Barbri - Corporations

Front 1

Formatoin:

follow all statutory provisions: people, paper, act) (insulates against personal liability of SHs)
People, Paper (articles of incorporation - name, incorporators, agent for service of process, purpose and duration). Act (filed with secreatry of state).

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de jure corporation

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formatoin:

(colorable compliance with most statutory provisions and exercise of corporate privileges) (insulates against personal liability of SHs, but corporation subject to quo warranto proceeding by state)

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de facto corporation

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formation:

(parties act as if there is a corporation; no requirement of following statutory provisions) (insulates against personal liability in contract, but not in tort)

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corporation by estoppel

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formation:

i. GR: A SH is not liable for the debts of a corporation
ii. EXCEPTION: A court might pierce the corporate veil and hold SHs personally liable if:
1. They have abused the privilege of incorporating; and
2. Giving SHs limited liability would be inequitable

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piercing the corporate veil

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formation:

1. Alter Ego → SH commingles personal and corporate funds; uses corporate assets as his own; pays personal debts with corporate funds
2. Undercapitalization → SHs failed to invest enough to cover prospective liabilities
3. Avoidance of existing obligations, fraud, or evasion of statutory provisions

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examples on when we can pierce the corporate viel

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formation:

SH who fails to pay the full amount agreed upon can be held liable for any sums unpaid

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unpaid stock

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formation:

i. Traditional rules → if a corporation issues par stock for less than par value (minimum issuance price), the corporation can sue:
1. The purchaser of watered stock
2. The corporation’s directors if they knowingly authorized the issuance
ii. RMBCA (no watered stock) → stock is validly issued, fully paid, and non-assessable when the corporation receives consideration authorized by the BOD, even if not the stated PV (note: a court might hold the directors liable for any damages caused by the issuance for less than PV since they breached a duty by failing to abide by the articles)

Back 7

water stock

Front 8

capital stock structure:

(written promises by subscribers to buy stock in the corporation)
i. Pre-incorporation offers are irrevocable for six months, unless they otherwise provide or all subscribers consent to revocation
ii. Post-incorporation subscriptions are revocable until acceptance by BOD

Back 8

subscription agreements

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capital stock structure:

i. Appropriate forms
1. Traditionally (money, tangible or intangible property, services already rendered, secured note)
2. RMBCA (any tangible or intangible property or benefit to the corporation) (including promissory notes and future services and promises to convey property in the future)

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consideration for stock

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capital stock structure:

corporation purchases outstanding shares pursuant to its articles) and Repurchases of Stock (agreement by corporation to buy back shares at SH’s reques. Corp may purchase from shareholders who voluntary offer to sell.

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redemption

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capital stock structure:

1. All directors are personally liable if negligent and did not act in good faith
2. SHs are liable if they knew the distribution was unlawful

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redemption; liabilty for unalwful distrubution

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stock transactions:

(owed to existing SHs and generally required privity) (tort of misrepresentation: intentional or negligent)

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common law duty

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stock transactions:

1. Misrepresentation of a material fact (no duty to disclose and opinion not actionable unless rendered by someone with superior knowledge in the area);
a. Silence not enough
b. Must make an affirmative misrepresentation
2. Scienter (i.e., when ∆ made the statement, she knew or believed it was false or that there was no basis for the statement);
3. Intent to induce ∏ to act or refrain from acting in reliance upon the misrepresentation;
4. Actual reliance;
5. Justifiable reliance as to statement of fact; and
6. Damages (∏ must suffer actual pecuniary loss)

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common law duty: intentional misrepresentation

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stock transaction:

(this action is confined to misrepresentations made in a commercial setting, and liability will attach only if reliance by the particular ∏ could be contemplated)
1. Misrepresentation by ∆ in a business or professional capacity;
2. Breach of duty toward a particular ∏;
3. Causation;
4. Justifiable reliance; and
5. Damages

Back 14

common law duty: negligent misrepresentation

Front 15

stock transactions:
(many courts impose upon directors and officers an affirmative duty to disclose special facts in a securities transaction with a SH or non-SH)
i. Special Facts → facts a reasonable investor would consider important in making an investment decision
ii. If these special facts are not disclosed, the SH with whom the insider dealt may sue
1. Corporation may sue the insider to recover the profits he made from selling the securities in the market
iii. Measure of damages = price paid – the value of the stock a reasonable time after public disclosure

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nondisclosure of special facts

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stock transactions:

(federal securities law misrepresentation action) (it is unlawful for any person, directly or indirectly, by the use of any means of interstate commerce, to (1) employ any device, scheme, or artifice to defraud, (2) make any untrue statement of a material fact or omit to state a material fact, and (3) engage in any act, practice, or course of business, that would operate as a fraud in connection with the purchase or sale of any security)

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10B-5

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stock transactions:

1. Interstate commerce
2. Fraudulent conduct
a. May be overt act or omission to act
b. Materiality → information a reasonable investor would be substantially likely to consider important in making an investment decision
c. Scienter
3. In connection with either a purchaser or sale

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10B-5 three requirements

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stock transactions:

1. Fiduciary relationship required (held directly liable for insider trading)
a. Traditional insider (director, officer, majority SH) (owes fiduciary duties to the issuer)
b. Temporary insider (one with a relationship of trust and confidence with the corporation)

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10B-5 insider trading

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stock transactions:

a. Tipper (traditional insider or temporary insider who does not personally trade on inside information can be vicariously liable as a tipper)
i. Intentionally passes along inside information to someone else who trades on it in breach of a duty to the corporation; and
ii. Derives a personal benefit from it (improper purpose) (making a gift or enhancing reputation)
b. Tippee (a non-insider can be held derivatively liable)
i. Tipper breached a duty; and
ii. The tippee knew or should have known that the tipper was breaching the duty

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10B-5 insider trading: tipper/tipee

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stock transactions:

(∆ is being prosecuted by the SEC and traded on market information in breach of a duty of trust and confidence owed to the source of the information)

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insider trading: misappropriation

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stock transactions:

(to prevent the kind of transaction in which abuse of inside information is likely to occur)
i. Any profit realized by a director, officer, or 10% SH from any purchase and sale, or sale and purchase, of any equity security of his corporation within a period of less than 6 months must be returned to the corporation (through SH derivative suit)
ii. Corporation may recover all profits made on the largest number of shares both bought and sold within a 6-month period
iii. No defenses

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16b

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operation and management of corp:

i. Promoters always liable until there has been a novation
ii. Corporation never liable until there is adoption

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promoters

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operation and managmeent of corporation:

a. Unanimous written consent
b. Annual meeting (corporations must hold annual meetings)(primary purpose of electing directors)
c. Special meeting (can be called by BOD, 10% of voting shares) (must be for a proper SH purpose)

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shareholder voting rights: meetings

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operation adn management of corporatoin:

a. Requirements
i. Written
ii. Signed
b. Only valid for 11 months unless otherwise provided
c. Easily revocable unless coupled with an interest

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sharehodler voting rights: proxies

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operation and managment of corproation:

a. Quorum necessary
b. Quorum (majority of outstanding shares entitled to vote) (only record owners can vote) (record date may not be more than 70 before the meeting)
c. Cumulative voting (for directors only)

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shareholder voting rights: effective shareholder action

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opeartoin and managment of corporation:

a. Pooling Agreements
i. SHs may enter into written and signed agreement providing for the manner in which they will vote their shares
ii. Specifically enforceable
b. Voting Trust
i. Entering into a signed writing setting forth the trust’s terms;
ii. On file;
iii. Expires in 10 years
c. Stock Transfer Restriction Agreements (must be a reasonable restriction and not an undue restraint on alienation) (right of first refusals usually upheld as long as the corporation pays a reasonable price for the stock)

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shareholder voting rights: shareholder agreements to control voting

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operation and management of corp:

(the right of an existing SH to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock for money)

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shareholder prescriptive rights

Front 28

operation and management of corp:

1. At least one class of stock must have a right to receive the corporation’s net assets on dissolution
2. Declarations of dividends is within the discretion of the BOD
a. SHs have no right to dividend until it is declared
b. Irrevocable once declared
i. Insolvency exception
3. Payable out of:
a. Earned surplus (all earnings minus all losses minus distributions previously made) (generated by business activity)
b. Never from stated capital (number of shares sold × par value) (generated by issuing stock)
c. Capital surplus (amount paid for stock in excess of stated par value plus amounts allocated on a no-par issuance) (generated by issuing stock)

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shareholder dividends

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operation and management fo corporation:

1. May only inspect records, books, shareholder lists, etc. (i.e., what’s on paper)
2. SH must give 5 days’ written notice of his request and state a proper purpose for the inspection (e.g., waging a proxy battle, investigating possible director/officer misconduct, seeking support for a SH initiative, etc.)
3. If the corporation fails to allow inspection, the SH may move for a court order compelling inspection and must be awarded costs and attorneys’ fees incurred in making the motion, unless the corporation can show that its refusal was in good faith

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shareholder inspection rights

Front 30

operation and management of corporation:

(SH is ∏ on behalf of corporation to enforce the corporation’s claim) (ask if the.
3. Requirements:
a. SH at time of and when suit brought
b. Prior demand on BOD unless this would be futile (if demand turned down in good faith, no suit)
c. Bond
If successful recovery goes to corp and individual is reimbursed for litigation costs. no settlement or dismissal w/o court approval

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dirivative suits

Front 31

operation and control of corp:

1. Controlling SH must refrain from obtaining a special advantage or causing the corporation to take action prejudicing minority SHs
a. Controlling SH can sell her stock for more than its value = control premium
b. Courts impose duties on the CSH, owed to the corporation and to minority SHs, especially in following situations:
i. Sale to looters (liable if CSH sells to looters without making a reasonable investigation of the buyer)
ii. Disguised sale of corporate asset (buyer pays a premium to the CSH so he can get his hands on an asset of the corporation)
iii. Sale of a board position (a fiduciary cannot get paid to relinquish her position) (watch for CSH selling her shares and then resigning from the BOD)

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shareholders, controlling sharehodlers

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operation and control of corp:

responsible for managment of the business adn affairs of the corporatoin

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directors

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operation and control of corporation:

(actual authority to bind the corporation can arise only if proper notice was given for a special meeting, a quorum was present, and a majority of directors approved the action, or there was unanimous written consent of the directors) (if requirements not met, any act by the BOD is void unless later ratified by a valid act)
1. Quorum (majority of the originally authorized number of directors)
2. Majority of quorum wins; or Unanimous written consent to act without a meeting
3. No voting agreements or proxies

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Directors: effective board of direcftors actions.

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operation and contro of corp:

ii. Board vacancy may be filled by other directors or SHs

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directors

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operation and control of corp:

directors owe a FD to the corp

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directors duties

Front 36

operation and control of corp:

A director owes the corporation a duty of due care. This means that he must act as a prudent person would with respect to his own business affairs”

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directors duty of care

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operation and control of corp:

(director does nothing, such as fails to attend BOD meetings)
i. “A prudent person would attend some director meetings, and failure to do so is a breach of the duty of due care, but the director is only liable if that breach caused an actual loss to the corporation”

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directors: duty of care - nonfeasance

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operation and control of corp:

(board does something that causes harm to the corporation)
i. If the board’s action causes a loss to the corporation, the directors are not liable if they acted in good faith, had a rational basis for the decision, and were reasonably informed (BJR)
ii. Directors will be liable for irrational or grossly negligent acts

Back 38

directors: duty of care - misfeasance

Front 39

operation and control of corp:

A director owes the corporation a duty of loyalty. This means that he must act in good faith and in a manner he reasonably believes to be in the corporation’s best interest”

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directors: duty of loyalty

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operation and control of corp:

i. A breach of the duty of loyalty is inferred whenever a director (or his business or close relative) obtains any personal benefit at the corporation’s expense
ii. The deal between the corporation and the interested director is invalid (and the ID is liable for damages) unless:
1. The deal is fair to the corporation; or
2. His interest is disclosed and the deal is approved by a majority of disinterested directors or SHs

Back 40

directors: duty of loyalty: self dealing

Front 41

operation and control of corp:
1. Adequacy of consideration
2. Corporation’s need to enter into the transaction
3. Financial position of corporation
4. Available alternatives

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directors duty of loyalty: self dealing - fairness factors

Front 42

operation and control of corp:

i. A director may not usurp a corporate opportunity or expectancy
1. An opportunity that is necessary to the corporation
2. An opportunity the corporation would reasonably be interested in
3. An opportunity in the corporation’s line of business
ii. Before taking advantage of corporate opportunity, the director must:
1. Disclose it to the BOD; and
2. Give BOD the opportunity to accept or reject
iii. Remedies (if the director is found liable):
1. He will be liable to the corporation for any profits made; and
2. The corporation may impose a constructive trust

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directors duty of loyalty: corporate opportuniy doctrine

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operation and control of corp:

i. Director may engage in unrelated business, but if engaged in competing business, then it is considered a conflict of interest
ii. A constructive trust remedy may be imposed on profits, and damages may be awarded if director harmed the corporation

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directors duty of loyalty: competing ventures

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control and operation of corp:

(directors may set their own compensation, but it must be reasonable) (excessive compensation is a waste of corporate assets)

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directors duty of loyalty: compensation

Front 45

operation and control of corp:

(loaning director money from corporation)
i. Traditionally, loans needed SH approval
ii. Modern trend permits these type of loans if they are reasonably expected to benefit the corporation

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directors duty of loyalty; improper loans

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operation and control of corp:

i. His dissent is noted in writing on the corporate record;
ii. He abstained from voting on the action;
iii. He was not present at the meeting; or
iv. He relied in good faith on financial statements prepared by auditors, book value of assets, or on the opinion of a competent employee or professional

Back 46

directors duties: defenses of individual directors:

a director is presumed to have concurred with all BOD actions, unless:

Front 47

operatoin and control of corp:

i. Financial benefits received by D to which she is not entitled
ii. Intentionally inflicted harm on corporation or SHs
iii. Unlawful corporate distributions
iv. Intentional violation of criminal law

Back 47

directors duties of loyalty:

defenses for individaul directors:

personal liablity cannot be limited for:

Front 48

operation and control of corp:

i. Owe same duties of care and loyalty as directors
ii. Agents of corporation
iii. Authority to act
1. Express (where the power to do something is specifically given in a statute, the articles, the bylaws, or by BOD resolutions)
2. Apparent (an officer will be deemed to have apparent authority to act where the corporation holds the officer out as having authority so 3rd parties believe it exists and rely on it)
3. Implied (or inherent) (by virtue of the office) (president has implied authority to enter into contracts and handle ordinary day to day affairs)

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officers

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fundamental corporate changes:

(A corp. and B, Inc. form A corp.; A corp. succeeds to all rights and liabilities of B, Inc.) and Consolidations (A corp. and B, Inc. form C corp.; C corp. succeeds to all rights and liabilities of both A and B)

Back 49

mergers

Front 50

fundamental corporate changes:

1. BOD approval of both companies (through resolution);
2. Written notice to SHs; and
3. SH approval (by majority of the shares entitled to vote) (short form merger does not require SH approval)
4. Filed with Secretary of State

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merger requirements

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fundamental corporate changes:

1. A dissenting SH to a merger/consolidation has the right to force the corporation to buy his shares at fair value
2. SH can assert the right by:
a. Before the SH vote, he must file written notice of objection and intent to demand payment;
b. He must abstain or vote against the proposed change; AND
c. After the vote, make written demand to be bought out

Back 51

merger: dissenting SH right of appraisal

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fundamental corporate changes:

i. If sale, lease or exchange of substantially all of the corporate assets is outside the ordinary course of business, then majority of directors and majority of shares entitled to vote must approve

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merger - sale of assets

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fundamental corporate changes:

1. Selling corporation’s BOD approval (through resolution);
2. Written notice to the selling corporation’s SHs; and
3. Approval by a majority of the selling corporation’s shares entitled to vote
4. Buying corporation in a share exchange must file with secretary of state (no filing requirement in a transfer of assets)

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merger - sale of assets requirements

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fundamental corporate changes:

1. Sale of assets may be de facto merger, triggering possible rescission or appraisal rights in selling corporation’s SHs only
2. Purchasing corporation may be liable for debts and liabilities if:
a. Agreement provides; or
b. The buying company is a “mere continuation” of the selling company

Back 54

merger - sale of assets: De facto merger

Front 55

fundamental corporate changes:

i. BOD approval + written notice to SHs + approval by majority of shares entitled to vote + filed with secretary of state
ii. No appraisal rights

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merger - amendment of articles

Front 56

fundamental changes:

i. Majority of directors and majority of shares entitled to vote must approve (no quorum concept)
ii. Involuntary dissolution (a SH may petition the court for dissolution if there is severe director abuse, waste, misconduct, or illegal or oppressive acts) (court may order buy out instead if it is a closely-held corporation)
iii. If liquidation, pay outside creditors first

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merger - dissolution and liquidation