Corporate governance

1
Corporate governance

• Management by board (Del 141(a)
• Shareholders vote on important issues
• Certificate amendment (242)
• Merger (251)
• Substantial asset sale (262)
• Dissolution (275)
• Replacing and removing directors (141, 223)
• Calling meetings (211 228)
• Shareholders vote by majority
• Cumulative voting
• Common share votes allocated by capital
• Voting by other security holders and classes

2
Governance comparison
Partnership Corporation Close
corp Voting Allocation Per capita Pro
rata Agreement Ordinary Majority None Agreement
Extraordinary Unanimity Majority Agreement Manag
ement Direct Board Agreement Transfer Restrict
ed Free Agreement Dissolution At
will Vote Agreement/ judicial
3
Shareholder voting arrangements
Larry Moe Curly Fred Capital
100 100 0 10 Vote 100 0 100
10 Voting trust Moes shares in voting
trust, Curly trustee Voting agreement
irrevocable proxy Moe agrees to let Curly vote
his stock. Moe cant revoke. Classified stock
Class A (Larry) 100 votes Class B
(Moe) 0 votes Class C (Curly)
100 votes Class D (Fred) 10
votes High vote 195 votes required for
decision. Moe gets veto with only 10 votes.
4
Ringling
Edith/Robert (315) Ida/John (370) Haleys (315)
2205 votes
2205 votes (7 x 315)
2590 votes
Shares to elect 1 director (X) if Y shares vote
for N directors (X)Y/(N 1) 1 1000/8 1
126 Without voting agreement 315/126
315/126 2 2 4. With voting agreement
630/126 5 ER and Haleys can elect themselves
plus Dunn. Ida and John cannot elect Griffin.
5
Effects of rulings
Pearson Edith Robert Dunn North Wood Griffin
Seitz Edith Robert Haley Haley Dunn North Wood
6
Abercrombie
Davies Ashland Signal Hancock
Globe/Lario
1 2 2 2 1 (number of
director/agents)
7
Lehrman
Lehrman (AL) Cohen (AC) Danzansky (AD) 50
ownership 50 ownership 0 ownership 40
vote 40 vote 20 vote
8
Director control Clark

• The agreement Dodge votes as (a) stockholder
  and (b) director that
• Clark continues as director
• Clark continues as general manager
• Clark receives 1/4 net income
• Nobody gets unreasonable salaries

9
Zion
Equimark Group Bank Lombard (Zion
(A) Kurtz (B))
note
guarantee
Half-Moon (Zion)
California land
10
Delaware close corporation

• 342 Definition of close corporation
• 343 Formation
• 350 Agreement restricting director discretion
  not invalid between parties
• 351 Certificate provision for shareholder
  management
• 354 Agreement not invalid because corporation
  operated as partnership
• 355 Shareholder option to dissolve
• 356  Does not repeal any statute or rule of law
  which is or would be applicable to any
  corporation which is organized under this chapter
  but is not a close corporation.

11
Share transfer restrictions

• Does merger sale?
• Frandsen
• Bruns
• Burt
• Who is the corporation?
• Who are the majority shareholders?
• Who are the remaining stockholders?

12
Americas Sweetheart
13
Piedmont Accounting
Balance Sheet Assets Liabilities Transmitt
er L Goodwill? Sh equity Antenna
move (book value) Radio ads Capital
surplus Other assets _____________________________
_____________________
?
?
Income Statement Revenues minus Expenses
Earnings Antenna move Radio ads
Valuation V Earnings x Capitalizer Capitaliz
er Risk Growth
14
Close corporation dissolution
Standard corporation Partnership Close
corp (per contract) Board Direct Dire
ct Pro rata vote Per capita Per
capita Majority vote Veto Veto Public
market No market No market Dissolution by
board Dissolution at ????? and sh vote will
15
Deadlock problem

• Board 1
• B1 B2 A C
• Bylaws
• Board must have 4 persons
• Shareholders must fill vacancy before business
  conducted
• First option share transfer restrictions
• Board 2
• B B C
• D owns A shares, voted by C.
• C wants to elect D.
• B1 and B2 want to elect B3.

16
Donahue
Board Charles, Frederick, Magnuson Shares
(before transfers) Donahue 50 Harry Rodd
200 Rodd shares (after transfers) Charles,
Frederick and Phyllis 39 (gift) 10 (gift)
sale 2 (_at_ 800) 51 x 3 153 Treasury 2
(transfer) 45 (sale _at_ 800)
17
The relevance of the statute

• Donahue Massachusetts no provisions
• Toner Maryland Consent to transfer or
  liquidation in close corporation if no share
  transfer agreement
• Sundberg (Minnesota) Close corporation
  oppression remedy public corporation remedy if
  unfairly prejudicial
• Illinois (12.55-.56) Close corporation
  oppression public corporation, no equivalent
  remedy
• New York What if plaintiffs owned less than
  20?
• Nixon (Delaware) Close corporation can contract
  for remedy
• MBCA Court may dissolve (14.30) buy out of
  petitioner permitted in close corporation (14.34)

18
Donahue problems
Problem 1 A 37.5 B37.5 C 25
A62.5 B37.5
Problem 2 A375 B375 10 shares 240
shares C250
A385 B375
corporation