CORPORATIONS Flashcards
(222 cards)
1
Q
What does it take to form a corporation?
A
People: Incorporators–must have one or more
Paper: Articles of Incorporation
Act: Incorporators have notarized articles delivered to the SoS and pay req’d fees. If SoS accepts–>conclusive proof of valid formation
2
Q
What does an incorporator do?
A
Executes (signs) the articles and deliver them to the Secretary of State.
3
Q
Can WXY, Inc. serve as an incorporator for AB Beauty Supply Corp.?
A
Yes, incorporator can be an individual or an entity.
4
Q
What are the Articles of Incorporation?
A
a. A contract between the corporation and the shareholders
b. A contract between the corporation and the state.
5
Q
What information is included in the Articles?
A
- Names and Addresses
•Corporate name w/ magic words
•Name and address of each incorporator
•Name and address of each initial director
•Name of registered agent and address of teh
registered office - If no statement of duration, presume perpetual existence.
- Statement of purpose
•General: “engage in all lawful activity, after
first obtaining necessary state agency
approval”
•Specific: If specific statement of purpose
possible ultra vires.
•UV contracts are valid as to 3rd parties
•Shareholders can seek an injunction to
stop an UV act
•The corporation itself can sue
responsible managers for UV losses
4. Capital Structure
• authorized stock
• number of shares per class
• information on voting rights and preferences
of each class.
6
Q
What is the organizational meeting?
A
Occurs after a de jure corporation is formed, where the board of directors selects officers and adopts any bylaws and conducts other appropriate business.
7
Q
The internal affairs of a corporation are governed by what law?
A
The law of the state in which the corporation is formed. (Even if all business is done in Iceland).
Internal affairs= roles and duties of directors, officer, and shareholders.
8
Q
A corporation is a separate _______ __________.
A
legal person. It can sue and be sued, hold property, be a partner in a partnership, make charitable contributions, etc.
9
Q
What is double taxation?
A
Applies to a corporation (non-S) because a corp. is taxed on its profits and additionally, shareholders are taxed on distributions.
10
Q
What is an S corporation?
A
An S corporation has no more than 100 shareholders, all of whom are human and US citizens or residents. There is only one class of stock and it is not publicly traded.
11
Q
In a corporation, are the directors or officers liable for what the entity does? What about shareholders?
A
NOPE. The corporation itself is liable for what the corporation does. Limited liability means that shareholders generally cna only lose the amount that they invested in the company.
12
Q
Requirements for de facto corporation:
A
(Anyone asserting the doctrine must be unaware of the failure to form a de jure corporation)
- There is a relevant incorporation statute (there is)
- the parties made a good faith, colorable attempt to comply with the statute, AND
- Some exercise of corporate privileges (acting like there is a corporation).
13
Q
If de facto corporation requirements are met, then _______.
A
the business is treated as a corporation for all purposes except in an action by the state.
Shareholders not liable on contract, e.g.
14
Q
What is corporation by estoppel?
A
•One who treats a business as a corporation may be estopped from denying that it is a corporation.
(you dealt with it like it was a corporation, so can’t get the benefit of it not being).
•It can also prevent the improperly-formed “corporation” from avoiding liability by saying it was not property formed.
15
Q
Corporation by estoppel applies only in what kinds of cases?
A
Contracts, not torts.
16
Q
What is the status of corporation by estoppel and de facto corporation?
A
The doctrines don’t exist in may states. Point this out on the exam.
17
Q
Are corporations required to have bylaws?
A
No, but usually do for internal governance–e.g. responsibilities of officers, times and places for regular meetings of the board, methods of giving notice, etc.
18
Q
Are bylaws filed with the state?
A
No. Articles are, not bylaws.
19
Q
Who adops the initial bylaws?
A
The Board of Directors at the organizational meeting.
20
Q
Who can amend or repeal the bylaws of a corporation?
A
Shareholders and, in some states, the Board as well.
21
Q
If bylaws conflict with the articles, which controls?
A
The articles because they are seen as a contract with the state.
22
Q
What/ Who is a promoter?
A
a person acting on behalf of a corporation not yet formed. She might enter into a contract on behalf of a corporation not yet formed.
23
Q
When does the corporation become liable on pre-incorporation contracts?
A
Not until it adopts the contract.
24
Q
How does a corporation adopt a contract?
A
- Expressly: Board takes an action adopting the contract (e.g. board resolution).
- Implied: The corporation accepts the benefits of the contract.
25
Unless the contract clearly provides otherwise, the promoter is liable on pre-incorporation contracts until there is _________.
Novation.
26
What is a novation?
an agreement of the promoter, the corporation, and the other contracting party that the corporation will replace the promoter under the contract?
27
Will a promoter be liable on the lease of the corporation is never formed?
Yup.
28
Will a promoter be laible on the lease if the corporation is formed and adopts the lease?
Yup. Promoter is liable until there is a novation.
* Adoption makes the corporation liable too, but does not relieve P. Here, both corporation & promoter would be liable.
29
What is a foreign corporation?
A corporation incorporated outside this state.
30
Foreign corporations transacting business in this state must ______ and _________.
qualify and pay prescribed fees.
31
Transacting business means the regular course of ________ activity. It doesn't include _____ or _____ activity in this state. It also doesn't include simply ____________.
intrastate
occasional or sporadic
owning property here.
32
How does a foreign corporation qualify to transact business in this state?
1. get a certificate of authority from the SoS
2. give information from articles
3. proves good standing in home state
4. must have registered agent in this state
5. pay fees.
33
If a foreign corporation transacts business without qualifying what happens?
1. civil fine
2. cannot sue in this state (though can be sued and defend).
(Generally if corp. qualifies and pays back fees and fines, it can sue here).
34
What is an issuance?
When the corporation sells its own stock. (never the stock of an other corporation).
It is a way for the corporation to raise capital.
35
What is a subscription?
a written offer to buy stock from corporation.
36
Pre-incorporation subscriptions are irrevocable for ______ unless ______ or _________.
6 months; the subscription says otherwise; all subscribers agree to let you revoke.
37
Are post-incorporation subscriptions revocable?
Yes, until acceptance. Until the Board accepts the offer.
38
_______ must be given to the corporation when it issues stock.
Consideration
39
What are the forms of consideration permitted in every state?
What are the controversial, split causing forms?
1. money (cash/ check)
2. tangible or intangible property
3. services already performed for the corporation
- ----------------
1. promissory notes
2. future services
*Discuss the split regarding the last 2 on the exam.
If forms used in a state where prohibited, results in "unpaid stock" meaning its all treated as water.
40
What does par mean?
Minimum issuance price If C.Corp is issuing 10,000 shares of $3 par stock, it must receive at least $30,000.
41
If C Corp issues 10,000 shares of $3 par stock, can it accept $40,000.
Yes. Par means minimum. No maximum.
42
Who sets the par price?
the Board of Directors.
43
What is treasury stock? How is the issuance price set?
Stock the company issued then reacquired. It is considered authorized but unissued, and the corporation can then resell it. If it does, the board sets any issuance price it wants.
44
If a corporation issues stock in exchange for property or past services, who determines the value of the property or services?
the Board of Directors. The Board's valuation is conclusive if it is made in good faith.
45
C Corp. issues 10,000 shares of $3 par stock to X for $22,000. The corporation wants to recover the $8,000 of "water." Who is liable?
* The directors if they knowingly authorized the watered issuance.
* X (the guy who bought the stock). No defense; he is charged with notice of the par value.
* If X transfers the stock to a 3rd party, TP is not laible if she didn't know about the water.
46
What are pre-emptive rights?
the right of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock FOR MONEY (cash or its equivalent--check).
47
Is the issuance of treasury stock a "new issuance" for purposes of pre-emptive rights?
Split--some say yes, some no.
48
Authorized stock is:
the maximum number of shares the corporation can sell.
49
Issued stock is:
the number of shares the corporation actually sells
50
Outstanding stock is:
the shares that have been issued and not reaquired.
51
S owns 1000 shares of C corp. There are 5,000 shares outstanding. C Corp. is planning to issue an additional 3,000 shares. If S has pre-emptive rights, then S has the right to ______________.
Buy 600 shares in order to maintain her 20% ownership interest.
*This is a choice--there is no obligation to buy.
52
If the articles are silent, are there pre-emptive rights?
In most states, no.
53
Suppose the C Corp articles provide for pre-emptive rights. You own 20% of the stock of C corp. C Corp. issues stock to Peggy to purchase property from her. Do you have preemptive rights?
Nope--must be an issuance for money. Here, the Corp. is issuing stock for property.
54
Statutorily, how many directors must there be in a corporation?
1 or more (must be adult, natural person).
55
Initial directors are usually ____________. Thereafter, who elects directors?
named in the articles
shareholders at the annual meeting. The entire board is elected each year unless there is a "staggered" board. Staggered board is usually set in the articles.
56
Shareholders can remove directors before their terms expire but this requires a vote of a _______________________.
majority of the shares entitled to vote.
57
On what basis can shareholders remove a director?
with or without cause.
58
If there is a vacancy on teh board, who selects the person who will serve as a director for the rest of the term? What if shareholders created the vacancy by removing a director?
Generally, either the Board or the shareholders, but if shareholders removed the director, then normally, they must replace the director.
59
What are the two ways in which the board of directors can act?
1. unanimous agreement in writing (common in closely held corporations)
2. meeting (has to satisfy quorum and voting requirements).
60
If directors act through individual conversations without a meeting or unanimous written agreement then ____________.
the act is void unless ratified later validly.
61
What are the notice rules for board meetings?
Regular meeting: no notice required
| Special meeting: notice is required. Must state time and place, but not purpose.
62
Failure to give required notice ______ whatever happened at the meeting, unless _____________.
Voids; the directors not notified waive the notice defect. They can do this in writing at anytime or by attending the meeting without objecting.
63
Can directors give proxies or enter into voting agreements for how they will vote as directors?
Nope. (shareholders can).
Void and against public policy--shareholders must show up.
64
There must be a __________ for meetings of the board, which generally means a _________ of all directors to do business (unless a different percentage is set in the bylaws).
quorum; majority
65
If a quorum is present at a meeting, passing a resolution requires only a _____________.
majority vote of those present.
66
If there are 9 directors, at least ____ directors must attend the meeting to constitute a quorum. If ____ (minimum #) directors attend, at least ____ must vote for a resolution for it to pass.
5; 5; 3.
67
A quorum of the board can be _____ or _____ if people leave. Once a quorum is no longer present, the board ________________.
lost; broken; cannot take an act at that meeting.
| different for shareholders
68
Generally, what does the board of directors do?
The board manages the business of a corporation. It sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental corporate changes to shareholders, etc.
69
The board can delegate to a committee of one or more directors. What can't a committee do?
1. Fill vacancies on the board
2. Declare dividends
* The committee can always recommend such things to the full board for its action.
70
What is the duty of care standard for a director?
A director owes the corporation a duty of care. She must act in good faith and do what a prudent person would do with regard to her own business.
71
If a director does nothing (called ___________), the director is liable for a breach of duty of care only if ___________.
nonfeasance; his breach caused a loss to the corporation.
JT a director of C Corp fails to attend any meeting or keep abreast of the co. business in any way.
• state and apply the standard: a prudent person would attend some meetings and do some work. Becuase he didn't do anything he has breached the duty of care.
• liable only if the breach caused a loss to corp.
72
If the board does something that hurts the corporation this is called _____________.
misfeasance.
73
A director is not liable for misfeasance if she meets the __________.
business judgment rule
74
The business judgment rule states that:
A court will not second guess a business decision if it:
(1) was informed,
(2) was made in good faith,
(3) was made without conflicts of interest, and
(4) had a rational basis.
As long as a board decision was made on an informed basis, in good faith, with no conflicts of interst, and with a rational basis, a court won't second guess the decision if it turns out badly.
75
Questions to consider when analyzing a decision under BJR:
(1) Was the board reasonably informed?
(2) Did it do appropriate homework before making the decision? (analyze & deliberate)
(3) Did it act in good faith, free of self-interest, with the belief that the decision was in the best interest of the corporation?
76
The BJR recognizes that a director is not a ___________.
guarantor of success
77
Duty of loyalty standard for directors:
A director owes the corporation a duty of loyalty. She must act in good faith and with a reasonable belief that what she does is in the corporation's best interest.
78
The BJR _______ apply in duty of loyalty cases. Why?
does not. Because no conflicts of interest is a prerequisite to the BJR, so BJR never applies when there is a conflict of interest.
79
An interested director transaction is:
any deal between the corporation ( on the one hand) and one of its directors, or a clos relative of a director, or another business of the director (on the other hand).
(not per se liable).
80
The interested director transaction will be set aside (or the director will be liable in damages) UNLESS the director shows either:
(1) the deal was fair to the corporation when entered, 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, a majority of disinterested shares
*Even if the deal is approved by an appropriate group, always say "some courts also require a showing of fairness even if (1) or (2) was met above.
81
Directors can set their own compensation as directors or officers, but it must be _________ and ___________. If excessive, it is a __________ and a breach of __________.
reasonable; in good faith; waste of corporate assets; duty of loyalty.
82
Competing Ventures is when a director
competes with her corporation. Director is a fiduciary.
So Sharon as a director of Ozzie's music co. can also serve on directors of Home Depot but can't start her own music company.
Remedy against Sharon = a constructive trust on profits.
83
A breach of the duty of loyalty can occur where a director usurps a ________ _________. Director cannot take an opportunity until he
Corporate opportunity
(1) tells the board about it and
(2) waits for the board to reject the opportunity.
84
What is a corporate opportunity? (3 tests)
1. something in the corporation's line of business
2. something the company has an interest or expectancy in
3. something the director found on company time or with company resources
85
What is the remedy for director breach of loyalty via usurpation of corporate opportunity?
If D still has it, he must sell it to the corporation at his cost. If D has sold it at profit, the corporation gets the profit through a constructive trust.
86
Besides breaches for duty of care and duty of loyalty, what are other state law bases of director liability?
1. ultra vires acts: responsible officers and directors are liable for ultra vires losses.
2. improper distributions
3. improper loans: loans generally are only permitted if it is reasonable expected to benefit the corporation (maybe business school loan).
*Sarbanes-Oxley Act (federal law) generally forbits 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 must certify accuracy and completeness of financial reports.
87
Which directors are liable for all the things directors can be liable for? A director is _______ to concur with board action unless her _____ or ______ is noted in writing in _______. In writing means:
Exceptions:
presumed; 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 officer at the meeting
(3) written dissent delivered to the corporation immediately after the meeting. (So an oral dissent alone is not effective).
Exceptions:
• An absent director is not liable for stuff done at the meeting she missed.
• A director is entitled to rely in good faith on information (including financial information) presented by an officer, employee, or committee (of which the relying director was not a member), or professional reasonably believed competent. This is a defense to liability.
88
Officers owe the same ________ and _______ as directors.
duties of care and duties of loyalty
89
Officers are ________ of the corporation so they can ______ the corporation by acts for which they have authority.
agent; bind
90
Officers are selected by and removed by the _______, which also sets officer compensation.
board
91
Shareholders hire and fire _______, but the board hires and fires ________. Generally, then, shareholders do not hire and fire ______________.
directors; officers; officers
92
When is the corporation barred from indemnifying an officer/ director?
If the officer/ director was held liable to the corporation or was held to have received an improper personal benefit.
93
When must a corporation indemnify an officer/ director?
If the officer/ director is successful in defending on the merits or otherwise, (so she prevailed in the proceeding), the corporation msut indemnify.
94
When may the corporation indemnify?
Anytime indemnification isn't either mandatory or prohibited.
E.g. if the case settled against the officer/director.
95
In order to be eligible for indemnification, the officer/director must meet the ___________.
duty of loyalty Must show that she acted in good fiath and with the reasonable belief that her actions were in the company's best interest.
•disinterested directors or disinterested shares or independent legal counsel determine eligibility
96
Notwithstanding the indemnification rules, the court where the director or officer was sued can order reimbursement ________________.
If it is justified in view of all of the circumstances. If shew as held liable to the corporation, this is limited to costs and attorneys' fees. (cannot include judgment)
97
The Articles can eliminate director liability to the corporation for _______, but not for ________, _______, __________, or __________. So basically, yes for ________, no for __________.
Do exculpatory provisions in the articles apply to officers as well as directors?
damages
```
Not for:
• intentional misconduct
• usurping corporate opportunities
• unlawful distributions
• improper personal benefit
```
Yes for duty of care, not for duty of loyalty
Applies to officers as well as directors in some states, but not others.
98
Do shareholders get to manage the corporation?
No. The board manages the corporation.
99
Generally, shareholders do not manage the corporation, but shareholders can run the corporation directly in a ____________.
Close corporation.
100
What are the characteristics of a close corporation?
1. small number of shareholders
| 2. stock is not publicly traded
101
If the corporations stock is not traded on a national exchange and there are a small number of shareholders, shareholders can eliminate the board and run the corporation directly. How?
Either
1. in the articles or bylaws and approved by all shareholders, OR
2. by unanimous written shareholder agreement
Either way, the agreement should be conspicuously noted on the front and back of the stock certificates.
102
If the shareholders eliminate the board and manage the company, who owes the duties of care and loyalty to the corporation?
the people who manage-- the managing shareholders
103
What is the fiduciary duty not to oppress each other and when does it apply? Why does the duty exist?
In a close corporation, controlling shareholders shoudl not oppress minority shareholders, e.g., by selling control to people who loot the corporation (without reasonable investigation of the buyer).
If there is oppression, the harmed minority can sue the controlling shareholder who oppressed her.
Courts let shareholders sue for breach of this duty because in a close corporation, minority shareholders don't have a way out. There is no public market for their stock.
104
What is a P.C. or a P.A.?
PC and PA indicate a professional corporation or a professional association. Licensed professionals including lawyers, medical professionals, and CPAs may incorporate this way. The articles must state that the purpose is to practice in a particular profession.
105
In a PC or PA the directors, officers, and shareholders usually must be ________. May the PC employ non-professionals?
licensed professionals
Yes, but not to render professional services.
106
In a PC or PA, are the professionals personally liable for their malpractice?
What about shareholders?
Yes, a person is always liable for his own tort.
*Shareholders are generally not liable for corporate obligations or for other professionals' malpractice.
107
Can shareholders be held liable for the acts or debts of the corporation?
Generally, no. But a shareholder might be personally liable for what the corporation did if the court "pierces the corporate veil."
108
In what kind of corporations can the court pierce the corporate veil?
close corporations only
109
To pierce the corporate veil and hold shareholders persoanly liable,
1. they must have abused the privilege of incorporating
2. fairness must require holding them liable.
* Courts may PCV to avoid fraud or unfairness.
110
What are the 2 classic fact patterns where courts have pierced the corporate veil?
1. alter ego
•E.g. X commingles personal and corporate funds, uses the corporate car as his own, and uses the corporate credit card to pay for personal purchases. C Corp fails to pay its bills.
• Note: If Y is a shareholder too but did nothing wrong, the veil is pierced only to reach X.
2. Undercapitalization: shareholders failed to invest enough to cover the corporation's reasonably foreseeable liabilities
• E.g. S is a shareholder of Glowco, Inc., a corporation that hauls and disposes of nuclear waste. Glowco does not carry insurance. Glowco has an initial capitalization of $1000. V is injured when G's truck melts down. V might be able to sue S. (insurance would have been enough).
111
What must you always say in an essay about piercing the corporate veil and why?
Courts may be more willing to pierce the corporate veil for a tort victim than for a contract claimant. Contract claimants make a conscious step to deal with a corporation and thus assume some risk of dealing iwth a limited liability co.
112
We pierce the veil to impose liability on _______ for what should be corporate debt. Remember that another _______ can be a _________.
shareholders; corporation; shareholder
* E.g. parent corporation forms a subsidiary to avoid its own obligations. Might pierce to go after the parent corporation.
113
A shareholder derivative suit is a suit in which
a shareholder is suing to enforce the corporation's claim, not her own personal claim. It's a case in which the corporation is not pursuing its own claim, so a shareholder steps in to prosecute it for the corporation.
114
When determining whether a shareholder is bringing a derivative or direct suit, always ask:
whether the corporation could have brough the suit itself.
115
S, is a shareholder of C Corp. and sues the board of directors of C Corp for usurping corporate opportunities. Is that a derivative suit?
Yes. Duty of loyalty (and care) are owed to the corporation. The corporation could have brought this suit for breach of duties owed to it.
116
S sues board of directors of C corp. for issuing new stock without honoring her preemptive rights. Derivative suit?
No. This is a shareholder's personal claim. The corporation was not hurt, so corporation can't sue.
117
S sues another shareholder for oppression in a close corporation. Derivative?
Nope. Direct suit for a breach of duty owed to a shareholder, not a corporation.
118
If the shareholder plaintiff wins the derivative suit, who gets the money from the judgment?
the corporation. Generally the plaintiff receives costs and attorneys' fees out of the judgment.
119
If the shareholder plaintiff loses the derivative suit, can S still recover costs and attorneys' fees?
No. S could be liable to the defendant he sued for that D's costs and attorneys' fees if he sued without reasonable cause.
120
If a shareholder brought a derivative suit, can other shareholders later sue the same defendants on the same transaction?
Nope. Claim preclusion
121
What are the requirements for bringing a shareholder derivative suit?
1. Stock ownership when the claim arose AND throughout the suit.
• the person bringing the suit must have owned stock at the time the claim arose or have gotten it by operation of law from someon who did own it then.
• Examples of operation of law= inheritance and divorce decree
2. Adequate representation of the corporation's interest
3. Must make a written demand on the corporation (usually the board) that the corproation bring the suit.
* In many states must make this demand and cannot sue until 90 days after making the demand.
* In many other states, you don't have to make the demand if it would be futile (e.g. when a majority of the directors will be the defendants in the suit).
4. Corporation must be joined as a defendant.
5. Can settle or dismiss only with court approval (court might give notice to shareholders and get their input on whether to dismiss or settle).
122
The corporation can move to dismiss a derivative suit on the basis that __________________. For example, __________.
independent investigation showed the suit was not in the corporation's best interest.
E.g.: low chance of success or expense would exceed recovery.
* Investigation must be made by independent directors or a court-appointed panel of one or more independent persons.
* In ruling on the motion, in all states will determine if those recommending dismissal are independent and dismiss if so. In some states, court will also make an independent assessment of whether dismissal is in the company's best interest.
123
The general rule for shareholder voting is:
The record shareholder as of the record date has the right to vote.
124
The record shareholder is ___________.
The person shown as the owner in the corporate records.
125
The record date is ___________.
a voter eligibility cut-off date.
126
C Corp. sets its annual meeting for July 7 and record date for June 6. S sells B her C Corp. stock on June 25th. Who is entitled to vote the shares at the meeting? S or B?
S will vote because she owned the shares on the record date, June 6th.
127
Exceptions to the general shareholder voting rule:
1. the corporation reacquires stock before the record date, so it is the owner of the "treasury stock" as of the record date. Corp doesn't vote that stock.
2. Death of a shareholder: If S dies after the record date, S's executor can vote the shares.
3. Proxies
128
What is a proxy?
A proxy is a:
(1) writing (fax/ email are ok)
(2) signed by record shareholder (email ok if can identify sender)
(3) directed to secretary of corporation,
(4) authorizing another to vote the shares.
129
How long does a proxy last?
A proxy is good for 11 months unless the proxy states otherwise.
130
Requirements for a voting trust:
1. written trust, controlling how the shares will be voted
2. copy to the corporation
3. transfer legal title to the shares to the voting trustee
4. original shareholders receive trust certificates and retain all shareholder rights except for voting.
(give up your voting stick)
131
A voting trust lasts for a maximum of ________.
10 years
132
Requirements for a voting agreement
* Different than a trust--really a voting pooling agreement.
1. In writing
2. signed by the shareholders who are participating
133
Are voting agreements specifically enforceable?
Some states yes, some no. It's just a contract, so is treated however specific performance for contracts is treated.
*Distinguish from a voting trust where you give up your voting stick portion of ownership.
134
Where do shareholders vote?
Shareholders usually take action at a meeting. Instead, they can act by unanimous written consent signed by holders of all voting shares (email is ok).
135
If shareholders have a meeting, does it have to be in the state of incorporation?
Nope.
136
What are the 2 kinds of shareholder meetings?
1. Annual meeting: to elect directors. If none held in 15 months, a shareholder can petition the court to order one. This is a required meeting.
2. Special meeting: can be called by (1) the board, (2) the president, (3) the holders of at least 10% of the voting shares, or (4) anyone else authorized by the bylaws
137
If 10% of the shares call a special shareholder meeting to remove an officer, is this ok?
Ok to call the special meeting, but removing an officer is not a shareholder function, so their decision won't be binding.
138
A special meeting of directors must state the time and place but not the ______. A special meeting for shareholders must state the time, place, and ______.
purpose; purpose
139
There is a ________ requirement for shareholder meetings. What are the requirements?
Notice;
1. must give written notice (fax/email are ok)
2. to every shareholder entitled to vote
3. must be delivered between 10-60 days before the meeting
4. notice must include time & place of meeting
5. (for special meeting, must state purpose)
*Failure to give proper notice to all shareholders results in the action taken at the meeting being void unless those not sent notice waive the notice defect.
140
Failure to give proper notice to all shareholders about a shareholder meeting results in:
action taken at the meeting is void unless those not sent notice waive the notice defect.
141
What are the 2 methods by which a shareholder can waive notice defect?
1. Express: in writing and signed anytime (fax/email ok)
| 2. Implied: attend the meeting without objection
142
There must be a _______ represented at a shareholder meeting to vote. Generally, a ______ requires a ________________.
quorum; quorum; majority of outstanding voting shares
143
Determination of a quorum for a shareholder meeting focuses on the number of ________ represented, not the number of ____________.
shares; shareholders
144
X Corp has 120,000 outstanding voting shares. X corp. has 700 shareholders. What constitutes a quorum?
At least 60,001 voting shares.
*majority of outstanding voting shares, not shareholders.
145
A shareholder quorum ____________ if people leave the meeting.
is not lost.
*This is different than a directors' meeting.
146
If the quorum requirement is met, an action will be deemed approved if:
the votes cast in favor of the action exceed the votes cast against the action (unless the areticles provide for a greater voting requirement).
147
X corp. has 120,000 voting shares outstanding. 62,000 voting share are represented at the meeting, but only 50,000 shares vote on a particular proposal. How many shares must vote for the proposal for it to be accepted by the shareholders?
at least 25,001. Will pass if the votes for the action exceed the votes cast against the action.
148
How and when do shareholders use cumulative voting?
CV is only available when shareholders elect directors. It is a device to give small shareholders a better chance of electing someone to the board.
149
What is the formula for cumulative voting?
Multiply the number of shares times the number of directors to be elected.
150
You own 1,000 shares of stock in C Corp. C Corp has 9 directorships open for election. You believe Napoleon Dynamite should be director of C Corp. Under cumulative voting, how many votes can you cast for Napoleon?
9,000 votes.
of shares (1,000) X # of directors (9) = 9,000
You can distribute the votes however you want, so can give them all to Napoleon.
151
The articles of C Corp are silent as to whether shareholders can vote cumulatively. Do the shareholders have cumulative voting?
Generally, no. It's usually an opt-in regime.
152
Sometimes people want to restrict transferability of stock, especially in close corporations. Can they?
Stock transfer restrictions will be upheld provided they are reasonable under the circumstances. There cannot be an absolute prohibition on transferability.
153
If there is a restriction on stock transferability, is the deal enforceable against the transferee?
Even if the restriction is reasonable and 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.
154
Does a shareholder have the right to (either personally or via agent) to inspect and copy the books and records of the corporation. If so, what is the procedure for doing so?
Generally, yes. Any shareholder can demand access.
Procedure: the shareholder must make a written demand stating the documents desired and a proper purpose for inspection. (proper purpose= a purpose related to her role as a shareholder).
155
If the corporation fails to allow proper inspection of the books & records to a shareholder, the shareholder can ________. If she wins, she can recover ___________.
* seek a court order
| * costs and attorneys' fees incurred in making motion.
156
Do directors ahve to go through the same procedures as shareholders to get access to corporate books and records?
No--they have unfettered access.
157
What are distributions? What are the 3 types?
Payments made by the corporation to the shareholders.
1. Dividends
2. Repurchase (a voluntary sale of a shareholder's stock to the corporation).
3. Redemption (a forced sale of a shareholder's stock to the corporation at a price set in the articles).
158
There is no right to a distribution until it is ________.
declared
159
Distributions are in the board's ________.
discretion. Ther is no right to distribution until it is declared.
160
An action to compel distribution is direct, not _______.
derivative
161
To win an action to compel distribution, you must ____.
Make a VERY strong showing of abuse of discretion. This will be very hard to win.
E.g. show that corproation consistently makes profits and the board refuses to declare dividends while they pay themselves giant bonuses. (might prevail).
162
What are the divisions of shareholders in regards to dividends?
1. preferred
2. participating
3. cumulative
4. common
163
What is preferred stock?
It means if you have preferred stock, you get paid first. There is generally a dollar amount of preference.
E.g. Bd of Directors declares $400,000 in dividends. There are 100,000 shares of common stock and 20,000 shares of preferred with a $2 preference.
* 20,000 x $2 = a total preference of $40,000
* That is paid first.
* That leaves $360,000, which goes to the common shares. Becuase there are 100,000 of those, each common share gets $3.60.
164
What is participating stock?
Participating means you get paid again.
165
What happens if you have preferred participating stock?
E.g. Bd of Directors declares $400,000 in dividends. There are 100,000 shares of common stock and 20,000 shares of preferred participating with a $2 preference.
* 20,000 x $2 = a total preference of $40,000
* That is paid first.
* That leaves $360,000, which goes to the common shares.
* Here, a participating stock holder gets paid along with the common shareholders too.
* So, $360,000/ 120,000 (rather than just 100,000)= $3.
* Here, preferred shareholders get $2 (preferred) + $3 (participating) = $5.
* Common shareholders get $3.
166
What is a cumulative dividend?
The divident accrues from year to year. So the corporation owes the cumulative holders for the 3 prior years, plus this year (when the dividend was declared).
E.g. E.g. Bd of Directors declares $400,000 in dividends. There are 100,000 shares of common stock and 20,000 shares of preferred that is cumulative with a $2 preference. No dividends have been paid in the 3 prior years.
* This means the corporation owes these shareholders 4 years' worth of a $2 preference.
* 4 years x $2 = $8 per share.
* So the corporation owes $8 to each cumulative preferred share. There are 20,000 such shares.
* $8 x. 20,000 = $160,000 paid first.
* $240,000 left for common shares.
* Each common share gets $2.40 per share.
* Each cumulative preferred got $8 per share.
167
What funds can be used for distributions (either dividend, repurchase, or redemption)? (in the traditional view)
1. Earned surplus: generated by business activity. Consists of all earnings minus all losses minus distributions previously paid. (Board can decide to use this).
2. Capital Surplus: generated by issuing stock. Payments in excess of par + amounts allocated in a no-par issuance.
3. NEVER used for distributions: Stated Capital: generated by issuing stock (just like capital surplus), so when corporation issues stock it has to allocate the proceeds between stated capital and capital surplus.
168
C Corp issues 10,000 shares of $2 par stock for $50,000. Of that, how much is stated capital and how much is capital surplus?
On a par issuance, the par value goes to the stated capital. Here: $20,000.
• 10,000 x $2 = $20,000
• Excess over par = $30,000
• $30,000 (excess) = capital surplus
On a non-par issuance, the board allocates the consideration between stated capital and capital surplus.
169
Under the modern view, what funds can a corporation use to pay dividends?
The modern view does not look at the funds. It says a corporation cannot make a distribution if it is insolvent or if the distribution would make it insolvent.
170
For a corporation to be insolvent it means:
Either
1. the corporation is unable to pay its debts as they come due, or
2. total assets are less than total liabilities (and liabilities include preferential liquidation rights).
171
Directors are __________ liable for improper distributions.
jointly and severally liable.
*Remember the directors' good faith reliance defense though.
172
Shareholders are personally liable for improper distributions only if ____________.
they knew the distribution was improper when they received it.
173
Fundamental corporate changes are extraordinary, so the Board cannot do them alone. What is needed?
1. Board action adopting a resolution of fundamental change.
2. Board submits proposal to shareholders with written notice.
3. Must get shareholder approval.
• Here, a majority of shares entitled to vote
is needed to approve.
• Generally, just More votes for approval than
against.
• This is a higher standard.
4. In most changes, need to deliver a document to the Secretary of State.
174
Examples of fundamental corporate changes:
1. Merger or Consolidation
2. Amendment of the Articles
3. Transfer of all or substantially all of the assets not in the ordinary course of business, or share exchange ( one company acquires all the stock of another)
4. Dissolution
175
What is the dissenting shareholder right of appraisal?
The right to force the corporation to buy your stock for fair value.
176
When will a shareholder have a dissenting shareholder right of appraisal? When does the shareholer not have the right?
Any of:
1. merger or consolidation
2. transfer of substantially all assets not in the ordinary course of business
3. transfer of shares in a share exchange
*NOT available if the stock is listed on a national exchange or has 2,000 or more shareholders. In this type of corporation, there is a public market for the stock, so the unhappy shareholder can just sell on the market.
• This means that the right of appraisal exists in a close corporation.
177
What does the shareholder have to do to perfect her right of appraisal?
1. Before 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. After the vote, within time set by corporation, make written demand to be bought out and deposit stock with the corporation.
* If the shareholder and the corporation cannot agree on a fair market value, the court can appoint an appraiser.
178
Is the right of appraisal the shareholder's only remedy for fundamental corporate changes?
Yes, absent fraud.
179
If there are 4,000 outstanding shares entitled to vote, how many must vote for an amendment of the articles?
At least 2001. (fundamental corporate change requires majority of all shares entitled to vote).
180
Are there dissenting shareholder rights of appraisal for amendment of the articles?
Nope.
181
What are the requirements to amend the articles of incorporation?
Fundamental Corporate Change
1. board of director action
2. notice to shareholders
3. shareholder approval (majority of all shares entitled to vote).
4. if approved, deliver amended articles to SoS.
182
A merger is when B, Inc. merges into A Corp., while a consolidation is when A Corp and B, Inc. form _______.
C Corp. A whole new corporation.
183
What is required to complete a merger/ consolidation?
1. Board of director action (both corporations)
2. Notice to shareholders (both)
3. Shareholder approval. (generally both corporations) (majority of shares entitled to vote) (no approval necessary if short-form merger).
4. If approved, surviving corporation delivers articles of merger or consolidation to the SoS.
*Right of appraisal here.
184
NO shareholder approval is necessary in what type of merger?
A short-form merger. Where a 90% or more owned subsidiary is merged into a parent corporation.
185
What is the liability effect of a merger or consolidation?
Successor Liability: Surviving corporation succeeds to all rights and liabilities of the constituents. Makes sense because the constituent corporation disappeared. So a creditor of that corporation can sue the survivor.
186
What constitutes substantially all of the assets for fundamental corporate change?
This varies from state to state. A rule of thumb is that it requires at least 75 % of the assets.
187
Transfer of all or substantially all of the assets not in the ordinary course of business, or share exchange is a fundamental corporate change for which corporation?
The seller only. NOT the buyer.
188
What is required to complete a transfer of all or substantially all of the assets not in the ordinary course of business?
1. Board of director action (both corporations)
2. Notice to shareholders (selling corporation only)
3. Approval by shareholders (selling/ transferring corporation only)
4. Generally no filing w/ SoS for transfer of assets
189
Are there dissenting shareholders' rights of appraisal for transfer or sale of all/ substantially all assets?
Yes, for shareholders of the selling corporation, but not for the shareholders of the buying corporation.
190
Is there successor liability in the sale of substantially all assets?
Nope. The selling company still exists.
191
What is required for voluntary dissolution?
1. Board of directors action
2. Notice to shareholders
3. Approval by shareholders (maj. of the share entitled to vote).
4. File notice of intent to dissolve w/ the SoS.
5. Notify creditors so they can make claims.
Corporation stays in existence to wind up.
192
Involuntary dissolution occurs by court order. Who can petition the court for involuntary dissolution of the corporation?
1. Shareholder because of
• director abuse, waste of assets, misconduct;
• director deadlock that harms the corp.; or
• shareholders have failed at two consecutive
annual meetings to fill a vacant board
position.
2. Creditor because corporation is insolvent and
• he has an unsatisfied judgment or
• the corporation admits the debt in writing.
193
Dissolution is _____ the end of a corporation. It is the ______________that will end the corporate existence.
not; beginning of a process
194
What does winding up consist of?
1. gathering all assets
2. converting to cash
3. paying creditors
4. distributing remainder to shareholers, pro-rate by share unless there is a liquidation preference.
195
What is a liquidation preference?
It means "pay first", so it works like a dividend preference. It must be in the articles.
196
Securities = __________
Investments
197
What is a debt security?
When the investor lends capital to the corporation, to be repaid (usually with interest) as specified in the agreement.
• Debt holder is a creditor, not an owner.
198
If a debt security is secured by corporate assets it is called a _____. If unsecured it is called a ______.
bond; debenture
199
What is an equity security?
Investor buys stock from the corporation which generates capital for the business.
• Investor is an owner, not a creditor.
200
What is Rule 10-b5?
Federal law aimed at deceit that prohibits fraud and misrepresentation (or nondisclosure) in connection with the purchase or sale of any security (debt or equity).
201
What are the elements of a 10-b5 action?
1. At some point, deal must use an instrument of interstate commerce (mail, phone, trade on nat'l exchange)
2. Type transactions
• Misrepresentation of material information
• Insider trading
• Tipping
3. Materiality: the misrepresenation or ommission must concern a material fact--one a reasonable investor would consider important in making an investment decision.
4. Possible Plaintiffs
• SEC
• Private action for damages by buyer or seller
of securities
5. Possible Defendants
• Any person (including entities)
• Buyer or seller of securities who
misrepresents material information
• buyer or seller of securities who trades on
material inside information when there is a
duty to disclose
• Tipper or tippee (must pass tipper liability
test)
6. Scienter: D must have an intent to deceive, manipulate, or defraud. Recklessness may suffice.
7. Reliance: Said to be a separate element, as in fraud cases, but is presumed in public misrepresenation (e.g. a misleading press release) and nondisclosure cases.
202
Definition of tipping:
Where an insider passes along material inside information for a wrongful purpose.
203
Definition of insider trading:
Trading securities on the basis of material inside information. Only a problem for someone high enough in the business hierarchy that she has a duty to abstain or disclose.
Who has this duty?
• Someone with a relationship of trust and confidence with the shareholders.
• Generally, directors, officers, controlling shareholders and EEs of the issuer.
204
Who has a duty to abstain or disclose in insider trading?
* Someone with a relationship of trust and confidence with the shareholders.
* Generally, directors, officers, controlling shareholders and EEs of the issuer.
205
What does the materiality element for a 10-b5 action mean?
The misrepresentation or omission must conern a material fact. One a reasonable investor would consider important in making an investment decision.
206
Widget, Inc. issues a press release that Buffett has expressed an interest in acquiring a major block of its stock. The release fails to indicate that it is Jimmy Buffett and not Warrent Buffett who is interested. Because of this press release, Becky does not sell her Widget stock. Does she have a 10b-5 claim?
Nope. She did not buy or sell.
Possible plaintiffs =
1. SEC
2. private action for damages brough by buyer or seller of securities.
207
Possible plaintiffs in a 10b-5 action are:
1. the SEC
| 2. the buyer or seller of securites who brings a private action for damages
208
Possible defendants in a 10b-5 action are:
• Any person (including entity)
For example,
•company that issues a misleading press release
• buyer or seller of securites who misrepresents material information
• buyer or seller of securities who trades on material inside information (when duty to disclose)
• tipper/ tippee
209
What is required for tipper liablity?
A person will be a tipper if
1. she passed along material inside information in breach of a duty to corp., AND
2. she benefitted (can be gift or reputation).
210
What is required for tippee liability?
Person is a tippee if:
1. traded on the tip and
2. knew or should have known that hte information was improperly passed.
211
L, an officer for X Co., learns that X Co. is plannign to merge w/ Y corp. She phones her son-in-law Joe about this and urges him to buy X co. stock. Acting on the tip, Joe buys the stock. Any violations of Rule 10b-5?
L is a tipper because she passed along material information in breach of a duty to X Co. and she benefited.
Joe is a tippee because he traded on the tip and knew of should have known that the information was improperly passed.
212
For 10b-5, when there is no _____, there can be no ______.
tipper; tippee
213
D is a director of C Corp. While waiting for a concert to start, D tells her husband about a new, secret processing method that C Corp. has just developed. Bobbitt, who is sitting in the next row overhears the conversation and buys C corp stock on a national exchange. Any violations of 10b-5?
Nope. At most, D was negligent, which is not enough for 10b-5 liability.
*Because there is no tipper, there cannot be a tippee. Bobbit can trade on the information freely.
214
The element of scienter in a 10b-5 action menas:
the D must have an intent to deceive, manipulate, or defraud. Recklessness may suffice.
215
The element of reliance means what in a 10b-5 case?
Said to be a separate element, but is presumed in public misrepresentation (e.g. misleading press release) and nondisclosure cases.
216
Section 16b is aimed at speculation by ______, ______, and _________.
directors, officers, and 10% shareholders
217
What does 16b do?
It provides for recovery by the corporation of "profits" gained by certain insiders from buying and selling the company's stock. The theory is that it is bad for market confidence to have these insiders buying and selling their own company's stock.
*Federal law
218
Because 16b creates a claim for the corporation, how might it come up?
Derivative lawsuit
219
When does 16b apply?
1. Reporting corporation
• Listed on a national exchange (publicly
traded), OR
• at least 2,000 shareholders ( or 500 non-
accredited shareholders AND $10,000,000 in
assets
2. Appropriate defendant
• Director (either when bought or sold)
• Officer (either when she bought or sold) or
• shareholder who owns more than 10% (both
when she bought AND sold)
3. Type of transaction: buying and selling stock within a single six-month period (short-swing trading). No fraud or inside information needed.
220
What happens when 16b applies?
All "profits from such "short-swing trading" are recoverable by the corporation.
Profit if within 6 mos. before or after any sale, there was a purchase at a lower price.
221
How is profit determined for 16b purposes?
If, within 6 mos before or after any sale, there was a purchase at a lower price, there is a profit.
*The order of buy/sell doesn't matter.
E.g. If I sell today at $10 and buy later at $1, there is a profit.
222
D is a director of Acme, Inc., which is a reporting company. In 2007, D bought 700 shares of Acme stock for $10 a share. In January 2012, D sold 700 shares for $6 a share. In March 2012, D bought 200 Acme shares for $1 a share. What result?
Doesn't look like a profit in real-world terms, but D owes the corporation $1000.
1. Did she buy at less than $6 within 6 mos. before the sale in Jan. 2012? NOPE
2. Did she buy at less than $6 within 6 mos. after the sale in Jan. 2012?
• YES. She bought at $1 in March. $5 per share profit.
3. Multiply $5 x 200 shares. Why 200?
• 200 is the largest number of shares that she both bought and sold within the 6 months.
