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Shareholder's Preemptive and Cumulative Rights

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Lucas Almonte

on 25 June 2013

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Transcript of Shareholder's Preemptive and Cumulative Rights

What preemptive and cumulative rights do shareholders have if the Articles of Incorporation are silent on these issues?
NY Business Corporation Law § 622(a)
Cumulative Rights
But before we begin
What is a corporation?
The corporation
is an artificial entity created by law,
an entity separate from its owners or managers,
has certain rights and powers, which it exercises through its agents.
How are corporations formed?
In order to establish a corporation the Articles of Incorporation that must be filed with the Secretary of the State
The articles of incorporation simply set out the rules and regulation that governs the corporation, board of directors, managers and shareholders
Board of Directors
are group of individuals that are elected as, or elected to act as, representatives of the stockholders to establish corporate management related policies and to make decisions on major company issues like
Dividends policies
Hiring/firing Executives
Mergers & Acquisitions
Raising Capital
Amending By-Laws
Expansion of Business
Shareholders
Shareholders or stockholder can be an individual or an institution who own a percentage of a company by purchasing shares.
Under the Articles of Incorporation and state statute, shareholders are granted certain rights

Which brings us back to our question
sets forth the statutory framework that allows shareholders to possess preemptive rights
"Preemptive right" means the right to purchase shares or other securities to be issued or subjected to rights or options to purchase, as such right is defined in this section."
Preemptive Rights
Factors to consider
The terms set by the certificate of incorporation,
the date that the corporation was originally incorporated on,
and the type of the shares and its effect on existing shareholders.
Certificate of Incorporation
The certificate of incorporation is often the best source for determining whether a shareholder possesses preemptive rights. The statute states;
“With respect to any corporation incorporated on or after the effective date of this sub paragraph, [Feb. 22, 1998] the holders of such shares shall not have any preemptive right, except as otherwise expressly provided in the certificate of incorporation.”
N.Y. Bus Corp. Law § 622 (b) (2) (McKinney 2003)

any corporation incorporated on or after the effective date, February 22, 1998, preemptive rights do not exist, unless expressly provided for in the certificate of incorporation.
Explanation
Amending the certificate of incorporation to deny preemptive rights require a majority vote of the shareholders, including a vote by any adversely affected class of shares, is possible under N.Y. Bus. Corp. § 804.
NY Business Corporation Law § 618
Under
§ 618,
shareholders have the right to cast votes based on the number of shares multiplied times the number of open directors seats to vote for.
"[...] each shareholder shall be entitled to as many votes as shall equal the number of votes which, except for such provisions as to cumulative voting, he would be entitled to cast for the election of directors with respect to his shares multiplied by the number of directors to be elected, and that he may cast all of such votes for a single director or may distribute them among the number to be voted for, or any two or more of them, as he may see fit, which right, when exercised, shall be termed cumulative voting. "
- N.Y. Bus Corp. Law (McKinney 2003)
who wants to read all of that?
Case Law
Facts:
The plaintiff was a director and stockholder
Two other people owned the remaining securities, with plaintiff, comprise the corporation's board of directors.
There was a special meeting called by the other two directors about the issuance of 75 shares of the corporation's common stock.
Plaintiff did not attended the special board meeting and they approved the issuance of the 75 shares.
Plaintiff did not exercise his option to buy the additional shares, other two directors purchased 25 shares each.
The corporation later dissolved and the two defendants received a larger amount than the plaintiff because they purchased more stock.
The plaintiff then brought a declaratory judgment action to gain his right to the proportional interest in the assets.
Katzowitz v. Sidler ., 24 N.Y.2d 512 (1969)
Issue:
Whether or not the plaintiff is entitled to a declaratory judgment ?
Ruling:
The Court of Appeals held that plaintiff should be entitled to declaratory judgment due to the fact that he is entitled to the same amount of shares as defendants even though he did not exercises his preemptive rights
Reasoning:
Preemptive rights granted to shareholders was done in order to protect their interests, their interest form dilution of their equity and in the corporation and to protect against dilution of their voting rights in the corporation.
Matter of Carroll v. Seacroft Ltd., 141 A.D.2d 726, 529 N.Y.S. 2d 829 (2nd Dep’t.1988)
Mr. Cron and Mr. Nolan were equal shareholders
each provided a sum of money in this land acre parcel corporation.
Shortly after, the corporation needed to refinance the mortgage payments on the property.
There was a shareholders meeting to increase the number of shares, restrict stocks and also seek to amend the bylaws which were permitted according to the articles of incorporation.
Issue:
Can the shareholder hold a special meeting without all of its shareholder members, if so would the votes be considered valid?
Ruling:
The courts concluded that the petitioner or appellant was late in casting his vote which showed that he “waived” his preemptive rights to vote as a shareholder. It was his sole responsibility to have been there or send someone to present his votes.
Reasoning:
The court reasoned that the plaintiff waived his rights and granted by N.Y. Bus. Corp. Law §622; shareholders have a preemptive rights to purchase enough shares to preserve his percentage interest in the corporation. The appellant did not file a notice of objection to the corporation until the decision to expand capitalization was made. Had the petitioner/appellant step up earlier and response to the corporation changes he would them have been entitled to the voting say.
Group C
Almonte, Lucas
Guerrero, Janessa
Jaradeh, Tunie
Rosales, Fernando
Srour, Renee
Full transcript