Equity, capital, shareholders

Question 1

Residual Claimants

Answer 1

Shareholders that have a residual interest

Question 2

Formula for Equity

Answer 2

Property - debts = Equity

Question 3

Elements of Equity Capital (3)

Answer 3

(1) initial contributions by the original promoters
(2) capital contributions by subsequent investors in exchange for ownership interests
(3) retained earnings of the company (money earned but not allocated or spent)

Question 4

Share

Answer 4

a unit of ownership in an entity. All shares in one class have the same right as every other share in that class

Question 5

Classes of shares - Common Stock

Answer 5

Have voting rights and receive dividends

Question 6

Classes of shares - Preferred Stock

Answer 6

get paid before common shareholders but that amount is fixed and capped. NO voting rights.
-usually have cumulative rights and a liquidation and dividend preference

Question 7

Classes of shares - Cumulative Stock

Answer 7

SH’s with cumulative rights get paid first for all outstanding money owed

Question 8

Classes of shares - Participating Stock

Answer 8

Gives right to preferred stock and the stockholder gets to participate in a common shareholder distribution.

Question 9

Classes of shares - Non-participating stock

Answer 9

just gets preferred dividend

Question 10

Classes of shares - Liquidation Preferences

Answer 10

When liquidation happens, the shareholder will be first paid out

Question 11

Classes of shares - Dividend Preferences

Answer 11

when dividends are issued, the shareholder will be given preferences for payout

Question 12

Redemption Rights

Answer 12

The corporation can redeem shares at any time and the shareholder has no choice but to accept it

Question 13

Conversion Rights

Answer 13

A shareholder may convert their preferred stock to common stock at any time. Common stock cannot be converted to preferred stock tho.

Question 14

Par Value

Answer 14

the amount that the stock is worth, chosen by the members

Question 15

Watered Stock

Answer 15

a stock sold for less than the par value, or for ineligible consideration

Question 16

Proper Consideration for Shares (5)
MBCA 6.21

Answer 16

tangible or intangible property benefit including:
(1) cash
(2) promissory notes
(3) services already performed
(4) contracts for services
(5) other services

Question 17

Preemptive Rights

Answer 17

a shareholder’s privilege to purchase in proportion to their holdings, new issues of stock by the corporation before the stock is offered to the public
-only really seen in closely held corporations

Question 18

Stokes v. Continental Trust Co.

Answer 18

a stockholder has an inherent right to a proportionate share of new stock unless the new stock is issued at a price that is at par or greater and the stockholder is allowed to take the same proportion of the new shares at that price

Question 19

MBCA § 6.30 Opt in/ Opt out statute

Answer 19

When there is an opt in statute, you must opt in to have preemptive rights.
-if opt out statute, preemptive rights is default

Question 20

Preemptive rights Example

Answer 20

If 20% of stock before new issuance, should be able to buy enough to keep 20% after

Question 21

Dodge v. Ford Motor

Answer 21

it is the duty of the corporation to make money for the shareholders

Question 22

Legal Restrictions on Distributions
MBCA § 6.40

Answer 22

The board of directors may authorize and the corporations may make distributions to shareholders unless there is a limitation

Question 23

Limitations to shareholder distribution

Answer 23

Balance Sheet Test or Equity Insolvency Test

Question 24

Balance Sheet Test

Answer 24

Assets must = liabilities + shareholder equity

Question 25

Preferential Distribution Rights

Answer 25

liabilities for the sole purpose of determining the amount available for distributions

Question 26

Equity Insolvency Test

Answer 26

The corporation cannot make a distribution if the assets are less than liabilities and what needs to be paid to be preferred shareholders

Question 27

Wrongful Distribution MBCA § 8.32

Answer 27

Personal liability to the corporation for the amount of the distribution that was illegal. -any director who approves the distribution or any shareholders who took it knowing it was illegal may be held jointly liable.

Question 28

Management and Control of Corporation, board of directors MBCA § 8.01

Answer 28

The board of directors are the managers of the corporation

Question 29

Management and Control of Corporation, close corporation MBCA § 7.32

Answer 29

In a close corp, dont have to follow the corporate formalities but you have to elect close corporation status

Question 30

Shareholder Voting and Agreements (5)

Answer 30

Shareholders can vote for: (1) the board of directors, (2) fundamental corporate changes, (3) initiate reforms (changing state of incorporation) (4) to amend the bylaws or articles (5) to raise shareholder proposals

Question 31

Registered/Record Owner

Answer 31

person whose name the shares are registered. Has power to vote. I.E. if you have stock through Charles Schwab, then Schwab is likely the record owner.

Question 32

Beneficial Owner

Answer 32

Actual owner, dividends belong to you. Can't vote but can compel registered/record owner to execute a proxy for beneficial owner to vote own shares. Can also compel payment of dividends that went to record owner.

Question 33

Cumulative Voting

Answer 33

A shareholder has a number of votes equal to the number of shares he owns multiplied by the number of board seats are up for election. Shareholder is then permitted to distribute this vote as he sees fit over one or more candidates. All of a shares votes may be given to one candidate. Generally opt in.

Question 34

Notice of Intent if Cumulative Voting

Answer 34

Notice of intent of cumulative voting must be given 48 hours before the meeting

Question 35

Straight Voting

Answer 35

Default. Each share gets one vote and one share may not vote for one candidate more than once. Shareholder with 51% of vote elects entire board.

Question 36

Vote Pooling

Answer 36

a private contract among multiple shareholders to coordinate voting

Question 37

Voting Trust

Answer 37

a formal transfer of title of the voting shares

Question 38

Irrevocable Proxy MBCA § 7.22(d)

Answer 38

A party cannot change their mind and withdraw the proxy holder's authority to vote the shares. -however, only upheld where the agreement specifically states that it is an irrevocable proxy and the agreement is coupled with the proxy having an interest.

Question 39

Proxy-shareholder Relationship

Answer 39

Fiduciary duty where shareholder is principal and proxy is agent

Question 40

Filling Vacancies in Board of Directors MBCA § 38

Answer 40

Any vacancy occurring in the board of directors may be filled by the affirmative vote of a majority of the remaining directors through less than a quorum of the board of directors

Question 41

Is dissolution appropriate? MBCA 14.30

Answer 41

The court has discretion as to whether dissolution is appropriate

Question 42

Two approaches when a minority shareholder fails to protect its right by contract

Answer 42

(1) instill a fiduciary duty that shareholders in closely held corps owe to one another or as a right to dissolution on the grounds of oppressive conduct (2) an oppressed investor can attempt to rely on traditional legal principles for protection but there are no other safeguards

Question 43

Duty between shareholders

Answer 43

Controlling shareholders in a close corporation have a fiduciary duty to offer an equal opportunity to all shareholders

Question 44

Equal Opportunity Test

Answer 44

If the controlling shareholder sells shares back to the corp, all other shareholders must have the opportunity to sell shares at the same price. If not, there is a cause of action for breach of fiduciary duty and breach of equal opportunity.

Question 45

Form of Proxy SEC § 14(a)

Answer 45

purpose is to ensure that SH have the option to vote to approve or disapprove issues submitted to them, and to vote for or against the directors proposed by the person soliciting the proxy, usually management

Question 46

Proxy Statements SEC § 14(a)

Answer 46

Proxy solicitation should be accompanied by a proxy statement containing the required information

Question 47

Annual Reports SEC § 14(a)

Answer 47

If a solicitation is by management and relates to an annual meeting at which directors are to be elected, the solicitation must be accompanied or preceded by an annual report containing the financial info and other material described in the rule

Question 48

Duty of Care

Answer 48

a director or officer has a duty to the corporation to perform functions in good faith, in a manner they reasonably believe is the best interests of the corporation, and with care that a person in a like position would use

Question 49

Duty of Care, director liability (1, 2, a-f) MBCA § 8.31

Answer 49

Not liable for any decision unless it's established (1) there is no defense based on a provision in the articles or statutory protection AND (2) the challenged conduct was the result of (a) an action not in good faith (b) decision was believed to not be in the best interests of the corp/not appropriately performed (c) lack of objectivity (d) sustained failure to devote attention (e) receipt of financial benefit to the director that was not entitled OR (f) any other breach of duty to deal fairly with the corporation and its shareholders

Question 50

Business Judgment Rule (3)

Answer 50

There is an evidentiary presumption that the directors, in making a decision, -have acted on an informed basis, -in good faith, -and in a manner they believed to be in the best interests of the shareholders. (gross negligence may overcome rule)

Question 51

Level of Care for Directors MBCA § 8.30

Answer 51

Directors must act with the care that a person in a like position would reasonably believe appropriate

Question 52

Duty of Loyalty

Answer 52

requires directors to exercise powers in the interests of the corporation, and not the director's own interest or interest of another. -directors should not use their corporate position to make a personal profit or gain for other personal advantage

Question 53

Self-Dealing

Answer 53

a transaction between the corporation and a director wherein the director uses their position to seek personal gain at the expense of the shareholders

Question 54

Self Dealing Framework

Answer 54

Must determine whether or not the transaction has been validated through one of the Section 144 procedures + pass the intrinsic fairness test

Question 55

Section 144

Answer 55

you can validate a self-dealing transaction by either: (1) disclosure and board/committee authorization by majority vote of disinterested directors (2) disclosure and shareholder authorization OR (3) contract/transaction is fair at the time it is authorized by the board/committee/SH

Question 56

Intrinsic Fairness Test

Answer 56

Was the transaction fair?

Question 57

Corporate Opportunity

Answer 57

when a fiduciary appropriates a business opportunity for themselves that belongs to the corporation

Question 58

Corporate Opportunity - American Law Institute Test (1-3, a-c) SEC § 5.05(b)

Answer 58

A director may not take advantage of a corporate opportunity unless (1) the opportunity is offered to the corp AND (2) disclosure concerning the conflict of interest is made AND (3) the opportunity to rejected by the corp AND (a) either the rejection is fair OR (b) the opportunity is rejected in advance of disinterested directors following disclosure OR (c) the rejection is authorized or ratified by the shareholders

Question 59

Insider Trading § 10 and Rule 10b-5

Answer 59

There is a a violation (1) by the use of any means or instrumentality; (2) in connection with purchase or sale of any security; (3) any manipulative or deceptive device; (4) in the public interest or for the protection of investors, AND (5) scienter (intent to deceive)

Question 60

Rule 10b-5-1

Answer 60

If a person is aware of the material, nonpublic information at the time they traded, then they are presumed to have traded on the basis of that information.

Question 61

Rule 10-5-2 Duty of Trust, or Duty of Confidence (3)

Answer 61

(1) person agrees to maintain confidence (2) 2 people have history/pattern/practice of sharing confidences so the recipient knows or should have confidentiality is expected (3) Bright Line Rule: if you learn from spouse, parent, child, or siblings then you cant trade on it -fiduciary duty to source!

Question 62

Rule 14e-3

Answer 62

Duty to disclose/abstain for any person possessing material nonpublic info who trades in securities related to tender offer (when someone offers cash for stock)

Question 63

Section 20A

Answer 63

Anyone who traded simultaneously with insider trader can sue

Question 64

Classic Insider Trading

Answer 64

a corporate insider trades shares using material, nonpublic information obtained through the insider's corporate position.

Question 65

Chiarella v. US

Answer 65

Duty to disclose or abstain from trading if there is a fiduciary duty. Mere possession of information does not create duty, must have a fiduciary duty.

Question 66

Tipper-Tippee: Tipper Liability

Answer 66

a tipper is only liable for insider trading if they breach their fiduciary duty by giving the information in order to personally benefit.

Question 67

Tipper Tippee: Tippee Liability

Answer 67

liable where they knew or should have know that information was given by breach of fiduciary duty

Question 68

Tipper-Tippee Personal Benefit

Answer 68

Can be a friend/family relationship OR the tipper receives a gift from the tippee

Question 69

Section 16(a) - Short Swing Trading

Answer 69

Reporting Requirement: requires specified insiders (officers, directors, and 10% or more shareholders) to report their trading every year to the SEC

Question 70

Section 16(b) - Short Swing Trading

Answer 70

if you made a purchase or sale, and then in 6 or less months sold/purchased, then strictly liable -no proof or intent required. All profits have to be returned to corp.

Question 71

3 Elements to Section 16

Answer 71

(1) JDX - only applies to companies who have had to register under section 12- (traded on national securities exchange AND corps with 10 mill in assets and shares of a class held by more than 2000 SH) (2) specified insider - officer, director, 10% shareholder (3) was there short swing profit? (must be purchase and sale)

Question 72

Permissive Indemnification MBCA § 8.51

Answer 72

Corp may choose to indemnify if the person acted in good faith in a manner reasonably believed in the corps best interests or that there was no reason to believe the conduct was unlawful

Question 73

Mandatory Indemnification MBCA § 8.52

Answer 73

Corp must indemnify. The person has to be wholly successful.

Question 74

Indemnification

Answer 74

Repayment of Costs usually after resolution of litigation

Question 75

Advancement

Answer 75

Immediate payment of ongoing expenses during investigation/litigation

Question 76

D&O (director and officer) insurance

Answer 76

a backup for indemnification if the corporation doesn't have enough money to pay