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from flashcardlet > BA II > Flashcards

BA II Flashcards

0
Q

De facto Corporation

A

An incompletely formed corp who in good faith thought they were operating the business as a duly formed corp. Everyone except the gov’t must treat as a corp.

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1
Q

Promoter

A

A person who identifies a business opportunity and puts together a deal, forming a corporation as the vehicle for investment by other people.

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2
Q

De jure Corporation

A

A Corporation formed in accordance with all applicable laws and recognized as a corp for liability purposes.

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3
Q

Corporation

A

An entity having authority under law to act as a single person distinct from the shareholders who own it and having rights to issue stock and exist indefinitely.

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4
Q

Types of Corporations

A

Primary Corps

  1. Public - public secondary market in which shares are traded.
  2. Closely held Corps - Often referred to as close corps (small corp). Absence of a secondary market for its stock. Often, but not always, a small number of shareholders who participate in Corp’s mgmt.

Other types:

  1. Professional Corps - accountants, lawyers, etc.
  2. Non-Profit (doesn’t pay taxes)
  3. Quasi-Governmental (ex. County or School District)
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5
Q

Elements of a Corporation

A
  1. Legal Personality - entity w/ separate legal existence from owners. Can sue and be sued; taxes; requires formal creation to get this personality.
  2. Limited Liability - Unless otherwise specified in AOI, not liable for acts or debts of Corp unless by their own acts or conduct.
  3. Separation btw. Ownership and Control - the Board of Directors is in control
  4. Liquidity - Secondary Trading markets (NYSE or NASDAQ) or for closely held corp, similar to Corp.
  5. Flexible Capital Structure - Securities in form of Stocks or Bonds used to fund the corp.
    Bond - a credit instrument and loan from bondholder to the corporation.
    Stock - a stock is not a loan but is a purchase that give you ownership equal to number of shares in corp and allows you to vote and have other rights afforded to stockholders.
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6
Q

Board of Directors

A
  • Central decision making body
  • Elected by shareholders
  • Board member can be shareholders
  • # of Directors set forth in AOI unless set forth by statute
  • Decides what to do with profits - reinvest it, save it, declare dividends
  • Typically one year, but can be continuously elected
  • Can be removed for cause for failure to perform a duty as defined by AOI
  • Hires the Corp Officers
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7
Q

Forming a Corporation

A
  1. Promoter - name and idea, name search, etc.
  2. Subscribers (become shareholders)
  3. File Articles of Incorporation
  4. Hold first organizational meeting
    First org meeting: take minutes, establish bylaws, elect officers and BOD, Issue Shares
    -bylaws - set out how the corp is going to be governed (meetings, when, how, etc.). Can have special meetings called by shareholders or directors for a specific purpose. For an official meeting, must have a quorum, which is a majority of directors or as specified in the bylaws.
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8
Q

Articles of Incorporation

A
  1. Corp Name
  2. Purpose of Corporation - “for any lawful purpose”
  3. Agent for Service of Process - must name a physical person and address
  4. Number of Shares (if more are needed later, need to go to shareholders and go through amendment to AOI)

**Can put other info in such as directors, addresses, management, value of shares, etc. but not required. The above 4 are required.

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9
Q

Corporate Officers

A
  • Hired by the Board of Directors
  • Agents of the Corp and therefore have the same fiduciary duties to CORP that other agents have.
  • Can be an officer, shareholder and member of BOD at same time.
  • In CA, must have CEO/President, CFO/Treasurer, Secretary
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10
Q

Shareholders

A

BODs act; Shareholders react

  • Votes for BOD
  • Vote on some fundamental transactions
    • life or death matters - M&A, decisions that affect AOI, etc.
  • Other rights of shareholders
    • inspect corp books and records
    • distribution upon termination of corp
    • right to file suit on behalf of corp (derivative suit) - recovered and returned to corp
    • dividends
    • right to purchase proportionate share of issuance of new stock to maintain current % of ownership interest.
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11
Q

Ultra Vires Doctrine

A

“Beyond the powers” - powers that are beyond the control of the Corp. Shareholders can enjoin the act which is beyond the powers ascribed to it.

**This is why you keep the purpose of the Corp very vague. Limit the powers that are outside the abilities of the Corp.

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12
Q

Piercing the Corporate Veil

A

To pierce the corp veil means to disregard the limited liability of the corp and hold the shareholders personally liability. This is done to prevent fraud or achieve equity.

3 tests

  1. Can pierce corp veil if
    a. Unity of Interest btw. shareholder and corp (no corp formalities, co-mingling of assets, undercapitalization, etc.) AND
    b. Can prove “a” and failing to pierce the veil would promote an injustice or sanction of fraud. (not being paid on a debt alone is not enough).
  2. Prong a above only (CA follows this mostly)
  3. Prong a and b if contractual; prong a only for tort creditor.

Piercing the Corp veil is vertical (Roman Catholic Church case - tried to go vertical).

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13
Q

Enterprise Liability

A

.

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14
Q

Corporate Opportunity Doctrine

A

If a corp officer or director is presented a business opportunity which:
1. The Corp is financially able to undertake
2. Is in the Corp’s line of business
3. the Corp has an interest or expectancy in the opportunity
4. and by embracing the opportunity, the officer or director has created a conflict of interest between herself and corp
Then the law will not permit her to seize the opportunity for herself.

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15
Q

Business Judgment Rule

A

A presumption that, in making a business decision, the BOD acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company.

A Plaintiff must have proof to overcome the presumption that the BOD’s decision was an informed one. Example with M&A - if P presents evidence, burden shifts back to Defendant BODs to show fair dealing and fair price.

Gross negligence can be used to show it was an uninformed decision. A mere fault in judgment is not enough.

This rule is concerned with the process used, not the outcome received.

BJR presumption can be lost due to: fraud by director(s), conflict of interest (acting out of personal interest rather than in Corp’s best interest), illegality

16
Q

Majority Shareholders

A

Sinclair Oil case

  • not self-dealing if all shareholders benefit equally.
  • a standard of intrinsic fairness will be applied in any self-dealing transaction but the action will only be self-dealing if it is to the detriment of the minority shareholders.

.

17
Q

Spinning

A

A practice that involves allocating shares of lucrative IPO of stock to favored clients.

18
Q

Shareholder ratification

A

Duty of Care claim after full disclosure eliminates the claim. If there was full disclosure, they are stuck with the decision.

If Directors make up majority, then is analyzed as self-dealing under intrinsic fairness. Will be considered self-dealing if it is detrimental to the minority shareholders.

19
Q

Caremark Claim

A

If the directors have a process in place to oversee and follow up on employee misconduct and properly exercise that system, they are not liable for their ignorance resulting in damages.

21
Q

Securities Act of 1933 and Securities Exchange Act of 1934

A

Securities Act - concerned with the primary market. Two goals - disclosure of material information to investors and fraud prevention.

Securities Exchange Act - concerned with the secondary market. Addresses insider trading, corporate insiders, securities fraud, regulation of shareholder voting, and regulation of tender offers. Also requires periodic disclosures by publicly held corps. Created the SEC.

22
Q

Securities

A

Important to determine if what you’re dealing with is a security because that determines whether you have to register it with the SEC or if it falls under one of the exemptions for having to register it.

Security = stocks, bonds, etc. Also, anything considered to be an investment contract. Look to whether they can exercise meaningful control over their investment. If so, likely not a security.

Must be registered with the SEC:

1. a security may not be offered for sale through the mail or by use of other means of interstate commerce unless a registration stmt has been filed with the SEC. 
2. Securities may not be sold until the registration statement has become effective.
3. a disclosure stmt must be delivered to the purchaser before a sale.

EXCEPTION: Doran exception - if the sale of the interest was done privately, the SEC rules do not apply.

23
Q

Corporate Waste

A

Plaintiff who fails to rebut the BJR is not entitled to any remedy unless the transaction constitutes waste. Therefore, the Plaintiff has the burden of proving that the exchange was so one sided that no business person of ordinary, sound judgment could conclude that the corporation received adequate consideration.” Very hard to prove. must be unconscionable.

23
Q

Characteristics of Common Stock

A
  1. Right to receive dividends
  2. negotiability
  3. ability to be pledged or hypothecated
  4. voting rights in proportion to the number of stocks
  5. capacity to appreciate in value.
24
Q

Securities - Private Placement Exception

A

Transaction may be exempt from being registered with SEC. Analyze based on:

  1. Number of offerees
  2. Number of units offered
  3. Size of offering
  4. Manner of offering - advertised, not advertised, etc.
26
Q

Rule 10(b) -5

A

Makes it illegal to lie, mistake, or intentionally omit info to the SEC. Used mainly in fraud/sales of securities and insider trading.

Elements of fraud involving sale or purchase of securities

  • Must involve sale or purchase of securities
  • must act knowingly or with reckless disregard
  • Must be proximate cause of damage
  • Info must be material to the decision
  • Must be some kind of reliance on the info
27
Q

Corporation by Estoppel

A

Held out to a 3rd party as a corp, now denying it is a corp, but 3rd party reasonably relied on that holding out.

28
Q

Short Swing Profits

A

Officers, Directors, and 10% shareholders in a Co. required to register stock under the 1934 rules must pay to the Corporation any profits they make w/in a six-month period of buying and selling the firm’s stock.

29
Q

Rule 10(b)(5) Insider Trading

A

Anyone trading for their own benefit who is an insider, may not take advantage of the inside information knowing it is unavailable to others and therefore must either 1. disclose the material information or 2. abstain from trading or recommending

*There must be a relationship of trust and confidence btw. transacting parties.

30
Q

10(b)(5) Tipper/Tippee

A

A tippee assumes a 10(b)(5) fiduciary obligation to shareholders not to trade on inside information when the tipper has breached his fiduciary duty to shareholders by disclosing the info to the tippee and the tippee knew or should have known about the breach.

31
Q

Proxy Fights

A

When an insurgent group tries to oust incumbent managers by soliciting proxy cards and electing its own reps to manage the board. 2 main reasons for proxy fights: control and shareholder proposals.

32
Q

Proxy

A

When shareholders appoint an agent to attend the meeting and vote on their behalf. The document by which the agent appoints the proxy is called the proxy card.

33
Q

Proxy Costs

A

Costs for obtaining proxies by incumbents can be paid for by Corp as long as costs are reasonable. The fight must be over policy rather than personnel issues. Incumbents are always reimbursed their reasonable costs whether they win or lose. Insurgents are only reimbursed costs if they win and the repayment is ratified by shareholders.

34
Q

Rule 14a

A

Prohibits false or misleading statements in the proxy statements. Shareholders can bring an action for violation of Rule 14a.

35
Q

Shareholder Proposals

A

14a(8) - If any security holder notifies the Corp of his intention to present a proposal for action at an upcoming meeting, that info shall be included in the proxy materials unless:
the proposal relates to info which accounts for less than 5% of Corp’s total assets at end of recent fiscal year and for less than 5% of recent fiscal year’s net and gross sales and is not otherwise significantly related to Corp’s business.

36
Q

Black-Scholes formula

A

5 factors in valuing an option:

  1. Current value of underlying asset
  2. Exercise price
  3. Current discount rate
  4. Price volatility of underlying asset
  5. Amount of time remaining until expiry of the option
36
Q

Cumulative Voting

A

Place all your votes on one director which creates a majority by shareholder who are otherwise considered a minority.

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