Monday May 5, 2003 Corporate Law One Day Four
Directors
Delegation of authority to Officers is provided in the bylaws. Directors are given the statutory authority to make most decisions regarding the operation of the corporation. State law allows for the creation of the Board of Directors with a wide breath of authority. Can limit or allow full breath of authority. Subject to election by shareholders and review and approval of shareholders.
Directors appoint officers. Officers authority is sometimes general, sometimes specific, sometime both.
Board must delegate authority
Directors are responsible for acts of the officers they appoint.
Specific authority is passed via:
Resolutions
By directors
In the bylaws
In the Articles of Incorporation
Delegation of Authority to Committees directors also commonly delegate authority to one or more committees comprised of members of the Board of Directors Delegation of authority to committees
MBCA says directors committees may not do the following:
1. cannot authorize dividends or distribution of shares to the shareholders -
2. may not approve or propose to shareholders actions that require shareholders approval.
3. cannot filling vacancies on Board of Directors or any of its committees
4. cannot amend the Articles of Incorporation
5. cannot adopt or amend or repeal the bylaws
6. cannot approve a plan of merger that doesnt require shareholders approval
7. cannot authorize or approve the issuance of sale or K for sale of stock.
Directors
Limitations on Authority
Actions which require shareholders approval
1. amendment of Articles of Incorporation
2. enactment, amendment & repeal of bylaws
3. issuance of stock
4. calling of shareholders meetings
5. approval of merger and consolidation plans
6. sale of corporation assets outside of regular course of business
Hawaiian International Finances, Inc. v. Pablo
488 P.2 1172 (1971)
Duty of Care
Duty of Loyalty
Shareholders Meetings
Proper notice must be given
Type of Notice must vary depending on the size
Make a determination which individuals are entitled to receive Notice of the meeting set a record date
1. Record date fixed in t he bylaws or resolution by Board of Directors all shareholders on the record date are entitled to notice of the meeting and to vote at that meeting. Purchase stock after the record date but before the meting, you are not entitled to a notice function of necessity. Once record date is send, the corporation prepares a list of shareholders they are entitled to notice WITH VOTING RIGHTS. Certain stock classes are not entitled to receive a notice (non-voting rights) this typically involves the person responsible for processing all stock transfers. May be talking about the corporate secy. often delegated to as the TRANSFER AGENT. An agent appointed to oversee all transfers of stock including the surrender of old stock certificates, the issuance of new certificates, and to maintain and up to date record of all shareholders.
2. Formal notice will include the date, time, place and purpose of the meeting.
3. MBCA requires that notice be given no more than 60 days and no fewer than ten days before the meeting date.
4. Individual responsible for mailing the notice will prepare an affidavit of mailing
5.
Voting at shareholders Meetings
Acting at all times interest on behalf of the corporation and its shareholders unhampered by personal pecuniary gain.
Shareholders that have a common interest may decide to form a Voting Trust
Voting trust is an agreement among shareholders and a trustee whererby rights to vote on the stock of the participating shareholders are transferred to the trustee and all other rights in the stock are retained by the shareholders.
Criteria of a voting trust
1. grant of voting rights for an indefinite period of time
2. acquisition of voting control (common purpose of the trust) of the corporation is the common purpose of the trust
3. voting rights are separated from the other attributes of stock ownership different from placing - we must relinquish some rights of control such as legal title or the benefits (trust fund for children) where I can retain control of the legal title (equitable title and legal title) TRUST AGREEMENT is created to create this trust specifically granting rights to the trustee
Tuesday May 6, 2003 Corporate Law Two Day one
Records:
1. Current names and addresses of all partners
2. a copy of the certificate of Ltd. p/s
3. copies of tax returns for the past three years
4. copies of p/s agreements
5. copies of financial statements for prior 3 years
· Designation for service of process
· Registered Agents (Optional)
· Effective Date (Optional)
· Liability of Certain Members
· Signed
· Fee $200
LLC
· Organizers prepares and signs and files Articles of Incorporation w/dos
· Written operating agreement
Articles caption LLC, L.L.C or LLC
Name
Office
Date of Dissolution (optional)
Management of the Corporation
· shareholders rights and responsibilities (shareholders own at least one share of stock and are considered a co-owner)
· relationship b/w shareholders and corporation is contractual and separate from other shareholders/corporate relationship (i.e., employment agreements, loan agreements)
· A shareholder may be an individual or a business entity.
· Usually there are no qualifications to be a shareholder (exceptions: s corporation)
· may be individual or business entity exceptions is S Corporation
Preemptive Rights
Give a shareholder an opportunity to protect their position with a corporation by granting to shareholders the right to purchase newly issued shares in an amount proportionate to their current stock ownership. The shareholders get first crack). These rights are often waived in the Articles of Incorporation. There are no rights unless and to the extent granted in the Articles of Incorporation.
· no preemptive rights granted unless and to the extent granted in the Articles of Incorporation. If you enable existing shareholders to purchase all of the rights, then the stock price stays the same.
Shareholders right to inspect corporation records
Rights to inspect are going to vary rights found in the statutes of the state of incorporation or domicile.
Shareholders are entitled to inspect and copy minutes, accounting and shareholder records. To exercise these rights, the shareholder must give the corporation five business days notice and the inspection must take during regular business hours. The demand to inspect must be made in good faith and for a proper purpose. The reason must be stated in the notice.
Pillsbury v. Honeywell, 191 N.W.2d 406
Supreme Court of Minnesota.
STATE of Minnesota ex rel. Charles A. PILLSBURY, Appellant,
v.
HONEYWELL, INC., Respondent.
No. 42541.
Oct. 22, 1971.
Mandamus action to compel corporate defendant to produce its original shareholder ledger, current shareholder ledger, and all corporate records dealing with weapons and ammunitions manufacture. From an order of the District Court, Hennepin County, Luther Sletten, J., denying all relief prayed for the petitioner appealed. The Supreme Court, Kelly, J., held, inter alia, that a stockholder who bought shares in corporation for sole purpose of bringing suit to compel production of corporate books and records, who was motivated by preexisting social and political beliefs that corporation should not be manufacturing ammunition to be used in Vietnam war, and who had no concern for economic well being of corporation did not have a proper purpose germane to his interest as a stockholder and hence could not compel production of corporation's shareholder lists or business records.
Affirmed.
A stockholder who bought shares in corporation for sole purpose of bringing suit to compel production of corporate books and records, who was motivated by preexisting social and political beliefs that corporation should not be manufacturing ammunition to be used in Vietnam war, and who had no concern for economic well being of corporation did not have a proper purpose germane to his interest as a stockholder and hence could not compel production of corporation's shareholder lists or business records.
· Activism person purchases 100 shares of Honeywell stock to change Honeywell policy of manufacturing weapons
· Plaintiff demands that Honeywell produce it shareholders ledger, address and number of share, both original and current list and all corporation records involved with munitions and manufacturing weapons Honeywell refused.
· Pillsbury v Honeywell, Inc. 191 N.W.2d 406
· In deposition, plaintiff details it position regarding war and Honeywells involvement and his hopes of altering Honeywells policy
He argues that the records are necessary to ensure accuracy of information in the files and to solicit proxies. The courts holding is in favor of Honeywell and they state that :a proper purpose for the inspection of corporation records is concerned with return on investment
Plaintiffs sole interest in Honeywell was to change their policy on munitions manufacturing, not on the return on investment.
Personal Liability of shareholders
1. piercing the corporate veil and hold the shareholders personally liable
2. personal guarantees
Both of these exceptions illustrate a disregard for the corporate entity which provides limited liability protection.
Another exemption, but very uncommon is
Tortuous acts of a corporation -
- shareholders may be liable for tortuous acts of the corporation if it can be proven that the shareholders were participating in the commission of the act. The courts would go after the shareholders who are on the Board of Directors and not the small shareholder.
Personal liability of directors
You cannot hold responsible a director who makes a bad business decision, if he had the best interest of the corporation.
Business Judgment Rule - Courts recognize that a directors decisions involve a certain amount of risk and that informed good faith decisions can go bad. The rule states that a directors corporate decision which involves no self-dealing or personal interest will not subject him to personal liability unless:
A directors corporation decision which involves not self interest will not subject him to personal liability unless:
1. director did not exercise due care to obtain relevant and available facts before voting to authorize an action.
2. unless the director voted to authorize even though they didnt reasonably believe or could not have reasonably believed that it was in the best interest of the corporation
3. or in some other way, the transaction was not in good faith.
The above represents a breach of fiduciary duty of care and/or our duty of loyalty
Unauthorized Acts
When a director acts beyond the scope of their personal authority, they may be held liable for those losses incurred by such actions. They may have to pay back losses from their personal assets.
Negligence
They are going to be held personally liable if they engaged in negligent acts that caused personal injury or acts to the corporation or to a third party.
Fraud and other illegal acts
Individual acts or acts commited by the corporation with their knowledge. However, if the director is not aware, the reasonableance standard question is applied.
This includes acts committed by them or with their knowledge.
Shareholders Actions the ability to take legal action (3 types)
1. individual shareholder action apply when an individual shareholders is injured by the acts of a corporation may bring suit for damages against the corporation - situations where the alleged wrong of the corporation affect the shareholder individually and not other shareholders. This is a personal claim, similar to any action that any individual could bring against the corporation.
Shareholders breach of employment agreement, etc.
2. representative actions action where the parties are too numerous to be joined and one party or a few are permitted to bring the action on behalf of the group this represents personal claims this cause of action belongs to the shareholders personally
3. derivative action action brought by one or more shareholders to enforce a corporation right or remedy a wrong in cases where the corporation fails to take appropriate action for its own protection.
Fraudulent transaction that was completed or contemplated which will result in serious injury to the corporation or to the interests of the corporation This cause of action belongs to a corporation. The corporation can sue itself (class action suits). The following must be present for a shareholder to maintain a derivative action.
1. There must be some action or threatened action of the Board of Directors which is beyond their authority, or
2. they have a fraudulent action completed or contemplated which will result in serious injury to the corporation or to the interest of the shareholders.
3. an action by the board or a majority of them in their own interests which is destructive to the corporation or to the shareholders.
4. an action by the majority of the shareholders themselves in oppressively and illegally acting in the name of the corporation which is in violation of the rights of other shareholders
Demand MBCA Section 7.42
This represents an order to avoid unnecessary litigation statutes require shareholders to make a good faith attempt to prompt the corporation to take action on its own behalf before a derivative action is filed. In order to avoid litigation, statutes require shareholders to make a good faith attempt to prompt the corporation to take action on its own behalf
No shareholders may commence a derivative proceeding until:
1. a written demand has been made upon the corporation to take suitable action
2. 90 days have expired from the date of demand unless a shareholder has earlier been notified that the demand has been rejected; or
3. irrepairable damage/injury would result by waiting 90 days.
Officers
Corporations have officers with the title, duties and responsibilities assigned to them by the statutes of the state of domicile, Articles of Incorporation and the bylaws. Corporation are given great latitude in the number, title and duties of its officers. These issues are usually addressed in the bylaws. Statutes often require that one officer be appointed to prepare the minutes of the directors meetings and the shareholders meetings.
Officers common titles and duties:
1. CEO - actively manages the business of the corporation , directly/indirectly supervise all other officers, agents and authorities. Presides over all meetings of shareholders and Board of Directors hard to overcome that reasonableness test
2. President specific duties assigned to the president acting as a backup,
3. Chairman of the Board shall be a member of the Board of Directors principal duties are to preside over each meeting of the Board of Directors. Keeps in close touch with members, ceo and pres.; closely involved with the admin of corporation; advises and counsels CEO and/or pres.
4. Vice Pres shall perform duties of pres during his absence
5. CFO is the custodian of funds, securities and property of the corporation - shall give and receive receipts of monies due and payable to the corporation also responsible for depositing any money - treasurer shall have such duties in the absence of CFO; in the bylaws
6. Secretary shall be responsible for the prompt and correct recording of all proceedings of all Board of Directors and supervises all publications of the reports, studies and other correspondences of the Board of Directors.
The bylaws will contain the names of officers, description of duties, methods of electing and removing officers and any special qualifications will be listed. Compensation issues may also be stated in the bylaws. Description of duties of offices
Method of electing officers
Method of any special qualifications for officers
Compensation issues are addressed in the bylaws
Election term of officers
Personal liability of officers
Officers are held to the same standard of conduct at directors.
Breaches of fiduciary
Breaches of care
Breaches of loyalty can subject them to liability
Mergers and Acquisitions
Merger combination of two or more corporations whereby one of the corporations survives and one or more are absorbed and cease to exist resulting in the merger corporation. All assets, liabilities and obligations of the merging corporation are transferred to the surviving corporation. Do not buy the corporation but just the assets and name. Maintain the corporation entity.
Effect of a Merger:
1. the separate existence of every merging corporation ceases
2. title to real or other property is vested in surviving corporation w/o impairment
3. surviving corporation takes on all liabilities of the corporations property to the merger
4. proceeding against a party to the merger by substituting the surviving corporation for the merging corporation
5. Articles of Incorporation of surviving corporation must be amended if necessary (there may be changes o officers, etc.)
6. the shares of each corporation party to the merger are converted into shares, obligations or other securities of the surviving corporation.
Shareholders of the merging corporation will revcieve shares in the new corporation in exchange of their old stock certificates. The Corporation is allowed to buyout of the shares of the shareholders.
Mergers b/w subsidiaries and parents
Upstream Merger sub into parent may be eligible for a short form merger. Obviously this type of merger is simplified. shareholders approval of the subsidiary is not necessary when the parent owns at least 90%. Examine the eligibility for short-form mergers.
Downstream Merger - when the parent company merges into the subsidiary. Same issues as above.
Share Exchanges
Acquisition a share exchange is a transaction whereby one corporation acquires all of the outstanding shares of another corporation by an exchange that is compulsory on the shareholders of the target corporation.
Target corporation may receive shares or cash in exchange for shares. Both corps survive. With target corporation becoming a subsidiary of the acquiring corporation. This differs from a merger..
Consolidations where you are merging two or more corporations into a new corporation and results in the subsequent disappearance of the merging corporations.
Celotex Corp. v. Pickett 490 So.2d 35 takes the bad will along with the goodwill exchanges and corporate interest.
Wednesday April 7, 2003 Corporate Law
Share exchange
Merger
State and Federal Law affecting Mergers and Share Exchanges
The following issues are addressed by federal/state statute:
1. requirements for the plan of merger and the plan of share exchange. This is the process that a corporation must undergo
The Merger is effectuated by filing a Certificate of Merger, setting forth the plan, the effective date, the provisions for the new C/I, and the manner of authorization with respect to each constituent corporation. See B.C.L. Section 904. The Merger is effective after filing with the Secretary of State and payment of the filing fees. B.C.L. §906. The surviving corporation is required to file a copy of such certified certificate in the County Clerks Office in each county in which an office of the constituent corporation is located
2. Method for adopting the plan the process
3. Requirements for the AoM or the Arts of share exchange filing subject to statutory requirements
4. Requirements for filing the AoM or AoSE
5. Provisions regarding the effect of a Merger or Exchange anti-trust considerations, federal reporting requirements, employment
6. Provisions for short term mergers
7. Provisions for dissenting shareholders rights
Federal Reporting Requirements
- Federal Securities Requirements
- IRS Codes
- Anti-trust Laws
- Procedures
Depends on the type of transaction and the parties involved.
If we have mergers between related parties, then the procedure will be much easier. (subsidiaries) A lot of extra due diligence work may not be required.
- Negotiations and the Letter of Intent
a) This will involve meeting and preliminary negotiations between the parties. This could be an act of the Board of Directors, the agents must be authorized individuals. Depends on the management structure of that corporation. Empowerment of one person will not happen. Corporation authorizes a committee, or Board of Directors to undergo these negotiations.
b) If these negotiations are successful, then this will lead to the creation of the Letter of Intent. This is typically a short document of a few pages in length. This sets for the preliminary understandings and intentions between the parties with regard to this transaction. Example, is this possible, what are we going to look from you when this goes through?
c) This letter may contain contingencies such as dates and deadlines that must occur in order for the party to undergo the manifestation of intent.
d) Purpose of this letter of intent is to demonstrate the seriousness of the parties.
- Plan of the Merger this is required by statute
Sets forth the terms of agreement between the parties. The plan must set forth the following:
- The names of each corporation planning to merge and the name of the surviving corporation.
- The terms and conditions of the merger.
- The manner and basis of converting the shares into shares, obligations and other securities of the surviving corporation or force into cash or other property
The Plan often includes:
- Provisions for amendment of the Articles of Incorporation
- Date of the agreement
- The name and authorized capitalization of each corporation listing all of the parties to the transaction, stock values, etc. Becomes particularly important for transactions that do not require shareholders approval.
- Name, purpose, principal office, number of directors and the capital stock of the surviving corporation is required.
- Provisions acknowledging the transfer of rights, property and liabilities of merging corporation to surviving corporation. Due diligence complexity will be great for larger corporations.
- Recitals by each Board of Directorss that they believe the merger to be in the best interest of the corporation to merge (support).
- Provisions for amending the bylaws of survivor voting rights, shareholders must make sure that they are adequately represented in the new corporation and this depends on the strength of the parties.
- Provisions for dissolving merging corporations winding up the affairs of the business
- Provisions for filing the AoM corporation
- Closing and effective date of the merger
- Provisions for abandoning the merger prior to completions
With the exception of the upstream/downstream, all of these conditions must be approved by the Board of Directors and shareholders of each corporation
Director and Shareholders Approval
1.Procedure for obtaining shareholders approval
1. bod recommeds the plan shareholders in a proposal of merger
2. Each shareholders, whether entitled to vote or not, must be notified of the shareof merger and the plan olders meeting pursuant to statute. It must state that the purpose of the meeting is to consider the plan of merger and must include a summary of the plan.
3. Must bee approved by a majority of the shareholders unless oltherwise provided by a certificate of incorporation or the bylaws. It is standard to have a super majority to accomplish this task. \
Approval of the shareholders of the surviving corporation is not always required. When it is not required is when the position and rights of the shareholders of the surviving corporation are not significantly affected by the merger. This often allows the Board of Directors of a largely held corporation to have a meeting without shareholders approval.
Dissenting Shareholders
Shareholders right to dissent refers to their right to object to certain extraordinary actions of the corporation and to obtain fair value of their shares by the corporation.
Any shareholders entitled to vote on the planned merger or shareholders of subsidiaries have the right to dissent
The rights to dissent also applies to situations where the Articles of Incorporation are amended in a way that materially and adversely affects the right of the shareholders. If the shareholders challenges the value on his shares by a corporation, he may file for a judicial appraisal of a proceeding.
Articles of Merger - Must be filed w/dos
Must set forth the following:
1. must consist of mainly the plan of merger
2. Statement regarding approval of the plan by the shareholders including the number of votes in favor and against.
3. Stateemtn fo shareholders approval not required if that is the case
Share Exchange:
Plan of Exchange must set forth:
1. Name of the corporation whose shares will be acquired and the name of the acquiring corporation
2. Terms and conditions of the exchange
3. the manner and basis for exchanging the shares to be acquired for shares, delegations or other securities of the acquiring corporation or for cash or other property.
Optional provisions are going to be similar to the merger such as the name, date, purpose, authorized capitalization. A lot of this will not be required. rights for property and liabilities are going to remain in the domain of the target corporation and will not be an issue here. Recitals can be included. Provisions for amending the bylaws may not be necessary. For dissolving, will not be necessary. Abandonment will be necessary. Bylaw modification might or may not be there.
Provisions for continuing the target corporation as a subsidiary. For continuing the target corporation as a subsidiary this provision will be there.
Director and shareholders approval rights of the planned exchange would be the same as for a merger.
Board of Directors is recommended by and approved by a majority of shareholders unless altered by statute, certificate or Articles of Incorporation or bylaws
Fair Merger Act
Level of federal approval
Dissenting shareholders
Share exchange, if properly approved, is binding on all shareholders. Even if I do not vote and the corporation does, I still must comply with the results of the vote; dissenters have a right to dissent to the share exchange, receive fair value for their shares and withdraw from the corporation.
Articles of Share Exchange
After the plan of share exchange has been adopted, the AoSE must be filed with the dos. The articles must set forth:
- the Plan of share exchange and
- statement regarding approval by shareholders and the date
Due Diligence and Pre-closing Matters
The parties participating in the share exchange must use DUE DILIGENCE to ascertain the validity of the statements and the plan
DUE DILIGENCE work involves a thorough review of the documentation supporting the information in the plan as well as onsite investigations or inspections of real estate, buildings, inventory and other assets.
Due diligence also involves inspections of the corporation records and books. A list of documents that are exchanged and reviewed would consist of:
1. Proof of corporation existence and the good standing of each corporation
2. Collect copies of corporate minute books including the Articles of Incorporation, bylaws and minutes
3. Examine the stock ledger and certificates
4. Examine financial statements
5. tax returns and the results of tax audits, relationship between the assets and stock
6. leases and or titles to property
7. lists of equipment
8. Paperwork concerning their patents, trademarks and copyrights make sure that they are registered; assignments, trademarks, any department that has a research and development department with patents that are filed. When we buy the intellectual rights to a corporation, we want to make sure that we are getting what we believe exist in the corporation that are being merged.
9. pending litigation
10. Copies of employment and non-competition agreements
11. Description of employee benefits
12. U.C.C searches on liens and priorities
13. loan agreements
14. accounts payable/receivable
15. customer lists
16. ascertaining whether any outside parties are required to consent to the transaction contracts that exists between two corporations and a third party. Parties must
Closing the Merger and Share Exchange Transaction - closing date must be specified and i
- at the closing, the shares of stock change hands
- assignments of Ks and transfers of property take place.
This meeting is attended by the key officers of each corporation. By the corporation counsel, third party. This is the execution and exchange of all documents referred to and required by the plan.
Documents typically required: Merger Closings
SE requirements:
- Articles of Merger, including any necessary articles of amendments to the Articles of Incorporation. Tomorrow-we will discuss the aemending the Articles of Incorporation
- The instruments of signing and transferring the appropriate shares of stock of each corporation
- The issuance of other instruments or deeds that assign or transfer the deeds of real property.
- The issuance of new stock certificates
- The instruments that assign and transfer equipment, vehicles and other property.
- Assignments of Patents, trademarks and copyrights
- Instruments assigning and transferring Bank Accounts signatures and officers must change on these accounts
- Appropriate SEC filings
- Copies of Board of Directors and shareholders resolutions approving the transactions
Documents required for Share Exchanges similar to merger closings, more emphasis is placed on the transfer of ownership on the target corporation. Here, we are dealing with the issuance of stock certificates that represent the ownership of target corporation by the acquiring corporation. The documents create a parent-subsidiary relationship.
shareholders get stock certificates and possibly the officers and directors may remain in place in order to operate that corporation.
Post Closing Matters
After the closing of this transaction, there are several matters that still need to be addressed such as the appropriate federal and state documents and the following:
- Organize new minutes books and stock ledgers
- Filing of the deed to exercise the transfer of proerty
- Changing the titles to all movable pieces of property (motor vehicles, etc.)
- Lease Assignments
- Other such tasks
Certificate of Change
Right to Dissent
Qualification of a foreign Corporation
No constitutional or statutory right to jury trial exists where there is no issue of fact.
**407 Syllabus by the Court
*322 1. In determining the right of a shareholder to inspect corporate books and records, there is no need to decide whether the law of the state of incorporation or local law applies when the test which is determinative of that right in both states is identical.
2. A stockholder who bought shares in a corporation for the sole purpose of bringing a suit to compel production of corporate books and records, who is motivated by preexisting social and political beliefs, and who has no concern for the economic well-being of the corporation, does not have a proper purpose germane to his interest as a shareholder and, therefore, cannot compel production of a corporation's shareholder lists or business records.
3. A trial court need not accept a shareholder's allegation that he has a proper purpose, but may make an independent assessment of the shareholder's motives.
**408 4. Where a shareholder is motivated solely by preexisting social and political beliefs and has no economic concern for the well-being of the corporation or himself, the fact that he seeks to achieve his political objectives by electing directors with similar beliefs will not entitle him to inspection.
5. In a mandamus action, it is not reversible error for the trial court to refuse to strike respondent's answer although it preceded the issuance of an alternative writ.
*323 6. In a mandamus action where the trial court permits respondent's answer to precede the issuance of an alternative writ, the cause of action has commenced, and respondent may serve notice of a deposition without a showing of cause.
7. Petitioner in a mandamus action is not entitled to a jury trial if the trial court finds as a matter of law from the deposition that no grounds for issuance of the writ exist.
John Remington Graham, Minneapolis, for appellant.
Dorsey, Marquart, Windhorst, West & Halladay and Bernard G. Heinzen and Robert A. Heiberg, Minneapolis, for respondent; Sigurd Ueland, Jr., Honeywell, Inc., Minneapolis, of counsel.
Heard and considered en banc.
OPINION
KELLY, Justice.
Petitioner appeals from an order and judgment of the district court denying all relief prayed for in a petition for writs of mandamus to compel respondent, Honeywell, Inc., (Honeywell) to produce its original shareholder ledger, current shareholder ledger, and all corporate records dealing with weapons and munitions manufacture. We must affirm.
The issues raised by petitioner are as follows: (1) Whether Minnesota or Delaware law determines the right of a shareholder to inspect respondent's corporate books and records; (2) whether petitioner, who bought shares in respondent corporation for the purpose of changing its policy of manufacturing war munitions, had a proper purpose germane to a shareholder's interest; (3) whether the respondent in a mandamus action may answer before the issuance of an alternative writ; (4) whether a deposition *324 may be considered by the trial court after the filing of a petition for an alternative writ of mandamus and an answer to the petition; and (5) whether petitioner was improperly denied a jury trial where the trial court found all questions of fact answered by the pleadings and petitioner's deposition.
Petitioner attended a meeting on July 3, 1969, of a group involved in what was known as the 'Honeywell Project.' Participants in the project believed that American involvement in Vietnam was wrong, that a substantial portion of Honeywell's production consisted of munitions used in that war, and that Honeywell should stop this production of munitions. Petitioner had long opposed the Vietnam war, but it was at the July 3rd meeting that he first learned of Honeywell's involvement. He was shocked at the knowledge that Honeywell had a large government contract to produce anti-personnel fragmentation bombs. Upset because of knowledge that such bombs were produced in his own community by a company which he had known and respected, petitioner determined to stop Honeywell's munitions production.
On July 14, 1969, petitioner ordered his fiscal agent to purchase 100 shares of Honeywell. He admits that the sole purpose of the purchase was to give himself a voice in Honeywell's affairs so he could persuade Honeywell to cease producing munitions. Apparently not aware of that purpose, petitioner's agent registered the stock in the name of a Pillsbury family nominee--Quad & Co. Upon discovering **409 the nature of the registration, petitioner bought one share of Honeywell in his own name on August 11, 1969. In his deposition testimony petitioner made clear the reason for his purchase of Honeywell's shares:
'q * * * (D)o I understand that you requested Mr. Lacey to buy these 100 shares of Honeywell in order to follow up on the desire you had to bring to Honeywell management and to stockholders these theses that you have told us about here today?
'A Yes. That was my motivation.'
*325 The 'theses' referred to are petitioner's beliefs concerning the propriety of producing munitions for the Vietnam war.
During July 1969, Subsequent to the July 3, 1969, meeting and after he had ordered his agent to purchase the 100 shares of Honeywell stock, petitioner inquired into a trust which had been formed for his benefit by his grandmother. The purpose of the inquiry was to discover whether shares of Honeywell were included in the trust. It was then, For the first time, that petitioner discovered that he had a contingent beneficial interest under the terms of the trust in 242 shares of Honeywell.
Prior to the instigation of this suit, petitioner submitted two formal demands to Honeywell requesting that it produce its original shareholder ledger, current shareholder ledger, and all corporate records dealing with weapons and munitions manufacture. Honeywell refused.
On November 24, 1969, a petition was filed for writs of mandamus ordering Honeywell to produce the above mentioned records. In response, Honeywell answered the petition and served a notice of deposition on petitioner, who moved that the answer be stricken as procedurally premature and that an order be issued to limit the deposition. After a hearing, the trial court denied the motion, and the deposition was taken on December 15, 1969.
In the deposition petitioner outlined his beliefs concerning the Vietnam war and his purpose for his involvement with Honeywell. He expressed his desire to communicate with other shareholders in the hope of altering Honeywell's board of directors and thereby changing its policy. To this end, he testified, business records are necessary to insure accuracy.
A hearing was held on January 8, 1970, during which Honeywell introduced the deposition, conceded all material facts stated therein, and argued that petitioner was not entitled to any relief as a matter of law. Petitioner asked that alternative writs of mandamus issue for all the relief requested in his petition. On April 8, 1970, the trial court dismissed the petition, holding that *326 the relief requested was for an improper and indefinite purpose. Petitioner contends in this appeal that the dismissal was in error.
[1] 1. Honeywell is a Delaware corporation doing business in Minnesota. Both petitioner and Honeywell spent considerable effort in arguing whether Delaware or Minnesota law applies. The trial court, applying Delaware law, determined that the outcome of the case rested upon whether or not petitioner has a proper purpose germane to his interest as a shareholder. Del.Code Ann. tit. 8, s 220 (Supp. 1968). This test is derived from the common law and is applicable in Minnesota. See, Sanders v. Pacific Gamble Robinson Co., 250 Minn. 265, 84 N.W.2d 919 (1957).[FN1] Minn.St. c. 300, upon which petitioner relies, applies only to firms incorporated under that chapter. We need not rule on whether the lower court applied the right state law since the test used was correct.
FN1. In Sanders v. Pacific Gamble Robinson Co., 250 Minn. 265, 84 N.W.2d 919 (1957), the court referred to Minn.St. 300.32 but did not apply it since the corporation was foreign.
Under the Delaware statute the shareholder must prove a proper purpose to inspect **410 corporate records other than shareholder lists. Del.Code Ann. tit. 8, s 220(c) (Supp.1968). This facet of the law did not affect the trial court's findings of fact. The case was decided solely on the pleadings and the deposition of petitioner, the court determining from them that petitioner was not entitled to relief as a matter of law. Thus, problems of burden of proof did not confront the trial court and this issue was not even raised in this court.
2. The trial court ordered judgment for Honeywell, ruling that petitioner had not demonstrated a proper purpose germane to his interest as a stockholder. Petitioner contends that a stockholder who disagrees with management has an absolute right to inspect corporate records for purposes of soliciting proxies. He would have this court rule that such solicitation is per se a 'proper purpose.' Honeywell argues that a 'proper purpose' *327 contemplates concern with investment return. We agree with Honeywell.
[2] This court has had several occasions to rule on the propriety of shareholders' demands for inspection of corporate books and records. Minn.St. 300.32, not applicable here, has been held to be declaratory of the common-law principle that a stockholder is entitled to inspection for a proper purpose germane to his business interests. While inspection will not be permitted for purposes of curiosity, speculation, or vexation, adverseness to management and a desire to gain control of the corporation for economic benefit does not indicate an improper purpose.[FN2]
FN2. Nationwide Corp. v. Northwestern Nat. Lefe Ins. Co., 251 Minn. 255, 87 N.W.2d 671 (1958); Sanders v. Pacific Gamble Robinson Co., Supra; State ex rel. G. M. Gustafson Co. v. Crookston Trust Co., 222 Minn. 17, 22 N.W.2d 911 (1946); State ex rel. Boldt v. St. Cloud Milk Producers' Assn., 200 Minn. 1, 273 N.W. 603 (1937); State ex rel. Humphrey v. Monida & Yellowstone Stage Co., 110 Minn. 193, 124 N.W. 971 (1910). See, Annotation, 15 A.L.R.2d 11.
Several courts agree with petitioner's contention that a mere desire to communicate with other shareholders is, per se, a proper purpose. Lake v. Buckeye Steel Castings Co., 2 Ohio St.2d 101, 206 N.E.2d 566 (1965). This would seem to confer an almost absolute right to inspection. We believe that a better rule would allow inspections only if the shareholder has a proper purpose for such communication. This rule was applied in McMahon v. Dispatch Printing Co., 101 N.J.L. 470, 129 A. 425 (1925), where inspection was denied because the shareholder's objective was to discredit politically the president of the company, who was also the New Jersey secretary of state.
The act of inspecting a corporation's shareholder ledger and business records must be viewed in its proper perspective. In terms of the corporate norm, inspection is merely the act of the concerned owner checking on what is in part his property. In the context of the large firm, inspection can be more akin to a weapon in corporate warfare. The effectiveness of the weapon is considerable:
*328 'Considering the huge size of many modern corporations and the necessarily complicated nature of their bookkeeping, it is plain that to permit their thousands of stockholders to roam at will through their records would render impossible not only any attempt to keep their records efficiently, but the proper carrying on of their businesses.' Cooke v. Outland, 265 N.C. 601, 611, 144 S.E.2d 835, 842 (1965).
See, also, Matter of Pierson, 28 Misc. 726, 59 N.Y.S. 1003 (Sup.Ct.1899), affirmed, 44 App.Div. 215, 60 N.Y.S. 671 (1899). Because the power to inspect may be the power to destroy, it is important that only those with a bona fide interest in the corporation enjoy that power.
That one must have proper standing to demand inspection has been recognized by **411 statutes in several jurisdictions.[FN3] Courts have also balked at compelling inspection by a shareholder holding an insignificant amount of stock in the corporation.[FN4]
FN3. See, e.g., Ark.Stat.Ann. s 64--312 (1947); D.C.Code Ann. s 29--920 (1967); Fla.Stat. s 608.39 (1969), F.S.A.; Ill.Rev.Stat. c.
32, s 157.45 (1967); La.Rev.Stat. s 12:103 (Supp.1970); Maine Rev.Stat.Ann. tit. 13, s 373 (1964); Mich.Comp.Laws Ann. s 450.45 (1967); Nev.Rev.Stat. s 78.105 (1970); N.J.Stat.Ann. s 14A:5--28 (1969); N.Y. Business Corporation Law s 624 (McKinney's Consol. Laws, c. 4, 1963); Model Bus.Corp. Act Ann. s 52 (1971).
FN4. See, People ex rel. Hunter v. National Park Bank of New York, 122 App.Div. 635, 107 N.Y.S. 369 (1907); Matter of Pierson, 28 Misc. 726, 59 N.Y.S. 1003 (Sup.Ct.1899), affirmed, 44 App.Div. 215, 60 N.Y.S. 671 (1899).
Petitioner's standing as a shareholder is quite tenuous. He only owns one share in his own name, bought for the purposes of this suit. He had previously ordered his agent to buy 100 shares, but there is no showing of investment intent. While his agent had a cash balance in the $400,000 portfolio, petitioner made no attempt to determine whether Honeywell was a good investment or whether more profitable shares would have to be sold to finance the Honeywell purchase. Furthermore, petitioner's agent had the power to sell the Honeywell shares without his consent. Petitioner also had a contingent beneficial interest *329 in 242 shares. Courts are split on the question of whether an equitable interest entitles one to inspection. See 5 Fletcher, Private Corporations, s 2230 at 862 (Perm. ed. rev. vol. 1967). Indicative of petitioner's concern regarding his equitable holdings is the fact that he was unaware of them until he had decided to bring this suit.
[3] Petitioner had utterly no interest in the affairs of Honeywell before he learned of Honeywell's production of fragmentation bombs. Immediately after obtaining this knowledge, he purchased stock in Honeywell for the sole purpose of asserting ownership privileges in an effort to force Honeywell to cease such production. We agree with the court in Chas. A. Day & Co. v. Booth, 123 Maine 443, 447, 123 A. 557, 558 (1924) that 'where it is shown that such stockholding is only colorable, or solely for the purpose of maintaining proceedings of this kind, (we) fail to see how the petitioner can be said to be a 'person interested,' entitled as of right to inspect * * *.' But for his opposition to Honeywell's policy, petitioner probably would not have bought Honeywell stock, would not be interested in Honeywell's profits and would not desire to communicate with Honeywell's shareholders. His avowed purpose in buying Honeywell stock was to place himself in a position to try to impress his opinions favoring a reordering of priorities upon Honeywell management and its other shareholders. Such a motivation can hardly be deemed a proper purpose germane to his economic interest as a shareholder.[FN5]
FN5. We do not question petitioner's good faith incident to his
political and social philosophy; nor did the trial court. In a wellprepared memorandum, the lower court stated: 'By enumerating the foregoing this Court does not mean to belittle or to be derisive of Petitioner's motivations and intentions because this Court cannot but draw the conclusion that the Petitioner is sincere in his political and social philosophy, but this Court does not feel that this is a proper forum for the advancement of these political-social views by way of direct contact with the stockholders of Honeywell Company or any other company. If the courts were to grant these rights on the basis of the foregoing, anyone who has a political-social philosophy which differs with that of a company in which he becomes a shareholder can secure a writ and any company can be faced with a rash and multitude of these types of actions which are not bona fide efforts to engage in a proxy fight for the purpose of taking over the company or electing directors, which the courts have recognized as being perfectly legitimate and acceptable.'
*330 [4] 3. The fact that petitioner alleged a proper purpose in his petition will not **412 necessarily compel a right to inspection. 'A mere statement in a petition alleging a proper purpose is not sufficient. The facts in each case may be examined.' Sawers v. American Phenolic Corp., 404 Ill. 440, 449, 89 N.E.2d 374, 379 (1949). Neither is inspection mandated by the recitation of proper purpose in petitioner's testimony. Conversely, a company cannot defeat inspection by merely alleging an improper purpose.[FN6] From the deposition, the trial court concluded that petitioner had already formed strong opinions on the immorality and the social and economic wastefulness of war long before he bought stock in Honeywell. His sole motivation was to change Honeywell's course of business because that course was incompatible with his political views. If unsuccessful, petitioner indicated that he would sell the Honeywell stock.
FN6. See, Nationwide Corp. v. Northwestern Nat. Life Ins. Co., 251 Minn. 255, 87 N.W.2d 671 (1958).
We do not mean to imply that a shareholder with a bona fide investment interest could not bring this suit if motivated by concern with the long- or short-term economic effects on Honeywell resulting from the production of war munitions. Similarly, this suit might be appropriate when a shareholder has a bona fide concern about the adverse effects of abstention from profitable war contracts on his investment in Honeywell.
In the instant case, however, the trial court, in effect, has found from all the facts that petitioner was not interested in even the long-term well-being of Honeywell or the enhancement of the value of his shares. His sole purpose was to persuade the company to adopt his social and political concerns, irrespective of any economic benefit to himself or Honeywell. This purpose *331 on the part of one buying into the corporation does not entitle the petitioner to inspect Honeywell's books and records.[FN7]
FN7. Petitioner cites Medical Committee for Human Rights v. S.E.C., 139 App.D.C. 226, 432 F.2d 659 (1970), for the proposition that economic benefit and community service may, in the motives of a shareholder, blend together. We have ruled that petitioner does not meet this test because he had no investment motivation for his inspection demands. The Medical Committee case did not reach the merits, the court ruling only that S.E.C. actions concerning the inclusion of proxy statements are reviewable. It is interesting to note, however, that the case presents an analogous factual situation. Shareholders sought to solicit proxies to stop the Dow Chemical Company's manufacture of napalm on grounds that management had 'decided to pursue a course of activity which generated little profit * * * and actively impaired the company's public relations and recruitment activities because Management considered this action morally and politically desirable.' 139 App.D.C. 249, 432 F.2d 681. (Italics supplied.) The court, in dictum, expressed its disapproval of Dow's claim that it could use its power to impose management's personal
political and moral prejudices. It would be even more anomalous if an outsider with no economic concern for the corporation could attempt to adapt Honeywell's policies to his own social convictions.
[5] 4. Petitioner argues that he wishes to inspect the stockholder ledger in order that he may correspond with other shareholders with the hope of electing to the board one or more directors who represent his particular viewpoint. On p. 30 of his brief he states that this purpose alone compels inspection:
'* * * (T)his Court has said that a stockholder's motives or 'good faith' are not a test of his right of inspection, except as 'bad faith' actually manifests some recognized 'improper purpose'--such as vexation of the corporation, or purely destructive plans, or Nothing specific, just pure idle curiosity, or necessarily illegal ends, or Nothing germane to his interests. State ex rel. G. M. Gustafson Co. v. Crookston Trust Co. (222 Minn. 17, 22 N.W.2d 911 (1946)) * * *.' (Italics supplied.)
While a plan to elect one or more directors is specific and the election of directors **413 normally would be a proper purpose, here *332 the purpose was not germane to petitioner's or Honeywell's economic interest. Instead, the plan was designed to further petitioner's political and social beliefs. Since the requisite propriety of purpose germane to his or Honeywell's economic interest is not present, the allegation that petitioner seeks to elect a new board of directors is insufficient to compel inspection.
[6] 5. Petitioner contends that the trial court should have struck Honeywell's answer to the petition for the writs of mandamus since Honeywell answered before the writ was issued. According to statutory procedure, an answer is proper after the alternative writ has issued. Minn.St. 586.06. While it is clear that Honeywell did not comply with the strict dictates of the statute, the question is whether such error is cause for reversal. We do not believe so.
If the trial court had struck Honeywell's answer and issued the alternative writ, Honeywell would have answered with the same allegations as in its original answer. On the merits, the issues would have been identical and would have created the same burdens of proof. Thus, the technical error did not affect the ruling upon the merits and is thus not reversible.
[7] 6. We have stated that it was not reversible error to allow Honeywell's premature answer. It follows that the notice to take his deposition, served upon petitioner the same day as the answer, was served subsequent to the commencement of the action. See, Rules of Civil Procedure, Rule 3.01.
[8] [9] 7. Petitioner's final contention is that he was improperly denied a jury trial. The court below denied the petition for a writ after a hearing at which Honeywell appeared in opposition. In denying the petition, the court found that the facts were undisputed and that they did not necessitate a jury trial. We agree that the facts are undisputed and are susceptible to only one inference on the crucial issue in this case, namely, whether petitioner had a proper purpose germane to his economic interest as *333 a shareholder. [FN8] We have affirmed the trial court's ruling that the facts as stated by petitioner in the deposition are sufficient to deny him all grounds of relief. Thus, there was no issue to try before a jury.[FN9] The fact that Honeywell raised issues of fact in its answer is immaterial. Inconsistent defenses are always permitted. Rules of Civil Procedure, Rule 8.05(2). No constitutional or statutory right to a jury trial exists where there is no issue of fact. Rheinberger v. First Nat. Bank, 276 Minn. 194, 150 N.W.2d 37 (1967).
FN8. This court has pointed out in other cases, involving negligence, that where the facts are undisputed and susceptible of only one inference, there is no fact issue for a jury. Jorgensen v. Hawton, 281 Minn. 370, 375, 161 N.W.2d 676, 680 (1968).
FN9. See, Thomsen v. State, by Head, 284 Minn. 468, 170 N.W.2d 575 (1969), where plaintiff landowner brought a mandamus action in district court to compel the state to condemn his property. We held that the
mandamus court should determine whether or not there was a taking that would require an order to the state to initiate condemnation proceedings. This court stated (284 Minn. 475, 170 N.W.2d 580): 'Plaintiff argues that this procedure deprives him of his right to a jury trial. However, in an action in the nature of mandamus, such as this one, where the facts are substantially undisputed, there is no reason to impanel a jury. State ex rel. Landon v. Anding, 132 Minn. 36, 155 N.W. 1048. The mandamus court should simply have decided the ultimate question of law as to whether any property right of plaintiff's has been 'taken' or 'damaged' in the constitutional sense, based upon the undisputed facts. It is only where the facts are disputed that the mandamus court should utilize a jury to resolve the disputes preparatory to its decision on the ultimate question of law.'
