Corporations

Question 1

O’s powers

Answer 1

O’s auth to act may be actual or apparent
Express auth may be granted by stat, AOI, bylaws, or board resolution, or such power may be implied
O may have apparent auth to act where corp “holds out” O as possessing auth - 3rd pty must reas rely on “holding out”

Question 2

Pre-incorporation K’s

Answer 2

Promoters act on behalf of corp not yet formed
Corp becomes liable when adopts K by
- express board resolution or
- implied ratification thru knowledge and acceptance of benefits
Promoters remain liable until there’s been a novation - agmt betw promoter, corp and 3rd pty that corp will replace promoter under the K

Question 3

Subscribers

Answer 3

Persons/entities who make written offers to buy stock from corp not yet formed
Pre-incorporation subscription offer to buy stock is irrevocable for 6 months

Question 4

Promoters

Answer 4

FD’s of each other and corp and can’t make a secret profit on dealings w/ corp

• sale to corp of prop acquired by promoter before becoming a promoter - profit recoverable by corp only if sold more than FMV
• sale to corp of prop acquired by promoter after becoming a promoter - any profit recoverable by corp

Question 5

De jure corp

Answer 5

General purpose and perpetual duration presumed unless specific purpose and duration stated
Specific stmt of purpose and ultra vires rules

Question 6

Ultra vires

Answer 6

Beyond the scope of the AOI
K’s
- valid as to 3rd pty’s
- SH’s can seek an injunction to stop ultra vires act
- corp can recover losses caused by ultra vires acts of D’s/O’s

Question 7

De facto corp

Answer 7

Exists when organizers made a good faith, colorable attempt to comply w/ corp formalities and have no knowledge of the lack of corp status

Question 8

Corp by estoppel

Answer 8

1 who treats biz as a corp may be estopped from denying later that it’s a corp
Prevents improperly formed “corp” from avoiding liability by saying it wasn’t properly formed

Question 9

Limited liability

Answer 9

D’s/O’s/SH’s aren’t liable for what corp does

SH’s can only lose amt invested

Question 10

Corp is a separate legal person

Answer 10

Can sue and be sued, be a partner in a p/s, make charitable contributions, etc.
Double taxation - tax on profits, SH’s taxed on distribution

Question 11

S corp’s

Answer 11

Avoid having to pay income tax at corp level
No more than 100 SH’s, all of whom are US citizens and residents
Only 1 class of stock
Not publicly traded

Question 12

Bylaws

Answer 12

Not req, but usually do for internal governance purposes
Board adopts initial bylaws at an organizational meeting
SH’s, and in some st’s, the board, may amend or repeal the bylaws
If bylaws and AOI conflict, then AOI controls

Question 13

KSN for stock

Answer 13

Can be anything so long as board values it in good faith

Par value

Question 14

Preemptive rt’s

Answer 14

Rt of an existing SH to maintain same % of ownership by buying stock whenever there’s a new issuance of stock for cash
Must be provided for in AOI

Question 15

Stat req’s - D’s

Answer 15

Board must have at least 1 member
SH’s elect D’s at annual meeting
SH’s can remove w/ or w/o cause by maj of shares entitled to vote
Board vacancy may be filled by other D’s or SH’s - if SH’s created the vacancy by removing a D, SH’s generally must select the replacement

Question 16

Effective board axn

Answer 16

Board can only act in 1 of 2 ways

• unanimous agmt in writing or
• meeting

Question 17

Meeting

Answer 17

No notice req for regular meetings
Notice req for special meetings - must state time and place, doesn’t have to state purpose
Need quorum - must have maj of all D’s to take axn, unless a diff % req in bylaws
Maj of quorum wins - voting agmt’s and proxies aren’t allowed
Each D is presumed to have concurred in board axn unless dissent or abstention recorded in writing

Question 18

D’s duty to manage corp

Answer 18

Board manages biz of corp
Sets policy, supervises O’s, declares distributions, determines when stock will be issued, recommends fundamental corp changes to SH’s

Question 19

D’s may delegate

Answer 19

Mgmt functions to a committee of 1 or more D’s that recommends axn to the board - committees can’t fill board vacancies or declare dividends

Question 20

FD

Answer 20

Duty of care

Duty of loyalty

Question 21

Duty of care

Answer 21

D’s must perform in good faith in the best interest of the corp, exercising the care an ordinarily prudent person would use w/ regard to his own biz
BJR

Question 22

Business judgment rule - BJR

Answer 22

Duty of care - doesn’t apply to duty of loyalty
Presumption that D’s manage the corp in good faith and in the best interests of the corp and its SH’s
D isn’t liable
- a ct won’t 2nd guess a biz decision if
–> was informed - did board do appropriate homework before making the decision/analyze info/deliberate?
–> was made in good faith
–> made w/o COI, and
–> had a rational basis

Question 23

Duty of loyalty

Answer 23

D must not rec an unfair benefit to the detriment of the corp or its SH’s, unless there has been material disclosure and independent ratification
Self-dealing
D can’t compete w/ the corp
Corp opportunity doctrine

Question 24

Self-dealing - interested D transaxn

Answer 24

D breaches his duty of loyalty when he rec’s an unfair benefit for himself (or relative, or another of his biz’s) in a transaxn w/ the corp
OK if either
- fair to corp when entered into or
- if approved, after full disclosure of material facts, by a vote of the disinterested D’s or shares
Some ct’s req a showing of fairness even if disinterested D’s/shares approve
Remedy is rescission

Question 25

D can't compete w/ corp

Answer 25

Remedy is CT on profits

Question 26

Corp opportunity doctrine

Answer 26

D breaches his duty of loyalty when he rec's an unfair benefit by usurping for himself an opportunity which the corp would have pursued D can't take a corp opportunity until - tells board about it and - waits for board to reject Corp's financial inability to pay for opportunity isn't a defense Remedies are damages, CT or corp gets opportunity at cost

Question 27

Ratification

Answer 27

D's may defend a claim by obtaining independent ratification thru - maj vote of independent D's - there must be a quorum/maj of the board in order for board to act - maj vote of committee of at least 2 independent D's or - maj vote of shares held by independent SH's

Question 28

No indemnification allowed

Answer 28

Corp is barred from indemnifying when D is liable to corp or held to have rec'd an improper personal benefit

Question 29

Mandatory indemnification

Answer 29

Corp must indemnify D if successful in defending, on the merits or otherwise

Question 30

Permissive indemnification

Answer 30

Corp may indemnify for anything not satisfying no indemnification or mandatory indemnification - ex. case against D settles D must show that he acted in good faith w/ reas belief that his axn's were in the corp's best interests Disinterested D's/shares/independent legal counsel determine eligibility

Question 31

SH's

Answer 31

Don't manage the corp, board does Can run corp directly in a close corp Generally, aren't liable for acts/debts of corp

Question 32

Close corp

Answer 32

Small # of SH's Stock isn't publicly traded If no board, bc eliminated by SH's, then managing SH's owe FD's of care and loyalty to corp Controlling SH's owe FD's not to oppress each other, especially minority SH's - can't sell control to looters - w/o reas investigation of the B - if there's oppression, a harmed minority SH can sue the controlling SH who oppressed her - minority SH's have no way out bc there's no mkt for stock

Question 33

Piercing the corp veil

Answer 33

Only in close corp's Done in order to avoid fraud or unfairness Holds SH's personally liable bc SH's abused privilege of incorporating and fairness req holding them liable Alter ego theory Undercapitalization Fraud More likely to be done for tort victim than for K victim

Question 34

Alter ego theory

Answer 34

Corp veil may be pierced when there's a failure to observe suff corp formalities

Question 35

Undercapitalization

Answer 35

Corp veil may be pierced when there's a failure to maintain suff funds to cover foreseeable liabilities

Question 36

Fraud

Answer 36

Corp veil may be pierced when nec to prevent fraud or prevent an individual from using the corp to avoid existing personal obligations

Question 37

Derivative suits

Answer 37

SH sues to enforce corp's c/a, not his own - ask - could corp have brought this suit? if so, then prob derivative, if not, then prob direct 1. contemporaneous stock owner 2. adequate rep'n of corp's interest 3. written demand - may not need to demand if it would be futile Remedy goes to corp, not SH

Question 38

Direct suits

Answer 38

SH enforcing SH rt's | Remedy goes to SH, not corp

Question 39

Annual meeting

Answer 39

Must be properly noticed Elect D's If none held in 15 mnths, SH can petition ct to order meeting

Question 40

Special meeting

Answer 40

Called by board, pres or 10% SH's Vote only on proposals or fundamental corp changes Notice - state time and place, must contain special purpose or else not heard

Question 41

Effective SH axn

Answer 41

Quorum nec | Quorum req maj of outstanding shares when meeting begins, UOA provided in AOI

Question 42

Proxies

Answer 42

1. written 2. signed by record SH 3. directed to corp secretary 4. auth another to vote Valid for 11 mnths Revocable unless conspicuously made irrevocable and coupled w/ an interest

Question 43

Pooling agmt's

Answer 43

Written agmt to vote shares as req in agmt Binding and enforceable No time limit

Question 44

Voting trusts

Answer 44

Formal written agmt delegating voting power to a ttee On file Expires in 10 yrs Cumulative voting - multiply # of shares X # of D's to be elected, must be granted in AOI

Question 45

Dividends

Answer 45

SH's have no rt to dividends

Question 46

Inspection rt's

Answer 46

SH's may only inspect records, books, SH lists, etc. | Any SH shall have access upon notice and at proper times

Question 47

SH liabilities

Answer 47

SH's generally aren't liable for corp obligations Exceptions - PCV - controlling SH's owe FD's to minority SH's - controlling SH's liable for selling corp to a looter, unless reas measures were taken to investigate

Question 48

Fundamental corp changes

Answer 48

Extraordinary, so board can't do them alone - mergers, sale of assets, amendment of AOI, dissolution and liquidation - board axn adopting resolution of fundamental change - board submits proposal to SH's w/ written notice - must get SH approval - maj of SH's entitled to vote

Question 49

Dissenting SH rt of appraisal - fundamental corp changes

Answer 49

Rt to force corp to buy stock for fair value Triggered by - merger or consolidation, xfer of substantially all assets not in the ordinary course of the biz, or xfer of shares in a share exchange Not available if stock is listed on nat'l exchange or has more than 2K SH's - rt only exists in close corp SH's only remedy for these changes, absent fraud

Question 50

Mergers

Answer 50

Surviving corp succeeds to all rt's and liabilities of the constituents - successor liability

Question 51

Sale of assets

Answer 51

If sale, lease or exchange of substantially all of the corp assets is outside the ordinary course of biz, then maj of D's and maj of shares entitled to vote must approve - fundamental corp change for selling corp only - appraisal rt's for selling corp only

Question 52

Amendment of AOI

Answer 52

Board axn and notice to SH's SH approval - maj of shares entitled to vote No SH rt's of appraisal

Question 53

Voluntary dissolution and liquidation

Answer 53

Board axn and approval by maj of shares entitled to vote Corp stays in existence to wind up Notify creditors so they can make claims

Question 54

Involuntary dissolution and liquidation

Answer 54

Ct order SH can petition bc of - D abuse, waste of assets, misconduct - D deadlock that harms the corp or - SH's have failed at 2 consecutive annual meetings to fill a vacant board position Alternatively, ct might order buyout of objecting SH, especially in a close corp

Question 55

Wind up/liquidate

Answer 55

Gathering all assets Converting to cash Paying creditors Distributing remainder to SH's, pro rata unless there's a liquidation preference

Question 56

Fraud

Answer 56

``` False stmt Material fact Scienter - intent to deceive Reliance Damages ```

Question 57

Misrepresentation

Answer 57

``` Misrep'n by ∆ Scienter - intent to deceive Intent to induce reliance on misrep'n Causation Justifiable reliance Damages ```

Question 58

10b5

Answer 58

Private π must show 1. fraudulent conduct - false stmt or omission to state a material fact 2. materiality - something a reas investor would consider imp in making a decision to buy or sell 3. scienter - pty must have knowledge that stmt was false or have an intent to deceive 4. in connection w/ purchase or sale 5. in IC - using phone, mail or some other instrumentality in IC 6. reliance 7. damages

Question 59

Insider trading - 10b5

Answer 59

1. person must be an insider 2. purchase/sale of stock in IC 3. based on non-public info

Question 60

Tipper liability - 10b5

Answer 60

If an insider gives a tip of inside info to someone else who trades on the basis of the inside info, tipper can be liable under 10b5 1. tipper must be an insider or w/ FD obligation to corp 2. tipper must have an improper purpose 3. tipper must rec some personal gain - $ or reputation or giving a gift

Question 61

Tippee liability - 10b5

Answer 61

1. tipper breached 2. tippee knew that tipper breached 3. purchase/sale in IC by tippee

Question 62

Misappropriation

Answer 62

Brought by gov't 1. misappropriated info from any source 2. in breach of duty of trust and confidence owed to the source of the info

Question 63

16b

Answer 63

Derivative claim 1. large corp - traded on nat'l exchange or 500+ SH's and $10M in assets 2. ∆ is O, D, or 10% SH's (before and after sale) 3. purchase and sale of stock w/in 6 mnth period - highest sales are matched w/ lowest purchases No defense