Can a corp file a chapter 7 bankruptcy petition without approval of the shareholders?

This is an update to the prior post.  My bankruptcy colleague posted:

Dear Colleagues,

A corporation filed for Chapter 7 protection.  However, the 80% shareholder, who is neither an officer, nor a director, did not sign anything authorizing the filing.  Can the case be dismissed based on the failure of the Board to have the 80% shareholder sign the corporate resolution authorizing the filing?

I suspect that the answer to my question is, “Look at the articles of incorporation and the by-laws,” but I thought I’d see if there is a general principle I can use here.

All the best, Nick

Someone asked him for more details and he responded: Continue reading

Question from a bankruptcy list serve

See how much you have learned?  Each of you can answer this question I’m sure.  The question was posted by a very knowledgeable and good bankruptcy lawyer.

Dear Colleagues,

A corporation filed for Chapter 7 protection.  However, the 80% shareholder, who is neither an officer, nor a director, did not sign anything authorizing the filing.  Can the case be dismissed based on the failure of the Board to have the 80% shareholder sign the corporate resolution authorizing the filing?

I suspect that the answer to my question is, “Look at the articles of incorporation and the by-laws,” but I thought I’d see if there is a general principle I can use here.

All the best,

Nick

Stockholder’s Demand for Books and Records

Nice discussion of a shareholder’s rights to review a corporation’s books and records, by K&L Gates.    The article is here.  The basic rule is that a shareholder may review books and records if he has a “proper purpose.”  The article discusses the recent case of Haque v. Tesla Motors, Inc., C.A. No. 12651-VCS (Feb. 2, 2017) where the Delaware Court refused to order Tesla to turnover certain records saying :

The Court acknowledged that use of corporate records to investigate potential wrongdoing or mismanagement at a company is a proper purpose under Section 220.  However, before compelling production of records in such cases, the Plaintiff must present evidence to establish a “credible basis” from which the Court can infer that mismanagement, waste, or wrongdoing may have occurred.

The opinion is here.

More Thoughts on Laker Family Feud

Two more things have caught my eye about the Laker feud which provide me a teaching moment for my Biz Org students.

Thing one is that according to some ESPN blog, AEG is a minority owner that “controls” two seats on the corporate board of directors.   The BOD remember is Jeanie, Johnny, and Joey Buss and two others.  I’m not sure how AEG “controls” the two seats.  It is either because it owns enough shares to vote in two seats using cumulative voting, or there is some shareholders agreement between the Buss Trusts and AEG that gives AEG two seats (completely enforceable as it would relate to voting at a shareholder meeting), or there could be more than one class of stock which allocates the board seats among the classes.

Thing two is that I heard someone this morning on the radio assuring everyone that “the documents” make it clear that Jeanie is firmly in control of the Lakers.    As I said in the last blog, she seems to be firmly in control as the “controlling owner” for NBA participation purposes, but why can’t AEG use its two board seats to support Johnny and Joey and Jim and appoint someone else as President of the Lakers corp leaving her on the board.  Unless the corp is a “statutory closed corp” in California, a shareholder’s agreement making Jeanie the President is unenforceable.  The BOD must do that.  Why can’t AEG join with Johnny etc to make someone else the “controlling owner”?  I assume they can but that would apparently violate Johnny etc’s fiduciary duties owed to these trusts.  That seems to raise a serious conflict issue if Johnny cannot vote as a board member on what is best for the Lakers’ corp because of duties he owes to some trust.  And it cannot be that the BOD’s hands are tied as to removing Jeanie (again unless there is an enforceable shareholder’ agreement – enforceable being the key word in that sentence).  Continue reading

Lakers Family Dispute Offers Great Opportunity for Review of Biz Org Basics

According the L.A. Times this morning, Jim and Johnny Buss tried to take over the Lakers and “oust [Jeannie Buss] as the Lakers’ president and controlling owner.”   Jeannie Buss responded by asking the court to issue a restraining order stopping the effort and that apparently was successful.

According to the article,

Jeanie Buss [had] removed Jim Buss from his role as Lakers vice president of basketball operations and hired Magic Johnson.  Three days later, according to court documents, Johnny Buss notified his sister of a March 7 meeting to elect the team’s board of directors.  He is listed as overseeing corporate development of the Lakers.

The brothers proposed four directors, according to court records, but didn’t include her.  In order to be the controlling owner, she also must be a director.

The family trusts that own 66% of the Lakers can elect three of the board’s five members.  The trusts mandate the co-trustees — Johnny, Jim and Jeanie — take all actions to ensure Jeanie Buss remains controlling owner of the Lakers.  She has occupied the role since their father, Jerry Buss, died in 2013.

Pretty fun.  So let’s put all of this in the terms we talk about in class.   The first thing we need to know is whether this is a corporation.  I went to the business search function of the California Secretary of State and found a corporation “The Los Angeles Lakers, Inc.” formed in 1979.  The form SI indicates that Jeannie Buss is the President and there are five board members:  Jeannie, Joey and Johnny plus two other persons whose names aren’t Buss.  No Jim. Continue reading

Preparation for 2016 Fiscal Year-End SEC Filings and 2017 Annual Shareholder Meetings

I found a pretty good post on the State Bar Business Law Section blog highlighting issues of compliance with the SEC rules required of “public” companies.   The part on director compensation caught my eye.  It discusses whether the court, when listening to shareholders complain about director compensation, should use the business judgment rule or the “fairness standard.”     The paragraph below advises companies how to anticipate the issue in advance and what to do to avoid shareholder derivative lawsuits on the issue.

Director Compensation in the Spotlight. *** the Delaware courts have shifted direction towards more shareholder protection by applying an entire fairness standard of review instead of the business judgment rule with respect to claims of excessive director compensation.  In order to avoid a lawsuit (or win on a motion to dismiss) companies should consider setting forth in their equity compensation plan a shareholder-approved cap (based either on a number of shares or cash value) representing the maximum amount that the company will compensate its non-employee directors in equity, which cap should be set at a meaningful limit.  This cap should be included in the equity plan when the plan is next brought to shareholders for approval.  In the meantime, companies should evaluate director pay each year and make adjustments accordingly and confirm that director compensation is in line with the company’s peer group.  Unless the courts provide clearer guidance on this topic, we expect that plaintiffs will continue to file shareholder derivative claims with regard to perceived excesses in director pay.  {emphasis added by MJH)

This post shows very nicely why it is so expensive to be a “public company.”  The amount of reporting disclosures required seems to me to be overwhelming.