Corporations Flashcards
(102 cards)
1
Q
What does it take to form a corporation?
A
- People
- Paper
- Act
2
Q
What’s included in the “people” requirement for corporation formation?
A
People are AKA incorporators.
Must have one or more. Can be entity (XYZ Inc.) or a person
An incorporator executes the articles and delivers them to the Secretary of State.
3
Q
What is included in the “paper” requirement for corporation formation (Articles of Incorporation)?
A
Articles are a contract between:
- corporation and shareholders
- corporation and the state
Information in articles taht are required:
- Name and addresses (corporate name, including magic words: corporation, company, incorporated, limited)
- Name and address of each incorporator
- Name and dadress of each initial director
- Name of registered agent and address of registered office (registered agent is the company’s legal rep, so can receive service of process for corporation).
- Statement of purpose
- Stock information re: capital structure (authorized stock, number of shares per class, and info on voting rights and preferences of each class)
4
Q
What is the duration of a corporation if there is no statement re: duration in the articles of incorporation?
A
It was perpetual existence.
5
Q
What is the required statement of purpose within articles of incorporation?
A
In some states, general purpose is presumed and the articles need not say anything about corporation purpose.
They can indicate that the purpose is to “engage in all lawful activity, after first obtaining necessary state agency approval.”
6
Q
What is the ultra vires rule re: a corporation’s purpose?
A
If there is a specific statement of purpose, a failure to adhere to that purpose (or going beyond the scope of the articles.
Impact:
At common law, voided beyond the corporation’s explicitly stated capacity.
Today: ultra vires contracts are valid. Shareholders can seek an injunction. Responsible managers are liable to the stock corporation for losses.
7
Q
What is authorized stock?
A
Max number of shares the corporation can sell
8
Q
What is issued stock?
A
Number of shares the corporation actually sells
9
Q
What is outstanding stock?
A
Shares that have been issued and not reacquired.
10
Q
What information about capital structure do the articles of incorporation need to include?
A
- Authorized stock (maximum number of shares the corp cal sell)
- Number of shares per class
- Info on voting rights/preferences of each class
11
Q
What is included within the “act” requirement of forming a corporation?
A
Incorporators must notarize the articles delivered to the Secretary of State and pay the required fees.
If the Sec of State’s office accepts the articles for filing, that is conclusive proof of valid formation. At that point, there is de jure corporation.
Next, board of directors holds an organizational meeting, where it selects officers/adopts bylaws, etc.
12
Q
Why does it matter that osmeone formed a corporation?
A
- Internal affairs are governed by the law of the state of organization (internal affairs rule)
- A corporation is a separate legal person with entity status. It can be sued, be a partner, make charitable contributions. It pays income tax on its profits and shareholders are taxed on its distributions (unless S corp, which doesn’t pay income tax at corporate level).
13
Q
What is an S Corporation?
A
No more than 100 shareholders, all of whom are human and US citizens/residents. THis is a class of stock. Isn’t publicly traded.
If you have an S corp, will not be required to pay income tax at the corporate level (but shareholders will still be taxed on distributions)
14
Q
Who holds liability within a corporation?
A
Directors/officers/shareholders (owners) are not liable for what entity does.
A corporation is “limited liability,” which means that shareholders are generally liable only for the price of their stock. Generally, the corporation itself is liable for what the corporation does.
15
Q
Who would assert de facto corporation/corporation by estoppel?
A
proprietors failed to form a de jure corporation, so they will be personally liable for what the business does (because it’s just a partnership). Under these doctrines, the business is treated as a corporation, so shareholders are not liable for what the business did. Anyone asserting either doctrine must be unaware of failure to form de jure corporation.
16
Q
What are the requirements for a De Facto Corporation (DCF)?
A
Abolished in most states
- Relevant incorporation statute (always met)
- Parties made good faith, colorable effort to comply with statute
- Some exercises of corporate privilege (acting like they have corporation)
If these are met, business is treated as a corp for all purposes, except in actions by the state (b/c that would be quo warranto)
17
Q
What is a corporation by estoppel?
A
Abolished in most states One who treats a business as a corp may be estopped from deying that it is a corp.
It prevents an improperly-formed corporation from avoiding liability by saying it was improperly formed.
Applies only in contract and not in tort.
18
Q
What are bylaws?
A
Not a condition precedent to forming a corp, but usually exist for internal governance.
Aren’t filed with the state, they are internal.
The board adopts them at the organizational meeting.
Shareholders can amend or repeal the bylaws of the corp, but in many states the board also can.
19
Q
Who wins, in a conflict between bylaws and articles of incorporation?
A
Articles, because they are a contract with the state and are therefore more important.
20
Q
What is a pre-incorporation contract?
A
When a promoter, acting on behalf of a corp not yet formed, enteres into a contract on behalf of that contract.
21
Q
When will a promoter be liable on a pre-incorporation contract?
A
Unless the K says otherwise, promoter is liable on pre-incorporation Ks until there is a novation.
A novation is an agreement of the promoter, corp, and other K party that corporation replaces the promoter under the K.
Note: adoption makes the corporation ALSO liable, but does not relieve promoter, so both will be liable absent novation.
22
Q
What is a foreign corporation? When must they pay fees?
A
A foreign corporation transacting business in the state must qualify and pay prescribed fees.
Transacting business - regular course of intrastate (not interstate) business activity.
NOT occasional/sporadic activity. Doesn’t include simply owning property.
23
Q
What happens if a foreign corporation transacts business in a state without first qualifying?
A
Civil fine AND
Corporation cannot sue in the state (but it can be sued).
They can sue only once corporation qualifies and pays back fees and fines.
24
Q
How does a foreign corporation qualify in order to do business transactions in a state?
A
- Gives the required Articles of Incorporation information and proves good standing in its home state.
- Registered agent in this state
- Must pay fees here too
25
What is a stock issuance?
When a corporation sells its own stock. It is a way the corp can raise capital.
Note: it won't count if just an individual is issuing stock
26
What is a subscription?
A written offer to buy stock from the corporation.
Pre-incorporation subscriptions are irrevocable for 6 months, unless otherwise stated or all subscribers agree to let you revoke.
Post-incorporation subscriptions are revocable until accepted by corporation (board acceptance).
27
What must the corporation receive when it issues stock?
Consideration. (What must the corporation receive when it issues stock?)
Step 1: Form of consideration (definitely OK: money, tangible/intangible property, and services already performed by corporation)
- split authority whether these work or are "treated as unpaid stock/water" - promissory notes, future services
Step 2: Amount of consideration
- Par ("minimum issuance price"
- No par (no minimum, board sets)
- Treasury stock (stock the company issued and then acquired, board can set whatever price it wants)
28
Who sets the value of the property or services, for purposes of issuance?
The board. The board's valuation is conclusive if it acted in good faith.
29
Who is liable for an issuance involving "watered stock"?
Watered stock means that it was sold below par price.
Directors who sold are liable if they knowingly authorized the issuance (implied if they sold less than par)
Guy who bought is liable - charged with notice of par value.
If X transfers to third party, is only liable if knew about the water.
30
What are the preemptive rights in a stock issuance?
The rights 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 (note: NOT for property).
Split as to whether "new issuance" includes the issuance of treasury stock.
If articles are silent, split as to whether shareholder gets preemptive rights.
31
What are statutory requirements re: number of directors?
Adult natural person, 1 or more.
32
WHat are statutory requirements w/r/t directors?
Initial directors usually named in articles.
Thereafter, shareholders elect directors at annual meeting.
Entire board is elected each year unless there is a "staggered board." A staggered board is divided into halfs or thirds, with half or third elected each year. Staggered board is usually set in the articles.
33
Can shareholders remove directors before their terms expire?
Yes, generally requires majority of shares entitled to vote.
Shareholders can remove with or without cause.
Exception: if there is a staggered board, shareholders can only remove a director with cause.
34
Suppose there is a vacancy on the board. Who selects the interim director?
Board or shareholders.
But if the shareholders create vacancy by removing a director, the shareholders generally must select the replacement.
35
What are the two ways in which board of directors can act?
Either by unanimous agreement in writing or at a meeting (which must satisfy quorum and voting requirements).
If directors agree to a corporate act through the individual conversations without meeting or unanimous writing agreement, that act is void unless ratified by a valid act.
36
Are individual directs the agents of a corporation?
No. Individual directors have no authority to speak for or to bind the corporation.
Officers, on the other hand, are agents of the coprorations.
37
What are the requirements for notice re: a corporate board meeting?
Regular meeting: no notice required.
Special meeting: notice requird, and must state time and place. Failure to give required notice voids whatever happened at the meeting, unless the directors not notified waive the notice defect (in writing or attending the meeting without objecting).
38
Can directors set proxies or enter voting agreements?
No. Those are VOID, because directors owe the corporation a non-delegable fiduciary duty.
39
What is the quorum required for a meeting?
For any meeting, need quorum.
Unless bylaws say otherwise, quorum is a majority of all directors. If a quorum is present, passing a resolution (which is how a board takes action), requires only majority vote.
Quorum can be lost (broken) if people leave. Once quorum is no longer present, Board cannot take act at that meeting.
40
What is the general role of a corporate director?
Generally, they manage the business of a corporation by setting policy, supervising officers, delcaring distributions, determining when stock will be issued, recommending fundamental corporate changes to shareholders, etc.
The board can delegate to a committee of one or more directors, but a committee cannot declare dividends, set director compensation, or fill a board vacancy. The committee can recommend those things to the full board for its action.
41
What is the duty of care for a corporate director?
Burden on plaintiff.
Standard: director owes the corporation a duty of care. They must act in good faith and do what a prudent person would do w/r/t her own business.
42
What is breach of duty of care by nonfeasance?
Director does nothing. A prudent person would attend some meetings and do some work. Breach of duty of care if fails to.
But only liable if the breach caused an actual loss to the corporation (difficult to prove that company lost money only because of director's nonfeasance)
43
What is the breach of duty of care by directorial misfeasance?
Board does something that hurts the corp, causation will be clear. A directors' action caused a loss to the corporation. However, a director is not liable if she meets the business judgment rule.
The business judgment rule: prudent people do appropriate homework. If you did appropriate homework (deliberate, analyze), then will not be held liable. Under BJR, a court will not second-guess a business decision if it was in good faith, informed, had rational basis. Director is not a guarantor of success.
44
What is the corporate director's duty of loyalty?
Burden is on defendant.
A director owes the corporation a duty of loyalty. They must act in good faith and with reasonable belief that what she does is in the corporation's best interest.
Business judgment rule does not apply in a duty of loyalty case.
45
What is an interested director transaction, and what is the standard for the duty of loyalty thereunder?
Any deal between the corporation and one of its directors (or close relative of director), or another business of directors.
Standard: Interested director transaction will be set aside (or the director will be liable for damages), UNLESS the director shows either:
1. The deal was fair to the corporation when entered into, OR
2. Her interest and the relevant facts were disclosed or known, and the deal was approved by either
(a) majority of disinterested directors OR
(b) majority of interested shareholders.
However, even if the deal is approved by an appropriate group, some courts also require a showing of fairness.
Special quorum rule: in many states, interested directors themselves will count toward this quorum.
46
What is the duty of loyalty owed by directors within a competing venture?
The director cannot compete directly with her corporation, due to the fiduciary duty of loyalty she owes.
Remedy: constructive trust on any profits the director made.
47
What is the duty of loyalty owed by a director in a corporate opportunity (expectancy) situation?
Definition: something a corporation has an interest or expectancy in, or that was found on company time or with company resources.
Standard of care: A director cannot usurp a corporate opportunity. That means the director cannot take it until he
1. Tells the board about it, and
2. Waits for the board to reject the opportunity
Company's financial inability to pay for the opportunity is not generally a defense.
Remedy: if director has it, must sell it to the corporation at his cost. If sold at a profit, corporation gets the profit via constructive trust
48
When will directors be liable based on improper loans?
Sarbanes-Oxley Act (federal law) generally forbids loans to executives in large, publicly-traded (“registered”) 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
49
Which directors are liable for all these things that directors may be held liable for?
A director is presumed to concur with the board action unless her dissent or abstention is noted in writing in corporate records.
In writing means
(1) in the minutes,
(2) delivered in writing to the presiding order at the meeting, or
(3) written dissent to the corporation immediately after the reading
An oral dissent is not sufficient in and of itself; needs writing.
Cannot dissent if you voted for a resolution at the meeting
Exceptions:
1. An absent director is not liable for stuff done at meeting missed (home sick)
2. Good faith reliance on information (including financial info) presented by officer, employee, committee (of which director relying was not a member), or professional reasonably believed to be competent. Reliance must be in good faith (no good if you knew the person giving info was bobo)
50
To what duty of care/loyalty are officers held, and who are officers?
They owe the same duties of care and loyalty.
Officers are agents of the corporation, so apply agency law (with corporation as the principal). Whether an officer can bind a corporation is determined by whether it has agency to do so.
Ex. President generally has inherent authority to bind corporation to contracts in ordinary course of business.
51
What are the requirements for offices within a corporation?
Must have president, secretary, treasurer. Can have others, and one person can simultaneously hold multiple.
52
Officer selection and removal - discuss
Officers are selected and removed by the board, which also sets officer compensation.
So note: shareholders hire and fire directors, but the board hires and fires officers. Generally, shareholders do not hire and fire officers.
53
When may directors/officers seek corporate indemnification for litigation in which they have been sued in their corporate capacity, (by or on behalf of) the corporation?
No indemnifying allowed when:
- if the director/officer was held liable to the corporation, or
- held to have received an improper benefit.
Indemnification is mandatory if:
- D/O is successful in defending, on the merits or otherwise; or
- D/O wins a judgment
Permissive, if:
- Case against her settled, anything else happened.
- Eligibility standard: acted in good faith and with the reasonable belief that her actions were in the company's best interest (as determined by disinterested directors, shares, independent counsel).
N/w/s rules above, the court can order reimbursement if justified in view of all the circumstances.
If she was held liable to the corp, this is limited to costs and atty fees (can't include judgment).
54
In what ways can articles limit liability?
The articles can eliminate director (and in some states officer) liability to the corp for damages, but not for intentional misconduct, usurping corporate opportunities, unlawful distributions, or improper personal benefit.
Provisions CAN eliminate duty of care liability, but CAN'T eliminate duty of loyalty liability
55
Do shareholders get to manage the corporation?
Generally no, because the board manages.
Exception: shareholders can run the corporation directly in a close corporation (not mandatory). Can do so either in articles and approved by all shareholders OR by unanimous written shareholder agreement.
However, if the shareholders DO this and eliminate the board, duties of care and loyalty to corp are owed by managing shareholders.
56
What are the characteristics of a close corporation?
- Few shareholders
- Stock not publicly traded
courts note that a closed corporation functions like a partnership (with few owners, who usually work for the business). Because of this, they have applied partners’ fiduciary duties to each other into the close corporation. So shareholders in close corporations must treat each other with utmost good faith.
Ex. if there is oppression of minority shareholders, they can sue the controlling shareholders who oppress them for breach of this fiduciary duty. For example, the controlling shareholders might deny the minority and any voice in corporate affairs, fire them from employment, refuse to declare dividends, and refuse to buy the minority’s stock (so the minority is getting no return on investment).
Some courts let the minority shareholder sue here because the oppression thwarts HER legitimate goals for investing.
57
How can licensed professionals incorporate into a corporation?
Lawyers, medical professionals, CPAs, etc.
Professional corporation/professional association (name must have one)
Article: must state that the purpose is to practice in a particular profession.
58
What are the requirements in a professional corporation/professional association?
The directors, officers, and shareholders usually need to be licensed professionals.
PC may employ non-professionals, but not to practice the profession duh.
Professionals are personally liable for their malpractice, but shareholders are generally not liable for corporate obligations or other professionals' malpractice (creating an incentive for this over a partnership).
Generally, the rules governing regular corporations apply to the PC.
59
Can shareholders be held liable for the acts or debts of the corporation?
Generally no, because the corporation is liable for what it does, though shareholders may be personally liable for what the corporation did if the court "pierces the corporate veil." You can only do this in a CLOSE CORPORATION.
60
How must you pierce the corporate veil (applies only to close corporations)?
To pierce the corporate veil and hold shareholders personally liable:
- they must have abused the privilege of incorporating AND
- fairness must require holding them liable.
So courts pierce the veil to avoid fraud or unfairness by the shareholder in a close corporation. Sloppy administration is not sufficient.
61
What are two classic situations in which a court might pierce the corporate veil?
1. Identity of interests (using corporate car as own, commingles personal/corporate funds, Corp fails to pay its bills). A creditor can probably get to the shareholder because they abused the corporation by treating corporate assets as their own, and it would arguably be unfair for shareholder to receive limited liability.)
2. Undercapitalization - If undercapitalized when formed, i.e. if shareholders fail to invest enough to cover prospective liability. Courts may be more willing to pierce for a tort victim than for a contract claim.
We pierce corporate veil to impose liability on shareholders for what should be a corporate debt. The shareholder might actually be another corporation (piercing to hold parent corp liable)
62
What is a shareholder derivative suit?
Shareholder is suing to enforce the corporation's claim, not her own personal claim. Corp is not pursuing its own claim.
COULD the corporation have brought this suit? If yes, derivative.
Ex. preemptive rights are direct and NOT derivative; duty of care would be.
63
Who gets the money from a judgment if a shareholder plaintiff wins a derivative suit?
The corporation
The shareholder plaintiff gets costs and atty fees, usually from the judgment won for the corporation.
If the shareholder, they can't recover costs or attorney's fees, and may even be liable to D sued for that D's costs and atty fees if sued w/o reasonable cause.
64
What are the requirements for bringing a shareholder derivative suit?
- Stock ownership when claim arose and throughout the suit (or got it by operation of law from someone who owned it then, i.e. inheritance, divorce decree)
- Adequate representation of corp interest
- Written demand on corp (board0, can't sue for 90 days, unless it would be futile
- Corporation must be joined, but as a defendant.
- Parties may settle; court must give notice to shareholders to get their input
65
Can a corporation who is added as a defendant to a derivative suit brought by a shareholder plaintiff move to dismiss? When?
Corp can move to dismiss upon showing that independent investigation showed the suit was not in corp's best interest.
Independent directors or a court-appointed panel of 1+ independent persons must have made this investigation (special litigation committee of independent directors).
In ruing on motion to dismiss, court ensures that those recommending dismissal are truly independent and that they made a reasonable investigation. If so, cuort will dismiss. In some states, courts make an independent assessment.
66
Which shareholders vote?
General rule: "record shareholder" (person shown as owner) as of the "record date" (voter eligibility cut-off)
Exception: If corp re-acquires stock before record date, doesn't vote the treasury stock (b/c it isn't outstanding)
Executors can vote the shares, if they meet the shareholder/date requirements.
67
Can shareholders assign voter proxies?
Proxy is a writing (fax and email are OK), signed by record shareholder (email OK if can identify sender), directed to secretary of corp, authorizing another to vote the shares. Good for 11 months, unless it says otherwise. Revocable by attending mtg/voting or by writing.
If states say it is irrevocable, ignore. Only way to have irrevocable proxy is a "proxy coupled with an interest":
1. proxy says irrevocable
2. proxy holder has interest in the shares other than voting
68
What is a voting trust, and what are its requirements?
Way to pool voting power.
1. 10 year maximum
2. Written trust agreement, controlling how shares will be voted
3. Copy to corporation
4. Transfer legal title to voting trustee, AND
5. Original shareholders receive trust certificates and retain all shareholder rights (except voting)
69
What are requirements for voting agreements (pooling agreements)?
Must be in writing and signed.
Voting agreements are only sometimes specifically enforceable, state split
70
Where do shareholders vote?
Usually at a meeting. Instead, can act by unanimous written consent, signed by holders of all voting shares (email is OK). If they have a meeting, doesn't need to be at place incorporated.
71
What are the two kinds of shareholder meetings?
1. Annual meeting - if no annual mtg within 15 months, shareholder can petition court to order one (required). At annual mtg, shareholders elect directors.
2. Special meeting - can be called by the board, president, or holders of at least 10 percent of voting shares, or anyone else authorized in the bylaws.
72
What is the notice requirement for a shareholder meeting?
Must give written notice (fax or email OK) to every shareholder entitled to vote. Deliver between 10-60 days before meeting.
Contents: time and place of mtg. For special mtgs, must state purpose (are bound by purpose topics).
Consequence of failure to give proper notice: action is void unless those not sent waive defect (expressly written/signed, or implied by attending meeting without objection)
73
What are shareholders allowed to vote on?
Elect directors
Remove directors
Fundamental corporate changes
Other things if the board asks for shareholder vote.
74
What is the quorum requirement for a shareholder meeting?
Determination is based on number of shares represented, not the number of shares.
General rule: quorum requires majority of outstanding shares
Ex. 120,000 shares entitled to vote, 700 shareholders. Need 60,001 shares.
Shareholder quorum will NOT be lost if people leave the meeting.
75
What is the vote requirement for various shareholder meeting functions?
To elect director: plurality (more than the others)
To remove director: majority of shares entitled to vote
To approve fundamental corporate change: majority
Other matters: majority that actually vote on the issue
76
What is cumulative voting, and when does it apply?
Available only when shareholders elect the directors.
It gives the small shareholders a better chance of electing someone to this board.
Multiple number of shares times the number of directors to be elected (say there are 3 open, you have 1k shares, you get 3k votes, can all go to 1 director). Top three finishers are elected.
Articles are silent as to whether shareholders can vote cumulatively, generally do not have.
77
What are stock transferability restrictions?
Ex. right of first refusal.
They are OK if they are reasonable (not an undue restraint on alienation).
If the restriction is valid, it can be enforced against a transferee if:
1. the restriction is conspicuously noted on the stock, or
2. transferee has actual knowledge of the restriction
78
What rights to shareholders have to inspect and copy the books/records of a corp?
Shareholders can do this personally or by agent.
Any shareholder can do so on 5 days' written demand. Must make written demand stating desired documents and proper purpose for inspection (related to interest as shareholder).
If courts fail to grant, shareholders can seek court order (can recover costs and atty fees incurred in making the motion).
Note that directors don't have to go through this procedure to get corporate books and records.
79
What are the three types of distributions to shareholders?
1. Dividends
2. Repurchasing shareholder stock, OR
3. Redemption (forced sale to corp at price set in articles)
80
Who determines when distribution occurs?
Board's discretion. Board declares the right to dividend/distribution.
It is discretionary, so it's very difficult to compel declaration of distribution (would need to make very strong case of abuse of discretion).
This would be a direct suit, not a derivative one.
81
Which shareholders get dividends?
Preferred - paid first.
Common shares - paid next.
A cumulative divident accrues year-to-year - corporation owes for prior years (when dividends were not declared).
82
What are the three types of funds in a corporation?
1. Earned surplus
2. Stated capital
3. Capital surplus
83
What is an earned surplus fund?
Generally by business activity (selling widgets).
Consists of all earnings minus all losses minus distributions
CAN be used to satisfy distributions.
84
What is a stated capital fund?
Generated by issuing stock rather than by business activity.
When corporation issues stock, it allocates proceeds between stated capital and capital surplus.
Stated capital can NEVER be used to satisfy distributions.
Stated capital is made up of the PAR VALUE. Any excess over par value goes into capital surplus (the amount sold that exceeded par value)
85
What is a capital surplus fund?
Generated by issuing stock. Comprised of payments in excess of the par plus amount allocated
CAN be used for distribution, if shareholders are notified.
86
What is the modern view for determining which funds can be used to satisfy distributions?
Modern view does not look at funds. Says a corporation can't make a distribution if either insolvent or distribution would render it insolvent.
87
What does it mean for a corporation to be insolvent?
1. Corporation is unable to pay its debts as they come due, OR
2. Total assets are less than total liabilities (liabilities include preferential liquidation rights)
88
Who is liable for improper distributions?
Directors are jointly and severally liable.
Directors' good faith reliance defense is strong.
Shareholders are personally liable ONLY if they knew the distribution was improper when they received it.
89
What is required for a fundamental corporate change?
Things like amending articles, selling off all assets, merging, etc. Need four things:
1. Board action adopting resolution of fundamental change,
2. Board submits proposal to shareholders with written notice
3. Must get shareholder approval. Shareholder vote required: majority of the shares entitled to vote. (growing minority says you can require only majority of the shares that actually vote).
4. Deliver document to Secretary of State
90
What is the right of appraisal for a dissenting shareholder?
Defined: right to force the corporation to buy your stock at fair value. Usually just close corporation.
Shareholder gets right of appraisal whenever company is:
1. Merging or consolidating
2. Transferring substantially all assets not in the ordinary course of business, or
3. Transferring its stock in a share exchange.
BUT even if the company is doing one of these things, no appraisal if the stock is listed on a national exchange or if the company has 2,000 or more shareholders (number of people).
91
How does a shareholder perfect their right of appraisal?
Before the shareholder vote, must file with the corporation the notice of objection and intent to demand payment,
2. Abstain or vote against proposed change, and
3. After vote, within time set by corp, make written demand to be bought out and deposit with corporation.
If shareholder and corp cannot agree to fair value of shares, corp sues and may appoint an appraiser. Right of appraisal is the shareholder's exclusive remedy if it doesn't like a fundamental change, unless it can show fraud.
92
How can a corporation amend its articles?
1. Board of director action
2. Notice to shareholders
3. Shareholder approval (majority of shares entitled to vote)
4. If approved, deliver amended articles to Sec of State
Dissenting shareholders to NOT have rights of appraisal
93
What is required for a corporate merger vote?
1. Board of director action (both corps) and notice to shareholders.
2. Shareholder approval (generally both corps, by majority of shares entitled to vote).
3. If approved, surviving corp delivers articles of merger to Sec of State
The merged/collapsed company has the right of appraisal.
No shareholder approval required if 90% or more owned subsidiary is merged into a parent corporation.
94
What is the effect of a corporate merger or consolidation?
Surviving corporation succeeds to all rights and liabilities of the constituents. This makes sense because the constituent corp has disappeared, so a creditor must be able to sue survivor (successor liability)
95
What is the corporate vote required for the transfer of all or substantially all of the assets not in the ordinary course of business, or share exchange?
In share exchange, one company acquires all the stock of another.
What constitues "substantially all" varies state to state, usually 75 percent at least.
These are fundamental corporate changes for the seller only, and not the buyer.
Requirements:
1. Board actions (both corps, and notice to selling company shareholder)
2. Approval by selling corp's shareholders (majority entitled to vote)
3. Delivery articles of exchange in share exchange to Sec of State
Dissenting shareholders have right to appraisal only from selling corp
NO successor liability for sale of substantially all assets, b/c the selling corporation still exists, so creditors can sue it. Exception if the buyer is a "mere continuation" of the seller (same management, shareholders, etc.)
96
What vote is required for a corporate dissolution (voluntary)?
1. Board of director action
2. Approval by majority of share entitled to vote
3. File notice of intent to dissolve with Sec of State
4. Notify creditors so they can make claims
97
What is required for an involuntary corporate dissolution?
Shareholder may petition due to:
1. Director abuse, waste of assets, misconduct;
2. Director deadlock that harms the corporation; or
3. Shareholders have failed at consecutive annual meeting to fill a board vacancy
NB: as alternative to an order, court just could order buy-out of the objecting shareholder.
A creditor can petition because the corporation is insolvent and
1. has an unsatisfied judgment, or
2. corporation admits debt in writing.
98
What happens after dissolution?
Wind-up (liquidation):
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 (must be in articles, paid first)
99
What is the difference between debt securities and equity securities?
Debt securities: investor lends capital to corporation, to be repaid (usually with interest). Debt holder is creditor, not owner. Secured by corporate assets (bond). Unsecured - debenture.
Equity securities - investor buys stock from corp, which generates capital for business. Equity holder's relationship to corp is owner, not creditor.
100
What does Rule 10B-5 protect?
This federal law prohibits fraud, misrepresentation, or nondisclosure in connection with the purchase or sale of any security (debt or equity).
Elements: deal must use an "instrumentality of interstate commerce" (mail, phone, trade on nat'l exchange).
Type of transactions include material misrepresentation, insider trading (one with relationship of trust and confidence with shareholders), tipping (insider passes along info and benefited).
Materiality = "one a reasonable investor would consider important in making an investment decision."
Scienter requirement (intent to deceive, manipulate, defraud, or recklessness)
Reliance (presumed in public misrepresentation and nondisclosure cases)
Possible plaintiffs - SEC, private action by buyer/seller of securities (personal claim, must have bought/sold BASED ON fraudulent behavior)
Possible defendant - company, buyer/seller, tipper/tippee
101
What is Section 16(b)?
Aimed at speculation by directors, officers, 10 percent shareholders. Creates strict liability!
Provides for recovery by the corp of "profits" gained by certain insiders from buying/selling equities stock. Bad for the market to have inside big kahunas buying and selling their own stock.
The corporation brings this claim.
Remedy: all profits are recoverable by corporation.
This only applies to "reporting" corporations:
1. Listed on nat'l exchange OR
2. 500 shareholders, 10 million in assets
Defendants: director, officer, shareholder.
102
16(b) applicability to short-swing trading?
16(b) only applies to buying and selling stock within a single six-month period (short-swing trading). No fraud or inside info needed, it's strict liability.
Note: the order of buy and sell is irrelevant! Ex. Can buy up, sell down, calculate the profit based purely on the difference!
