Closely Held Corporations A corproation with "integration of ownership and managmenet in which S/Hs occupy most MGMT positions.

"

Valuation
Generally Common Problems -Book value
THREE ELEMENTS (Donahue) - Illiquidity Prob: No market for CHCs; difficult to determine stock -Earnings value (Predicted
value earnings discounted to value)
(1) Small # of S/Hs -Fixed price (choose a price,
-Owners are Active Participants: Income is often dependent on can be fixed with formula, may
(2) No ready market for corp. stock; AND salary & job tenure not be fair)
-Arbitariton
(3) Substantial majority of S/H -Control Allocation Can Result in Deadlock: Owners have
participation in management, direction, incentive to create voting agreements AND owners have incentive to Governing Law.
and operations of company. create disparate voting rights which are not publicly traded AND they
may place restrictions on share transfers.
Generally, these are FAMILY Delaware - Specific Statutes.
OPERATIONS. -Family Corporations: Families prone to personal disputes AND
Corps cannot dissolve as easily as pships AND Families use Others -> Mostly common law.
corporations in estate planning.
IF met, will have fiduciary duties more
akin to a partnership.

DISSOLUTION - Two Means; Statutory and Meiselman Rule.

Fiduciary Duties PARTNERSHIP 1) MBCA 14.30(a)(2) Meiselman Rule -> Maj. in CHC has fiduciary
Note: All corps; not just CHC. duty to fulfill the minority's reasonable
"Not honesty alone, but punctillio of an - Atty General may petition for dissolution if expecations
honor most sensitive" EITHER (1) corporation obtained AoC by fruad;
Donahue v. Rodd. or (2) corporation is abusing its authority under 1. REASONABLE EXPECTATIONS RULE
law When a shareholder in a CHC has a "substantial
Equal Opportunity Rule -> !!! -Creditors can sue for dissolution. reasonable expectation of continued participation
Donahue. ------------------------------------ in the business which is known or assumed by
When CONTROLLING SHAREHOLDER of -SH have right to mandated dissolution of the other participants, GETS TO HAVE THEM.
a CHC sells his shares back to the corp, corp IF EITHER
the MINORITY S/H must be given the (1) Director Deadlock. [Risks irreparable injury i) "substantial" -> what were course of dealings (ie
opprotunity to do so as well (w/o deduction to corproation AND business cannot be business passed down by faterh to son)
for control premium) conducted] "reasoanable" -> known or assumed by other s/h
(2) Shareholder Deadlock. No election of OR concurred in by them.
directors at two consecutive meetings. ii) WERE these frustrated? Was the frustration
ALTERNATIVE TO [Simple deadlock is not enough; must be able to beyond his control due to minority position?
DISSOLUTION: show corp cannot function. iii) BARGAINING: If there is opportunity to
(3) Missaplication: Corp. assets are being bargain, court will be unlkley to give things which
MBCA 14.40(4) wasted; OR could have been bargained for; BUT minority
(4) Illegality/ Oppressive conduct: shareholders cannot bargain.
When faced with a forced Directors/MGMT are acting or will act illegally,
dissolution, a company may fraudulently, or in oppressive manner. NO need for a written agreement of the
elect to have a buyout instead MEISELMAN RULE TRIGGERED. reasonable expectations. Blount v. Taft.
of dissolution. HOWEVER, if there is such a written
(4) Oppression -> Some courts like NC do not agreement, the minority CAN ONLY rely on the
In NC, court can MANDATE use "oppression" but force dissolution when rights in agreement; using one is still good
this. reasonably necessary to protect rights oc idea.
complaining shareholders.

The Meiselman rule is a use of the dissolution statute by the minority SH to get whats theirs. Because the judge has
Remedy for Breach:
equitable authority in these, there is usually option for forced buyout at fair price
Refusal to register. No vote,
no dividends.
Transfer Restrictions

The transfer restrictions may be

MBCA. Permitted for three Call Approval Right
an independent K, in bylaws or Transfer
reasons. Prior Approval/ Right of
in AoI. If approved, ONLY THE Option Put Option Prohibition.
First Refusal
SH who voted in favor of the ---
(1) The identity and structure The corp or other
restrictions will be bound Mandatory Right of Prohibits ANY
on the coporation is limited by The corp or another SH SH has the ability
thereby. Buyback Redemption. sales to specified
the number of SH and identity must first be given the to veto any
people or classes
(ie S corp, non 12(g) corps) opportunity to purchase attempted
-> Must be conspiruously noted Owning SH of people.
the shares at the price transfer.
on the front and back of all Corp or can force
(2) To prevent the loss of offered to the third party.
encumbered shares. If not, and other SH the corp or Permitted but
relevant securities exemptions -------- Permitted but
an innocent buyer purchases can force other SH to disfavored and
(ie 12(g) avoiders) Right of first OPTION disfavored and
without notice, then NOT. the current buy his enforceable only if
-> At price corp PRE-SET not enforceable if
holder to stock. not "manifestly
(3) Other reasonable purpose. price "manifestily
If violated w/ notice, corp can purchase unreasonable"
CHC unreasonable"
deny registering.

-Self-dealing transactions 3rd

Fiduciary Duties General Rule: A Exceptions: Controlling SH owe a
Variety
of Controlling controlling SH does not fiduciary duty not to act to the Pulling
owe fiduciary duties to detriment of minority SH in THREE -Taking of Corp. Opportunities
Shareholders. strings
minority SHs. SITUATIONS unlikely
Apply to all corps; but -"Pulling director's stinrings to make
BoD breach duties to min SH. to
particularly important with CHCs appear.

Self-Dealing Transactions. Sets Burden. Corporate Opportunities. Can be contemporaneous w/ self dealing
If self-dealing/ conflict of interest -> NO BUSINESS JUDGMENT RULE. If no self-dealing in Copr. Opp. case, BUSINESS JUDGMENT RULE APPLIES.

Intrinsic Fairness Actual Fairness.

a1) Cntrling S/H has 2) Show approval b) If MINORITY S/H or

General Self burden of by disinterested independent body of
When a maj S/H acts in his own self-interest, he
Dealing Rule INTRINSIC directors directors approves;
must ALSO be serving the interests of the
FAIRNESS. (Based BURDEN SHIFTS to Plt
corporation.
(for MAJ S/H) on reasonable 3) Show approval to DISPROVE
business bejctives. by shareholders. FAIRNESS.

Duties in Sale i) Sale to Known WORKING CONTROL SH iii) Sale of Corp. iv) Corporate Opportunity
of Control Corporate Raider. ONLY; does not apply to Assets
Transactions General true control Maj SH cannot sell his
Rule: TEST: Maj should know Maj SH must return controlling shares if it will
EXCEPTIONS

Refers to sale of selling to looter IF, (1) ii) Sale of Corp Office. the premium to the deprive the min. SH of
a controlling No duty investigates purchaser corp for selling an benefit of corp.
interest (can be to share and discovers purchaser If no true or working identifiable opportunity.
either a singe control has previously looted; control, SH MAY NOT sell corporate asset
person's interest premium OR (2) premium high shares at premium -> CERBCO Case -> Corp went
or a block of with enough to arouse amounts to selling seats on May keep control to Maj SH (CERBCO) instead
interests. minority suspicion. the board. premium of whole body of SH.
interests nonattributable to Because they came to
when Duty to Investigate Control agreements/ corp assets. CERBCO in its capacity as
2 Types of Control selling Purchaser -> When high seratim resig, FINE if there maj SH (not as
True Control: control. premium offered CNTRL is actual or working control. BURDEN: Plaintiff director/officer), had
Majority SH. SELLER UNDER DUTY must prove that maj obligation to first present
Working Control: to investigate if buyer is SEC 1934 -> 14(f) NOTE-> SH's CNTRL corporation with
Less than majority LOOTER. Public disclosure requried PREMIUM amounted opportunity.
but still controlling. 10 days prior to election if to sale of corp asset.
transfer of control has Difficutl to overcome.
director change provision.
Mbca 12.02 -> Sale
Example: Steel company of substantial portion
Korean war. 1934 14(f) of all assets in ord.
course of business =
REMEDY: Control premium Any time there is needs S/H approval.
must be disgorged to SALE OF
corporation; if not, pro rata CONTROL
to the shareholders. agreement
including MGMT Note: Corporate assets can
BUT turnover, this must be intanglble such as good
be FULLY will/ reuptation to sell more
DISCOLOSED. steel after the war ends.

BoD's discretion can also be

a corporate asset.

Parent Subsidary
Sinclair v.
Levinsion
Detriment & exclusion Then Apply Intrinsic
Fairness.
Inhernently
self-dealing Favorable tax Inherently bad k?
Implications? Not Unfair.
unfair.