Business Organizations

Special Corporate Formsand

Dealing with Special Problems

2

“Close Corporation”• 17 states, including Delaware and Texas,

allow election of “close” status (usually 30-50 shareholders maximum)

• Main issues:– Controlling board decisions– Controlling voting by other shareholders– Controlling transfer of shares– Abuse of minority shareholders by majority(Note—this is not the same as close corporation or closely held corporation for federal securities purposes.)

3

Close Corps. v. Public Corps.

• Major conflicts for close corps are different: – majority vs. minority.– shareholder-manager vs. non-manager

shareholders.– valuation problems because of lack of public

markets for shares.– discipline of public capital markets absent.– many disputes occur in endgame scenarios.

4

Other control agreements

• Shareholder voting agreements• Voting trusts• Super class shares

5

Deadlock

• Avoid through effective planning– Pre-dispute arbitration– Tie breaker shareholders– Tie breaker rules

6

• Members organize “operating agreement”– Cross between corporate by-laws and

partnership agreement• Hybrid: tax treatment of partnership +

limited liability of corp. + more flexible management

LLC

7

Nevada: Top Choice for LLC

Advantages:No Personal Income TaxNo Corporate Profit TaxSpecial Business CourtsStrong Protection for Directors/OfficersLLCs May Be in a Series (one own another)Strong Protection for Corporate Veil

8

An Ad for Nevada LLCs

9

XYZ, LLC.

ABC, Inc.Shareholder

Member

Member

Member

Member

10

• Filing required to create an LLC, details vary by state.

• Operating agreement - governs internal operation, establishes process for new members, withdrawal, contribution, voting, dissolution and windup.

• Maximum freedom / flexibility: “It is the policy of this chapter to give maximum effect to the principle of freedom of contract and to the enforcement of limited liability company agreements.” DE St. 18-1101(b)

11

Fiduciary obligations in LLCs

• About half of LLC statutes allow altering fiduciary obligations in the LLC Operating Agreement