A student has emailed me with a question about the effect of the note on the assignment that Bookstores, Inc. is a not a “close corporation.”

As I said in class, there is no typical definition of “close corporation.”  California has a statutory definition which requires that the Article of Incorporation specifically state that the corp is a close corp.

The reason I noted on the exam that the corp is not a close corp is because some states (and therefore the commercial outlines) often throw out the usual rules regarding shareholder agreements – that we went over in class – when there are only a few shareholders.   Some states treat close corps – whatever that is – as if they were partnerships, meaning the shareholders owe fiduciary duties to each other and on that basis and simple equity, any shareholder’s agreement is enforceable.

By saying this is not a close corp on the exam, I am telling you that, as to shareholder agreements, the rules we discussed in class apply.  In other words, it doesn’t matter, for purposes of the question, whether the corp is “large” or “small,” i.e., lots of shareholders or few – the basic rules apply.

Shareholder’s Agreements are very common, especially in corps where there are only a few shareholders.  Some states provide that corps with few shareholders are “close corps” and that that designation – by itself – changes the rules.  We have not talked in class about “close corps,” i.e., corps in states where the usual rules don’t apply.  In the exam question, the usual rules, that we discussed at length, apply.