Corporation Flashcards
(207 cards)
1
Q
Six fact patterns in corporations law:
A
- Organization of a corporation; 2. Issuance of stock; 3. Directors and officers; 4. Shareholders; 5. Fundamental corporate changes; 6. Federal securities.
2
Q
What are the general formation requirements of a corporation in very broad terms?
A
- People; 2. Paper; 3. Act
3
Q
In the formation of a corporation what people are required?
A
Incorporators–must have more than one.
4
Q
What does an incorporator do?
A
Execute and file the articles. Might also hold the organizational meeting.
5
Q
Who can have the job of incorporator?
A
It can be a natural person or entity.
6
Q
What paper is required for formation of a corporation?
A
Articles of Incorporation
7
Q
What are the purposes of the articles of incorporation?
A
- The articles are a contract between corporation and shareholders; 2. articles are a contract between corporation and state.
8
Q
What goes in the articles?
A
- Statement that corporation formed under the Business Corporation Law of 1988; 2. Names and addresses; Capital structure (stock).
9
Q
What names and addresses need to be in articles?
A
- Corporate name; 2. Name and address of each incorporator; 3. Name of registered agent and address of registered office.
10
Q
One of what words must be in the corporate name?
A
- Corporation (Corp.); 2. Company (Co.); 3. Incorporated (Inc.); 4. Limited (Ltd.); 5. Association (cannot be abbreviated); 6. Fund; 7. Syndicate (cannot be abbreviated)
11
Q
Must you name the initial directors in the articles?
A
In Pennsylvania, it is your option. But if you do, you must give their addresses too.
12
Q
If there is no statement of duration in the articles, the default rule is what?
A
Perpetual duration.
13
Q
If there is no statement of corporate activity, what is the default rule?
A
All lawful activity.
14
Q
How do we handle ultra vires (beyond the scope of the articles) today?
A
- Ultra vires contracts are valid; 2. Shareholders can seek an injunction; 3. Responsible managers are liable to the corporation for ultra vires losses.
15
Q
What is Authorized Stock?
A
Maximum number of shares the corporation can sell.
16
Q
What is Issued Stock?
A
The number of shares the corporation actually sells.
17
Q
What is Outstanding Stock?
A
Shares that have been issued and not reacquired by the corporation.
18
Q
What does the articles have to contain with regard to stock?
A
Articles must include: 1. Authorized stock; 2. information on par value (if any par shares); 3. voting rights; 4. preferences of each class of stock.
19
Q
What is the act of forming a corporation?
A
File articles with Pennsylvania Department of State and pay required fee.
20
Q
What if the Pennsylvania Department of State accepts the articles for filing?
A
That is conclusive proof of valid formation. At that moment we have formed a de jure corporation.
21
Q
After the corporation is formed, what must happen?
A
The board of directors holds the organizational meeting, where they select officers and adopt any bylaws and can conduct other appropriate business. BUT if the initial directors were not named in the articles, incorporators hold an organizational meeting, where they elect directors and adopt any bylaws.
22
Q
What is the legal significance of formation of corporation:
A
- Internal affairs of a PA corporation are governed by PA law (Internal Affairs Doctrine) even if corporation does business elsewhere; 2. A corporation is a separate legal person (it can sue and be sued, be a partner in a partnership, make charitable contributions, be taxed on its profits);
23
Q
What is double taxation?
A
Corporation is taxed on its profits and the shareholders are taxed on distributions.
24
Q
How can you form a corporation and avoid it being taxed at the corporate level?
A
S-corporation
25
Who is liable for what the corporation does?
The directors, officers and the shareholders are not liable for what the business does. The corporation is liable for what the corporation does. You are personally liable if you personally participated in wrongdoing.
26
In the event of a failure to form a de jure corporation, all you have is a partnership and the proprietors will be personally liable for what the business does. What are defenses for shareholders to avoid personal liability? To use these defenses the person must be unaware of the failure to form a de jure corporation.
1. De Facto Corporation; 2. Corporation by estoppel
27
De Facto Corporation requirements:
1. There is a relevant incorporation statute (there is! the BCL); 2. the parties made a good faith, colorable attempt to comply with it; 3. Some exercise of corporate privileges (acting like we have a corporation).
28
Corporation by estoppel:
one who treats a business as a corporation may be estopped from denying that it is a corporation. Example: you did business thinking it was a corporation, then later you try to sue the proprietors individually--estopped. Or the business tries to avoid liability by saying it was not a properly formed corporation--estopped.
29
Corporation by estoppel generally applies in what kinds of cases?
Contract, not tort.
30
What is the status of the doctrines of de facto corporation and corporation by estoppel doctrines?
May be abolished, but unsure.
31
Are bylaws a condition precedent to forming a corporation?
No.
32
What are bylaws for?
internal governance
33
Who adopts the initial bylaws?
Board or incorporators. Who does this depends on whether we named the initial directors in the bylaws.
34
Who can amend and repeal the bylaws of a corporation?
Shareholders. The board can only if the bylaws allow.
35
If the bylaws conflict with the articles, what controls?
Articles. Because bylaws are for internal governance and are not filed with a state agency. They are binding on directors and officers, but not binding on outsiders.
36
What is a promoter?
A person acting on behalf of a corporation not yet formed.
37
Who is liable for pre-incorporation contracts?
A corporation is not liable on pre-incorporation contracts until it adopts the contract.
38
How can a corporation adopt pre-incorporation contracts?
1. Express (board of director action adopting the contract); 2. Implied (arises if the corporation accepts a benefit of the contract).
39
Liability of the promoter for pre-incorporation contracts:
Promoter is liable until there has been a novation. A novation would be an agreement of the promoter, the corporation, and the other contracting party that the corporation will replace the promoter under the contract. So even if the corporation adopts the contract and is liable for the contract, the promoter is still liable until novation.
40
What is the Pennsylvania rule regarding foreign corporations?
Foreign corporations transacting business in Pennsylvania must qualify and pay prescribed fees.
41
What is a foreign corporation?
Anything outside Pennsylvania.
42
What does it mean to transact business?
Regular course of intrastate business activity.
43
How can a foreign corporation qualify to do business in PA?
Get a certificate of authority by giving information from articles and proving good standing in its home state. It must have a registered agent in Pennsylvania and pay fees here too.
44
What happens if a foreign corporation transacts business in Pennsylvania without qualifying?
1. There is a civil fine; 2. It cannot assert a claim in Pennsylvania; 3. Although it can be sued and it can defend.
45
Once a corporation qualifies and pays back fees and fines, can it then sue in Pennsylvania?
yes
46
What is an issuance of stock?
When a corporation sells its own stock. It is not an issuance for somebody else to sell the stock.
47
Why does a corporation sell stock?
To raise capital.
48
What is a subscription?
A written offer to buy stock from corporation.
49
Are subscriptions revocable?
Yes, any time before a corporation accepts the offer to buy stock.
50
When do the corporation and the subscriber become obligated under a subscription agreement?
When the board accepts the offer.
51
With regard to consideration, what form must the consideration be in for the corporation to issue stock?
Permitted: any tangible or intangible property or benefit to the corporation. Includes money, tangible or intangible property, services done for the corporation, release of obligations, promissory notes, even future services.
52
What is prohibited with regard to the form of consideration for a corporation to issue stock?
Anything else--almost impossible to have a prohibited form of consideration.
53
Who decides if consideration is adequate?
the board--regardless of par value
54
What does par mean?
minimum issuance price
55
What does "no par" mean?
No minimum issuance price.
56
Treasury stock is what?
Stock that was previously issued and has been reacquired by the corporation. The corporation can then resell it at any price the Board sets.
57
What are preemptive rights?
The rights of an existing shareholder to maintain her percentage of ownership by buying stock when there is a new issuance of stock. Has a right to buy a certain amount of shares.
58
In Pennsylvania when do preemptive rights exist?
Only if the articles provide for them OR in a statutory close corporation preemptive rights exist unless the articles provide otherwise.
59
What is the statutory requirement for number of directors?
One or more adult natural persons.
60
If the articles are silent about the number of directors, how many do we have?
Three.
61
Who may select directors?
Initial directors can be named in the articles or selected by incorporators. Thereafter, it is shareholders at the annual meeting.
62
What is a classified board?
Where the board is divided by halves or thirds, with half or one third elected each year. Most states call this a staggered board.
63
On what bases can shareholders remove directors before their terms expire?
With or without cause. Unless it is a classified board, and then the shareholders can only remove a director for cause.
64
Can the board remove a director?
Yes, for cause.
65
Can a board remove a director for mental incapacity?
Only if there is a judicial determination of incapacity.
66
Who selects the person who will fill a vacancy on the board?
Usually majority vote of remaining directors.
67
The board of directors can only take an act in one of two ways:
1. Unanimous agreement in writing; 2. At a meeting (which has to satisfy the quorum and voting requirements).
68
What if the directors agree to act through individual conversations, without a meeting or unanimous written agreement?
Act is void unless ratified by a valid act.
69
Does email count as an agreement in writing?
Yes, if the printout is kept in the records.
70
Does a conference call count as a meeting?
Yes.
71
If there is a board meeting, the method for giving notice is usually set in the bylaws. Is notice required for regular meetings? Is notice required for special meetings?
No for regular meetings. Yes for special meetings: at least five days written notice stating the time and place.
72
Failure to give notice for special meeting does what to whatever happens in the meeting?
Voids whatever happens in the meeting unless those not given notice waive the defect. They can do so in writing anytime or by attending the meeting without objecting to the lack of notice.
73
Can directors give proxies or enter voting agreements for how they will vote as directors?
No. No such thing as director's proxies and voting agreements.
74
What is the rule for shareholders voting by proxy?
Shareholders can vote by proxy and by voting agreement.
75
What is a quorum for a meeting of the board?
A majority of all directors unless a different percentage is set by the board.
76
If a quorum is present at a meeting, passing a resolution requires how many votes?
Only a majority of those present.
77
What is a broken quorum?
Quorum of the board can be lost if people leave. Once a quorum is no longer present, the board cannot take an act at that meeting.
78
How can a shareholder quorum be lost?
Never can be lost.
79
What is the role of directors?
Manages business of corporation. (sets policy; selects and monitors officers, declares dividends; decides when the corporation will issue stock; recommends fundamental corporate changes to shareholders)
80
Can the board delegate substantial management functions?
To a committee consisting of one or more directors.
81
What functions can a committee NOT perform?
1. amend by-laws; 2. fill a board vacancy; 3. submit a financial corporate change to shareholders. It can recommend these for board action.
82
With regard to the duty of care of a director, the burden is on whom?
On the plaintiff
83
What is the duty of care of a director?
A director must discharge her duties in good faith and with a reasonable belief that what she does is in the corporation's best interest. She must act with that degree of care a prudent person would use with regard to her own business. In doing so, a director is not required to consider the interest of any particular group as controlling. (If you see a director screwing up you must put this entire statement in your answer.)
84
When does a breach of the director's duty of care result in liability?
Only if his breach CAUSED a loss to the corporation.
85
Misfeasance that causes harm to the corporation results in liability of the director when?
Only if she does not meet the business judgment rule. Look at things like whether they did their homework, deliberated, analyzed. A court will not second-guess a business decision if it was made in good faith, was informed, and had a rational basis. A DIRECTOR IS NOT A GUARANTOR OF SUCCESS.
86
In a duty of loyalty question, the burden is on who?
the defendant
87
Why does the business judgment rule not help directors in duty of loyalty cases?
Because duty of loyalty issues involve conflicts of interest and the business judgment rule doesn't address that.
88
What is an "interested director transaction?"
any deal between the corporation and one of its directors (or a director's relative (close enough to affect judgment) or another business of the director's).
89
Interested director transaction will be set aside unless what?
the director shows: 1. the deal was fair to the corporation when entered, OR 2. material facts and her interest were known and the deal was approved in good faith by either of these: 1. shareholders or 2 majority of disinterested directors. Even if proper approval was gotten from one of these groups, the court might still insist on a showing that the deal was fair.
90
Competing ventures:
Director cannot compete unfairly with her corporation. Almost any competition is going to see as being unfair because she is a fiduciary.
91
What is the remedy for breach of loyalty where the director has a competing venture?
Constructive trust on profits so that corporation recovers any profit she made by competing. The director will have to account for her profit.
92
Corporate opportunity is what?
Something the company needs, or has an interest or expectancy in, or that is related to present or prospective business.
93
What is the director's duty regarding corporate opportunity?
A director cannot usurp a corporate opportunity. That means he cannot take it until 1. he tells the board and 2. waits for the board to reject the opportunity.
94
Is it a valid defense to say that the corporation lacked the financial ability to pay for the opportunity?
No.
95
What is the remedy for a breach of a director's duty of loyalty regarding corporate opportunity?
Constructive trust: if have something then must sell to the corporation as cost or if sold item for a profit, the corporation gets the profit.
96
What is the rule regarding the board's compensation?
The directors can set their own compensation, but it must be reasonable. If excessive, then a waste of corporate assets and a breach of the duty of loyalty.
97
Which directors are liable for all the things directors can do wrong?
General rule: we presume that a director concurred with what the board did unless her dissent is noted in writing in corporate records. That means 1. in the minutes or 2. in writing to the corporate secretary at the meeting or 3. in writing to the secretary immediately after the meeting. Exceptions: 1. absent directors are not liable; 2. good faith reliance on (a) book value of assets; or (b) financial statements by auditors or president or chief accounting officer; or (c) opinion of an employee, officer, professional, or committee of which the relying party is not a member (if reasonably believed competent).
98
What duty do officers owe?
Same duties of care and loyalty as directors)
99
What are officers status?
They are agents of the corporation and can bind the corporation if they have authority to do so.
100
What inherent authority does the president have?
The president has inherent authority to bind the corporation to a contract in the ordinary course of business.
101
What officers must you have?
A president, secretary, and a treasurer "or persons who act as such." Can have other officers.
102
Can one person hold simultaneous officers?
Yes.
103
Who selects, monitors and removes officers?
The board. Generally, shareholders do not (although they hire and fire directors)
104
Who sets officer compensation?
Generally the board sets reasonable compensation for officers either before or after services are rendered.
105
When is board compensation set?
Before services are rendered.
106
Is an option to buy the corporation's stock proper compensation for an officer?
Yes, if it is made as an incentive for service.
107
Sarbannes Oxley Act: what do you need to know?
Federal law that generally forbids loans to executives in large, publicly-traded corporations. It requires the board of such a large corporation to establish an audit committee and oversee work of registered public accounting firm. Chief executive and financial officers must certify accuracy and completeness of financial reports.
108
When is the corporation barred from indemnification?
If the person was held liable to the corporation.
109
When does the corporation have mandatory indemnification duties?
To the extent the person wins a judgment on the merits or otherwise. Does not have to win every claim in the case to qualify for mandatory indemnification. To the extend she won there is mandatory indemnification.
110
When may the corporation indemnify? Permissive indemnification?
The corporation may choose whether it will indemnify in any case that does not prohibit indemnification or demand mandatory indemnification.
111
For permissive indemnification, what is the eligibility standard for indemnification?
must show she acted in good faith and with the reasonable belief that her actions were in the company's best interests.
112
Who determines eligibility in permissive indemnification cases?
1. Disinterested directors; 2. independent legal counsel in a written opinion; 3. shareholders.
113
A corporation can advance litigation expense to the director or officer, as long as what?
she agrees to repay them if she is ultimately determined ineligible for indemnification.
114
Articles can provide for limitation or elimination of director liability for what?
director liability for damages, but not for breach of the duty of loyalty, reckless or intentional misconduct, or wrongful personal benefit.
115
Do shareholders get to manage the corporation?
No. Because the board manages. Unless it is a close corporation.
116
What are the characteristics of a close corporation?
Has few shareholders and the stock is not publicly traded.
117
What is a statutory close corporation?
The stock certificates must note the status, the articles must state that the stock will not be sold publicly. It is one that meets a particular legislative definition.
118
How is a statutory close corporation managed?
In a statutory close corporation, we can have a board of directors or shareholders can eliminate the board and run the corporation in the articles or bylaws and approved by all shareholders. OR shareholders can make management decisions by written agreement of a majority of shares.
119
In a close corporation in which the board has been eliminated, who owes to the corporation the duties of care and loyalty?
The managing shareholders.
120
In a close corporation, shareholders owe a fiduciary duty to each other. What does this mean?
Controlling shareholders may be liable for oppressive acts toward minority shareholders, e.g., selling control to one who loots the corporation (without making a reasonable investigation of the buyer.)
121
In a professional corporation (PC) only who are shareholders?
licensed professionals PC can hire non-professionals to do other services.
122
Is a professional in a PC liable for her own malpractice?
yes
123
Is a professional in a PC liable for other members' malpractice or for business expenses?
no. this is why this is better than a partnership
124
Rules of operation and formation for a PC are what?
the same as for a regular corporation
125
Are shareholders liable for the acts or debts of the corporation?
no--even if there is only one shareholder in the corporation
126
When can a shareholder be liable for corporate acts or debts?
Pierces the veil--can only happen in a close corporation.
127
What is the test for piercing the veil?
1. Shareholders abuse the privilege of incorporating; 2. Fairness requires that they may be held personally liable. PURPOSE: to avoid fraud or unfairness
128
Piercing the veil: Alter ego
Although shareholders are not liable for acts or debts of a corporation, a court may pierce the veil if the shareholder's failure to respect the separate corporate entity harmed creditors. 2 parts of the test: 1. Did a shareholder abuse the corporation? Yes if the shareholder treated corporate assets as his own. 2. Would it be unfair for the shareholder to have limited liability? Yes, if the shareholder's conduct resulted in creditors being unpaid. Only the shareholder who abused the corporate form would be liable.
129
Piercing the veil: Undercapitalization
A court might pierce the veil when a corporation is undercapitalized when formed because they failed to invest enough to cover prospective liabilities. (Insurance will cover liabilities.)
130
When may courts be more willing to pierce the veil?
For a tort victim than for a contract claimant.
131
When can a corporation be liable upon piercing the corporate veil?
When a corporate is a shareholder--such as a parent corporation.
132
What is a derivative suit?
Shareholder is suing to enforce the CORPORATION'S claim. Not her own personal claim. For some reason, the corporation did not sue, so a shareholder steps in to vindicate the corporate claim. Always ask, "Could the corporation has brought this suit." If they could have, then it is a derivative suit.
133
A breach of duty of care owed by a director or officers is a duty owed to whom?
The corporation. Not the shareholders. Therefore, a suit would be a derivative suit.
134
Who gets the money from a judgment in a derivative suit?
The corporation.
135
What does the shareholder plaintiff receive for bringing a derivative suit?
Costs and attorney's fees, usually recovered from the corporation.
136
If the shareholder loses a derivative suit, what are the risks to the shareholder?
Cannot recover costs and attorney's fees? May be liable to the defendant for costs and attorney's fees if the suit was brought without reasonable cause or in bad faith.
137
Can other shareholders later sue the same defendants on the same transaction?
No. Barred by claim preclusion--that claim has already been asserted because regardless of what shareholder brings the suit, it is still the corporation's claim and it has already been brought even though the first shareholder may have lost.
138
What are the requirements for bringing a shareholder derivative suit?
1. Stock ownership (person bringing suit must have owned stock at the time the claim arose or have gotten it by operation of law from someone who did AND must own stock throughout the litigation; 2. Must fairly and adequately represent the interests of the shareholders; 3. Must also make a written demand on directors that the corporation bring suit; 4. Plaintiff must plead with particularity her efforts to get the corporation to sue or, alternatively, why the demand was futile; 5. If the shareholder bringing the derivative suit owns less than 5% of any class of stock, the corporation can demand that she post security for costs (unless the stock she owns has a fair market value of over $200K); 6. Corporation must be joined as a defendant because it did not bring the claim itself.
139
What does it mean to get stock by operation of law?
Inheritance and divorce decree.
140
When is demand on directors that the corporation bring suit excused for the purposes of a derivative suit?
Demand is excused only if it would be futile to make the demand. In Pennsylvania that means plaintiff makes a specific showing that irreparable injury to the corporation would result if demand were made. This is where the suit would be against the sitting the directors because they breached the duty of care or loyalty or both.
141
Can the parties settle or dismiss a derivative suit?
Only with court approval. Just like a class action. Court may give notice to the shareholders and seek feedback on whether to approve.
142
What are the rules for a corporation to move to dismiss the derivative suit?
Motion must be based upon investigation by disinterested directors. The court will dismiss if these disinterested directors determined in good faith that suit is not in the company's best interest. The court will scrutinize the decision carefully, and will consider things like whether the board was truly disinterested, assisted by counsel, and conducted an adequate investigation.
143
Shareholder voting: who votes?
The record shareholder as of the record date has a right to vote.
144
Record shareholder is who?
The person shown as the owner in the corporate records.
145
What is the record date?
The record date is a voter eligibility cut-off, not more than 90 days before the meeting.
146
What are exceptions to the rule that record owner on record date votes:
1. Treasury stock: corporation reacquires some of its stock before the record date. Does it vote this "treasury stock?" No. 2. Death of a shareholder--executor can vote the shares.
147
What is a proxy?
A writing, signed by record shareholder, authorizing another to vote the shares. It is good for 3 years. It is revocable--revoked when notice is given to corporate secretary in writing or by electronic transmission or by attending the meeting and voting. Revocation of the proxy only revoked upon death of the shareholder when written notice of death is given to the corporate secretary.
148
Can a shareholder revoke a proxy when the proxy says it is irrevocable?
Yes.
149
When is a proxy irrevocable?
When the proxy says it is irrevocable AND the proxyholder has some interest in the shares other than voting. For example, if shareholder sells shares after the record date, then can create an irrevocable proxy because the new share owner has an interest. But the interest doesn't have to be ownership.
150
Requirements for voting trust:
1. written trust agreement controlling how the shares will be voted; 2. copy to corporation; 3. transfer legal title of shares to voting trustee; 4. original shareholders receive trust certificates and retain all shareholder rights except for voting.
151
Does the Business Corporation Law impose a time limit on voting trusts?
No, but trust law might under rules against perpetuities.
152
Requirements for voting (pooling) agreement:
1. Shareholders can enter into voting agreements as long as they have a contract. The contract is enforceable. (So in Pennsylvania you don't have to mess with a voting trust which is more complicated because you have to set up a trust.)
153
What two ways can shareholders have to take a valid corporate act?
1. file with corporation a unanimous written consent of the holders of all voting shares to act without a meeting (includes email print-out), or 2. a meeting that satisfies quorum and voting rules.
154
What are the two types of meetings of shareholders?
1. Annual meeting; 2. Special meeting
155
What is the annual meeting?
Unless articles say otherwise, must be held. Date is usually set in the bylaws. If not held within six months of that date, a shareholder can call the meeting. Elect directors at annual meeting.
156
Who can call a special meeting of the shareholders?
1. the Board; 2. the holders of at least 20% of the voting shares; 3. someone else as provided in the articles.
157
Can you have a meeting on the internet?
Yes. As long as participants can hear or read the proceeding as they go on, can vote and pose questions to directors.
158
Who must preside over a shareholder meeting?
An officer.
159
Notice requirement for meetings:
must give written notice (includes fax or email printout if shareholder provided number or address to corporation) to every shareholder entitled to vote, for every meeting (annual or special).
160
What is the required contents of the notice for shareholder meeting?
Always must tell when and where. Notice of a special meeting also states the purpose of the meeting.
161
What is the consequence of failure to give proper notice to all shareholders entitle to vote?
Action taken at the meeting is void unless those not sent notice waive the notice defect.
162
How does waiver of notice defect occur?
1. Express: in writing and signed any time; 2. Implied: attend the meeting without objection.
163
Quorum for shareholder meeting?
Determination of a quorum focuses on the number of shares represented, not the number of shareholders. Generally a quorum requires a majority of outstanding shares.
164
If the quorum requirement is met, an action requires what?
a majority of shares actually cast on the particular issue, not necessarily a majority of all shares present.
165
How and when do shareholders use cumulative voting?
Only available when shareholders are electing directors. It is a device to give small shareholders a better chance of electing someone to the Board. Multiple number of shares times number of directors to be elected. Cumulative voting exists unless the articles say no.
166
Stock transfer restrictions can be established how?
In articles, bylaws, or by shareholder agreement. Example: right of first refusal--must first offer sale of stock to corporation.
167
When are stock transfer restrictions upheld?
Are reasonable under the circumstances--not an undue restraint on alienation.
168
Is the stock transfer restrictions enforceable against the transferee?
Even if the restriction is reasonable and thus valid, it cannot be invoked against the transferee unless either (a) it is conspicuously noted on the stock certificate or (b) the transferee had actual knowledge of the restriction.
169
Who has standing to demand access (during regular business hours) to share register, books and records of account, records of proceedings of incorporators, shareholders, and directors?
Under the Pennsylvania Business Corporation Law, any shareholder. Under the common law, each shareholder also has a right to inspect that probably covers a broader array of documents.
170
What is the procedure for a shareholder to inspect?
Verified written demand stating a proper purpose--related to your interest as a shareholder. This can be hostile to management. Shareholders can and do hire and fire directors. (not officers)
171
If the corporation does not allow proper inspection what can happen?
The shareholder can seek a court order. If she wins she can recover costs and attorney's fees incurred in seeking that order. The burden is on the corporation to show the shareholder's purpose is improper.
172
What if a director wants to inspect the books and records?
The director has a right of access to all books and records without having to make a showing as required by shareholders.
173
What are distributions?
Payments to shareholders: 1. dividend; 2. repurchase shareholder's stock; 3. to redeem stock (redemption is a forced sale to corporation at price set in articles).
174
Distributions are at whose discretion?
The board's. Suits to force distribution must make a strong showing abuse of discretion. Example: corporation consistently makes profits and the Board refuses to declare distribution while paying themselves a bonus.
175
What are preferred shares?
Means they are paid first.
176
What are preferred participating shares?
Means paid first then paid again.
177
What are preferred shares that are cumulative?
A cumulative dividend accrues year to year. So a preferred share that is cumulative gets paid first and gets paid the cumulative dividends.
178
What is the rule on limitations on distribution?
The corporation can make a distribution even though it lost money last year, but a corporation cannot make a distribution if it is insolvent or if the distribution would render it insolvent.
179
What does insolvent mean?
Either 1. Equity Test: Unable to meet corporate debts as they come due. 2. Balance sheet test for insolvency: Total assets are less than total liabilities (and liabilities include preferential liquidation rights if the corporation dissolved today.)
180
When are directors liable for unlawful distributions?
When made intentionally or in breach of their duty of care. Not strict liability like in many states. Remember the director's defense of good faith reliance.
181
Can shareholders be liable for unlawful distributions?
Only if they knew they were unlawful when they received it.
182
What are the characteristics of fundamental corporate changes?
1. Unusual occurrences, so they require Board action AND notice to shareholders AND approval by a majority of the shares actually cast on the issue; 2. Generally must notify Pennsylvania Department of State.
183
With regard to fundamental corporate change, what should you watch for?
Possibility of dissenting shareholder's right of appraisal.
184
What is right of appraisal?
The right to force the corporation to buy your stock at fair value.
185
When will a shareholder have a dissenting shareholder's right of appraisal?
1. Merging; 2. Consolidating; 3. Transferring substantially all of the assets; 4. Shares are being acquired in a share exchange.
186
When is there NO right of appraisal?
If the stock is listed on a national exchange or if there are more than 2000 shareholders. So the right of appraisal really only comes up in close corporations.
187
Is the right of appraisal your exclusive remedy?
Yes, unless there is fraud or fundamental unfairness.
188
If there is a right of appraisal, how does a shareholder perfect it?
1. Before the shareholder vote, file with the corporation written notice of objection and intent to demand payment; 2. Abstain or vote against the proposed change; and 3. within 30 days after notice that the change was approved, make written demand to be bought out.
189
If the shareholder and the corporation cannot agree on fair value of the shares in a right of appraisal, what must happen?
The corporation petitions the court to determine the fair value of the shares.
190
Fundamental Change: Amendment of the Articles--how?
1. Board of directors action (or petition by at least 10% of the shares) and notice to shareholders; 2. Shareholder approval by majority of those that actually vote; 3. If approved, file amended articles with Department of State; 4. Are there dissenting shareholder rights of appraisal? No.
191
Fundamental Change: Mergers (B merges into A) or Consolidations (A and B form C)--how?
1. Board of director action for both corporations, and notice to shareholders; 2. Shareholder approval (usually both corporations): majority of shares that actually vote on the proposal; 3. No shareholder approval required if 80% or more owned subsidiary is merged into a parent corporation (this merger is called short form merger); 4. If it is approved, file articles of merger or consolidation with Dept. of State. 4. Right of appraisal exists for dissenting shareholders of both companies in a regular merger and a consolidation. In a short-form merger, the right only exists for the shareholders of the subsidiary.
192
What is the effect of merger or consolidation?
The surviving company succeeds to all rights and liabilities of the constituent companies (successor liability). Generally, successor cannot be liable for asbestos related liability of the acquired company in excess of the value of that corporation (as of the merger).
193
Fundamental Change: Transfer of all or substantially all of the assets not in the ordinary course of business (usually means a sale) or share exchange
These are fundamental changes only for the selling company--not for the buyer. In PA it is not a transfer of substantially all assets if the seller retains at least 25% of its revenues from continuing operations. 1. Board of directors action (both corporations); 2. Approval by transferring corporation's shareholders (only the seller not the buyer); 3. Dissenting shareholders of the selling corporation have rights of appraisal; 4. In the share exchange, the transferring corporation files articles of exchange with Dept of State, No filing requirement in transfer of assets. 5. Generally we do not expect successor liability in a transfer of assets because the selling corporation still exists so a creditor can sue it.
194
Fundamental Change: Dissolution--voluntary?
Just like everything else--board of director action and notice to shareholders and approval by a majority of the shares actually voting on the issue.
195
Fundamental Change: Dissolution--involuntary?
Involuntary dissolution is by court order. 1. Shareholder or director can petition because of fraudulent, illegal, or oppressive acts by director(s); waste of assets; or director deadlock that harms the company. Even if dissolution is not warranted, the court may appoint one or more custodians to run the corporation.
2. Creditor can petition because the corporation is insolvent and the creditor has an unsatisfied judgment against the corporation or the corporation admits the debt in writing.
196
Whenever you have a dissolution what happens?
The corporation remains in existence, but only for winding up: 1. gather all assets; 2. convert to cash; 3. pay creditors; 4. distribute remainder to shareholders pro rata by share unless there is a liquidation preference (be careful about being insolvent).
197
What are securities?
Investments
198
What are debt securities?
The investor lends capital to the corporation to be repaid (usually with interest) as specified in the agreement. Secured by corporate assets--bond. Unsecured--debenture. The debt holder is a creditor to the corporation.
199
What are equity securities?
Investor buys stock from the corporation, which generates capital for the business. What is the equity holder's relationship to the corporation? She is an owner not a creditor.
200
Federal Rule 10b-5:
Federal law prohibits fraud or misrepresentation in connection with the purchase or sale of any security (debt or equity).
201
Elements of 10b-5
Elements: 1. At some point the deal must use an "instrumentality of interstate commerce" (mail, telephone, or trade on a national exchange); 2. Type transactions: 1. Misrepresentation of material information; 2. Insider trading; 3. Tipping (insider passes along material inside information for a wrongful purpose. 3. Materiality: the misrepresentation or omission must concern a material fact--one a reasonable investor would consider important in making an investment decision. 4. Possible plaintiffs--very limited (SEC; private actions for damages by buyer or sellers of securities--can't just hold stock); 5. Possible defendants--any person (including entities); Scienter (intent to deceive, manipulate, or defraud. Recklessness may suffice.); 6. Reliance (said to be a separate element as in fraud cases, but is presumed in public misrepresentation and nondisclosure cases.
202
What is insider trading?
Trading securities on the basis of material inside information. But this is only a problem for someone high enough in the business hierarchy that she has a duty to abstain or disclose. Somebody with a relationship of trust and confidence with the shareholders. Such insiders cannot trade on secrets. They have a duty to abstain or ensure disclosure s o everybody's on the same footing.
203
Tipper:
1. passed along material inside information in breach of a duty to corporation; 2. benefitted (can benefit by making a gift or enhancing reputation)
204
Tippee:
1. traded on the tip; 2. knew or should have known that the information was improperly passed.
205
If there is no tipper then what?
there is no tippee
206
Section 16B:
Aimed at speculation by 3 kinds of people: directors, officers, and ten percent shareholders. Strict liability. Federal law provides for recovery by a corporation for profits that are gained by certain insiders from buying or selling their own company's stock. Because this is the corporation's claim it can be raised by a derivative suit.
207
When does 16B apply?
Only reporting corporations: 1. listed on national exchange; 2. at least 500 shareholders and $10M in assets. Types of defendants: director (either when she bought or sold; 2. Officer: either when she bought or sold) or 3. Shareholder who owns more than 10% (both when she bought and sold). Short swing trading. All profits from such short swing trading are recoverable by the corporation. If within six months before or after a sale, if there is a purchase at a lower price there is a profit.
Key to this is to cut through the facts and focus on the sale and the timing.
