker” director
Chapter 29
Planning in CHC
Slide 20
of 59
Class voting
Justin
(400)
Kathy
(400)
Lorenzo
(200)
Can shareholders
vote by class?
Class Class Class
J
K
L
(1 D) (1 D) (2 Ds)
How is this
accomplished?
Widget Inc
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 21
of 59
Alternatives to traditional
shareholder voting …
•
•
•
•
•
Corporations:
A Contemporary Approach
Cumulative voting
Class voting
Voting trust
Vote-pooling agreement
“Tie breaker” director
Chapter 29
Planning in CHC
Slide 22
of 59
Voting trust
Justin
(400)
Kathy
(400)
Lorenzo
(200)
What is a voting trust?
Transfer shares
Trustee
Vote according to trust agreement
• Why must file with
corporation?
• Why limited to
10 years?
Board
Widget Inc
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 23
of 59
Alternatives to traditional
shareholder voting …
•
•
•
•
•
Corporations:
A Contemporary Approach
Cumulative voting
Class voting
Voting trust
Vote-pooling agreement
“Tie breaker” director
Chapter 29
Planning in CHC
Slide 24
of 59
Vote-pooling agreement
Justin
(400)
Kathy
(400)
Lorenzo
(200)
What is a vote-pooling
agreement?
Agreement
• What if a party does not
vote as promised?
• Does mandatory
arbitration solve this?
What about irrevocable
proxy?
Vote according to agreement
Board
Widget Inc
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 25
of 59
Alternatives to traditional
shareholder voting …
•
•
•
•
•
Corporations:
A Contemporary Approach
Cumulative voting
Class voting
Voting trust
Vote-pooling agreement
“Tie breaker” director
Chapter 29
Planning in CHC
Slide 26
of 59
“Tie breaker” director
Justin
(400)
Kathy
(400)
Lorenzo
(200)
Class Class Class Class
J
K
L
TB
(1 D) (1 D) (2 Ds) (1 D)
You
(0 shs)
Can there be shares
without economic rights?
Should you be a
director?
Widget Inc
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 27
of 59
Lawyer as director
“A man who is his own lawyer
has a fool for a client.”
NYSE listing standards
Louis Brandeis
(1856-1941)
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 28
of 59
1. In a CHC, plurality voting:
a. Means Shs can elect Ds
according to pro rata shs
b. Requires that each director
receive a majority of votes
c. Allows majority Sh to elect
all Ds
2. In a CHC, cumulative voting
allows 20% Sh to choose:
a. 3 of 4 Ds
b. 2 of 4 Ds
c. 1 of 4 Ds
3. In a CHC, class voting must
be set out in …
a. Shareholders’ agreement
b. Bylaws
c. Articles
4. In a CHC, a voting trust …
a. Can be unlimited in time
b. Requires approval of all Shs
c. Creates beneficial owners
5. In a CHC, a vote-pooling
agreement…
a. Must include all Shs
b. Can include arbitration if Shs
do not comply
c. Must include corporation as
party
6. In a CHC, a tie-breaking D …
a. Must be approved by all Shs
b. Must be in shareholders’
agreement
c. Can be in articles – new class
of stock
Answers:
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 29
of 59
Close Corporations
(private contracting)
What if agreement -•
deviates from model?
•
does not comply with statute?
•
is unfair?
•
is incomplete (no liquidity)?
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 30
of 59
Close Corporation
(incorporated partnership)
Shareholder-level
arrangements
•Voting
• Cumulative
voting
• Class voting
• Voting trust
• Irrevocable proxy
• Vote-pooling
agreement
•Liquidity
• Transfer
restrictions
• Buy-sell rights
Corporations:
A Contemporary Approach
Shareholders
Board-level
arrangements
•Delegation
•
Board of
Directors
•
Specify
functions
Positions
•Decisions
Close Corporation
Chapter 29
Planning in CHC
•
•
•
Salaries
Dividends
Veto rights
Slide 31
of 59
Management limits (CHC)
McQuade v. Stoneham
(NY 1934)
• Majority SHs
• SH / mgmt limits
Triggs v. Triggs
(NY 1978)
• Majority SHs
• SH /mgmt limits
MBCA - hypo
(1984)
• Majority SHs
• SH /mgmt limits
5
3
Dodge v. Clark
(NY 1936)
• All SHs
• SH / mgmt limits
Zion v. Kurtz
(NY 1980)
• All SHs
• Minority veto
Smith v. Atl Prop
(Mass App 1981)
• All SHs
• Minority veto / duties?
McQuade v. Stoneham (NY 1934)
As shareholder, each will vote his
shares to elect:
> 3 parties as directors
> remaining 4 Stoneham nominees
Stoneham 55%
McGraw 5%
McQuade 5%
Non-party
shareholders
Board
As director, each votes to elect
Stoneham as president - $45,000
McGraw as vice president - $7,500
McQuade as treasurer - $7,500
NY Giants
Creditors
What is theoretical problem?
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 33
of 59
NY Court of Appeals (1934):
"... stockholders may not, by
agreement among
themselves, control the
directors in the exercise of
judgment vested in them ... to
elect officers and fix salaries."
"Directors may not by
agreement .... abrogate their
independent judgment.”
McQuade v. Stoneham (NY 1934)
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 34
of 59
Clark v. Dodge (NY 1936)
Agreement:
Dodge 75%
Clark 25%
Board
(1) Clark will be director and
general manager so long as
"faithful, efficient, competent"
(2) Clark will receive 1/4 of
corporation's net income as
dividends or salary
(3) Dodge will not circumvent
agreement
Close Corporation
Creditors
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 35
of 59
NY Court of Appeals (1936):
"... as director Dodge should
continue Clark as general manager,
so long as he proved faithful efficient
and competent -- an agreement that
could harm nobody ..."
"... Clark should always receive
salary or dividends one-fourth of "net
income" ... it is just to construe that
phrase as meaning whatever was left
for distribution after the directors had
... set aside whatever they deemed
wise ...”
Clark v. Dodge (NY 1936)
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 36
of 59
Triggs v. Triggs (NY 1978)
Father (44%)
Sons (28%, 14%, 14%)
Agreement:
Frederick Sr (44.5%) and son
Ransford (28.0%)
Board
Close Corporation
Corporations:
A Contemporary Approach
• Frederick Sr. to be board chair
(with guaranteed salary)
• Ransford to be president (also
with a salary).
• Ransford has right to buy
Frederick Sr.'s shares on his
death
Chapter 29
Planning in CHC
Slide 37
of 59
NY Court of Appeals (1978):
No argument is made that the stock
purchase option, standing alone would
be invalid .... The critical issue is
whether, because of ... the provisions
said to fetter the authority of the board,
the stock purchase provision is now
unenforceable.
.... following the signing of the
agreement, the assertedly illegal
provisions of the agreement were
ignored ....
the agreement "did not in any way
sufficiently stultify the Board of
Directors in the operations of this
business“
Triggs v. Triggs (NY 1978)
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 38
of 59
Hypothetical
Justin and Kathy agree to the
following.
(1) As shareholders they will elect
themselves to the JKL board.
(2) As directors, they will use their
best efforts to elect Justin as
CEO and Kathy as CFO – each
to be paid $75,000. They also
agree to have the corporation
pay annual dividends of 50% of
net profits.
• Without Lorenzo, is their
agreement valid?
• Can their agreement be valid
without fitting safe harbor?
Consider the MBCA.
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 39
of 59
MBCA
§ 7.31 Voting Agreements
(a) Two or more
shareholders may
provide for the manner in
which they will vote their
shares by signing an
agreement for that
purpose. A voting
agreement created under
this section is not subject
to the provisions of
section 7.30 [which
imposes notice
requirements and 10year limit for voting
trusts]
Corporations:
A Contemporary Approach
§ 7.32 Shareholder Agreements
(a) An agreement among the shareholders ... that complies with
this section is effective among the shareholder and the
corporation even though it is inconsistent with one or more
other provisions of the Act in that it -(1) eliminates the board ... or restricts the discretion ... of
directors ...
(3) establishes who shall be directors or officers of the
corporation;
(8) otherwise governs the exercise of the … management
of the business and affairs of the corporation
(b) An agreement authorized by this section shall be -(1) set forth
(A) in the articles or bylaws and approved by all
shareholders
(B) in a written agreement signed by all
shareholders .... and made known to the
corporation ...
(3) valid for 10 years, unless agreement otherwise.
Chapter 29
Planning in CHC
Slide 40
of 59
Zion v. Kurtz (NY 1980)
Kurtz (80%)
Zion (20%)
Management
agreement
Shareholder
agreement
Kurtz to file articles
under Delaware CHC
statute
Board
Veto right to Zion
Corporation
(CHC under
Delaware statute)
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 41
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NY Court of Appeals (1980):
There are no intervening rights of third
persons, the agreement requires
nothing that is not permitted by the
[Delaware] statute, and all of the
stockholders of the corporation
assented to it,
The certificate of incorporation may be
ordered reformed, by requiring Kurtz
to file the appropriate amendments …
Zion v. Kurtz (NY 1980)
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 42
of 59
Smith v. Atlantic Properties (Mass App 1981)
Shareholders
Shareholder
agreement:
4 equal shareholders on
board
Management
agreement:
Board
Close Corporation
(Massachusetts)
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
80% vote of
board for
declaration of
dividends
(effective
unanimity)
Slide 43
of 59
Mass Appeals Court (1981):
Whatever may have been the reason
for Dr. Wolfson’s refusal to declare
dividends … that he recklessly ran
serious and unjustified risks of
precisely the penalty taxes eventually
assessed …. inconsistent with duty of
“utmost good faith and loyalty”
Court order:
(1) directors prepare financial
statements
(2) directors confer on dividends
(3) hearing if don’t stipulate!!
Smith v. Atlantic Properties (Mass App 1981)
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 44
of 59
“With power comes responsibility”
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 45
of 59
Management limits (CHC)
McQuade v. Stoneham
(NY 1934)
• Majority SHs
• SH / mgmt limits
Triggs v. Triggs
(NY 1978)
• Majority SHs
• SH /mgmt limits
MBCA - hypo
(1984)
• Majority SHs
• SH /mgmt limits
5
3
Dodge v. Clark
(NY 1936)
• All SHs
• SH / mgmt limits
Zion v. Kurtz
(NY 1980)
• All SHs
• Minority veto
Smith v. Atl Prop
(Mass App 1981)
• All SHs
• Minority veto / duties?
1. Shareholders of CHCs …
a. Can agree how to vote their
shares
b. Can agree to limit their
discretion as Ds
c. Can bind selves as Ds, if part
of Shs’ agreement
2. In a CHC, all shareholders can
agree to having sole manager
a. If they agree in writing
b. If agreement does not
jeopardize creditors
c. Only if statute allows
3. In a CHC, fewer-than-all Shs can
agree to voting and mgmt …
a. Under modern common law
b. Under modern statutes
c. Provided other Shs and
creditors not harmed
4. In a CHC, a mgmt agreement by
fewer-than-all shareholders …
a. Is void under MBCA
b. Is valid under MBCA if in writing
c. Is not within MBCA safe harbor
5. In a CHC, agreement by all Shs to
limit board discretion …
a. Must be authorized by statute
b. Must be in articles
c. Must be in writing
6. In a CHC, a minority Sh with veto
power …
a. Must exercise the veto
responsibly
b. Can veto as chooses
c. Cannot veto majority action
Answers:
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 47
of 59
Close Corporations
Unfair agreements
What if agreement -•
deviates from model?
•
does not comply with statute?
•
is unfair?
•
is incomplete (no liquidity)?
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 48
of 59
Concord Auto Auction v. Rustin (D Mass 1986)
Three entrepreneurial siblings -brother Cox, sister Thomas
and sister Powell -- invest in
the exciting and glamorous
business of auto auctioning.
They want an agreement to
provide liquidity on death. If
you were drafting for them,
what issues should you
address in the agreement?
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 49
of 59
Shareholder purchase agreement –
drafting issues
• who buys?
– corporation / Shs?
– first-refusal / contingencies death, withdrawal
• kind of right – “must / may”?
– call or put?
– contingencies - withdrawal,
outside offer, death
• price?
– book value
– annual re-set
– arbitration / appraisal
• how funded?
– insurance / self-funded
– payment in installments?
– repurchase account
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 50
of 59
Shareholders' agreement
¶2 If any shareholder dies, the shareholder's
representative shall within 60 days tender all his
shares and the corporation shall repurchase the
decedent's shares at a price set by the parties as
provided in paragraph 6.
¶6 The price is $672/$744. It shall be reviewed at least
annually no later than the annual shareholders'
meeting ... All parties may agree to a new price ...
[which] shall remain in full force until changed...
¶7 To fund the corporation's repurchase obligation, the
corporation shall annually purchase life insurance in
a face amount equal to the price set by the parties.
Signed, Cox / Thomas / Powell / Corporation
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
Slide 51
of 59
MBCA § 6,27
Restriction on transfer of shares and other securities
(a) The articles of incorporation, bylaws, an agreement among shareholders, or an
agreement between shareholders and the corporation may impose restrictions on the
transfer or registration of transfer of shares of the corporation. ...
(b) A restriction on the transfer or registration of transfer of shares is valid and
enforceable against the holder or a transferee of the holder if the restriction is
authorized by this section, it is not unconscionable under the circumstances, and its
existence is noted conspicuously ...
(d) A restriction authorized by G.S. 55-6-27(c) may:
(1) Obligate the shareholder first to offer the corporation or other persons (separately,
consecutively, or simultaneously) an opportunity to acquire the restricted shares;
(2) Obligate the corporation or other persons (separately, consecutively, or
simultaneously) to acquire the restricted shares;
(3) Require the corporation, the holders of any class of its shares, or another person
to approve the transfer of the restricted shares, if the requirement is not manifestly
unreasonable;
(4) Prohibit the transfer of the restricted shares to designated persons or classes of
persons, if the prohibition is not manifestly unreasonable;
(5) Contain any other provision reasonably related to an authorized purpose.
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A Contemporary Approach
Chapter 29
Planning in CHC
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Unfair agreement?
(violation of fiduciary duties)
Mother and Child with Shawl
Pablo Picasso, 1903
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
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District Judge Young (interpreting
Massachusetts law):
"... contracts must be interpreted and
enforced exactly as written...."
"... the Agreement covers precisely
the situation before the Court: no
revaluation occurred, therefore the
price remains as set forth in the
Agreement ..."
"... intrusion into the private ordering
of commercial affairs offends both
good judgment and good
jurisprudence ...
"... agreements will be upheld
absent any fraud, overreaching,
undue influence, duress, mistake ..."
Concord Auto Auction v. Rustin (D Mass 1986)
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
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Hypothetical – fiduciary duties?
The parties had religiously reset the
companies' value, until last year
when Cox developed acute and
irreversible carbon monoxide
poisoning. But he was hanging
on.
This year when it came time to reset
the value, his two sisters Thomas
and Powell looked at each and
winked. They then did nothing.
Cox goes to the great car lot in the
sky. What does his estate get?
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
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Distinguish
Concord Auto Auction v.
Ruskin (Mass 1986)
Zion v. Kurtz
(NY1980)
Parties agreed to buy-sell
arrangement
Parties agree to shareholder
veto
Parties agreed to reset price, but
sisters didn’t reset.
Kurtz agreed to file for close
corporation status, but didn’t.
Holding: court refuses to estop
sisters from asserting validity
of agreement.
Holding: court estops Kurtz from
denying the lack of close
corporation status.
Cox bound by contract, which
“must be interpreted and
enforced exactly as written"
Kurtz cannot avoid contract just
because he failed to comply
with it!
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
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Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
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Uppity Enterprises LLC brings on Bob as a
new programmer and, as an inducement,
sells him cheap “stock rights” (owner
interests in the LLC).
Group hypo
Then management gets bored of Bob and
fires him. Bob feels OK since he has a
“golden parachute” – namely, his stock
rights.
He takes his employment agreement to you,
which refers to the LLC’s operating
agreement (see next page). The term
“Default Member“ is defined as “any
member whose employment is terminated.”
He asks you:
• What rights do I have under the agreement
when I leave the company?
• Do I have any non-contractual protections?
Please advise your client Bob.
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A Contemporary Approach
Chapter 29
Planning in CHC
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LLC OPERATING AGREEMENT
(c) The Company may exercise the right to purchase
all or a portion of a Defaulting Member’s interest
pursuant to this Section 13.3 by delivery of written
notice to the Defaulting Member no later than sixty
(60) days after the last to occur of (i) the occurrence
of the event giving rise to the purchase right, and (ii)
actual receipt by the Company of written notice of
the occurrence of such event. Upon delivery of such
notice to purchase, the Company shall have the
right and obligation to purchase the Defaulting
Member’s interests, and the Defaulting Member
shall be required to sell such interest at a purchase
price equal to the balance in the Defaulting
Member’s Capital Account [the nominal $0.01 per
share paid by Shareholder] on the date the
purchase right is exercised.
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A Contemporary Approach
Chapter 29
Planning in CHC
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The end
Corporations:
A Contemporary Approach
Chapter 29
Planning in CHC
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