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Chapter 29 Planning in CHC. Overview Dilemma – incorporated partnership Nature of CHC Shareholder voting arrangements Types: cumulative voting, class voting, voting trust, Irrevocable proxy, vote-pooling agreement, transfer restrictions Lawyer as director What if agreement – - PowerPoint PPT Presentation
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Corporations:A Contemporary Approach
Chapter 16Public Shareholder Activism
Slide 1of 65
Family-owned Pensione Bencistá, Fiesole, Italy (overlooking Florence)
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 2of 59
Chapter 29Planning in CHC
• Overview– Dilemma – incorporated partnership– Nature of CHC
• Shareholder voting arrangements– Types: cumulative voting, class voting,
voting trust, Irrevocable proxy, vote-pooling agreement, transfer restrictions
– Lawyer as director • What if agreement –
– deviates from model? Compare shareholder and management Ks
– does not comply with statute? Fiduciary duties of minority shareholders
Module X – Close Corporations
Citizen of world
Law profession
Corporate practice
Bar exam
Corporations:A Contemporary Approach
Chapter 29Planning in Close Corporation
Slide 3of 59
1. Fundamentals– Introduction to firm– Corporate basics
2. Corporations and policy– Corporate federalism– Corporate social responsibility – Corporate political action
3. Corporate form– Organizational choices– Incorporation– Locating corporate authority
4. Corporate finance– Numeracy for corporate lawyers– Capital structure
5. Corporate externalities– Piercing corporate veil– Corporate environmental liability– Corporate criminal liability
6. Corporate governance – Shareholder voting– Shareholder information rights– Public shareholder activism
7. Fiduciary duties– Shareholder litigation– Board decision making – Board oversight – Director conflicts– Executive compensation – Corporate groups
8. Stock trading– Securities markets– Securities fraud class actions– Insider trading
9. Corporate deals– Sale of control– Antitakeover devices– Deal protection
10. Close corporations– Planning– Oppression
1. Fundamentals– Introduction to firm– Corporate basics
2. Corporations and policy– Corporate federalism– Corporate social responsibility – Corporate political action
3. Corporate form– Organizational choices– Incorporation– Locating corporate authority
4. Corporate finance– Numeracy for corporate lawyers– Capital structure
5. Corporate externalities– Piercing corporate veil– Corporate environmental
liability– Corporate criminal liability
6. Corporate governance – Shareholder voting– Shareholder information rights– Public shareholder activism
7. Fiduciary duties– Shareholder litigation– Board decision making – Board oversight – Director conflicts– Executive compensation – Corporate groups
10. Close corporations1. Planning2. Oppression
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 4of 59
Corporation – Traditional Model
Corporation
Board ofdirectors
Shareholders
Shareholder role
• Vote (and voice)• elect board• veto fundamental
changes• amend bylaws, adopt
resolutions• Sue (BJR) • Sell (liquidity)
Management role • Manage / supervise
business• control cash flow• delegate authority
• Initiate fundamental changes
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 5of 59
Partnership – Traditional Model
Partnership
Partners’ role
• Vote • Fundamental changes (all)• Approve new partners (all)
• Sue (accounting)• Heightened duties• No BJR
• Sell withdraw• Management
• Bind partnership (each P)• Day-to-day business (equal)• Information rights
Corporations:A Contemporary Approach
Slide 6of 59
1. In a partnership, a partner who wants out:a. Must get approval of all
partnersb. Must get approval of majority
of partnersc. Simply withdraws and gets pro
rata cash
2. In a CHC, a shareholder who wants out:a. Must get approval of all
shareholdersb. Must get approval of boardc. Is stuck
3. In a partnership, a partner …a. Can block major decisionsb. Must accept majority’s willc. Must get approval to bind
partnership
4. In a CHC, a shareholder …a. Can veto fundamental
transactionsb. Must accept majority’s will (board
action)c. Can bind the corporation
5. In a partnership, profits …a. Flow to the partnersb. Must be claimed in an
accountingc. Are shared on majority action
6. In a CHC, profits …a. Create a right to shareholder
dividendsb. Must be claimed in an
accountingc. Are shared based on majority
(board) action
Answers:Chapter 29
Planning in CHC
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 7of 59
The close corporation
What do they want?
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 8of 59
Close Corporation(incorporated partnership)
Close Corporation
Board ofDirectors
Shareholders
Shareholder-level arrangements• Voting
• Cumulative voting• Class voting• Voting trust• Irrevocable proxy• Vote-pooling agreement
• Liquidity• Transfer restrictions• Buy-sell rights
Board-level arrangements• Delegation
• Specify functions / positions• Decisions
• Salaries• Dividends• Fundamental transactions
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 9of 59
Shareholder voting …
Straight (plurality) votingCumulative voting
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 10of 59
Widget Inc
Justin (400)
4directors
Straight (plurality) voting
Kathy(400)
Lorenzo(200)
How many directors does each elect with straight (plurality) voting?
Who are the top 4 vote-getters?
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 11of 59
Straight (plurality) voting
Candidate Votes
Justin’sSlate
J1 400J2 400J3 400J4 400
Kathy’sSlate
K1 400K2 400K3 400K4 400
Lorenzo’sslate
L1 200L2 200L3 200L4 200
Widget Inc
Justin(400)
4directors
Kathy(400)
Lorenzo(200)
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 12of 59
Straight (plurality) voting
Candidate Votes
Justin’sSlate
J1 400J2 400J3 400J4 400
Kathy’sSlate
K1 600K2 600K3 600K4 600
Lorenzo’sslate
L1L2L3L4
Widget Inc
Justin (400)
4directors
Kathy(400)
Lorenzo(200)
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 13of 59
Alternatives to traditionalshareholder voting …
• Cumulative voting• Class voting• Voting trust• Vote-pooling agreement• “Tie breaker” director
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 14of 59
Widget Inc
Justin (400)
4directors
Cumulative voting
Kathy(400)
Lorenzo(200)
What is cumulativevoting?
• How many directors for each shareholder?
• Possible to circumvent?
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 15of 59
MBCA § 7.28 Voting for Directors; Cumulative Voting
(a) Unless otherwise provided in the articles of incorporation, directors are elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present.
(b) Shareholders do not have a right to cumulate their votes for directors unless the articles of incorporation so provide.
(c) A statement included in the articles of incorporation that "[all] [a designated voting group of] shareholders are entitled to cumulate their votes for directors" (or words of similar import) means that the shareholders designated are entitled to multiply the number of votes they are entitled to cast by the number of directors for whom they are entitled to vote and cast the product for a single candidate or distribute the product among two or more candidates.
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 16of 59
4 directors
A B
7030
A = 30 shares * 4 directors = 120 votes
B = 70 shares * 4 directors = 280 votes
Assume a corporation with two shareholders, A (30 shares) and B (70 shares). They choose cumulative voting.
The board has 4 directors.• How many votes can A and B
cast for directors?
Cumulative voting
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 17of 59
4 directors
A B
7030
A A1 (120 votes)
B B1, B2, B3 (with 280 votes, cannot give all three more than 120)
Assume a corporation with two shareholders, A (30 shares) and B (70 shares). They choose cumulative voting.
The board has 4 directors.• How many votes can A and B
cast for directors?• Can A cast all her votes for her
board candidate and be assured of election?
Cumulative voting
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 18of 59
4 directors
A B
7030
A A1 (60 votes), A2 (60 votes)
B B1 (70 votes), B2 (70 votes), B3 (70 votes), B4 (70 votes)
Assume a corporation with two shareholders, A (30 shares) and B (70 shares). They choose cumulative voting.
The board has 4 directors.• How many votes can A and B
cast for directors?• Can A cast all her votes for her
board candidate and be assured of election?
• Can A split her votes and be assured of electing two board candidates?
Cumulative voting
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 19of 59
Widget Inc has cumulative voting. How many shares does Lorenzo need to get X directors on board?
Assume 1000 shares outstanding. Four directors on board
Formula:X = S * d / (D + 1) + fraction
WhereX = # shares requiredS = # shares at meetingd = # directors wantedD = # directors to elect
Directors wanted Formula Shares
needed
1 1000*1/5 + fraction 201 shs
2 1000*2/5 + fraction 401 shs
3 1000*3/5 + fraction 601 shs
4 1000*4/5 + fraction 801 shs
Cumulative voting
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 20of 59
Alternatives to traditionalshareholder voting …
• Cumulative voting• Class voting• Voting trust• Vote-pooling agreement• “Tie breaker” director
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 21of 59
Widget Inc
Justin (400)
ClassJ
(1 D)
Class voting
Kathy(400)
Lorenzo(200)
Can shareholders vote by class?
How is this accomplished?
ClassK
(1 D)
ClassL
(2 Ds)
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 22of 59
Alternatives to traditionalshareholder voting …
• Cumulative voting• Class voting• Voting trust• Vote-pooling agreement• “Tie breaker” director
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 23of 59
Widget Inc
Justin (400)
Board
Voting trust
Kathy(400)
Lorenzo(200)
What is a voting trust?
• Why must file with corporation?• Why limited to 10 years?
Trustee
Vote according to trust agreement
Transfer shares
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 24of 59
Alternatives to traditionalshareholder voting …
• Cumulative voting• Class voting• Voting trust• Vote-pooling agreement• “Tie breaker” director
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 25of 59
Widget Inc
Justin (400)
Board
Vote-pooling agreement
Kathy(400)
Lorenzo(200)
AgreementVote according to agreement
What is a vote-pooling agreement?
•What if a party does not vote as promised? •Does mandatory arbitration solve this? What about irrevocable proxy?
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 26of 59
Alternatives to traditionalshareholder voting …
• Cumulative voting• Class voting• Voting trust• Vote-pooling agreement• “Tie breaker” director
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 27of 59
Widget Inc
Justin (400)
ClassJ
(1 D)
“Tie breaker” director
Kathy(400)
Lorenzo(200)
Can there be shareswithout economic rights?
Should you be adirector?
ClassK
(1 D)
ClassL
(2 Ds)
You(0 shs)
ClassTB
(1 D)
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 28of 59
Lawyer as director
“A man who is his own lawyer has a fool for a client.”
Louis Brandeis(1856-1941)
NYSE listing standards
Corporations:A Contemporary Approach
Slide 29of 59
1. In a CHC, plurality voting:a. Means Shs can elect Ds
according to pro rata shsb. Requires that each director
receive a majority of votesc. Allows majority Sh to elect
all Ds
2. In a CHC, cumulative voting allows 20% Sh to choose:a. 3 of 4 Dsb. 2 of 4 Dsc. 1 of 4 Ds
3. In a CHC, class voting must be set out in …a. Shareholders’ agreementb. Bylawsc. Articles
4. In a CHC, a voting trust …a. Can be unlimited in timeb. Requires approval of all Shsc. Creates beneficial owners
5. In a CHC, a vote-pooling agreement…a. Must include all Shsb. Can include arbitration if Shs
do not complyc. Must include corporation as
party
6. In a CHC, a tie-breaking D …a. Must be approved by all Shsb. Must be in shareholders’
agreementc. Can be in articles – new
class of stockAnswers:
Chapter 29Planning in CHC
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 30of 59
Close Corporations (private contracting)
What if agreement -- • deviates from model? • does not comply with statute? • is unfair? • is incomplete (no liquidity)?
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 31of 59
Close Corporation(incorporated partnership)
Close Corporation
Board ofDirectors
Shareholders
Shareholder-level arrangements
•Voting • Cumulative
voting• Class voting• Voting trust• Irrevocable proxy• Vote-pooling
agreement
•Liquidity• Transfer
restrictions• Buy-sell rights
Board-level arrangements
•Delegation• Specify
functions • Positions
•Decisions• Salaries• Dividends• Veto rights
Management limits (CHC)
McQuade v. Stoneham (NY 1934)• Majority SHs• SH / mgmt limits
Dodge v. Clark (NY 1936)• All SHs• SH / mgmt limits
Triggs v. Triggs (NY 1978)• Majority SHs• SH /mgmt limits
MBCA - hypo (1984)• Majority SHs• SH /mgmt limits
Zion v. Kurtz(NY 1980)• All SHs• Minority veto
Smith v. Atl Prop(Mass App 1981)• All SHs• Minority veto / duties?
1 3
4 5
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 33of 59
NY Giants
Stoneham 55%McGraw 5%
McQuade 5%
As shareholder, each will vote his shares to elect: > 3 parties as directors > remaining 4 Stoneham nominees
Board
As director, each votes to electStoneham as president - $45,000 McGraw as vice president - $7,500 McQuade as treasurer - $7,500
McQuade v. Stoneham (NY 1934)
Non-partyshareholders
What is theoretical problem?
Creditors
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 34of 59
NY Court of Appeals (1934): "... stockholders may not, by agreement among themselves, control the directors in the exercise of judgment vested in them ... to elect officers and fix salaries."
"Directors may not by agreement .... abrogate their independent judgment.”
McQuade v. Stoneham (NY 1934)
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 35of 59
Clark v. Dodge (NY 1936)
Close Corporation
Board
Dodge 75%Clark 25%
Agreement:
(1) Clark will be director and general manager so long as "faithful, efficient, competent" (2) Clark will receive 1/4 of corporation's net income as dividends or salary (3) Dodge will not circumvent agreement
Creditors
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 36of 59
NY Court of Appeals (1936):
"... as director Dodge should continue Clark as general manager, so long as he proved faithful efficient and competent -- an agreement that could harm nobody ..." "... Clark should always receive salary or dividends one-fourth of "net income" ... it is just to construe that phrase as meaning whatever was left for distribution after the directors had ... set aside whatever they deemed wise ...”
Clark v. Dodge (NY 1936)
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 37of 59
Triggs v. Triggs (NY 1978)
Close Corporation
Board
Father (44%)Sons (28%, 14%, 14%)
Agreement:
Frederick Sr (44.5%) and son Ransford (28.0%)
• Frederick Sr. to be board chair (with guaranteed salary)
• Ransford to be president (also with a salary).
• Ransford has right to buy Frederick Sr.'s shares on his death
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 38of 59
NY Court of Appeals (1978):
No argument is made that the stock purchase option, standing alone would be invalid .... The critical issue is whether, because of ... the provisions said to fetter the authority of the board, the stock purchase provision is now unenforceable. .... following the signing of the agreement, the assertedly illegal provisions of the agreement were ignored ....
the agreement "did not in any way sufficiently stultify the Board of Directors in the operations of this business“
Triggs v. Triggs (NY 1978)
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 39of 59
HypotheticalJustin and Kathy agree to the
following. (1)As shareholders they will elect
themselves to the JKL board. (2)As directors, they will use their
best efforts to elect Justin as CEO and Kathy as CFO – each to be paid $75,000. They also agree to have the corporation pay annual dividends of 50% of net profits.
• Without Lorenzo, is their agreement valid?
• Can their agreement be valid without fitting safe harbor?
Consider the MBCA.
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 40of 59
MBCA§ 7.31 Voting Agreements
(a) Two or more shareholders may provide for the manner in which they will vote their shares by signing an agreement for that purpose. A voting agreement created under this section is not subject to the provisions of section 7.30 [which imposes notice requirements and 10-year limit for voting trusts]
§ 7.32 Shareholder Agreements(a) An agreement among the shareholders ... that complies
with this section is effective among the shareholder and the corporation even though it is inconsistent with one or more other provisions of the Act in that it --
(1) eliminates the board ... or restricts the discretion ... of directors ...
(3) establishes who shall be directors or officers of the corporation;
(8) otherwise governs the exercise of the … management of the business and affairs of the corporation
(b) An agreement authorized by this section shall be -- (1) set forth
(A) in the articles or bylaws and approved by all shareholders
(B) in a written agreement signed by all shareholders .... and made known to the corporation ...
(3) valid for 10 years, unless agreement otherwise.
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 41of 59
Zion v. Kurtz (NY 1980)
Corporation(CHC under
Delaware statute)
Board
Kurtz (80%) Zion (20%)
Shareholder agreement
Kurtz to file articles under Delaware CHC statuteManagement
agreement
Veto right to Zion
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 42of 59
NY Court of Appeals (1980):
There are no intervening rights of third persons, the agreement requires nothing that is not permitted by the [Delaware] statute, and all of the stockholders of the corporation assented to it,
The certificate of incorporation may be ordered reformed, by requiring Kurtz to file the appropriate amendments …
Zion v. Kurtz (NY 1980)
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 43of 59
Smith v. Atlantic Properties (Mass App 1981)
Close Corporation(Massachusetts)
Board
ShareholdersShareholder agreement:
4 equal shareholders on board
Management agreement:
80% vote of board for declaration of dividends (effective unanimity)
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 44of 59
Mass Appeals Court (1981):
Whatever may have been the reason for Dr. Wolfson’s refusal to declare dividends … that he recklessly ran serious and unjustified risks of precisely the penalty taxes eventually assessed …. inconsistent with duty of “utmost good faith and loyalty”
Court order:(1) directors prepare financial statements(2) directors confer on dividends(3) hearing if don’t stipulate!!
Smith v. Atlantic Properties (Mass App 1981)
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 45of 59
“With power comes responsibility”
Management limits (CHC)
McQuade v. Stoneham (NY 1934)• Majority SHs• SH / mgmt limits
Dodge v. Clark (NY 1936)• All SHs• SH / mgmt limits
Triggs v. Triggs (NY 1978)• Majority SHs• SH /mgmt limits
MBCA - hypo (1984)• Majority SHs• SH /mgmt limits
Zion v. Kurtz(NY 1980)• All SHs• Minority veto
Smith v. Atl Prop(Mass App 1981)• All SHs• Minority veto / duties?
1 2 3
4 5
Corporations:A Contemporary Approach
Slide 47of 59
1. Shareholders of CHCs …a. Can agree how to vote their
sharesb. Can agree to limit their
discretion as Dsc. Can bind selves as Ds, if part
of Shs’ agreement
2. In a CHC, all shareholders can agree to having sole managera. If they agree in writingb. If agreement does not
jeopardize creditorsc. Only if statute allows
3. In a CHC, fewer-than-all Shs can agree to voting and mgmt …a. Under modern common lawb. Under modern statutesc. Provided other Shs and
creditors not harmed
4. In a CHC, a mgmt agreement by fewer-than-all shareholders …a. Is void under MBCAb. Is valid under MBCA if in writingc. Is not within MBCA safe harbor
5. In a CHC, agreement by all Shs to limit board discretion …a. Must be authorized by statuteb. Must be in articles c. Must be in writing
6. In a CHC, a minority Sh with veto power …a. Must exercise the veto
responsiblyb. Can veto as choosesc. Cannot veto majority action
Answers:Chapter 29
Planning in CHC
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 48of 59
Close Corporations Unfair agreements
What if agreement -- • deviates from model? • does not comply with statute? • is unfair? • is incomplete (no liquidity)?
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 49of 59
Concord Auto Auction v. Rustin (D Mass 1986)
Three entrepreneurial siblings -- brother Cox, sister Thomas and sister Powell -- invest in the exciting and glamorous business of auto auctioning.
They want an agreement to provide liquidity on death. If you were drafting for them, what issues should you address in the agreement?
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 50of 59
Shareholder purchase agreement – drafting issues
• who buys? – corporation / Shs? – first-refusal / contingencies -
death, withdrawal • kind of right – “must / may”?
– call or put? – contingencies - withdrawal,
outside offer, death • price?
– book value – annual re-set – arbitration / appraisal
• how funded? – insurance / self-funded – payment in installments? – repurchase account
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 51of 59
Shareholders' agreement
¶2 If any shareholder dies, the shareholder's representative shall within 60 days tender all his shares and the corporation shall repurchase the decedent's shares at a price set by the parties as provided in paragraph 6.
¶6 The price is $672/$744. It shall be reviewed at least annually no later than the annual shareholders' meeting ... All parties may agree to a new price ... [which] shall remain in full force until changed...
¶7 To fund the corporation's repurchase obligation, the corporation shall annually purchase life insurance in a face amount equal to the price set by the parties.
Signed, Cox / Thomas / Powell / Corporation
Is this v
alid?
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 52of 59
MBCA § 6,27 Restriction on transfer of shares and other securities
(a) The articles of incorporation, bylaws, an agreement among shareholders, or an agreement between shareholders and the corporation may impose restrictions on the transfer or registration of transfer of shares of the corporation. ...
(b) A restriction on the transfer or registration of transfer of shares is valid and enforceable against the holder or a transferee of the holder if the restriction is authorized by this section, it is not unconscionable under the circumstances, and its existence is noted conspicuously ...
(d) A restriction authorized by G.S. 55-6-27(c) may: (1) Obligate the shareholder first to offer the corporation or other persons (separately,
consecutively, or simultaneously) an opportunity to acquire the restricted shares; (2) Obligate the corporation or other persons (separately, consecutively, or
simultaneously) to acquire the restricted shares; (3) Require the corporation, the holders of any class of its shares, or another person
to approve the transfer of the restricted shares, if the requirement is not manifestly unreasonable;
(4) Prohibit the transfer of the restricted shares to designated persons or classes of persons, if the prohibition is not manifestly unreasonable;
(5) Contain any other provision reasonably related to an authorized purpose.
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 53of 59
Unfair agreement?(violation of fiduciary duties)
Mother and Child with ShawlPablo Picasso, 1903
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 54of 59
District Judge Young (interpreting Massachusetts law):
"... contracts must be interpreted and enforced exactly as written...."
"... the Agreement covers precisely the situation before the Court: no revaluation occurred, therefore the price remains as set forth in the Agreement ..."
"... intrusion into the private ordering of commercial affairs offends both good judgment and good jurisprudence ...
"... agreements will be upheld absent any fraud, overreaching, undue influence, duress, mistake ..."
Concord Auto Auction v. Rustin (D Mass 1986)
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 55of 59
Hypothetical – fiduciary duties?
The parties had religiously reset the companies' value, until last year when Cox developed acute and irreversible carbon monoxide poisoning. But he was hanging on.
This year when it came time to reset the value, his two sisters Thomas and Powell looked at each and winked. They then did nothing.
Cox goes to the great car lot in the sky. What does his estate get?
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 56of 59
Distinguish Concord Auto Auction v.
Ruskin (Mass 1986)
Parties agreed to buy-sell arrangement
Parties agreed to reset price, but sisters didn’t reset.
Holding: court refuses to estop sisters from asserting validity of agreement.
Cox bound by contract, which “must be interpreted and enforced exactly as written"
Zion v. Kurtz (NY1980)
Parties agree to shareholder veto
Kurtz agreed to file for close corporation status, but didn’t.
Holding: court estops Kurtz from denying the lack of close corporation status.
Kurtz cannot avoid contract just because he failed to comply with it!
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 57of 59
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 58of 59
Group hypoUppity Enterprises LLC brings on Bob as a
new programmer and, as an inducement, sells him cheap “stock rights” (owner interests in the LLC).
Then management gets bored of Bob and fires him. Bob feels OK since he has a “golden parachute” – namely, his stock rights.
He takes his employment agreement to you, which refers to the LLC’s operating agreement (see next page). The term “Default Member“ is defined as “any member whose employment is terminated.”
He asks you:• What rights do I have under the agreement
when I leave the company? • Do I have any non-contractual protections?
Please advise your client Bob.
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 59of 59
LLC OPERATING AGREEMENT
(c) The Company may exercise the right to purchase all or a portion of a Defaulting Member’s interest pursuant to this Section 13.3 by delivery of written notice to the Defaulting Member no later than sixty (60) days after the last to occur of (i) the occurrence of the event giving rise to the purchase right, and (ii) actual receipt by the Company of written notice of the occurrence of such event. Upon delivery of such notice to purchase, the Company shall have the right and obligation to purchase the Defaulting Member’s interests, and the Defaulting Member shall be required to sell such interest at a purchase price equal to the balance in the Defaulting Member’s Capital Account [the nominal $0.01 per share paid by Shareholder] on the date the purchase right is exercised.
Corporations:A Contemporary Approach
Chapter 29Planning in CHC
Slide 60of 59
The end