Business Topics Flashcards
(254 cards)
1
Q
a corporation is owned by its….
A
shareholders
2
Q
the group in charge of management is…
A
board of directors
3
Q
members of the board of directors are elected by the….
A
shareholdeers
4
Q
the board appoints people to carry out its policy– who are they?
A
officers
5
Q
what do we need to form a corporation?
A
a person
paper
act
6
Q
who is the person needed to form a corporation?
A
incorporator
must have one or more
7
Q
what does an incorporator do?
A
executes the articles and delivers to the secretary of state
8
Q
does an incorporator have to be a citizen of the state of incorporation?
A
No
9
Q
what paper is needed to form a corporation?
A
articles of incorporation
10
Q
what needs to be in an article of incorporation?
A
name
name and address of each incorporator
registered agent and street address of the registered office (in this state)
information regarding the stock
11
Q
are there any name restrictions for a corporation?
A
NEED:
corporation
company
incorporated
limited
12
Q
who is the registered agent?
A
the company’s legal representative so they can receive service of process for the corporation
13
Q
what information regarding stock is on the article of incorporation?
A
authorized stock
14
Q
what is authorized stock?
A
the max # of shares the corp can issue (issue- can sell)
must be in the article
15
Q
what happens if the company has different classes of stock?
A
many states require that the articles state the number of shares per class
and
voting rights
and
preferences of each class of stock
16
Q
what is the act required to create a corporation?
A
incorporators have notarized articles delivered to the secretary of state and pay the required fees.
17
Q
what happens if the secretary of state accepts the articles for filing?
A
it forms the corporation
establishes a de jure corporation
18
Q
what is the organizational meeting?
A
if the initial directors were named in the articles, the directors hold the organizational meeting.
if they were not incorporators hold the organizational meeting, where they elect the initial directors (who then take over management)
at the meeting the board of directors must complete the organization of the corporation
19
Q
what does “complete the organization of the corporation” mean?
A
appoint officers and adopt initial bylaws
20
Q
what are bylaws?
A
ann internal document
comprise an operating manual
- includes: setting record dates and methods of giving notice
21
Q
are the bylaws filed with the state?
A
No they are internal
22
Q
if the buyers and articles conflict, what governs?
A
articles
23
Q
who can amend or repeal the bylaws or adopt new ones?
A
the shareholders
OR
the board
24
Q
internal affairs rule
what law governs the internal affairs of the corporation?
A
the law of the state of incorporation governs internal affairs
25
entity status
a corporation is...
a legal person
can sue and be sued, hold property, be a partner in a partnership, invest in other companies or commodities.
26
benefit corporation
is one formed for profit and also to pursue some benefit to a broader social-policy cause.
articles must say is a "benefit corporation"
27
how is a corporation and its shareholder's taxed?
corporation is taxed on its profits
shareholders are taxed on their distributions
IDEA: double taxation
28
how is an s-corp taxed?
the corporation is not taxed at the corporate level
29
what are the qualifications of an S-corp?
no more than 100 shareholders
shareholders are human, US citizewns, or residents
has one class of stock and it is not publicly traded
30
if the corporation incurs a debt, commits a tort or breaches a contract are the shareholders personally liable for that debt?
No
This is limited liability
shareholders are only liable to pay for their stock, not for corporate debts
31
are directors or officers vicariously liable for corporate debts?
No
32
who is liable for the corporate debts?
the corporation itself!!!
33
defective corporation
the proprietors thought they formed a corporation but they failed to do so.
making them personally liable for business debts
they have formed a partnership and partners are liable for business debts
34
what two doctrines allow the proprietors to escape liability?
ANYONE asserting either doctrine myst be unaware of failure to form de jure corporation
de facto corporation
corporation by estoppel
35
de factor corporation requirements
there is a relevant incorporation statute
the parties made a good faith colorable attempt to comply with it
and
there has been some exercise of corporate privileges
- they are acting as though they thought it was a corporation
36
if de factor corporation applies...
the business is treated as a corporation for all purposes except in an action by the state.
this would be quo warrantp
37
when does a de factor corporation take place?
when incorporators put together the proper documents and mail them to the secretary of state.
unknown to them the documents are lost in the mail.
38
if a company is a de facto corporation and in the meantime the business is being operated as a corporation, and enters a contract are the shareholders personally liable on the contract?
yes, unless the court applies De factor corporation.
39
corporation by estoppel
someone who treats a business as a corporation may be estopped from denying that it is a corporation.
40
can a corporation by estoppel avoid liability?
No, they can not prevent liability by saying it was not properly formed.
41
corporation by estoppel applies only in what kind of cases?
contract NOT tort
42
a promoter is.....
a person acting on behalf of a corporation not yet formed. they might enter a contract on behalf of a corporation not yet formed.
43
is the corporation liable on contracts pre-incorporation contracts?
the corporation is liable on a pre-incorporation contract ONLY if it adopts the contract
44
implied adoption arises when?
the corporation accepts a benefit of the contract
45
is the promoter liable on these contracts?
unless the contract clearly says otherwise, the promoter is liable on pre-incorporation contracts until there is novation
46
foreign corporations transacting business in the state....
must qualify and pay prescribed fees.
REMEMBER: foreign can even be a state B corp transacting busness in State A
47
transacting business means...
the regularcourse of intrastate ( not intersatate) business activity.
this does not include occasional or sporadic activity in this state and not simply owning property there.
48
how does foreign corporation qualify to transact business in the state?
by getting a certificate of authority from the secretary of state
it gives information from its articles and proves good standing in its home state
49
does a foreign corporation have a registered agent?
Yes, they must appoint a registered agent and maintain a registered office in that state.
50
what happens if a foreign corporation conducts business without qualifying?
civil fine
the corp does not assert a claim in the state
51
can the foreign corporation be sued and defended in that state?
yes
52
what is needed to start and operate a corporation?
capital
53
what are ways the corporation can gain capital?
borrow or raise it by selling stock
or both
54
security
investment
investment = debt
55
debt securities
the corporation borrows money from X and agrees to repay with interest
56
debt securities are usually called
bonds
57
the person holding a bond is a
creditor not an owner of the corporation
58
equity securities
the corporation sells an ownerhsip interest to X
59
equaity securities are called
stock
60
the person holding is called...
a shareholder or stockholder
61
a stockeholder or shareholder is an...
owner not a creditor of the corporation
62
what is an issuance of stock
when corp sells its own stock
63
what are subscriptions?
written offers to buy stock from a corporation
64
revocation of pre-incorporation subscriptions are irrevocable for how long?
6 months
65
is post-incorporation subscription revocable?
yes until accepted by the corporation
66
at what point are the corporation and the subscriber obligated under a subscription agreement?
when the board accepts the offer
67
stock (or an option to buy stock) may be issued for...
any tangible or intangible property or benefit to the corporation
includes: money, property, services already performed for the corporation, and discharge of a debt, promissory notes, future services to the corporation
68
can a corporation give employees options to buy stock as payment for services?
yes because for future services
69
what does par mean?
minimum issuance price
70
what does no par mean?
no minimum issuance price
the bard can have the stock issued for any price that it sets
71
treasury stock
stock the company issued and then reacquired
it is considered authorized and the corporation can then resell it.
if it does, the board sets any issuance price it wants.
72
is the board's valuation of the stock conclusive?
yes, if made in good faith
73
watered stock
C corp issues 10K shares of $3 par to X for $22K. the corporation wants to recover the $8K of "water" who is liable?
the directors if they knowingly authorized the issuance
X (purchaser of the stock)- he has no defense as he was charged with notice of the par value
74
watered stock
C corp issues 10K shares of $3 par to X for $22K. the corporation wants to recover the $8K of "water".
what if X transfers the stock to third party. is the TP liable?
tp is not liable if she acted in good faith.
she did not know about the water
75
preemptive right
right of an existing shareholder of common stock to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock for money
76
if the articles are silent, do we have pre-emptive rights?
no
77
Are there statutory requirements for the amount of directors?
1 or more
the number can be set in the articles or bylaws
78
directors of the corporation
initial directors may be named in the articles
if not they are elected by the incorporators at the organizational meeting.
if there is an election then the shareholders are the ones that vote
79
when is there a board election?
each year unless there is a "staggered" board.
80
what is a staggered board?
divided into half or 3rds with 1/2 or 1/3 elected each year.
this is usually set in the articles
81
can shareholders remove directors before their term expires?
Yes!
can be done with or without cause!
if the board is staggered then shareholders can only remove a director if for cause
82
if theres a vacancy on the board, who selects the person who will serve as director for the rest of the term?
board or shareholders
BUT if the shareholders created the vacancy by removing a director, the shareholders generally must select the replacement.
83
must the board of directors act as a group?
Yes
84
is an individual director an agent of the corporation
no
individual directors have no authority to speak for or bind the corporation.
the directors must act as a group
85
how do directors act as a group?
unanimous agreement in writing
- email is okay
- seperate documents are okay
at a meeting
- must satisfy the quorum and voting requirements
- a conference call qualifies as a meeting
- if individual conversations, then void unless valid act
86
if there is a board meting, do the board members need notice?
Yes
87
is notice required for regular meetings?
No
88
is notice required for special meetings?
yes unless the bylaws say otherwise, the corporation must give at least 2 days notice of:
date
time
place
89
what happens if proper notice is not given?
then whatever happened at the meeting is voidable unless the directors not notified waive the notice defect.
they can do this in:
writing anytime
OR
by attending the meeting without objecting at the outset of the meeting
90
can directors give proxies or enter voting agreements for how they will vote as directors?
No
these efforts are void because directors owe the corporation non-delegatable fiduciary duties
91
can shareholders vote by proxy and etner into voting agreements?
Yes
92
quorum for meetings of the board
for any meeting of the board, we must have a quorum.
unless the buylaws say othewise-- a quorum is a majority of the directors
without a quorum the board cannot act.
93
if a quorum is present at a meeting, passing a resolution requires....
only a majority vote of all directors that are present
94
can a quorum be broken?
Yes, it can be "lost" if people leave.
once it is no longer present, board cannot take an act at that meeting
95
what is the role of the board of directors?
manages the corporation
```
sets policy
supervises officers
declares distributions
determines when stock ill be issued
recommends fundamental corporate changes to shareholders
```
96
can a board delegate to a committee?
yes, to a committee of one or more directors
97
what can a committee not do?
declare contributions
fill a board vacantcy
recommend a fundamental change to shareholders
98
can a committee recommend such things to the full board of its action?
yes
99
what tare the fiduciary duties owed to the corporation?
duty of care
| duty of loyalty
100
what is the standard of fiduciary duties owed?
a director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation
she must also use the care that a prudent person in the position would reasonably believe appropriate under the circumstances.
101
duty of care
burden is on the plaintiff
nonfeasance-- when a director does nothing
- he is liable if this breach caused a lose to the corporation
misfeasance- the board makes a decision that hurts the business
- if did appropriate homework then not liable
102
what is the business judgment rule
presumption that when the board took the act it did appropriate homework
burden is on the plaintiff to show that the board either did not do appropriate homework or did something bad.
the court will not second guess a business decision if it was made in good faith, was informed and had a rational basis.
103
duty of loyalty
THINK: conflict of interest
burden is on the defendant
self-dealing (interested director transaction)
competing ventures
corporate opportunity
104
does the BJR apply to duty of loyalty?
No because it can never apply when the fiduciary has a conflict of interest
105
duty of loyalty
self-dealing (interested director transaction)
any deal between the corporation and one of its directors or another business of the directors.
the deal was fair to the corporation when entered
OR
her interest and the relevant facts were disclosed or known and the dal was approved by either:
- majority OR at least 2 of the disinterested directors
- majority of the disinterested shares
106
duty of loyalty
self-dealing (interested director transaction)
can directors set their own compensation as directors or officers?
yes but it must be reasonable and in good faith.
if it is excessive, they are wasting corporate assets and breaching the duty of loyalty
107
duty of loyalty
competing ventures
director cannot compete directly with her corporation
typical remedy: company gets a constructive trust on profits the director made from the competing venture
108
duty of loyalty
corporate opportunity (expectancy)
something the company had an interest or expectancy in or something defendant found on company time or with company resources
the company's financial inability is NOT defense
109
can a corporation make a loan to a director?
yes if it is reasonably expected to benefit the corporation
110
when can a director be held liable?
```
for:
improper distributions
improper loans
ultra vires acts
breaches of fiduciary duties
```
111
a director is presumed o concur with board action unless....
her dissent or abstention is noted in writing in corporate records
112
what does in writing mean?
in the minutes
delivered in writing to the presiding officer a the meeting
written dissent to the corporation immediately after the meeting
113
is an oral dissent effective?
not by itself
114
when can a director not dissent?
if they voted for the resolution at the meeting
115
when is a director not liable?
if they were absent from the meeting
good faith reliance on info presented by an officer, employee, or committee or professional reasonably believed competent. reliance must be in good faith
116
what is an officer?
an agent of the corporation
corporation is the principal; officer is an agent
whether the officer has agency authority to do so can bind the corporation
117
what officers are required to have?
president
secretary
treasurer
it can have others
118
can one person be multiple officers?
Yes
119
how are officers selected and removed?
by the board
the board also sets officer compensation
120
can shareholders fire or hire officers?
no only the board
121
what is it called when:
someone has been sued on behalf of the corporation in her capacity as an officer or director.
they have incurred costs, attorney's fees, maybe even fine, a judgment or settlement in that litigation.
now the director is seeking....
indemnification (reimbursement) from the corporation
122
when can a corporation not indemnify a director or officer?
one was held liable to the corporation or to have received an improper benefit.
123
when must a corporation indemnify a director or officer ?
when they prevail in the case on the merit or otherwise.
some states:
they must win the entire case
in others:
they are entitled to indemnification "to the extent"
that she wins the case
124
when may a corporation indemnify a director or officer her litigation expenses?
if she shows she acted in good faith with the reasonable belief that she acted in the company's best interest.
must show that she met the duty of loyalty
125
indemnification of directors and officers
who determines the director or officers eligibility for permissive indemnification?
disinterested directors
disinterested shares
OR
independent legal counsel
126
can a court order a director or officer who was sued order reimbursement if it is justified in view of all circumstances?
YES!
if she was held liable to the corporation, this is limited to costs and attorneys fees
this cannot include judgment
127
can the articles eliminate director liability to the corporation for damages?
yes
BUT not for intentional misconduct, usurping corporate opportunities, unlawful distributions or improper personal benefit.
can eliminate liability only for duty of care
128
do shareholders get to manage the corporation?
No because the board managers
129
who runs the corporation in a close corporation?
close corporation
REMEMBER ON THE BAR-- MOST CORPORATIONS WILL BE CLOSE!
130
what are the characteristics of a close corporation?
few shareholders
stock not publicly traded
131
in a close management how can management be set up?
with a board of directors, and run it like a regular corporation
OR
eliminate the board and have shareholders run he business
OR appoint a manager
132
what is a shareholder management agreement (SMA)
alternative management for the close corporation
can be done:
in the articles and approved by all shareholders
OR
by unanimous written shareholder agreement
the agreement should be conspicuously noted on the front and back of the stock certificates
- failure to do so does not affect validity
133
close corporation
if the shareholders set up management by shareholders or by a manager, who owes the duties of care and loyalty to the corporation?
who ever manages
134
what are the special fiduciary duty in close corporations?
whoever manages the corporation owes the duties of care and loyalty to the corporation.
some states: courts impose a fiduciary duty on shareholders owed to other shareholders
135
close corporation
what does a corporation look like?
what do those partners owe each other?
partnership
fiduciary duty of utmost good faith
136
close corporation
what if there is oppression of minority shareholders what can they do?
they can sue the controlling shareholders who oppress them for breach of this fiduciary duty
```
examples:
the controlling shareholders might deny the minority any voice in corporate affairs
fire them from employment
refuse to declare dividends
AND
refuse to buy the minority's stock
- no return on investment
```
137
close corporation
why do the courts let the minority shareholders sue alleging oppression of minority shareholders?
bc this oppression thorts their legitimate goals for investing
AND
she has no way out (cannot sell stock)
138
what is a professional corporation
OR
professional association?
when licensed professionals, including lawyers, medical professionals, and CPAs incorporate their business.
139
how do you know if an entity is a professional corporation OR professional association?
the name has phases like "P.C." or "P.A."
140
professional corporation or professional association:
directors, officers, and shareholders usually must be...
licensed professionals
141
professional corporation or professional association:
can they hire non professionals?
Yes because not practicing the profession.
142
professional corporation or professional association:
are the professionals liable for their malpractice?
Yes
143
professional corporation or professional association:
are shareholders liable for corporate obligations or for other professionals malpractice?
No
144
what rules apply to governing PC?
the same rules that govern regular corporations
145
can shareholders be held liable for corporate debts?
No because the corp is liable for what it does.
146
when can a shareholder be held liable for corporate actions?
if the court "pierces the corporate veil"
147
what corporations can the court pierce the corporate veil?
close corporations
148
to pierce the corporate veil and hold the shareholders personally liable what must happen?
they must have abused the privilege of incorporating and fairness must require holding them liable
courts may pierce the corporate veil to avoid fraud or unfairness by shareholders in a close corporation
149
what is not enough to pierce the corporate veil?
sloppy administration is not enough
150
what is the alter ego (identity of interests)?
when shareholders of a close corp co-mingle personal and corporate funds and close corp fails to pay the bill
151
can a creditor of a corporation who has been unable to collect its claim from the corporation collect from the shareholders?
if the court pierces the corporate veil, the shareholder who co-mingled funds would be held liable.
152
undercapitalization
if S is a shareholder of Glowco (close corporation) that hausl and disposes of nuclear waste.
glowco does not carry insurance.
glowco has an initial capitalization of $1K.
V is injured when one of Glowco's trucks melts down.
Can V sue S?
shareholders not liable for corporate obligations
pierce corporate veil
the court might PCV because the corporation was undercapitalized when formed
because the shareholder failed to invest enough to cover prospective liabilities
courts may be more willing to PCV for a tort victim than for a contract claimant
153
can a shareholder be another corporation?
Yes!
example: parent corporation forms a subsidiary to avoid its own obligations
the court might PCV and hold the parent corporation liable just as it could if the shareholder were a human.
154
derivative suits
a shareholder is suing to enforce the corporations claim not her own personal claim
when the corporation is not pursuing its own claim, so a shareholder steps in to prosecute it for the corporation
ASK: could the corporation have brought the suit?
155
derivative suits
if the shareholder wins the derivative suit who gets the money from the judgment?
the corporation
156
derivative suits
what does the shareholder recover?
costs and attorney fees usually from the judgment won for the corporation
157
derivative suits
if the shareholder losses the suit can they still recover?
No
158
derivative suits
is the shareholder then held liable for the defendant's attorney's fees?
yes, if sued without reasonable cause
159
derivative suits
if the shareholder sues, loses, can other shareholders then later sue the same defendant's on the same transaction?
No
160
what are the requirements for bringing a shareholder derivative suit?
stock ownership when the claim arose and throughout the suit
plaintiff must provide adequate representation of the corporation's interest
plaintiff must make written demand on corporation (usually that means the board) that the corporation bring the suit.
- cannot sue until 90 days after making the demand
the corporation is joined as a defendant.
161
can parties settle or dismiss a derivative suit?
yes only with court approval
the court may give notice to shareholders and get their input on whether to settle or dismiss
162
derivative suits
after the derivative suit is filed the corporation may.....
move to dismiss
this is based on an independent investigation that concluded that suit is not in the corporation's best interest
163
derivative suits
who must make the independent investigation to determine if the corporation should dismiss the case?
independent directors
OR
appointed panel of 1 or more independent persons
usually a special litigation committee of independent directors
164
derivative suits
in ruling on the corporations's motion to dismiss, what is the court looking for?
those recommending dismissal were truly independent
AND
they made a reasonable investigation
165
outstanding stock
shares the company issued and has not reacquired
166
who is the record shareholder?
the person shown as the owner in the corporate records.
167
what is the record date
voter eligibility cut-off
168
C-corp sets annual meeting for July 7 and record date for June 8. S sells B her c corp stock on June 25. who is entitled to vote the shares at the meeting?
S or B?
S because she owned it on June 8
169
what are the exceptions to the general rule that record order on record date votes?
the corporation re-acquires stock before the record date, so it is the owner of its "treasury stock" as of the record date.
- will not vote bc is outstanding on the record date.
death of a shareholder
- after the record date, S's executor can vote even if not the executor on the date
voting by proxy
170
what is a proxy?
writing (fax or email = ok)
signed by record shareholder (email okay to ID)
directed to secretary of corporation
authorizing another to vote the shares
171
how can shareholder revoke proxy?
in writing to corp secretary
OR
by attending meeting and voting
172
can a shareholder revoke their proxy even if states irrevocable?
Yes
173
to have a irrevocable proxy it must be:
proxy coupled with an interest
requires:
the proxy says its irrevocable
AND
the proxy-holder has some interest in the shares other than voting
interest: beyond the simple interest in voting the shares
174
shareholder voting trusts requirements:
written trust agreement, controlling how the shares will be voted
copy to the corporation
transfer legal title to the voting trustee
original shareholders receive trust certificates and retain all shareholder rights except for voting
175
requirements for voting (pooling) agreement
shareholders can enter into
must be in writing and signed
they are enforceable
176
in states that will grant specific performance of the voting agreement what happens to the voting trust?
there is no need to use the voting trust
177
where do shareholder's vote?
usually take actin at a meeting
they can act by unanimous written consent signed by holders of all voting shares
178
if there is a meeting must be held in the state of incorporation?
No
179
what are the different kinds of shareholder meetings?
annual meeting
special meeting
180
what happens if there is no annual meeting?
if no annual meeting is held within 15 months, a shareholder can petition the court to order one
its required
181
what do shareholders do at the annual meeting?
elect directors
182
who can call a special meeting?
```
the board
the president
the holders of at least 10 percent of the outstanding shares
OR
anyone else authorized in the bylaws
```
183
notice of shareholder meeting requirements
must give written notice (fax or email is okay) to every shareholder entitled to vote
deliver it between 10-60 days before the meeting
184
what must the notice of the shareholder meeting state
date
time
place of meeting
for special meeting:
purpose of the meeting
185
what the are consequences of failure to give proper notice to all shareholders?
whatever action that was taken at the meeting is voidable
UNLESS those not sent a notice waive the notice defect
186
how can the shareholders not given notice waive?
express- in writing and a signed anytime
implied- attend thee meeting without objecting at the outset
187
what do shareholders get to vote on?
to elect directors
to remove directors
on fundamental corporate changes
they may also vote on other things if the board asks for their vote
188
every time the shareholders vote we must have...
a quorum represented
quorum is determined on the number of shares represented NOT the number of the shareholders
requires a majority of outstanding shares
189
can a shareholder quorum be lost if people leave the meeting?
No
190
if the quorum requirement is met, the shareholders vote
what vote is required:
to elector a director?
plurality
the person who gets more votes for that seat on the board than anyone else
191
if the quorum requirement is met, the shareholders vote
what vote is required:
to approve a fundamental corporate change
majority of the shares
192
if the quorum requirement is met, the shareholders vote
what vote is required:
to remove a director
traditionally needed majority of the shares entitled to vote
treat this as "other matters"
193
if the quorum requirement is met, the shareholders vote
what vote is required:
other matters
majority of the shares that actually vote on the issue
194
cumulative voting
usually only in close corporations
gives smaller shareholders a better chance of electing someone to the board of directors
195
when is cumulative voting allowed?
ONLY when shareholders elect directors
196
difference between straight voting and cumulative voting for directors?
straight voting- vote for each director individually
cumulative- have one large election
-the top two finishers are elected to the board
197
how do you determine voting power when cumulative voting exists:
multiply the number of shares times number of directors to be elected
198
if the articles are silent cumulative voting, is it applicable?
No
199
are stock transfer restrictions okay?
Yes if they are reasonable
| meaning: they are not an undue restriction on alienation
200
if a stock restriction is valid, can it be enforced against the transferee?
Yes if:
the restriction is conspicuously noted on the stock certificate
OR
the transferee had actual knowledge of the restriction
201
does a shareholder have a right to inspect the books and records of the corporation?
yes, any shareholder does!
202
shareholder have a right to inspect the books and records of the corporation
procedure for non-controversial things
shareholder makes a written demand at least 5 business days in advance
no need to state a proper purpose
include: articles, bylaws, minutes of shareholder's. meetings for past 3 years, names and addresses of current directors and officers most recent annual report of corporation
203
shareholder have a right to inspect the books and records of the corporation
procedure for controversial things
shareholder makes a written demand at least 5 business days in advance
need to state a proper purpose
proper purpose: related tot your interest as a shareholder
204
shareholder have a right to inspect the books and records of the corporation
what are more controversial things?
excerpts of minutes of board meetings
accounting records
record of shareholders
205
shareholder have a right to inspect the books and records of the corporation
what happens if the corporation fails to allow proper inspection?
shareholder seeks a court order
if she wins she can recover costs and attorney's fees incurred in making the motion
206
do directors have to go through this procedure to get access to corporate books and records?
no they have unfettered access
207
what are distributions?
payments by the corporation to shareholders
208
what are types of distributions?
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dividends
OR
repurchase shareholders stock
OR
redemption
(a forced sale to corporation at price set in articles)
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209
who determines the distributions to shareholders?
board
210
at what point does a shareholder have a "right" to a dividend or other distribution?
when the board declares it
211
is a suit to compel the declaration of a distribution direct or derived?
direct because the harm is to the shareholders not to the corporation
212
for any distribution (dividend, repurchase, redemption)
which funds can be used?
traditional view
earned surplus
stated capital
capital surplus
213
what is earned surplus?
generated by business activity
consists of:
all earnings
- all losses
- distributions previously paid
this is a proper fund for paying distributions
214
what is stated capital?
generated by issuing stock
so when the corporation issues stock, it allocates the proceeds between stated capital and capital surplus
215
can stated capital be used for distributions?
no
216
which shareholder get dividends?
board of directors declares dividends totaling $400K
who dividends if the outstanding stock is:
100K shares of common stock
4 per share
217
which shareholder get dividends?
board of directors declares dividends totaling $400K
who dividends if the outstanding stock is:
100K shares of common and 20K shares of preferred with $2 preference
preferred means pay first
20K preferred shares multiplied by $2 preference equals a total preference of $40K. that is to be paid first.
that leaves 360K which goes to the common shares
bc there are 100K of those each common share gets $3.60.
REMEMBER: preferred means pay 1st
218
which shareholder get dividends?
board of directors declares dividends totaling $400K
who dividends if the outstanding stock is:
100K shares of common and 20K shares of $2 prefered that is cumulative (and no dividends have been paid in the 3 prior years).
the corporation owes the cumulative holders for the 3 prior years plus this year
meaning: the corporation owes them four years worth of a $2 preference.
4 years multiplied by $2 equals $8 per share
so the corporation owes $8 tp each cumulative preferred share.
there are 20K such shares
20K x $8= 160K pay it first (bc it is preferred)
THEN LEAVES
240K and goes to common shares $2.4 for common shares
219
what does cumulative means when determining what shareholders get what?
cumulative means add them up
a cumulative dividend accrues year-to-year
220
what is " on a par issuance"?
the par value goes to state capital
221
what is " on a par issuance"?
hypo: c corp issues 10K shares of $2 par stock for $50K. of that how much is stated capital and how much is capital surplus?
$20K bc issued 10K shares of $2 par value
and any excess over par goes to capital surplus
30K bc its excess overpar
222
what is "on a no-par issuance"?
the board allocates the consideration between stated capital and capital surplus
223
capital surplus
generated by issuing stock
it is computed by payments in excess of pay plus amounts allocated in a no-par issuance
224
can capital surplus be used for distributions?
yes if we inform the shareholders
225
what is the modern view for any distribution which funds can be used?
a corporation cannot make a distribution if it is insolvent or if the distribution would render it insolvent.
226
what is the modern view for any distribution which funds can be used?
what does insolvent mean?
the corporation is unable to pay its debts as they come due
OR
total assets are less than total liabilities
liabilities include preferential liquidation rights
227
who is liable for improper distributions?
directors are jointly and severally liable
REMEMBER: the directors good faith reliance defense
shareholders are personally liable only if they knew the distribution was improper when they received it
228
what are the fundamental corporate changes
amend the articles
merge or consolidate into another company
transfer substantially all assets (or having stock acquired in "share exchange")
convert to another form of business
dissolve
229
in order complete a fundamental corporate change we need:
board action adopting a resolution of fundamental change
board submits proposal to shareholders with written notice
shareholder approval
- need majority of shares entitled to vote
deliver a document to secretary of state
230
what is the dissenting shareholder right of appraisal?
the right force the corporation to buy your stock for fair value
231
what changes trigger the right of appraisal?
merging or consolidating
transferring substantially all assets
stock being acquired in a share exchange
OR
conversion to another form of business
232
when will a right of appraisal NOT happen even if the proper change that would trigger the right of appraisal takes place?
if the company's stock is listed on a national exchange
OR
if the company has 2K or more shareholders
233
where does the right of appraisal exist?
close corporation
234
how do you perfect your right of appraisal?
before the shareholders vote, file with the corporation a written notice of objection and intent to demand payment
at the shareholder vote, abstain or vote agaisnt the proposed change
AND
after the vote within time set by corporation, make written a demand to be bought out and deposit stock with the corporation
235
right of appraisal
what happens if the shareholder and the corporation cannot agree on a fair value of the shares?
the corporation sues and the court may appoint an appraiser
236
right of appraisal
is the right of appraisal the shareholder's exclusive remedy if she does not like a fundamental change?
Yes absent fraud
237
amendment of the articles
whats needed:
board of director action and notice to shareholders
shareholder approval (need a majority)
if approved, deliver amended articles to the sectary of state
238
amendment of the articles
are there dissenting shareholder rights of appraisal?
No
239
mergers OR consolidations
whats needed?
board of director action and notice to shareholders
shareholder approval (generally both corporations)
no shareholder approval required if a 90% or more owned subsidiary is merged into a parent
if approved- surviving corporation delivers articles of merger or consolidation to secretary of state
REMEMBER: right of appraisal
240
short-form merger
a 90% or more owned subsidiary is merged into a parent corporation
241
what is the effect of merger or consolidation?
surviving corporation succeeds to all rights and liabilities of the constitutents.
THINK: because the constituent corporation disappeared so a creditor of that corporation can sue the survivor-- successor liability
242
transfer of all or substantially all of the assets not in the ordinary course of business or a share exchange
(one company acquires all the stock of another)
what constitutes a substantially all of the assets?
varies from state to state
it requires transfer of at least 75 percent of the assets
243
transfer of all or substantially all of the assets not in the ordinary course of business or a share exchange
(one company acquires all the stock of another)
this is a fundamental corporate change for which corporation?
the selling corporation ONLY not the buyer
244
transfer of all or substantially all of the assets not in the ordinary course of business or a share exchange
(one company acquires all the stock of another)
what do you need?
board action (both corporations) and notice to selling company's shareholders
approval by the selling corporation's shareholders
- need majority of share approval of selling company
- do not need any votes for buying company
deliver to secretary of state articles of exchange in share exchange
- no filing in a transfer of assets
245
transfer of all or substantially all of the assets not in the ordinary course of business or a share exchange
(one company acquires all the stock of another)
is there successor liability?
the company that buys the stock is not liable for the debts of the company that sold the assets
EXCEPTION: if the buyer is a mere continuation of the seller- has the same manangment, shareholders, etc.
if a court concludes that the deal was really a disguised (De factor) merger
246
conversion
business converts to another form (corporation converts to LLC)
```
board approval
notice to shareholders
shareholder approval
deliver document to secretary of state
dissenting shareholders right of appraisal
```
247
what types of dissolution exist?
voluntary
| involuntary
248
what is voluntary dissolution?
board of directors action and shareholder approval
file notice of intent to dissolve with secretary of state
corporation stays in existence to wind up.
notify creditors so they can make claims
249
what is involuntary dissolution?
by court order
250
what is an alternative to the court ordering involuntary dissolution?
might order buy-out o the objecting shareholder
this is likely in a close corporation
251
hwo can petition an involunatry dissolution?
a shareholder can petition because of:
director abuse, waste of assets, misconduct
director deadlock that harms the corporation
OR
shareholders fail at consecutive annual meetings to fill a board vacancy
a creditor can petition because corporation is insolvent and :
he has an unsatisfied judgment
OR
the corporation admits the debt in writing
252
is dissolution the end of the corporation?
no it is the beginning of a process that will end the corporate existence
the corporation continues to exist, so it can sue and be sued
it cannot start a new business but must wind up (liquidate)
253
what are the steps taken to wind up?
give written notice to known creditors and publish notice of dissolution in a newspaper in the county of its principal place of business
gather all assets
convert assets to case
pay creditors
and
distribute any remaining sums to shareholders, pro-rata by share unless there is a liquidation preference
254
what is a liquidation preference
"pay first" so it works like a dividend preference
comes up at dissolution
works the same as a dividend preference
