Chapter 44 – Shareholders’ Rights and Liabilities
44-8
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
for directors and executives who receive substantial compensation as directors and
officers of public companies.
A utilitarian or profit maximizer may conclude that the cost of litigating against a
director, including legal fees, and the diversion of executive time outweigh the
people escaping liability. A rights theorist may elevate the right to hold wrongdoers
liable above the right to maximize corporate profits. You’ve often heard people say,
those who harm them.
I. Shareholder Liability
corporate debts.
2. Sale of control
a. Explain why control shares are worth more than non-control shares.
Feldman’s shares, was required to pay full value for the steel it bought from
Newport. Therefore, it is difficult to find any damage in that case. Newport could
shares.
c. There are two ways for a controlling shareholder to reduce her risk of liability when
she sells her shares:
avoid a lawsuit.
3. Oppression of minority shareholders
This area is confusing because it is not clear whether the managers only or whether
controlling shareholders also owe a duty not to oppress minority shareholders. You may
want to refer to the oppression materials in Chapter 43 at pages 1137.
Examples: Problem Cases ## 8, 9, and 10.
Brodie v. Jordan (p. 1173): Massachusetts courts have a long history of creating special
remedies in the close corporation context. Several of those cases are cited in this case.
Here the court was willing to consider ordering the corporation to pay dividends to the
minority shareholder or to allow her to participate in corporate governance, but it was
not willing to allow her to obtain the windfall of having her shares purchased.
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Points for Discussion: Where was the evidence of oppression in this case? Jordan and
Barbuto were the only directors and both received salaries or other compensation for the
return.
Additional Points for Discussion: On what basis did the court decide to fashion a
remedy for Mary? It based its decision on her reasonable expectations. It believed that
she could reasonably expect to receive a profit from her investment and to participate in
shares at a favorable price while denying the minority the same right. No such
preference existed here.
Additional Points for Discussion: Ask your students whether they feel sorry for the
position Mary is in. Wasn’t this predictable when Walter first formed the corporation
with Jordan and Barbuto? Couldn’t Walter have prevented his and Mary’s ouster from
unaffected by the majority’s actions. Being frozen out of management and profits is only
the result of the majority’s actions.
Additional Point for Discussion: Mary was lucky she was in Massachusetts. Your
students and their clients may not be so lucky. Ask your student what should have been
long-term employment contracts requiring payments to shareholders-employees even if
they were fired as employees or officers. These business planning devices are essential
to avoid domination and to obtain a return on investment in a close corporation.
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J. Members’ Rights and Duties in Nonprofit Corporations
2. Point out the leniency of rules requiring membership approval of matters like
debate whether it is sufficient that a shareholder or member has been informed about a
stock corporation.
4. A nonprofit corporation is greatly restricted in distributing its assets to its members due
nonprofit corporation.
5. Note the great latitude given to nonprofit corporations to expel members. Note that
shareholders from a for-profit corporation: the lack of a profit motive reduces the
context.
K. Shareholders Rights Globally
of capitalism worldwide.
2. The Global Business Environment (p. 1177): Note some of the differences between
L. Dissolution of Corporations
1. Briefly review the ways in which a corporation may be dissolved. Give special attention
Example: Problem Case # 11.
3. Note that dissolution of nonprofit corporations is substantially like dissolution of for–
profit corporations, with the exception that third-party approval may be required.
IV. RECOMMENDED REFERENCES
V. ANSWERS TO PROBLEM CASES
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Wallace, the holder of a majority of the shares, conducted a valid shareholder meeting when
1981).
2. Here is one of many possibilities. There should be seven classes of shares. Five classes are
managers receives all the shares of one of the five classes. Each class owns 5% of the equity
director elections. This class’s permission is required to amend the articles in any manner
harmful to this class or its rights. Half of the shares owned by the five managers are
convertible into shares of the public class. This allows the five managers to maintain their
control of the company and to be able to sell some of their shares on the open market and get
Therefore, James could at any time revoke the proxy he had given to Louise, as he did by
making a new agreement with Sarah. Eliason v. Englehart, 733 A.2d 944 (Del S. Ct. 1999).
4. Aspen wanted to exercise a dissenter’s right, or right of appraisal, that is, to have a court
holders of warrants exchangeable for shares. Therefore, Aspen had no appraisal rights. In
5. No. The Delaware Supreme Court ruled it was inappropriate to deny a shareholder the right
that suit was dismissed without prejudice and with leave to amend, and (2) bringing the
6. Yes. The business judgment rule protects a board’s decision whether to pay a dividend,
requiring that the board’s decision to retain earnings and not pay a dividend be in good faith
the dividend, Furman will add $955 million to its retained earnings. While not enough by
itself to fund the development, which will cost $1.17 billion over four years, when added to
Chapter 44 – Shareholders’ Rights and Liabilities
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
current retained earnings, there will be sufficient funds for the development, yet leave a
balance to finance extraordinary operations and other capital investments that might arise.
Retaining additional earnings and cash instead of paying the usual dividend appears to be a
rational way of financing the new product developments.
7. The shareholders seeking damages for having overpaid for their GM shares or for buying
GM shares that they otherwise would not have purchased have brought a class action against
action for administrative convenience.
The shareholders who claim that GM has been harmed by GM’s management have brought a
derivative action, an action on behalf of the corporation and for its benefit against those that
are alleged to have harmed GM or unless they prove it is futile to ask the board to sue
management on the grounds that the board lacks independence in making the decision
comply with Zapata because there are no disinterested members of the board to make up the
shareholder litigation committee, the shareholder derivative action will proceed to trial.
8. No. While the court noted that a majority of states find that directors and officers owe
and Tesches had breached their fiduciary duty to the Jorgensens. Jorgensen v. Water Works,
Inc., 582 N.W.2d 98 (Wis. Ct. App. 1998).
9. Yes. The court held that the market created for United was a market that would have been
available for Association shares had the majority taken Associated public. After United
became public, it became a virtual certainty that no equivalent market could be created for
Association shares. Thus the majority shareholders chose a course of action in which they
public market for shares. The court merely held that if they do choose to create a public
market for their own shares, they should create a market for all the shares. Jones v. H.F.
Ahmanson & Co., 460 P.2d 464 (Cal. Sup. Ct. 1969).
10. Yes. The Utah Supreme Court agreed with McLaughlin that shareholders in close
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therefore, the defendants did not breach any fiduciary duties owed him. Schenck’s actions
Schenk (sic), 220 P.3d 146 (Utah S. Ct. 2009).
11. No. The court held that the provision in the articles giving power to dissolve the corporation
for a judicial dissolution. Sutter v. Sutter Ranching Corp., 14 P.3d 58 (Okla. S. Ct. 2000).