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ordinary shares, which carried one vote per share, and preferred
shares, which carried no voting rights. During the relevant
years, SDI had between 16 and 24 shareholders and each held one
ordinary share and 340 preferred shares.
SDI maintained a redemption account for each shareholder.
Pursuant to the Articles, the amount of a shareholder's
redemption account: (1) Represented the price at which SDI would
redeem that shareholder's preferred shares, (2) formed a basis
for allocating dividends to that shareholder, and (3) served as a
point of reference for determining the maximum amount of funds
that SDI could advance that shareholder.
Preferred shares were redeemable for a price based on a
formula. The formula provided that preferred shares could be
redeemed for an amount equal to (1) the shareholder's capital
contributions and share of SDI's profits (e.g., profits
attributable to policies issued by the shareholder's dealerships)
and investment income, less (2) his share of SDI's losses and
dividends paid with respect to the shares. Negative redemption
accounts reduced other redemption accounts pro rata.
SDI did not pay dividends. It did, however, advance
interest-free funds to its shareholders. The Articles authorized
the board to approve an advance to a shareholder if such advance
and all previous advances for that shareholder did not exceed 75
percent of that shareholder's redemption account. If a
shareholder's redemption account declined in value such that the
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Last modified: May 25, 2011