Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning Chapter 45 Shareholder Rights in Corporations Twomey Jennings Anderson’s Business Law and the Legal Environment, Comprehensive 20e Anderson’s Business Law and the Legal Environment, Standard 20e Business Law: Principles for Today’s Commercial Environment 2e

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 2 Stocks and Bonds 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 3 Stocks and Bonds 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 4 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

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 5 Common Stock (Common stock entitles the holder to:) –(3) participate, upon dissolution, in the distribution of net assets after the satisfaction of all creditors (including bondholders).

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 6 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 7 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 8 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. –Pre-incorporation (offer to corporation). –Post-incorporation (corporation must accept offer).

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 9 A receives the cash dividend. B receives the cash dividend. B receives the stock dividend. A sold to B on May 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 If corporation declared stock dividend on May 10. Stock distributed on June 10. Transfer of Shares

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 10 Rights of Shareholders Ownership: –Stock Certificate. Properly executed by Corporate Secretary. –Transfer of Shares. Corporation may restrict transfer (e.g., close corporation).

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 11 Rights of Shareholders Voting. Shareholders control the corporation indirectly by electing directors through their voting rights. –Cumulative voting. –Voting by proxy. –Voting agreement and trusts.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 12 Rights of Shareholders Preemptive rights, if they exist, allow shareholders to maintain their voting percentages when the corporation issues additional shares of stock. Inspection of Books. –Form of Books. –Financial Statements.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 13 Dividends 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 14 Liability of Shareholders 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.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 15 Liability of Shareholders 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. –Determination that injustice would result if the corporate entity were recognized.

Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 16 Liability of Shareholders Wage Claims. Unpaid Subscriptions. Unauthorized Dividends. Professional Corporation. –Cannot create to avoid liability. –Liability for malpractice of associate.