Business Organizations 2009-2010 Lectures Partnerships, Corporations And the variants PROF. BRUCE MCCANN Lecture 11 SHAREHOLDER AGREEMENTS and piercing the corporate veil pp. 436-478

Postscript on Consents Model Act now allows electronic or other consents without unanimity and without notice to all shareholders if: Articles of Incorporation provide for passage by majority vote, and The action is approved by consents signed, even electronically, by a majority of eligible voters By default, Directors are to be elected by “plurality” (rather than cumulative vote or majority vote) True both under Model Act and Delaware law BUT, bylaws may provide for majority or other constraint Lec.11, PP 436-478 Corps Prof. McCann

Shareholder Agreements Liberally construed in closely held corporations BUT, under Model Act, Must be included in writing filed with the corporation Must be unanimously approved by all shareholders at time of creation Must be included in articles or bylaws or in a separate writing BUT Cannot eliminate fiduciary duties of officers and directors, Are not binding on creditors or third parties Are not binding on shareholders without knowledge Lec.11, PP 436-478 Corps Prof. McCann

GALLER V GALLER Held: Shareholder agreement not violative of public policy unless Violates an express statement of policy or Is “manifestly injurious” to public welfare and Where corrupt or dangerous tendency clearly appears on face of agreement or is part of a corrupt scheme and disguised to conceal true nature of the transaction Lec.11, PP 436-478 Corps Prof. McCann

The Role of the Employment Contract Tool to try to cement control in named persons BUT All officers are “at will,” so directors can readily fire Or, directors can cut salary, duties, powers, etc. Counter Moves Liquidated damages Golden Parachutes Defined powers and salary increases Lec.11, PP 436-478 Corps Prof. McCann

PIERCING THE CORPORATE VEIL The issue is not whether the corporate entity should be disregarded for all purposes, nor whether its very purpose was to defraud the plaintiff. Rather, the issue is whether in the particular case and for purposes of that case "justice and equity can best be accomplished and fraud and unfairness defeated by a disregard of the distinct entity of the corporate form." (Kohn v. Kohn (1950) 95 C.A.2d 708) Lec.11, PP 436-478 Corps Prof. McCann

Sea-Land Rule Corporate entity will be disregarded and veil of limited liability pierced if: There is a unity of interest and ownership such that the separateness of the personalities of the entity and the individual (or other entity) no longer exists; Circumstances must be such that adherence to the fiction of separateness would SANCTION A FRAUD PROMOTE INJUSTICE Lec.11, PP 436-478 Corps Prof. McCann

Sea-Land Rule – “Promote Injustice?” Means more than that a creditor will go unpaid. There must be a wrong beyond creditor’s inability to correct, e.g., Unjust enrichment to person or entity who looted corporation Scheme to move assets to one entity and liabilities to another Must be sufficient to “merit the evocation” of the court’s equitable powers. Lec.11, PP 436-478 Corps Prof. McCann

§ 17101. Personal liability of members (b) A member of a limited liability company shall be subject to liability under the common law governing alter ego liability, and shall also be personally liable under a judgment of a court or for any debt, obligation, or liability of the limited liability company, whether that liability or obligation arises in contract, tort, or otherwise, under the same or similar circumstances and to the same extent as a shareholder of a corporation may be personally liable … except that the failure to hold meetings of members or managers or the failure to observe formalities pertaining to the calling or conduct of meetings shall not be considered a factor tending to establish that a member or the members have alter ego or personal liability for any debt, obligation, or liability of the limited liability company where the articles of organization or operating agreement do not expressly require the holding of meetings of members or managers. Lec.11, PP 436-478 Corps Prof. McCann

Piercing Based on Agency Analysis Where person uses a corporation as a shield to pursue the person’s interests and activities, effectively same conduct as if used any other agent: Therefore, liability imposed on principal via respondeat superior No matter if agent’s wrongdoing arises in contract or tort Lec.11, PP 436-478 Corps Prof. McCann