CHAPTER 5: CORPORATE DIRECTORS, OFFICERS, AND SHAREHOLDERS 21
whole or in part.
22 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
When a corporation is dissolved and its debts and the claims of its creditors have been satisfied, the
remaining assets are distributed on a pro rata basis among the shareholders. Certain classes of
preferred stock can be given priority.
H. THE SHAREHOLDER’S DERIVATIVE SUIT
2. Any Damages Awarded Go to the Corporation
Any damages recovered by the suit usually go into the corporation’s treasury.
CASE SYNOPSIS—
Case 5.3: McCann v. McCann
Bill McCann was the president and chief executive officer of McCann Ranch & Livestock Co. He and his
brother Ron each owned 36.7 percent of the stock. Their mother, Gertrude, owned the rest of the stock, which
was to pass to Bill on her death. The corporation paid Gertrude’s personal expenses in an amount that
represented about 75 percent of the net corporate income. Bill received regular salary increases. The firm did
not issue a dividend, however, and Ron had been removed from the board of directors and was not
authorized to work for the firm. Ron filed a complaint against the others, alleging that he was the victim of a
freeze-out. The court dismissed the suit, finding that Ron had filed a derivative suit without making a written
demand on the corporation first. Ron appealed.
The Idaho Supreme Court reversed. Unlike Bill and Gertrude, who were the only other shareholders, Ron
did not benefit from any of the decisions in question. Thus, he could bring an individual suit for breach of
fiduciary duty because he could show that he had been uniquely harmed.
………………….………………..……………………………….………………………………..……..…………………
Notes and Questions
Are the circumstances significantly different when the shares of a close corporation are involved
in a case including allegations of oppression? Yes. The lack of marketability of the shares of a closely
held corporation means that minority shareholders are especially vulnerable to the loss of their investments.
The ‘squeeze–out’ tactics of majority shareholders often deprive minority shareholders of management
participation, employment income or other advantages that they reasonably have come to expect, and which
whole or in part.
CHAPTER 5: CORPORATE DIRECTORS, OFFICERS, AND SHAREHOLDERS 25
whole or in part.
A shareholder may be liable personally if he or she receives watered stock without paying the share’s
stated value. In that case, the shareholder may be liable not only to the corporation for difference
between the price paid and the stock’s stated value, but to creditors for corporate debts.
B. DUTIES OF MAJORITY SHAREHOLDERS
A majority shareholder has a fiduciary duty to the corporation and to the minority shareholders when he
or she (or a few shareholders acting together) owns enough shares to exercise de facto control over the
corporation.
ENHANCING YOUR LECTURE—
CREATING AN E-DOCUMENT RETENTION POLICY
If a corporation becomes the target of a civil lawsuit or criminal investigation, the company may be
required to turn over any documents in its files relating to the matter during the discovery stage of litigation.
These documents may include legal documents, contracts, e-mail, faxes, letters, interoffice memorandums,
notebooks, diaries, and other materials, even if they are kept in personal files in the homes of directors or
officers. Under the current Federal Rules of Civil Procedure, which govern civil litigation procedures, a
defendant in a lawsuit must disclose all relevant electronic data compilations and documents, as well as all
relevant paper documents.
Although certain documents or data might free a company of any liability arising from a claim, others
might serve to substantiate a civil claim or criminal charge. It is also possible that information contained in a
document—an interoffice e-mail memo, for example (or even a memo referring to that memo)—could be used
to convince a jury that the company or its directors or officers had condoned a certain action that they later
denied condoning.
WHICH E-DOCUMENTS SHOULD BE RETAINED?
How does a company decide which e-documents should be retained and which should be
destroyed? By law, corporations are required to keep certain types of documents, such as those specified in
the Code of Federal Regulations and in regulations issued by government agencies, such as the
Occupational Safety and Health Administration. Generally, any records that the company is not legally
required to keep or that the company is sure it will have no legal need for should be removed from the files
and destroyed. A partnership agreement, for example, should be kept. A memo about last year’s company
picnic, however, should be removed from the files and destroyed; obviously, it is just taking up storage space.
MODIFICATIONS MAY BE NECESSARY DURING AN INVESTIGATION
If the company becomes the target of an investigation, it usually must modify its document–retention
policy until the investigation has been completed. Company officers, after receiving a subpoena to produce
specific types of documents, should instruct the appropriate employees not to destroy relevant papers or e-
documents that would otherwise be disposed of as part of the company’s normal document-retention
program.
Generally, to avoid being charged with obstruction of justice, company officials must always exercise
whole or in part.
good faith in deciding which documents should or should not be destroyed when attempting to comply with a
subpoena. The specter of criminal prosecution would appear to encourage the retention of even those
documents that are only remotely related to the dispute—at least until it has been resolved.
22 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
When a corporation is dissolved and its debts and the claims of its creditors have been satisfied, the
remaining assets are distributed on a pro rata basis among the shareholders. Certain classes of
preferred stock can be given priority.
H. THE SHAREHOLDER’S DERIVATIVE SUIT
2. Any Damages Awarded Go to the Corporation
Any damages recovered by the suit usually go into the corporation’s treasury.
CASE SYNOPSIS—
Case 5.3: McCann v. McCann
Bill McCann was the president and chief executive officer of McCann Ranch & Livestock Co. He and his
brother Ron each owned 36.7 percent of the stock. Their mother, Gertrude, owned the rest of the stock, which
was to pass to Bill on her death. The corporation paid Gertrude’s personal expenses in an amount that
represented about 75 percent of the net corporate income. Bill received regular salary increases. The firm did
not issue a dividend, however, and Ron had been removed from the board of directors and was not
authorized to work for the firm. Ron filed a complaint against the others, alleging that he was the victim of a
freeze-out. The court dismissed the suit, finding that Ron had filed a derivative suit without making a written
demand on the corporation first. Ron appealed.
The Idaho Supreme Court reversed. Unlike Bill and Gertrude, who were the only other shareholders, Ron
did not benefit from any of the decisions in question. Thus, he could bring an individual suit for breach of
fiduciary duty because he could show that he had been uniquely harmed.
………………….………………..……………………………….………………………………..……..…………………
Notes and Questions
Are the circumstances significantly different when the shares of a close corporation are involved
in a case including allegations of oppression? Yes. The lack of marketability of the shares of a closely
held corporation means that minority shareholders are especially vulnerable to the loss of their investments.
The ‘squeeze–out’ tactics of majority shareholders often deprive minority shareholders of management
participation, employment income or other advantages that they reasonably have come to expect, and which
whole or in part.
CHAPTER 5: CORPORATE DIRECTORS, OFFICERS, AND SHAREHOLDERS 25
whole or in part.
A shareholder may be liable personally if he or she receives watered stock without paying the share’s
stated value. In that case, the shareholder may be liable not only to the corporation for difference
between the price paid and the stock’s stated value, but to creditors for corporate debts.
B. DUTIES OF MAJORITY SHAREHOLDERS
A majority shareholder has a fiduciary duty to the corporation and to the minority shareholders when he
or she (or a few shareholders acting together) owns enough shares to exercise de facto control over the
corporation.
ENHANCING YOUR LECTURE—
CREATING AN E-DOCUMENT RETENTION POLICY
If a corporation becomes the target of a civil lawsuit or criminal investigation, the company may be
required to turn over any documents in its files relating to the matter during the discovery stage of litigation.
These documents may include legal documents, contracts, e-mail, faxes, letters, interoffice memorandums,
notebooks, diaries, and other materials, even if they are kept in personal files in the homes of directors or
officers. Under the current Federal Rules of Civil Procedure, which govern civil litigation procedures, a
defendant in a lawsuit must disclose all relevant electronic data compilations and documents, as well as all
relevant paper documents.
Although certain documents or data might free a company of any liability arising from a claim, others
might serve to substantiate a civil claim or criminal charge. It is also possible that information contained in a
document—an interoffice e-mail memo, for example (or even a memo referring to that memo)—could be used
to convince a jury that the company or its directors or officers had condoned a certain action that they later
denied condoning.
WHICH E-DOCUMENTS SHOULD BE RETAINED?
How does a company decide which e-documents should be retained and which should be
destroyed? By law, corporations are required to keep certain types of documents, such as those specified in
the Code of Federal Regulations and in regulations issued by government agencies, such as the
Occupational Safety and Health Administration. Generally, any records that the company is not legally
required to keep or that the company is sure it will have no legal need for should be removed from the files
and destroyed. A partnership agreement, for example, should be kept. A memo about last year’s company
picnic, however, should be removed from the files and destroyed; obviously, it is just taking up storage space.
MODIFICATIONS MAY BE NECESSARY DURING AN INVESTIGATION
If the company becomes the target of an investigation, it usually must modify its document–retention
policy until the investigation has been completed. Company officers, after receiving a subpoena to produce
specific types of documents, should instruct the appropriate employees not to destroy relevant papers or e-
documents that would otherwise be disposed of as part of the company’s normal document-retention
program.
Generally, to avoid being charged with obstruction of justice, company officials must always exercise
whole or in part.
good faith in deciding which documents should or should not be destroyed when attempting to comply with a
subpoena. The specter of criminal prosecution would appear to encourage the retention of even those
documents that are only remotely related to the dispute—at least until it has been resolved.