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Bar Exam > Corporations > Flashcards

Corporations Flashcards

1
Q

Ohio corporations are governed by

A

the GCL: general corporation law

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2
Q

under the GCL: corporations are:

A

limited liability legal entities which can:

  1. sue or be sued in their own names
  2. execute contract
  3. purchase property
  4. acquire or be acquired by other corporations or business entities
  5. enter into partnerships
  6. borrow money
  7. resist takeovers
  8. and make charitable contributions
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3
Q

corporations limited liabilities for shareholders

A
  1. shareholder are not liable absent unusual circumstances for the torts or contracts attributable to the corporation
  2. the shareholders of corporations are only liable for corporate tort/contracts if
    a) torts: the shareholder commits the tort himself while acting on corporate business
    b) contracts: the shareholder co-signs
    c) K/tort: the court pierces the corporate veil
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4
Q

incorporators

A
  1. a person who creates a corporation by signing the articles of incorporation
  2. under the GCL, only one incorporator is required but there can be more than one
  3. this includes natural persons, citizens and noncitizens of ohio and legal persons
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5
Q

articles of incorporation

A
  1. a document that is filed with the state yo create a de jure corporation
  2. articles must contain:
    name of the corporation: distinguishable from other ohio businesses and contains the words: corporation, incorporated, company or an abbreviation
    place of principal office in ohio, can be owned by a firm elsewhere but has to have an office here
    initial capital stock structure:
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6
Q

what does the initial capital stock structure include?

A
  1. the maximum number of shares of stock that can be sold without amending the articles
  2. the number of shares in each class if there are different classes
  3. the voting rights and distribution preferences of each class and any par value if shares with par value are sold
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7
Q

article of incorporation may include:

A
  1. a statement of purpose (if there is no statement the corporation may engage in any lawful activity)
  2. paid in capital requirements
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8
Q

statement of purpose

A
  1. generally, if no statement of purpose the GCL allows a business to engage in any lawful activity
  2. if the corporation contains a more limited statement of purpose, then it can generally only act within the confines of that purpose
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9
Q

ultra vires:

A

if the corporation’s articles contain a statement of purpose any actions outside the scope of that statement are ultra vires and directors and officers responsible for the UV act are personally responsible for the corporate losses

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10
Q

paid in capital requirements

A
  1. may provide that a certain amount of capital must be paid into the corporation before any business can commence
  2. if business commences before the capital requirement is met, the incorporators/directors are personally liable
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11
Q

filing articles

A
  1. delivered to the secretary of state along with a filing fee
  2. unless otherwise specified the corporation’s existence begins upon filing
  3. filing has to be accompanied by a statement identifying an agent for service who must be a resident of ohio, an ohio corporation, or a corporation who has qualified as a foreign corporation to do business in ohio
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12
Q

after filing of the articles:

A
  1. the incorporators organize a shareholder’s meeting where:
  2. initial directors are elected
  3. regulations or by-laws may be adopted
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13
Q

adoptions of regulations v. articles

A
  1. most corporations set forth rules to govern the corporation
  2. can be amended by a majority vote and sometimes without a meeting
  3. easier to amend than the articles which require a meeting and a 2/3 vote
  4. in a conflict between the articles and the regulations, the articles win
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14
Q

de facto corporation

A
  • **the defendant has to be unaware that they failed to achieve corporate status
    1. unsuccessful but
    2. good faith attempt to comply with the incorporation statute and
    3. colorable compliance with the statute and
    4. some exercise of corporate privilege
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15
Q

effect of a de facto corporation

A

treat the business which is really a partnership, a joint venture or a sole proprietorship as if it were a de jure corporation for all purposes except an action by the state
2. apply to tort or contract claims

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16
Q

corporation by estoppel

A
  1. where a third party treats a business as a corporation that third party may be estopped from denying that the business’s corporate form
  2. the defendant cannot be aware that there was a defect leading to a lack of corporate status
  3. this is valid in ohio except in an action by the state
  4. apply to contract claims only
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17
Q

promotors

A
  1. people who act on behalf of a corporation that has not yet been formed (because the articles are not filed)
  2. incorporators are promoters, they act to create the corporation but not all promotors are incorporators
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18
Q

contracts entered into by promotors

A

1, promotors sign in their own name or the name of a partnership or JV

  1. the corporation is not liable until it adopts the contract
  2. promoters who sign on behalf of a business prior to incorporation remain liable on the contract until there is novation
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19
Q

adoption of a contract by a corporation

A
  1. can be express like a formal board resolution

2. can be implied if the corporation recieves benefits of the K

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20
Q

novation

A

an agreement modifying the contract between the contracting party, the corporation, and the promotor in which the corporation replaces the promotor as the party to the contract

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21
Q

adoption v. novation

A
  1. adoption makes the corporation liable but only a novation relieves the promotor of liability
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22
Q

foreign corporation

A
  1. formed under the laws of another state
  2. can transact business in ohio
  3. can form a contract in ohio, be sued in ohio as long as there is a license from the secretary of state which inclues a designated agent in ohio for the service of process
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23
Q

if a foreign corporation fails to obtain a license in ohio:

A

it can still be sued in ohio courts but subject to a fine

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24
Q

internal affairs doctrine

A
  1. disputes concerning the governance of a foreign corporation are resolved under the law of the state in which it is incorporated
  2. ohio will not deny a license because of differences in ohio law and law of incorporation state
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25
Q

professional associations

A
  1. only professionals of the particular profession can be shareholder
  2. eligible professions are: attorneys, CPAs, professional engineers and architects and physicians, dentists orthodontists
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26
Q

limited liability and veil piercing in corporations

A
  1. once validly formed, the shareholder, officers and directors are not personally liable for the obligations of the firm
  2. however, an extraordinary remedy exists in piercing the corporate veil
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27
Q

piercing the corporate veil

A
  1. the corporation is an alter ego of a shareholder, the court may choose to pierce the corporate veil and hold the shareholder liable for the torts and contracts of the corporation
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28
Q

apply piercing the corporate veil where

A
  1. corporation lacks a separate will, mind or existence of its own
  2. the corporation is used to commit fraud or illegal acts AND
  3. injustice would result from following the general rule
    Caveat:
  4. just because a corporation only has 1 shareholder, director and officer does not mean the veil will be pierced
  5. failure to respect corporate formalities such as the requirements to hold meetings, keep separate accounts or conduct elections does not mean the veil is pierced
  6. inadequate capitalization without more does not justify the pierce, though it is often considered (a corporation should have adequate capital to carry out ordinary business)
  7. individuals who commit fraud and other torts while acting on corporate business are personally liable w/o veil piercing
  8. when a veil is pierced only those actively involved in the wrongful conduct are affected
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29
Q

veil piercing standards applied

A
  1. can impose liability on indiviual shareholders, and under the same standards of a parent corporation for the obligation of their subsidiaries
  2. more likely to be applied in tort cases where the victim is less likely to be aware of the corporations legal limited liability status
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30
Q

stock or shares

A
  1. the basic units of ownership or equity in a corporation
  2. shareholders are generally entitled to vote on appropriate matters (election of BOD & fundamental corporate changes), to share in dividends when declared and split the remaining assets in the event of dissolution
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31
Q

debt as a form of security in corporation

A
  1. ex. corporate bond
  2. debt affords no ownership status
  3. a corporate bond holder is a creditor of the corporation entitled to be paid a certain amount at a certain time
  4. bondholders are generally not entitled to bring claims regarding fiduciary breaches by directors and officers, but shareholders can
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32
Q

issuing stock

A
  1. only the BOD can issue stock

2. stock issued to investors is issued and outstanding

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33
Q

treasury stock

A
  1. owned by the corporation

2. not outstanding becuase not owned by investors

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34
Q

subscriptions (corporations)

A
  1. a written promise by an incorporator or another to buy stock in a corporation
  2. once accepted by a subscriber, a subscription cannot be unilaterally revoked by the subscriber
  3. a subscription becomes binding on the corporation when it is accepted by the board of directors which can under the GCL also release, settle, or compromise a subscription
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35
Q

consideration (corporation)

A

shares may be issued in exchange for any benefit of value to the corporation including

  1. cash/ check
  2. property (including tangible, and intangible property)
  3. services already performed
  4. promissory notes or services to be performed in the future (shares are not considered paid for until the note is satisfied or the service is provided)
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36
Q

unpaid stock

A
  1. if a subscriber or a shareholder breaches a promise to pay for corporate shares
  2. the subscriber or shareholder is liable to the corporation (and for bankrupt firms to the receiver or trustee) under contract law and the corporation may auction the shares
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37
Q

par value

A
  1. the minimum price issue for a share
  2. under GCL, Par is not required
  3. a corporation may sell no par stock, but if there is par, the shares cannot be issued for less than par
  4. par is a floor not a ceiling
  5. if no par, just have to sell at any positive value
  6. the bod determines the value of property in exchange for shares, the boads valuation is conclusive unless it is shown by clear and convincing evidence that the board knowingly assigned a false value
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38
Q

watered stock

A
  1. the sale of stick for consideration less than par value
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39
Q

liability for the water stock

A
  1. the holder of the watered stock is liable to the corporation even if the holder is a transferee who received the stock from the original purchaser
  2. exception: the transferee is not liable if she holds the stock in a fiduciary capacity or holds a security interest in the stock
  3. the board is liable for fiduciary duty breaches
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40
Q

pre-emptive rights

A
  1. shareholder may wish to preserve their relative ownership stake in a corporation by obtaining preemptive rights
  2. preemptive rights allow the shareholder to claim portions of new share to preserve their relative holdings
  3. gives the option to buy shares but does not require the purchase
  4. if a corporation is formed prior to march 17, 2000 preemptive rights were automatic under common stock, not they are only present when specifically mentioned
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41
Q

preemptive rights and treasury shares

A

there is no preemptive rights for the treasury shares and shares sold for other than cash

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42
Q

Directors

A

sit on the BOD with full managerial authority over the corporation

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43
Q

officers

A

are senior managers who may or may not also be directors

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44
Q

the board of directors

A

manages the business and recommends fundamental corporate changes to shareholders (mergers, acquisitions)

  1. the board may delegate substantial management functions to committees of more or more directors
  2. however a board cannot create a committee to assume all the functions of the BOD
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45
Q

statutory requirements for the BOD

A
  1. at least 3 directors unless there is only 1 shareholder (req. 1 director) or 2 shareholders (2 directors)
  2. natural, adult persons: a director cannot be a corporation
  3. the articles of incorporation may specify additional requirements for the directors
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46
Q

election of directors

A
  1. shareholders elect at an annual meeting
  2. directors terms may vary but cannot exceed three years, directors with different terms are elected at different times which makes a corporate takeover more difficult
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47
Q

removal of bod

A
  1. shareholders may vote by a majority to remove any or all directors whether or not there is cause for removal
  2. however, if cumulative voting is used for director elections, directors may not be removed if the vote against removal is enough to elect a director
  3. Also id the board if classified and has staggered elections then shareholders can only remove a director for cause
  4. the bod may remove a director is the director does not accept the office after being elected or if the director has become bankrupt or adjudicated as of unsound mind
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48
Q

vacancy on bod

A
  1. vacant seats (by death, retirements etc) can be filled by the majority of remaining directors even if there are not enough directors to constitute a forum OR
  2. shareholders except for directors removed by shareholders must be replaced by shareholder vote
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49
Q

bod can make decisions by:

A
  1. unanimous written consent including email
  2. meetings including teleconference or videoconference so long as all persons can hear each other
  3. board meetings do not have to be in ohio
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50
Q

notice for bod meeting

A
  1. notice of board meetings must be provided to all directors at least 2 days before the meeting (time and place)
  2. failure to give notice can be waived if a director shows up to the meeting and does not object or in writing
  3. the notice need not state the purpose of the meeting and may be delivered in person, by telegram or any other means of communication including email authorized by the director
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51
Q

voting bod: quorum

A
  1. the minimum number of directors that must vote on a proposal for that vote to be effective unless otherwise in the articles is a majority of the duly constituted board (the board with no vacancies)
  2. if a director leaves a meeting she is not counted for the sake of the quorum
  3. if enough directors leave the meeting quorum is broken
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52
Q

voting bod: majority

A

unless otherwise provided, if a majority of directors voting on an issue vote yes then the proposal is adopted

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53
Q

bod proxy voting or voting agreements

A

not allowed for bod

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54
Q

Proxy voting

A
  1. giving someone else the right to your vote

2. allowed for shareholder voting

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55
Q

voting agreement

A
  1. voters agree how they will vote, not permitted for bod because would compromise the discretion of the board
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56
Q

fiduciary duty: bod: duty of care

A

directors must act in

  1. good faith
  2. in the best interest of the corporation (think about shareholders and other constituencies, long and short term effect)
  3. with the care an ordinarily prudent person would employ in a like position and under similar circumstances
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57
Q

Business judgement rule

A
  1. a director is presumed to act in the best interest of the corporation unless the plaintiff proves by clear and convincing evidence to the contrary.
  2. courts will not second guess a board decision made in good faith based in available information and after reasonable investigation and which had a rational basis
  3. BJR 2 step: state the duty of care, state the bjr
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58
Q

Mis-feasance (bod)

A
  1. the board of directors makes an error
  2. generally only where a decision is so irrational that it essentially amount to waste of corporate assets and is outside the broad discretion of the BJR will it be second guessed by the courts
59
Q

non-feasance bod

A
  1. the board takes no action
  2. if they take no action, failed to act in good faith, and do not investigate, it could fall outside the BJR
  3. however liability will only be imposed if the plaintiff also proves causation, the director’s nonfeasance made a difference (but for test)
60
Q

duty of care defenses bod

A
  1. if a transaction is ratified by shareholders it cannot be challenged for duty of care violation
  2. directors can defend against duty of care claims by pointing to a good faith reliance on information, opinions, reports, or statement prepared by lawyers, accountants, other director or other corporate ees
61
Q

duty of loyalty bof

A 
The BJR does not protect here!!!
requires the director to act in a manner that is:
1.conscientious
2. fair
3. moral and
4. honest
62
Q

corporate violations of duty of loyalty

A
  1. self dealing/ conflict of interest
  2. usurping corporate opportunities and
  3. engaging in unfair competition
63
Q

cleansing a duty of loyalty concern

A
  1. approval by a majority of disinterested directors after full disclosure of material facts (even if there are not enough disinterested to make a quorum)
  2. approval by a majority of shareholders who are not conflicted after full disclosure
  3. fairness at the time of transaction. look at whether the corporation got a fair value or paid a fair price (compare the market value and the proce paid or received)
  4. the first two methods are procedural, the third is substantitve
64
Q

who is disinterested?

A
  1. no financial interest in the transaction and
  2. should not be sufficiently under the influence of a party with a conflict of interest that the directors discretion is sterilized (close family relations, extensive external business connections)
  3. director conflict of interest is heavily tested
65
Q

corporate opportunity and director

A
  1. where the business venture is considered a corporate opportunity, a director of that corporation cannot pursue the venture without first offering it to the corporation. otherwise the director will be found to have usurped a corporate opportunity
  2. if a director usurps: have to disgorge profits made form the venture which is an unusually strong remedy
66
Q

what is a corporate opportunity

A
  1. line of business test: what is the general type of business in which a firm is engaged? does the opportunity fall into that line of business? nexus
  2. interest or expectancy test: does the corporation have an interest in a business venture or prior expectation or participation?
67
Q

how does a director avoid liability for a business opportunity?

A
  1. disclose to the bod and give the bod the chance to reject the opportunity
  2. formal presentation and cleansing vote are the best practices
  3. a director can defend herself by indicating that the corporation was legally incapable of pursuing the opportunity
  4. ohio courts generally reject the defense of financial incapacity
68
Q

unfair competition

A
  1. a director cannot compete with the corporation in an unfair way
  2. this applies not just to new business ventures but also to business ventures that the director had prior to joining the board
69
Q

executive compensation

A
  1. directors and officers should negotiate their own financial conflicts at arm’s length, should fully negotiate and should be approved by disinterested directors
  2. if compensation bears no relation to services rendered, it can rise to the level of corporate waster and violate the duty of care
70
Q

officers required by statute

A
  1. president
  2. secretary
  3. treasuer
71
Q

agency power of the officers

A
  1. officers are agents of the corporation and can bind the corporation according to agency law principles, scope of employment for torts, actual express and implied and apparent for K
72
Q

specific kinds of implied authority in corporation

A
  1. President: sign contracts and carry on ordinary business
  2. VP: act as president in his absence
  3. treasurer: keep and receive finds, sign checks
  4. keep and certify corporate records
73
Q

fiduciary duties for corporate officers

A

same as directors

74
Q

selection, hiring, compensation, firing of officers

A
  1. only the board of directors fires, hires, and selects officers
  2. if a person is a director and an officer, removal from one position does not automatically cause removal from the other (unless otherwise indicated, for example in the articles or regulations)
  3. officers cannot be removed without cause but a corporation may be liable under contract for damages
75
Q

Sarbanes-Oxley

A
  1. the ceo or cfo or similar corporate officers, must certify that reports submitted to federal securities regulations (the SEC) fairly represent the company’s financial position. violations are subject to fine and may subject the executive to imprisonment
76
Q

indemnification and corporations

A
  1. indemnification is required where the officer or director is successful in defending a lawsuit
  2. indemnification is prohibited if a corporate director or officer sued by the corporation or in shareholder derivative action and found negligent or to have engaged in misconduct
  3. indemnification is permitted even in unsuccessful suits or suits by outsiders if teh officer or director acted in good faith and with a reasonable belief that she was acting in the best interests of the corporation
77
Q

who makes the determination to indemnify the officer or director?

A

the bod: disinterested directors, special legal counsel shareholders or the court

78
Q

shareholders: management rights

A
  1. shareholders have no direct control or management rights with respect to the corporation
  2. exception: closely held corporations where shareholders may execute close corporation agreements
79
Q

closely held corporation

A

relatively few shareholders and no public sale of stock

80
Q

shareholder indirect control

A
  1. elect directors
  2. vote of fundamental corporate changes like mergers and acquisitions and amendments to the articles and vote on certain shareholder proposals
  3. shareholders do not owe each other or the corporation fiduciary duties
81
Q

management of closely held firms

A
  1. shareholders can assume managerial authority through the execution of a close corporation agreement if signed by all shareholders and conspicuously noted on share certificates, the agreement can eliminate the bod and establish who will govern the closely held firm
  2. if the bod is eliminated, shareholders in the closely held firm take on all the powers, rights and duties of the board
  3. alternatively, the shareholders can use the general model of an elected bod to govern the corporation
82
Q

majority shareholders in a closely held corporation

A
  1. owe minority shareholders a fiduciary duty of loyalty
  2. they breach this duty when they oppress minority shareholders
  3. in ohio, minority oppression consists of denying minority shareholders an equal opportunity to enjoy the benefits of corporate ownership without a legitimate business purpose
83
Q

minority oppression (shareholders)

A
  1. is a special claim available to minority shareholder in closely held firms because they can be prevented completely from exercising control
  2. since the majority can elect the board without the minority representation
  3. since there is no ready market for the sale of shares in closely held firms
84
Q

shareholder derivative suits: direct action

A

direct action: shareholders can sure the corporate executives for breach of specific contracts to shareholders such as preemptive rights or for denying shareholders specifically granted statutory rights like he right to inspect the corporate books

85
Q

shareholder derivative suit: derivative action

A
  1. the shareholder brings a lawsuit to enforce a claim that is actually the corporation’s claim
  2. the shareholder’s standing to bring the action derives from corporate ownership
  3. most claims against officers and directors for breach of fiduciary duty must be brought as derivative claims
86
Q

the basic test for derivative lawsuits

A
  1. could the corporation have brought the suit itself?
  2. if yes, the lawsuit must be brought derivatively
  3. exception: minority shareholders suing for minority oppression can bring direct lawsuits against majority shareholders
87
Q

if a derivative action is successful where do the payments go?

A

1/ to the corporation since the suit enforces a claim of the firm and not the individual plaintiff
2. shareholders who bring the actions are entitled to reasonable expenses

88
Q

procedure for bringing a derivative action

A
  1. ownership: the plaintiff must own shares at the time of the injury to the corporation
    Exception: if shares where acquired not by purchase but through operation of law (divorce, inheritance)
  2. representation: the plaintiff must adequately represent the interests of the shareholders not a special interest lawsuit
  3. plead futility or make a pre-suit demand (a written pre-suit demand on the bod that the corporation file suit)
89
Q

how can a plaintiff avoid making a demand by pleading in derivative shareholder suit?

A
  1. excuse
  2. futility(demand would be served on the wrongdoers or on those under the influence of wrongdoers)
  3. particularity
90
Q

should shareholders always plead futility?

A
  1. YES: if they instead make a demand on the bod, and they decline, the decision is protected under BJR
  2. even if shareholders plead futility, the disinterest board can vote to decline to pursue the case
  3. if this happens the court will conduct a more searching inquiry into legitimate business reasons to dismiss the suit
91
Q

settlement in derivative lawsuit

A
  1. must be approved by the court
92
Q

shareholder voting: where do they vote?

A
  1. elect directors at annual or special meeting
  2. a corporation must hold an annual meeting where directors are usually elected
  3. a special meeting may be called to get shareholder approval for a fundamental corporate change, to replace a director etc
  4. special meetings can be called by the chairperson of the bod, the bod, the president or by any 25% of shareholders
  5. can be in ohio or elsewhere
93
Q

notice of shareholder meetings

A

must be sent to shareholders for any meeting and must:

  1. be in writing
  2. identify the time, place and purpose for the meeting
  3. can be sent by mail, overnight or any other form of communication authorized by shareholder such as email
  4. delivers at least 7 days and not more than 60 days before the meeting
94
Q

defective notice of shareholder meeting

A
  1. can be waived in writing or if a shareholder attends the meeting and does not object to the defective notice
95
Q

quorum of shareholders

A
  1. the minimum number of shares present at a meeting to take effective action
  2. shares can be present when someone holding a proxy for that share’s vote attends
  3. remember number of shares if different than number of shareholders
  4. number of shares for a quorum is set by the articles usually
96
Q

when the articles are silent as to the number of shares required for a quorum

A
  1. quorum if whoever shows up
  2. this is an unusual provision and most states require a majority of shares to be present
  3. exception: for a fundamental corporate change 2/3 support is needed from the shareholders, that proportion must vote yes for certain, for certain control share acquisitions 50% of shares
97
Q

who votes at a shareholder vote

A
  1. the shareholders as of the record date has the right to vote
  2. the bod sets the record date and the owner on that date gets to cast a vote that comes with the share
  3. exceptions:
    a) treasury shares do not vote
    b) death, guardianship or legal incapacity of the shareholder of the record date (heirs are entitled to vote)
    c) shares owned by other corporations, an officer of that corporation votes
    d) proxy holders
98
Q

proxy holders

A
  1. entitles the holder to cast the vote of a share at a shareholder meeting
  2. proxies must be in writing, signed by record-date shareholder, directed to the corporation’s secretary and grants to another person the right to vote the shares
  3. proxies expire after 11 months unless they indicate otherwise
99
Q

revocability of proxy

A
  1. ordinarily revoked by shareholders such as
    though writing or by granting subsequent proxy or by notice given at an open meeting, under GCL the shareholder does not revoke the proxy simply by presence at the meeting
100
Q

irrevocable proxy

A
  1. proxy must say irrevocable and must be coupled with an interest
  2. the holder of the proxy has some other interest in the share other than the proxy such as security interest ownership of the share after the record date
101
Q

federal regulations of proxy

A
  1. the federal securities laws govern the solicitation of proxies
  2. the rules prohibit fraud in connection with the solicitation of proxies
  3. misstatements or omissions in proxy solicitations violate the sec rules to be actionable such statements must be material meaning
    a) concerning matters that a reasonable shareholder would consider in deciding whether or not to grant or withhold the proxy
102
Q

voting trusts

A
  1. ten year maximum duration but may be renewed
  2. shareholders designate a trustee who takes legal title to the shares and votes those shares
  3. the trustee will distribute dividends or other financial returns to the individual shareholders
  4. each shareholder is issued a voting trust certificate by the trustee which unless the voting trust documents indicate to the contrary is freely transferable
  5. particularly useful in closely held corporation
103
Q

voting pooling agreement

A
  1. a group of shareholders agrees to vote as one
  2. individuals may retain the right to vote or may grant proxies to a pool representative
  3. breaches of agreement handled using contract law
104
Q

mechanics of voting: how do vote count?

A
  1. on any matter other than the election of directors and fundamental corporate changes in which shareholders are entitled to vote: one share, one vote
    UNLESS the articles specify otherwise
105
Q

cumulative voting for director elections

A
  1. in ohio, the default rule is to use cumulative voting for director elections
  2. articles may opt out of cumulative voting in which case straight voting is used
  3. cumulative voting is ONLY used in director elections and it serves to protect the minority shareholders
106
Q

mechanics of cumulative voting

A
  1. multiply the number of seats on the board open (this is a shareholder’s total number of votes in an election)
  2. a shareholder can concentrate all those votes on one or more director candidates, improving the chances that a particular candidate will be elected
  3. at least one shareholder has to give the corporation notice 48 hours before a meeting of the intent to vote cumulatively, where such voting applies
107
Q

removal of directors and cumulative voting

A

in cumulative voting, removal from the board cannot happen if the director has the minimum number of votes needed to elect a director under cumulative voting

108
Q

shareholder action without a meeting

A
  1. shareholders may act without a meeting if there is unanimous consent to take a particular action
  2. a written document of consent must be signed by each shareholder
109
Q

share transfer restrictions

A
  1. corporate shares, unless otherwise indicated may be freely sold at any time to third parties
  2. some corporations, particularly closely held firms, will try to preserve control arrangements by restricting the transfer of shares
  3. a typical stock transfer restriction would require a shareholder to offer the shares for sale to the corporation before selling to a third party
  4. to determine is the restriction is valid, ask: is it reasonable under the circumstances?
110
Q

reasonable share transfer restrictions

A
  1. the typical right of first refusal is likely valid and reasonable under most imaginable circumstances
  2. by contract, a total bar on transfer is likely unreasonable as is a requirement that all shareholders consent to the sale to a third party
111
Q

enforcement of share transfer restrictions

A

to prevent a third party from effectively acquiring ownership of a share, the transfer restriction must be noted conspicuously on the share certificate or the transferee must have had knowledge of the transfer restrictions

112
Q

inspection rights of a shareholder

A
  1. shareholders are entitled to the books, records, minutes, voting trust agreements, and shareholder records (names, addresses, share ownership)
  2. have to give written notice and a proper purpose to view
  3. in ohio there is no minimum ownership requirements for this right
  4. the right to inspect includes the right to make copies but does not apply to holders of voting trust certificates, only the voting trust trustee has the right to inspect
113
Q

right to capital gains

A

there is no right to capital gains instead shareholders get distributions

114
Q

dividends

A

payments to shareholders, typically on a per share basis.

money is distributed from corporate treasury to individual shareholders in exchange for nothing

115
Q

repurchases

A

shareholder is offered a chance to sell the shares to the corporation, board will set the offer price, shareholders who which can turn over stock and get money distributed from the corporation

116
Q

redemptions

A

if provided in the articles, the board can redeem shares by forcing shareholders to sell the shares back to the corporation according to a price set by some method as spelled out in the articles. the money is distributed to those shareholders who hand over their shares

117
Q

suing based on dividends

A
  1. shareholders have no right to a dividend or other distribution
  2. the only way to sue to receive dividends is: the preach of a specific promise to pay a dividend or
  3. non-payment of a dividend as part of denial of equal opportunity in a claim of minority oppression
118
Q

limitations on dividends and other distributions

A
  1. a corporation cannot pay a dividend or make a distribution if doing so would make the corporation insolvent
  2. a corporation may pay a dividend even though it is losing money
119
Q

stated capital

A
  1. the sum of par value of shares of outstanding stock and any other amount allocated as such by the bod
  2. a corporation can only pay a distribution if there is a surplus
120
Q

suplus definition

A
  1. the difference between assets minus liabilities and stated capital
  2. can result from earnings or from money received from the issuance of stock which exceed ths par value
  3. in ohio, no par stock can be issued so it is possible for a corporation to have a stated capital of 0
121
Q

if the directors approve a distribution that impairs the stated capital…

A

the directors are personally liable and any shareholder aware of the unlawful nature of the distribution is also liable but directors can claim good faith reliance on valuation by accountants

122
Q

common stock dividends

A
  1. common stock is basic stock

2. if a dividend is declared all common stockholders get equal payment on a per share basis

123
Q

preferred stock and dividends

A
  1. are entitled to payment before any distributions are paid to non-preferred stock
  2. only get paid a dividend in years where a dividend is declared by bod
124
Q

cumulative preferred shares and dividends

A
  1. preferred shares for which in any year no dividend is paid, the preferred payment amount builds and must be paid to its accumulated amount in any year a dividend is declared
125
Q

participating preferred shares and dividends

A
  1. are special kinds of preferred shares that receive both the states preference and get to participate as would common shares in the remaining dividend
126
Q

fundamental corporate changes

A
  1. amendments to the articles
  2. mergers
  3. acquisitions,
  4. consolidations
  5. dissolution
127
Q

what does a fundamental corporate change require:

A
  1. board approval
  2. shareholder approval by a 2/3 vote unless otherwise specified in the articles
  3. notice to the shareholders
128
Q

class vetoes and fundamental corporate change

A
  1. a particular class of shareholder can vote yes or no
  2. even if certain classes are nonvoting, if they are negatively affected by the change they are entitled to a class vote which gives the negatively affected class a veto over potential change
129
Q

appraisal rights

A
  1. a board can form a recommendation to shareholders during a fundamental corporate change and they can campaign for that position.
  2. in some cases dissenting shareholders who oppose and vote no on the change acquire a right to force the corporation to buy their shares and have the court award fair value
  3. to obtain court appraisal, shareholders must notify the coporation prior to the change of the intent to demand appraisal, must vote no and can bring an action to have the court declare fair market value
  4. in ohio, appraisal is not an exclusinve remedy for dissenters
130
Q

amendments to the articles

A

requires

  1. board vote and 2/3 of shareholders unless the changes are administrative in nature such as a name change in which the board can act alone
  2. appraisal rights are only for shareholder negatively affected in terms of dividend or distribution preference or if the amendment fundamentally changes the purposes of the corporation
  3. a regulation of the corporation can be amended by a simple majoirty
131
Q

mergers or consolidations

A
  1. boards of both corporations must vote yes
  2. 2/3 of the shareholders of any disappearing corporation’s shares (the acquired corp. or any in a consolidation) EXCEPT in a statutory short form merger where a parent corporation acquires a subsidiary in which it owns 90% of the shares with no shareholder vote
  3. rights and liabilities of disappearing corporations become those of the surviving corporation
  4. appraisal rights generally for any shareholder who had a right to vote
132
Q

merger

A

one corporation is merged into another (the acquirer) which remains in existence and the target corporation ceases to exist

133
Q

consolidation

A

two or more corporations form a new corporation and are merged into that corporation, both predecessor firms cease to exist after consolidation

134
Q

asset acquisition

A
  1. if a firm sell substantially all of its assets (outside the usual course of business) to another firm
  2. usually means 75% or more of assets
  3. liabilities usually do not flow to the acquirer
    unless the acquirer agrees to take on the liabilities or a court considers the asset acquisition a de facto merger because surviving firm is a mere continuation of the firm it acquired the assets from
  4. both boards must approve but no shareholder vote is required
  5. appraisal rights for the shareholders of the selling firm only
135
Q

dissolution

A
  1. terminated the corporate existence
  2. automatic in a merger but also from other things
  3. voluntary dissolution: 2/3 shareholder vote
  4. quo warranto action by the state (misuse of corporate power)
  5. involuntary dissolution: for the benefit of shareholders, majority of shares can ask the court to dissolve the corporation for the benefit of the shareholders
  6. deadlock among directors: 1/2 of the shares (not a majority) may ask the court to dissolve a corp due to deadlock in an even number seat board unable to decide how to manage corporate affairs
136
Q

ohio control share acquisition statute

A
  1. to protect shareholders from a hostile takeover, ohio requires a person/corporation to obtain shareholder approval when crossing a control threshold (20%, 33%, 50%)
  2. the acquiring person crossing the threshold must file notice with the corporation regarding terms of the acquisition and a special shareholder meeting must be called where a quorum of 50% of shares is required and a majority have to approve the acquisition
137
Q

federal securities regulation

A
  1. securities include both debt and stock
  2. federal regulation due to the interstate commerce requirement generally applies only to publicly traded companies listed on the NYSE, AMEX or traded on an over the counter system like NASDAQ
  3. does not apply to closely held corporations
138
Q

Rule 10b5 in federal securities regulations

A
  1. makes it unlawful to commit fraud in connection with the purchase or sale of securities
  2. the SEC can bring actions against violators, and private damages can also be recovered in civil actions by palintiffs
139
Q

elements of a 10b5 violation

A
  1. false statement or omission
  2. materiality-something that would matter to a reasonable shareholder in deciding whether to but or sell shares
  3. in connection with the purchase or sale or securities (broadly interpreted)
  4. scienter: intent to deceive, speaker must at minimum know the statement is false or be reckless with respect to its truth or falsity
140
Q

insider trading

A
  1. prohibited by 10b5
  2. under the classic theory the insider must trade: on the basis of material non-public information
  3. insider’s duty is to disclose or abstain
  4. liability can be avoided either by not trading or by revealing the nonpublic information
141
Q

if an insider reveals non-public information

A
  1. it is not a 10b5 violation but if the person is a fiduciary it is a breach of duty to maintain confidentiality or a duty of loyalty
142
Q

misappropriation theory

A

allows the prosecution of persons who does not owe the corporation itself a fiduciary duty but instead misappropriates non public information from some other source about the corporation, in breach of a duty of trust or confidence, including an agreement or history of sharing confidences
2. tippers are liable if they give a tip for improper purposes, tipees are liable if they know the person providing the tip is breaching a duty

143
Q

short swing profits

A
  1. even when insider trading is not involved, section 16 prohibits certain individuals from profiting by buying and selling shares of a firm within a 6 month period
  2. this applies to officers, directors and 10% shareholders
  3. profits also included losses avoided

Bar Exam (15 decks)

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