Corporations

Question 1

Articles of Incorporation

Answer 1

1. Name of corporation, cannot be similar to existing corporation.
2. Number of authorized shares
3. Also must include name and address of incorporated and registered agent.

Look for clause limiting corporation’s purpose, activities beyond the scope of purpose are ultra vires and may be enjoined or directors held liable for authorizing such acts.

Question 2

When does corp existence begin?

Answer 2

1. When articles filed by state.
2. Promoters generally liable for preincorporation K’s. Liability continues even after corp formed absent a novation. Corp does not become liable unless it adopts.

Question 3

What if there are defects in formation?

Answer 3

1A person who purports to act on behalf of a corporation knowing there was no valid incorporation is personally liable. Except:

1. No liability if a defecto corp: (i) colorable compliance with incorp statute; and (ii) exercise corp privileges.
2. No liability if a corporation by estoppel, people treating business as valid corporation are estopped from denying corporation’s existence.
3. Where no corporation recognized, only those who acted on behalf of the business will be held liable; passive investors not liable.

Question 4

Piercing the Corporate Veil

Answer 4

Theory 1: Alter Ego: Harm caused to third party because: (i) owners do not treat corp as separate entity; (ii) commingle personal and corp assets; (iii) use corp assets for personal purposes; and (iv) owners do not observe corp formalities or hold meetings. Parent and sub corps can be held liable FOR this.

Theory 2: Inadequate capitalization at inception. Corp must start with sufficient unencumbered capital to meet its prospective liabilities.

Theory 3: Fraud: Cannot be formed to avoid existing liabilities, but can be formed to limit future liabilities.

If pierced, generally: (i) only active shareholders liable; and (ii) only liable for tort obligations.

Question 5

Capitalization of Corps

Answer 5

1. Authorized but unissued shares
2. Issued and outstanding
3. Treasury shares, now called 1.

Preincorporation subscription agreements are irrevocable for 6 months.

Consideration for shares:

Acceptable Form:

1. Under Model Business Corporations Act (“MBCA”) any benefit to Corp.
2. Traditionally only cash, property, or services already performed.

Acceptable Amount:

1. Under MBC amount set by directors, and their good faith valuation, is conclusive.
2. Traditionally not less than par value.

Question 6

Shareholders: Voting

Answer 6

Generally SH do not run C on a day to day basis, except in closely held corps where they may dispense with a board by SHA and run C through a different scheme.

SH indirectly control the corp by electing directors, amending bylaws, and approving fundamental changes.

Question 7

Record Shareholders and Notice of Meeting

Answer 7

1. Shareholders of record on the record date have the right to vote at the annual meeting to elect directors and regarding fundamental corp changes.
2. Notice of meetings must be given to the SH as follows: Annual meeting, date time, location; Special meeting, date, time, location, and purpose. Improper notice: action taken at meeting can be nullified, or waived by attending without complaint.

Question 8

Proxies

Answer 8

CA Law:

Written proxies valid for 11 months

Generally revocable unless they specifically provide otherwise and are coupled with an interest

May be revoked by attendance or later appointment.

Federal Law:

Proxy solicitations must fully and faithfully disclose all material facts
Prohibits material misstatements and fraud in connection with proxy solicitation
Materiality, a reasonable SH would consider it important in deciding how to vote.

Question 9

Quorum

Answer 9

Generally majority of outstanding voting shares for a valid vote. Once quorum reached, SH leaving does not invalidate quorum.

Question 10

Approval

Answer 10

MBCA: if quorum present, action approved if votes cast in favor exceed votes cast against

Cumulative voting for directors:

1. MBCA allows articles to provide for cumulative voting.
2. Cumulative voting is automatic in some states.
3. Mechanics SH can vote shares owned multiplied by the number of directors being elected, can cast all votes for one candidate or split.

Question 11

Shareholder Agreements

Answer 11

1. Voting Trusts: SH transfer share ownership to a trustee who votes shares as agreed.
2. SH management agreements: used in small corporations
3. Share transfer restrictions. Restrictions must be reasonable and conspicuous.

Question 12

Inspection Rights

Answer 12

Limited: books, papers, accounting, records. Available with five days written notice, and proper purpose (related to SH rights).

Unlimited: articles and bylaws, minutes of SH meeting, names and addresses of current directors, and recent annual reports.

Question 13

Preemptive Right

Answer 13

Right to purchase shares to maintain proportionate ownership interest.

1. Exists only if provided for.
2. If provided for, does not apply to:

Shares for comp
Shares issued within 6 months of incorp
Shares issued for consideration other than money
Nonvoting shares with a distribution preference

Question 14

Shareholder Suits

Answer 14

1. Direct suit is to enforce right of SH. Recovery to SH.
2. Derivative suit is to enforce right of the Corp. Elements: Must have owned shares at time of wrong, must maintain ownership throughout suit, and must make a demand on the board to bring suit. Recovery to corp.

Derivative suit may be dismissed upon showing that a majority of disinterested with no personal interest determine in good faith that suit is not in best interests of corp.

Question 15

Distributions

Answer 15

Dividends or liquidity assets. No right to receive unless/until declared by board.

1. Insolvency limitation: May not pay if C unable to pay debts as they become due OR if total assets less than total liabilities.
2. Preferences: Pref shares may have preferences. Cumulative (accumulates until paid), Cumulative if earned (accumulates only if profits were sufficient to pay pref), Participating (preference and a share of the distribution made to common SH).
3. Director liability:

(i) D who votes for unlawful distribution is personally liable for the excess
(ii) D may seek contribution from other directors who voted for distribution
(iii) D may recover from a shareholder who received a distribution knowing it was unlawful; and
(iv) Good faith defense, may rely on accountants or reliable officers and employees who indicate distribution is lawful.

Question 16

Shareholder Liability

Answer 16

Generally not liability, not fiduciaries, may act in self-interest. Exception where there is a controlling SH, cannot use control to obtain special advantage at expense of minority SH’s.

Question 17

Directors: Voting/Meetings

Answer 17

Meetings:

(i) D must attend in person (no proxies) or thrrough telecommunications equipment of all participating directors can simultaneously hear each other.
(ii) No particular notice required for regular meetings
(iii) special meetings typically require two days notice of date, time, and place (but not purpose)
(iv) quorum of directors must be present at time vote is taken
(v) approval of action requires affirmative vote of a majority of the directors present.

Question 18

Business Judgment Rule

Answer 18

Protects directors from personal liability to corporations/shareholder.

1. Director must act in good faith
2. With care that an ordinarily prudent person in a like position would exercise, and
3. In a manner reasonably believed to be in the best interests of the corporation.

Question 19

Articles Limiting Director Liability

Answer 19

Articles may further limit or eliminate director personal liability to corporation or shareholders except:

1. To the extent D received improper benefit
2. For liability for unlawful distributions, or
3. For intentionally inflicted harms or criminal violations of law.

Question 20

Reasonable Reliance

Answer 20

Director may defend suits with a claim of reasonable reliance on opinions, reports, etc., prepared by experts or reliable employees.

Question 21

Waste

Answer 21

D duty to prevent corporate waste.

Question 22

Duty of Loyalty/SelfDealing

Answer 22

The D owes a duty of loyalty to the corporation and must avoid self-dealing without disclosure and approval. A transaction between a corporation and a director will NOT be set aside for self-dealing if:

1. Director discloses all material facts, and transaction was approved by disinterested directors or shareholders; or
2. It is fair to the corporation.

Question 23

Corporate Opportunity Doctrine

Answer 23

A D may not divert to himself a business opportunity within the corporation’s line of business without first giving the corporation an opportunity to act.

The remedy is recovery of D’s profits or forcing D to convey the opportunity to the corp.

Question 24

Indemnification

Answer 24

1. If a D is sued as a D and is successful, corp must indemnify for expenses.
2. If D is sued as a D and is unsuccessful corp has discretion to indemnify if D complied with BJR; except where found liable to corp or received an improper benefit, then you get nothing.
3. Corps may purchase liability insurance for D’s even if they would not be entitled to indemnification under the circumstances.

Question 25

Required Officers

Answer 25

1. MBCA does not require any particular officers. Officers as described in bylaws or appointed by directors.
2. Some states require a President and a Sec.
3. Person can hold more than one office.

Question 26

Appointment and Removal, Authority, Liabilities and Indemnification

Answer 26

1. Officers appointed by board, may be removed by board, and if removal is breach of K then they can get damages.
2. Officers have the ACTUAL authority given to them by the Board, and the APPARENT authority of what their position normally allows.
3. Officers owe corp duties similar to those of D, and have right of indemnification similar to that of D.

Question 27

Types of Fundamental Corporate Change (FCC)

Answer 27

Amendment to articles
Mergers
Consolidations
Share exchanges
Disposition of substantially all assets outside regular course of business (business sale)

Question 28

General Procedure for FCC

Answer 28

1. Board Resolution
2. Notice to SH
3. SH approval/consent.
4. Articles consistent with the FCC filed with the state.

Question 29

Merger of Corporations

Answer 29

Generally must be approved by directors and SH of both corps, except for parent-subsidiary mergers where the rights of survivor SH not significantly affected.

Question 30

Dissenters’ Appraisal Remedy

Answer 30

SH who do not like the FCC may force corp to purchase their shares at a fair price if they:

1. Give corp notice of intent to demand appraisal rights BEFORE vote is taken
2. Do not vote in favor of the FCC
3. Demand payment after the FCC is approved.

Question 31

Tender Offer/Williams Act

Answer 31

(a) If a bidder makes a tender offer, and the offer will result in the bidder obtaining more than 5% of a class of securities of the target, the bidder must file a schedule 14D
(b) Schedule 14D contains extensive disclosure regarding the bidder’s identity, source of funds, past dealings with the target, and plans concerning the target
(c. ) Offer must be open for at least 20 days and must be open to all members of the class of securities sought
(d. ) Shareholders must be permitted to withdraw tendered shares while the offer remains open
(e. ) If the offer is oversubscribed, the bidder must purchase on a pro rata basis from among the shares deposited during the first 10 days of the offer

f. If the offer price is increased, the higher price must be paid to all tendering
shareholders

g. The management of the target must either (1) give its shareholders a recommendation concerning the offer, with a statement of reasons, or (2) explain why it cannot make a recommendation
h. Act also prohibits any false or misleading statements or omissions in connection with the offer

Question 32

Control Share Acquisition Statutes

Answer 32

State law provides that if a designated stock ownership threshold is crossed, the shares so purchased will not have voting rights unless the holders of a majority of the disinterested shares vote to grant voting rights in the acquired shares.

Must be limited to corporations or transactions having a significant connection to the regulating state.

Question 33

Voluntary Dissolution

Answer 33

If shares have not yet been issued or business has not yet commenced a majority of the incorporators or initial directors may dissolve corporation by delivering articles of dissolution to the state.

After shares have been issued corporation may dissolve by a corporate act approved under the FCC procedure.

Question 34

Effect of Dissolution

Answer 34

1. Corp existence continues
2. Corp not allowed to carry on business except winding up and liquidating affairs.
3. Claim may be asserted against a dissolved corp, even if it does not arise until after dissolution, to the extent of the corps undistributed assets:

(i) if assets have been distributed to SH, a claim can be asserted against each SH for a pro rata share of the claim, to the extent of the assets distributed to the SH
(ii) A corp can cut short the time for bringing known claims by notifying claimants of a filing deadline.
(iii) Unknown claims can be limited to five years by publishing notice of the dissolution in a newspaper in the county where the corp’s known place of business is located.

Question 35

Administrative Dissolution

Answer 35

State may bring an action to admin dissolve the corp for reasons such as the failure to pay fees or penalties, failure to file an annual report, and failure to maintain a registered agent in the state.

Question 36

Judicial Dissolution

Answer 36

1. AG may seek it on grounds that corp fraudulent obtained its articles or that it is exceeding or abusing its authority.
2. SH may seek it if:
   (i) D are deadlocked in the management of corp and SH unable to break deadlock and irreparable injury to corp is threatened, or corp affairs cannot be conducted to advantage of SH as a result of the deadlock;
   (ii) the D have acted or will act in a manner that is illegal, oppressive, or fraudulent;
   (iii) the SH are deadlocked in voting power and have failed to elect one or more directors for a period of time that includes two consecutive annual meeting dates; OR
   (iv) corp assets being wasted, misapplied, or diverted for non corp purposes.
3. Creditors may seek it if:
   (i) Corp has admitted in writing that the creditor’s claim is due and the corp is insolvent; or
   (ii) the creditor’s claim is now a judgment, execution of the judgment has been returned unsatisfied, and corp is insolvent.

Question 37

Rule 10b-5 Overview

Answer 37

Makes it illegal for any person:

1. To use any means or instrumentality of interstate commerce
2. In connection with the purchase or sale of any security
3. To employ any scheme to defraud, make any untrue statement of material fact (or omit a material fact), or engage in any practice that operates as a fraud.

Question 38

Rule 16(b) Overview

Answer 38

1. Requires surrender to the corporation of any profit realized by any director, officer, or shareholder owning more than 10% of a class of the corporation’s stock from the purchase and sale, or sale and purchase, of any equity security within a six month period.
2. Applies to publicly held corporations.
3. Profit is determined by matching highest sales price against the lowest sales price.

Question 39

Sarbanes Oxley

Answer 39

1. Applies to companies (1) with more than $10 million in assets and 2,000 or more shareholders (or 500 shareholders who are not accredited investors) in any outstanding class or (2) whose shares are traded on a national exchange
2. Requires covered companies to establish an audit committee of board members which:

a. Oversees work performed by the registered public accounting firm
b. Establishes internal procedures for receiving and handling complaints about the company’s accounting, internal accounting controls, and auditing procedures

3. The CEO, CFO, or similar person of covered companies must certify in each report, among other things, that:
   a. The officer has reviewed the report;

b. Based on the officer’s knowledge, the report is true and does not contain any
material omissions; and

c. The signing officer is responsible for establishing internal controls, has designed such controls to ensure that material information is made known to the officer, and has evaluated the controls within 90 days prior to the report
4. If a company is required to restate financial reports because of misconduct with respect to the reports, the company’s CEO and CFO must reimburse the company for any bonus or other incentive-based compensation received by them during the 12-month period after the inaccurate reports were filed with the SEC or made public
5. SOX generally prohibits covered companies from making any personal loans to directors and executive officers
6. SOX provides that the statute of limitations for private cases of securities fraud is the later of two years after discovery of the facts giving rise to the cause of action or five years after the action accrued