Flashcards in Corps - Fundamental Changes & Director Liability Deck (57):
In order to undertake a fundamental corporate change, a corp must
(1) board action adopting a resolution of fundamental change
(2) board submits the proposal to shareholders for written notice
(3) shareholder approval: majority of the shares ENTITLED to vote
(4) in most cases, deliver document to Sec. State
Shareholder approval of a fundamental corporate change requires a ______ of shares ______ to vote.
majority; entitled.**States are moving in the direction of allowing majority of shares that actually vote.
The "right of appraisal" for fundamental corporate change allows a shareholder to
force the corp to buy the shareholder's stock at FMV.
A shareholder will have the "right of appraisal" if the corporation is
(1) merging or consolidating
(2) transferring substantially all assets not in the ordinary course of business
(3) transferring its stock in a share exchange
(4) the company is not listed on a national exchange and has less than 2,000 shareholders**I.e. it must be a CLOSE corporation
In order to perfect a right of appraisal, the shareholder must
(1) written notice to corporation(2)(3)
Amending the corp's articles _____ a fundamental corporate change but there is no
is; right of appraisal.
A merger or consolidation ______ a fundamental corporate change and there is ________.
is; right of appraisal.
If 90% of more of a subsidiary is being merged into a parent corp, this is called a _______ and shareholder approval _________.
short-form merger; is not required.
The two types of security investments are
(1) debt securities (e.g. bonds, call them creditors)
(2) equity securities (e.g. stocks, call them owners)
Rule 10b-5 prohibits ____ or ______ in connection with the purchase or sale of a ______.
fraud; misrepresentation; security (debt or equity).
The elements of a 10b-5 case are
(1) instrumentality of interstate commerce (mail, phone, trade on national exchange)
(2) misrepresentation, insider trading, or tipping
(5) reliancePlaintiffs: SEC or a buyer or seller of securities who was defrauded (contemporaneous trader)
"Insider trading" and "tipping" involve...
(1) insider trading for those who's job gives them access to confidential info: someone with a relationship of trust and confidence with the shareholders.
TIPPER is liable if
(1) the TIPPER passed along material inside information
(2) in breach of a duty to the corp and
(3) the TIPPER benefits (making a gift or enhancing reputation is enough)
A TIPPEE is liable if
(1) TIPPEE trades on the tip and
(2) TIPPEE knew or should have known that the information was improperly passed
**Merely overhearing a convo is not enough to give rise to tippee liability
The section 16(b) "short-swing" trading rule imposes ______ liability for speculation by ____________.
strict; directors, officers, and 10% shareholders.
Section 16(b) applies only to reporting corporations, which means
(1) listed on a national exchange, or
(2) at least 500 shareholders and $10 million in assets
______ and _____ are covered by Section 16(b) either when they _____ OR _____,
Directors and officers; buy; sell.
E.g., director can buy, lose status as director, then sell, but still liable.
10% shareholders are covered only when they _____ AND _____ while holding that status.
buy AND sell.
Section 16(b) liability attaches to buying and selling stock within a single ______ period.
A section 16(b) violator owes the corporation the difference between the _____ price and the _______ price times the largest number of shares common to both the
purchase and sale within the six-month period.
**This applies regardless of the order of buying/selling.
A director owes the corporation a duty of care, meaning she must
act in good faith and do what a prudent person would do with regard to her own business
A director who has breached of the duty of care is still only liable if her breach caused
a loss to the corporation (must show causation and not just breach)
Even if a D caused a loss to the corporation, they are not liable if their actions meet the
business judgment rule, i.e. decision was made in good faith, was informed, and had a rational basis.
The business judgement rule provides that a court
will not second-guess a business decision that was made in good faith, was informed, and had a rational basis. (D is not a guarantor of success)
To prove a breach of the duty of loyalty, the burden is on the
plaintiff to show the conflict of interest. Once that is shown, the burden shifts to the defendant to show fairness and/or disinterested director/shareholder approval
A D owes the corporation a duty of loyalty, which means she must
act in good faith and with a reasonable belief that what she does is in the corporation's best interest
BJR does NOT apply in duty of loyalty cases when there is an alleged
conflict of interest
An interested director transaction will be set aside (or D liable in damages) UNLESS the director shows either
1. the deal was fair to the corporation when entered
2. her interest and the relevant facts were disclosed or known and deal was approved by either majority of disinterested Ds or majority of disinterested shares
(although always also note that some courts also require a showing of fairness regardless of whether there was majority disinterested approval)
A director cannot compete directly with her corporation becuase
1. it violates her duty of loyalty, and
2. she's a fiduciary(remedy is constructive trust on profits)
A director cannot usurp a corporate opportunity, meaning he cannot take it until he
1. tells the board about it, and
2. waits for the board to reject the opportunity (although if they reject it just for financial reasons that's generally not a defense)
The board can vote to lend money to a director as long as
it's reasonably expected to benefit the corporation
A director is presumed to concur with board action unless
her dissent or abstention is noted in writing in corporate records
If a D voted for a resolution at the meeting, she cannot later
An absent D (is/isn't) liable for things done at the meeting she missed
Officers owe the same duties of _____ and ______ as Ds
care and loyalty
Officers are selected, removed, and their compensation set by ____________
the board of directors
Shareholders (do/don't) hire and fire officers
DON'T. They only hire and fire Ds, who then hire and fire Os.
A corporation is barred from indemnifying a D or O if they were
(1) held liable to the corporation
(2) received an improper personal benefit
(3) approved unlawful distributions
(4) intentionally committed a crime
(5) intentionally inflicted harm on the corporation or its shareholders
A corporation MUST indemnify a D or O who is
successful in defending, whether on the merits or otherwise (i.e. wins a judgment)
A corporation may, but does not have to, indemnify a D or O who
falls somewhere in between the other two situations (i.e. not liable to corp but not totally successful either). Good example is if the case against her settled. D or O must show she acted in good faith and with reasonable belief that her actions were in the company's best interest (i.e. duty of loyalty)
The articles can eliminate D (and sometimes O) liability to the corporation for damages in this type of case
duty of care
Shareholders can manage the corporation directly only in a
close corporation (by just eliminating the board)
A close corporation is one in which there are
few shareholders and the stock is not publicly traded
If the shareholders in a close corporation want to eliminate the board they must
1. write it in the articles and have it approved by ALL SHs, or
2. unanimous written SH agreement
If the SHs in a close corporation eliminate the board and run the company directly, the _________ owes duties of care and loyalty to the corp
those who manage it
In a closed corporation, SHs must treat each other with
utmost good faith (theory is that it's like a partnership's fiduciary duties)
If a minority SH in a close corp is being oppressed, they can
sue the controlling SHs who oppress them for breach of their fiduciary duty
A professional corporation is one whose articles state that it is ________ and whose name must include _______
formed to practice a particular profession; P.C. or P.A.
In a professional corporation, Ds, Os, and SHs must all be
licensed professionals; they are personally liable for their malpractice but not others
A SH might be personally liable for corporation's action (PCV) only if
1. it's a close corp
2. they must have abused their privilege of incorporating, and
3. Fairness must require holding them accountable
The general rule is that SHs are not liable for corp obligations, but a SH can be personally liable if
the corporation was undercapitalized when formed (and it meets the other requirements)
Courts are more willing to pierce the corporate veil for a _______ victim than a _______ claimant
tort; contract (contractor beware; they voluntarily chose to do business with that party and could have inspected or been more cautious; a tort victim didn't intend to be a tort victim!)
A derivative suit is a case in which
a shareholder sues to enforce the corporation's claim, not her own personal claim(key question: could the corp have brought this suit?)
If the SH plaintiff wins a derivative suit, the judgment goes to
the corporation; she can recover costs and attorneys' fees
To bring a SH derivative suit, a plaintiff must fulfill these
1. stock ownership when the claim arose and throughout the suit
2. adequate representation of the corporation's interest
3. written demand on a corporation that they bring the suit (unless it would be futile, for example if Ds will be defendants in the case)
4. corporation must be joined as a defendant
Parties can settle a derivative suit only if there is