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Do S/Hs owe a fiduciary duties to each other or to the corporation?
CLOSE CORPORATION: YES shareholders (esp. CONTROLLING S/Hs) owe each other and the corp. fiduciary duties
1) May she sell her SHARES at a premium?
2) Can she sell her shares to whomever she likes?
3) Can she sell BOD positions?
1) YES--and she may keep the premium for herself ("control premium")
2) NO--Must make a REASONABLE INVESTIGATION into who the purchaser is
: cannot sell to a looter
CONSEQUENCES OF BREACH
: Disgorage profit AND liable for ALL DAMAGES to corporation
3) NO--May not sell BOD positions (disgorge profit)
1) What is a freeze-out?
2) Will a court uphold one?
1) MERGER designed to cash-out minority shareholders UNFAIRLY
2) LIKELY TO UPHOLD if transaction is fair "as a whole" (fair PRICE and course of dealing). Factors to consider
Whether the deal is tained by SELF-DEALING or FRAUD
Whether the minority shareholders were DEALT WITH FAIRLY
Whether there is LEGITIMATE BUSINESS PURPOSE for the merger
Consequences of market TRADING on inside information?
BREACH OF DUTY to corp. by D/O
corp. may sue to RECOVER D/O's profit (possible derivative suit)
Corporations 6 - Controlling Shareholders & Related Topics