FORMATION AND OPERATION | Dealing With Internal Disputes

Corporations and shareholders

Unless a corporation has only one owner, questions will arise about how ownership of the corporation should be shared. Everyone involved in the operation of a business entity, whether it is a corporation, close corporation or LLC and whether the participants are an organizers, shareholders, directors, managers or members, must be aware of the respective rights of the entities and the participants. Their violation can lead to costly litigation. Because such litigation can sometimes do nothing more than exhaust the resources of the businesses and their participants, McCormick and Boyd Law Firm works closely with its clients to prevent the violation of these rights through careful planning and monitoring of the entities’ activities. Nevertheless, should litigation become necessary, McCormick and Boyd Law Firm stands ready to vigorously represent its clients in the prosecution or defense of such lawsuits.

Issuance of initial shares

Corporations typically issue shares in proportion to the relative contributions of the owners. This should be decided by the organizers before forming the company and soliciting investment of capital and “sweat equity” from the initial participants.

Issuance of shares after formation

Compliance with securities laws is necessary to some extent, regardless of whether newly issued shares are to be issued privately or publicly. Seek advice of counsel before issuing new shares.

Shareholder derivative actions

Shareholders have a number of rights to receive information from the corporation and to take action to protect interests of the corporation if the Board of Directors and management fail to perform their duties.

Shareholder rights and actions

Shareholders have a number of rights, which they may be able to enforce either through an action for themselves or an action for the benefit of the corporation itself:

  1. The right to attend and vote at shareholder meetings
  2. The right to maintain relative ownership position (i.e., avoidance of dilution though issuance of new shares or the redemption of existing shares)
  3. The right to be free from oppression (i.e., to be free from actions by persons in control that force declines in the value of shares or sales of minority shares to reap profits)
  4. Rights to dividends under some circumstances
  5. Rights to shares in the value of corporate assets upon liquidation of the corporation
  6. The right to information about the corporation and its operations, including the right to inspection of the corporation's books and records
Closely held (or close) corporations

A close corporation is a corporation that meets certain specific criteria when it is formed and, unlike ordinary corporations, a board of directors is not required. This means that shareholders will be much more closely involved in the day-to-day operations of the corporation than in ordinary corporations. Consequently, shareholders in a close corporation will be subject to liability that they would not ordinarily be exposed to in an ordinary corporation. Also, shareholder agreements will have a more prominent role in close corporations.

LLCs and members

When an LLC is managed by managers, the members of the LLC have rights similar to those of shareholders. Likewise, when the LLC is managed by its members, the members are in a position similar to that of shareholders in a close corporation, in that they are subject to liability that ordinary corporate shareholders are not.