BUSINESS LAW Twomey Jennings 1 st Ed Twomey
BUSINESS LAW Twomey • Jennings 1 st. Ed. Twomey & Jennings BUSINESS LAW Chapter 44 Shareholder Rights in Corporations © 2004 West Legal Studies in Business A Division of Thomson Learning
BUSINESS LAW Twomey • Jennings 1 st. Ed. 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. © 2004 West Legal Studies in Business A Division of Thomson Learning 2
BUSINESS LAW Twomey • Jennings 1 st. Ed. 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). © 2004 West Legal Studies in Business A Division of Thomson Learning 3
BUSINESS LAW Twomey • Jennings 1 st. Ed. 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. © 2004 West Legal Studies in Business A Division of Thomson Learning 4
BUSINESS LAW Twomey • Jennings 1 st. Ed. 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. © 2004 West Legal Studies in Business A Division of Thomson Learning 5
BUSINESS LAW Twomey • Jennings 1 st. Ed. 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. © 2004 West Legal Studies in Business A Division of Thomson Learning 6
BUSINESS LAW Twomey • Jennings 1 st. Ed. Transfer of Shares A 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. A receives the 2. If corporation declared cash dividend on May 20 to be paid to those who will be holders on June 15. B receives the 3. If corporation declared stock dividend on May 10. Stock distributed on June 10. B receives the © 2004 West Legal Studies in Business A Division of Thomson Learning cash dividend. stock dividend. 7
BUSINESS LAW Twomey • Jennings 1 st. Ed. 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. Shoaf v Warlick (1989) Did the majority shareholder have the right to sell his stock? © 2004 West Legal Studies in Business A Division of Thomson Learning 8
BUSINESS LAW Twomey • Jennings 1 st. Ed. 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. Security First v U. S. Die Casting (1997) Did the stockholder have the right to inspect the books? © 2004 West Legal Studies in Business A Division of Thomson Learning 9
BUSINESS LAW Twomey • Jennings 1 st. Ed. 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. © 2004 West Legal Studies in Business A Division of Thomson Learning 10
BUSINESS LAW Twomey • Jennings 1 st. Ed. 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. Hubbard v Tomlinson (2001) Can an individual shareholder bring a lawsuit in his own name? © 2004 West Legal Studies in Business A Division of Thomson Learning 11
BUSINESS LAW Twomey • Jennings 1 st. Ed. 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. © 2004 West Legal Studies in Business A Division of Thomson Learning 12
BUSINESS LAW Twomey • Jennings 1 st. Ed. Liability of Shareholders • 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? © 2004 West Legal Studies in Business A Division of Thomson Learning 13
BUSINESS LAW Twomey • Jennings 1 st. Ed. Liability of Shareholders • Wage Claims. • Unpaid Subscriptions. • Unauthorized Dividends. • Professional Corporation. – Cannot create to avoid liability. – Liability for malpractice of associate. © 2004 West Legal Studies in Business A Division of Thomson Learning 14
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