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145 Cards in this Set
- Front
- Back
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Corporate Characteristics
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1. Limited Liability
2. Free Transferability 3. continuity of life: exists in perpetuity 4. centralized management: shareholders elect board, board elects officers, officers manage the corporation |
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General Partnership Characteristics
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1. Unlimited liability: partners are individually liable
2. transferability only with the consent of all partners 3. dissolution on the death or withdrawal of a partner management by the partners |
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Limited Partnership Characteristics: Limited Liability
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Rule: made up of at least one GP and one LP
1. Limited Liability GP: in theory GP has unlimited liability; in practice can have LL if an entity LP: absent additional obligations, the LP has limited liability only for the amount of contributions the LP has made Compare: a) RULPA: an LP who participates in the control of the partnership IS liable for debts of the LP b) ULPA: an LP who participates in control is NOT liable for debts of the LP |
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Limited Partnership Characteristics: Transferability
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2. restrictions on transferability: allowed only with consent of all partners
assignee does not become a substitute partner unless all partners consent |
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Limited Partnership Characteristics: Continuity of Life
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3. continuity of life
rule: LP continues if GP remains RULPA: withdrawal of a GP results in dissolution IF: a) no other GP, unless all LPs agree to continue the partnership and appoint a new GP; OR b) there is another GP and the partnership agreement permits the remaining GP to carry on the partnership business ULPA: the withdrawal of GP results in dissolution of IF: a) there is no other GP, and a majority of LPs do not vote to continue the partnership and replace the GP; OR b)there is another GP, but a majority of the partners vote to dissolve the partnership |
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Limited Partnership Characteristics: Centralized Management
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4. centralized management
GPs manage the limited partnership LPs may have right to vote on certain matters; based on partnership agreement consent of all parties is required for certain actions that fundamentally affect the partnership |
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LLC Characteristics
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1. LLC is member managed (partnership characteristic)
2. Transferability only with member consent (partnership characteristic) 3. Exists in perpetuity (corporate characteristic) 4. Limited Liability (corporate characteristic) NOTE: best of both worlds - taxed as partnership - have limited liability |
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Deciding which form to use: Formalities
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how formal do the investors want the relationship to be?
minority vs majority interests rule: working together as a business, the default is the business is a partnership |
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Deciding which form to use: Default Rules
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1. Limited liability
2. allocation of control and management 3. continuity of life 4. transferability of interests |
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Deciding which form to use: Ability to raise capital
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how does the form affect the ability to raise capital?
- banks look for sufficient assets to repay the debt - small business loans - friends and family - LLC and GPs are barriers to acquiring large amounts of capital because of impermanence of arrangement, deters commitment - C Corp or LPs can go public with LL protections |
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Deciding which form to use: Taxation Corporation
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C Corp is treated as a separate taxpaying entity.
Double Taxation: 1.first level: corporation pays tax on net income 2. second level: shareholders pay tax on dividends |
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Deciding which form to use: Taxation Partnership (pass-through)
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business is not taxed as a separate entity. the income is passed through to the partner and taxed on his individual income
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Setting up an S-Corporation
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1.no more than 100 shareholders
2. shareholders cannot be non-resident aliens 3. cannot have an entity shareholder 4. cannot have more than on class of stock |
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Taxation: business operates as loss
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C-Corp: the loss is the net operating loss (NOL) and deducted from income on tax return
Partnership: each investor records the loss on individual tax returns which can offset other income "passive loss limitation" rule: losses can only be deducted from passive activities |
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Taxation: NOL 2 year carry back, 20 year carry forward
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the business can amend a return for prior 2 years and get refund for tax paid in that year; or carry the loss forward 20 years
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Setting up the corporation: ethical considerations
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lawyer owes allegiance to the entity
Code of Prof Responsibility - prohibits the lawyer from representing more than one client, where the exercise of the lawyers independent judgment is likely to be adversely affected, or where there are different interests EXCEPTION: full disclosure and consent from clients - duty of allegiance to the entity maintain duty of confidentiality |
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Choosing state of incorporation: Internal Affairs Doctrine
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the law of the state of incorporation controls the corporations internal affairs or corporate governance
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choosing state of incorporation: External Affairs
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the laws of the state where tort or contract actions occurs is controlling law
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Promoter's liability on pre-incorporation contracts
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general rule: the promoter is liable for preincorporation contracts entered into on behalf of the corporation
EXCEPTIONS 1. Ex Ante (planning) - promoter should state that the signature is on behalf of the entity - the K should specifically provide for a novation when the coporation comes into existence - the promoter should wait to enter into K until the corporation is formed - the promoter should take assignable option on the K and assign the option to the corporation after it is formed 2. Ex Post (litigation arguments) - general rule; promoter liable - minority view: courts sometimes look to the intentions of the parties, based on all of the facts and circumstances, to determine whether a promoter is liable on preincorporation contracts |
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Contents of Article of Incorporation/Certificate: MUST be included
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1. Name of the corproation
2. name and address of agent and office 3.state purposes of the corporation (to engage in lawful business) 4. powers for accomplishing purposes 5. statement of the capitalization of the corporation. specify number of shares to be issued, as well as par value of the stock |
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Contents of Article of Incorporation/Certificate: MAY be included
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1. can designate directors in initial incorporation
2. fiduciary duties of directors: Del 102b7 says that if the certificate of incorporation specifies, the directors can be relieved of monetary damages for breach of duty of care. this does not cover breach of good faith |
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Ultra Vires doctrine
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if a corporation does something that based on its charter it did not have power to do, the corporation can invoke ultra vires to get out of obligation.
Del 124: a shareholder can sue to invoke ultra vires if a 3d party will not be hurt Cal 207: a corporation shall have all the powers of a natural person in carrying out business |
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Who can adopt and amend the bylaws?
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stock issued? then shareholder have the power
stock not issued? then the incorporater or board has the power Process: 1. board approval 2. shareholder approval |
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Bylaws: contents and powers
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holds the ground rules for the business
the certificate of incorporation trumps the bylaws if there is a conflict Special meeting of shareholders: bylaws can specify other parties, besides the board, who can call special meetings |
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traditional model of the firm
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focuses on the preeminence of the shareholders. the goal is to maximize shareholder wealth.
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new economic theory of the firm
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a corporation is a nexus of contracts among factors of production. the goal is to reduce transaction costs.
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the Berle-Dodd debate
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Berle model: the role of the corporation is to maximize shareholder wealth
Dodd model: a corporation has a profit making and a social responsibility SEE Dodge v Ford Motor Co.: generalized philanthropy doesn't get benefit of the doubt, not acting in SH best interest by not paying out dividends |
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ALI Principles of corporate governance section 2.01
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a corporation should have as its objective the conduct of the business activities with a view of enhancing corporate profit and shareholder gain
even if corporate and shareholder gain are not thereby enhanced, the corporation: 1. is obliged to stay within the law 2. may take ethical considerations that are reasonably regarded as appropriate to the responsible conduct of business, and 3. may devote reasonable amount to public welfare, humanitarian, educational, and philanthropic purposes |
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Constituency Statutes
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Del and Cal do NOT have these
statutes that require corporation consider the interests of the local economy, community, and effects of closing or moving business ABA did not want to include constituency statutes because of the worry of the conflict of interest between constituencies and shareholders |
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The Role of Counsel: ABA model rule 2.1
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Advisor: in representing a client, a lawyer shall exercise independent professional judgment and render candid advice. in rendering advice, a lawyer may refer not only to the law, but to other considerations that may be relevant
scope of advice: - a lawyer should not be deterred from giving candid advice by the prospect that the advice will be unpalatable to the client - advice couched in narrowly legal terms may be of little value to a client, especially where practical considerations, such as cost or effects on other people are predominant. it is proper for a lawyer to refer to relevant moral and ethical considerations in giving advice offering advice: in general a lawyer is not expected to give advice until asked by the client. however, when a lawyer knows that a client proposes a course of action that is likely to result in substantial legal consequences to the client, the lawyers duty to the client may require that the lawyer offer advice if the clients course of action is related to the representation |
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Corporate Charitable Giving: Del and Cal statutes
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Del: not explicit that contribution can be made without regard to corporate profits
section 122(9): all corps have the power to make donations for the public welfare or for charitable, scientific, or educational purposes, and in time of war or other national emergency in aid thereof Cal section 207e: corp has power of a person, including the power to make donations to charities regardless of specific corp benefit |
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Corporate Charitable Giving: Theodora Holding Corp Case
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Muscling through a gift in kind to a boys’ camp, a pet gift to a pet donor.
A corporate gift need only (1) be reasonable as to amount (the federal tax deduction limitation under the internal revenue code is a helpful guide) and (2) have a valid (reasonable) purpose (balance the benefits to the beneficiaries against the loss to the shareholders from the charitable contribution. |
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Corporate Charitable Giving: Kahn v Sullivan Case
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arm and hammer’s museum – business judgment rule. It’s about process.
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Rationale for Limited Liability
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- promotes capital formation
- reduces monitoring costs with respect to management - reduces monitoring costs with respect to other shareholders -facilitates diversification of investments by shareholders - facilitates orderly trading of investments - encourages corporate managers to take business risks that promote growth - gives managers incentives to take business risks that promote growth |
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Critiques of Limited Liability
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- creates a moral hazard problem that managers may be less likely to control risks for which there is only limited liability
- involuntary tort victims and contract creditors bear the costs of limited liability |
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Doctrines the Protect creditors in the conflict between creditors and shareholders
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1. Pierce the corporate veil
2. Legal Capital rules 3. equitable subordination 4. fraudulent conveyance |
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Piercing the Corporate veil: Theories to support a piercing claim
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1. instrumentality test: P must show
- that the owner has exercised such control that the corp becomes a mere instrumentality of the owner - such control resulted in unjust loss or injury to the P - Contracts ONLY: show also there was fraud or other wrong committed 2. undercapitalization at inception - insurance counts as adequate capitalization - general rule: undercapitalization alone is not enough to pierce - 9th circuit exception: severe undercapitalization will pierce 3. failure to observe corporate formalities 4. fraud/misrepresentation: usually someone is the equitable owner of the corporation |
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Piercing the Corporate veil: Parent-Sub Factors
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disregard corporate formalities
inadequate capitalization intermingling of funds overlap of officer and employee common office space degree of discretion bby dominated corp whether objectively it appears dealings were arms length whether corp was indep profit center payment of guarantees of corp debts by allegedly dominating party |
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Piercing the Corporate veil: Freeman v Complex computing
contract case |
“c3.” The case of the slimy grad student. The veil can be pierced to reach the equitable owner. Fraud/misrepresentation
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Piercing the Corporate veil: Magnan v TTS
Walkovsky v Carlton Tort Cases |
Magnan v TTS
Key factors showing domination and control. Gave directions to the operating companies, Provided inspectors, Kept the books, Reported daily receipts, Maintained a claim department, Sold all parts, gasoline, oil, grease and tires, Hired all mechanics, Maintained a central repair garage, Examined, investigated and approved all applicants to be drivers, and even Furnished the legal services to the dominated entities in this suit. Walkovsky there was no undercapitalization where taxicab company had statutory minimum insurance. |
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In re Silicone Gel Breast
Fletcher v Atex Inc Tort Cases (Parent-Subs) |
In re Silicone
The plaintiff must show that the two corporations “operated as a single economic entity such that it would be inequitable to uphold a distinction between them.” Facts Subsidiary presidents did not attend board meetings Many did not know they were board members They had not received any notices of meetings in 5 years. Resolutions were prepared by parent. Subsidiary reported to a parent committee. Parent approved subsidiary budgets. Parent received & maintained subsidiary’s cash. Parent set subsidiary employment policies and wage scales. Subsidiary key executives received parent stock options. Parent provided lawyers, labs, qc, pr. Parent interviewed candidates for subsidiary’s vp position. Parent’s name and logo were contained in the product packaging and promotions. Parent received a note from subsidiary for $57 m. Fletcher v Atex Inc Kodak parent, atex subsidiary, no piercing, no liability, even with use of logo and parent’s name. |
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Corporate Securities; Elements
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1. duration of investment
- equity: permanent investment - debt: interest is generally for a fixed term 2. security holders entitlement to operating income of the business - equity: return generally depends on the corporation earning a profit - debt: typically entitled to only a fixed return, must contract for more 3. security holders entitlement to distributions in the event of liquidation the claims of equity securities are subordinated to the claims of creditors 4. security holders governance rights - equity: interests generally have voting rights - debt: generally do not have voting rights, would have to contract for them |
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Leverage
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general rule: a company will find it profitable to finance business activities with borrowed money whenever it can earn more income from those activities than it will pay in interest on the borrowed money
IF business if profitable, then leverage shareholder return on capital IF business operates at a loss, then leverage results in reduction of invested capital and may impair ability to pay fixed claims to creditors shareholder-creditor conflict: - shareholders have a larger conflict problem when debt interest is greater than equity interests - the less equity shareholders have invested, the more willing they may be to engage in risky projects - debt holders will generally prefer that the corporation engages in safer investments |
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Debt: Types of debt instruments
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Bonds: normally long-term and normally secured by property
Debenture: long-term debt, unsecured, sold to the public or institutional investors notes: shorts term and held by large financial institutions corporations are the issuer of security/bond, and are the debtors/borrowers/issuers. Lenders/creditors are the debt-holder, investor, bond-holder |
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Debt: Who negotiates the debt contract?
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IF privately placed, it is the bank and the corporate issuer that negotiate the debt contract
IF the debt is publicly placed - need underwriter, which is an investment bank that acts as an intermediary in the transaction - underwriter buys the debt from corporate issuer and sells it to the public - underwriter negotiates the terms of the contract |
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Debt: Issues to be negotiated
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1. interest: how interest is calculated
- schedule of payment: can be periodic or could pay out at end of term - amortization: a loan that provides for a fixed payment at regular intervals and part of the payment is the interest and part is the principle - balloon: making interest payments and when it matures pay 100% interest - floating interest rate: an interest rate that is pegged onto something else 2. repayment of principal: want to make sure issuer will have the capital to pay back the principal - sinking fund provision: a requirement that the corporate issuer set aside a specific amount of money per year to guarantee a pot of money to repay the principal when the bond matures - mandatory redemption: when the corporate issuer buys-back its own securities 3. right to convert: debt is convertible into the stock of the issuing corporation 4. priority highest priority is secured debt below secured is general class of unsecured creditors lowest is equity interests 5. events at default and rights upon default: defined in contract 6. negative covenants: requires borrower to refrain from taking certain actions that might jeopardize the position of the creditor 7. role of creditor in corporate governance default rule: debt holders dont have rights to participate in corporate governance - must contract for governance rights 8. information: bondholders want info about the issuer |
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Equity: Statutory authorization to issue stock
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Delaware
section 141a; corporation may issue stock in various classes and series section 170a: the default is shareholders not entitled to dividends unless board announces they will pay section 157: authorizes a corporation to issue rights to purchase its stock |
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Equity: common vs preferred stock
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common stock: most basic kind of security
- all corporations have common stock - represents a residual claim on both current income and the assets of a corporation - holders are first to lose their investments - have greatest potential for gain if corporation is successful - holders first in line with respect to control - holders are primary beneficiaries of the fiduciary duty preferred stock: when the articles assign to it economic rights senior to those customarily assigned to common stock - operating distributions (dividends): these must be paid to preferred stock before any is paid to common stock -- stated as a fixed amount that must be paid annually/quarterly -- cumulative - liquidating distributions: also has liquidation preference over common stock shareholder blank check preferred stock: essential characteristics of rights to dividends, liquidation preferences, redemption rights, voting rights, and conversion rights; can be set by the board at the time of stock |
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Terms of equity securities: Dividend rights
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no guarantee of payment of dividend at fixed interval or time because directors do not have to declare and pay dividends
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Terms of equity securities: Cumulative Preferred Shares
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paid an amount equal to the cumulative value of all annual dividends that haven't yet been paid
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Effect of cumulative dividends
Hypo #1: There are 100 shares of 5% CPS outstanding and 100 shares of CS outstanding. (No shares of PS have been issued.) |
Year 1: No dividend is declared.
Year 2: No dividend is declared. Year 3: BOD declares a $2,000 dividend. Who gets it? $5 dividend/share of CPS x 3 years = $15 dividend/share of CPS. 100 shares x $15/share of CPS = $1,500 dividend paid to CPS. BOD pays a dividend of $1,500 ($15/share) to the CPS. BOD pays a dividend of $500 ($5/share) to the CS. |
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Other miscellaneous types of securities: options
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Call Options: gives the holder the right to buy a security at a specified price for a specified period of time
strike price = specified price in-the-money=if the strike price is less than market price out-of-the-money=if the strike price is greater than the market price warrant: is like a call option except that a warrant is issued and expires after a longer period of time Put Option: holder has the right to sell a security at a specified price for a specified period of time in-the-money=if the stock is currently trading at a price that is lower than the strike price out-of-the-money=if the stock is currently trading at a price that is greater than the strike price |
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More on the shareholder-creditor conflict: Equitable Subordination
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claimants inequitable conduct results in injury to the creditor or conferred unfair advantage on the claimant
general rule: there must be a showing of fraudulent conduct, mismanagement, or inadequate capitalization shenanigans |
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Equitable Subordination: Fett Roofing case
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fett loaned capital it to the corporation using unsecured bank loans for which he was personally liable
on the eve of bankruptcy, he recorded backdated deeds of trust. his objective was to jump up to the secured creditor class. intent was to defraud other creditors. Remedy. Subordination to other unsecured creditors. accorded fett’s loans equity status, not debt status, converting his claim to a common, residual claim. |
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Accounting and Financial Statements: Balance Sheet
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the balance sheet gives a snapshot of the corporations finances and includes;
1. Assets - current assets (cash, accounts receivable, inventories, prepaid expenses) - fixed assets (property, plant and equipment) 2. liabilities - current liabilities (accounts payable, notes payable, accrued expenses payable) - long term notes payable 3. equity -total equity -paid in capital -capital surplus |
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Accounting and Financial Statements: Inventory Formulas
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Opening Inventory
+Purchases during the year = goods available for sale Goods available for sale - Closing inventory = Cost of goods sold Gross receipts from sales - Cost of goods sold = Operating profit from sales |
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Accounting and Financial Statements: Inventory Conventions
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FIFO first-in-first-out
assume that the first item bought for the inventory are the first items sold out of the inventory a company using FIFO will record a higher inventory value, higher profits and higher taxes LIFO last-in-first-out assume that the last items bought for the inventory are the first items sold from the inventory a company using LIFO will record a lower inventory value, lower profits, and lower taxes -- this is because it will record the more expensive "last in" inventory first specific identification method: for unique goods sold; value each inventory item at cost, unless its market value is lower than cost, and compute COGS by adding up the actual cost of all inventory items sold during the relevant period |
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Analyzing the balance sheet and income statement: Profitibility Formulas
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profits per dollar of net sales = operating profit/net sales
use this formula to see if percentage per net sales has increased or decreased return on equity=net income/shareholders equity use this formula to see if the shareholders are earning a better return with this business |
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Analyzing the balance sheet and income statement: Liquidity Formulas
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working capital = current assets - current liabilities
this is a ratio current ratio = current assets/current liabilities if this ratio is less than 1 the business cannot pay its debts as they come due prefer current ratio of at least 2:1 |
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Valuation: Methods
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1. Salvage value - undervalues income ability
2. one years crop - ignores future revenue 3. accumulated gross revenue: multiplies current gross revenue by the number of years the asset will last ignores time value of money 4. market price - active trading does not necessarily give best valuation method 5. book value - ignores future earnings 6. capitalization of earning 7. discounted cash flow |
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Valuation: Capitalization of earnings
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this method takes into account that the business will provide for future revenue
formula: value of business = earnings/capitalization rate OR value of business=earnings x multiplier note: the higher the capitalization rate, the lower the value of the company |
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Valuation: Discounted Cash Flow
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looking at the net cash flow for each year and discount to present value
1. compare yearly cash flow of business for next N years 2. calculate the PV for each year 3. add all those PVs up and salvage value to find current value of the business PV formula: PV = FV/(1 + r)n |
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Legal Capital; The concept
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legal capital rules promote fairness between different groups of shareholders
- govern whether SHs have paid adequate consideration - govern whether the consideration offered is a valid type of consideration - corporation statutes explicitly provide that directors can be held liable if they approve issuance of stock or distribution of a dividend in violation of applicable provisions - sometimes attorneys have to give opinion whether stock is 1) duly authorized, 2) validly issued, 3)non-assessable (based on consideration) |
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Legal Capital: the capital accounts
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stated capital = par value x number of shares issued (PN)
capital surplus (aka paid in capital) = total consideration received for stock - stated capital earned surplus (retained earnings)= earnings from business - dividends paid |
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Legal Capital: The effect of par value on capital accounts
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In all three examples, assume that 500 shares of stock are issued for consideration of $100 per share.
Example 1: $100 par stated capital = $50,000 ($100 par value per share x 500 shares issued) capital surplus = 0 ($50,000 total consideration received for the stock less $50,000 stated capital) Example 2: $10 par stated capital = $5,000 ($10 par value per share x 500 shares issued) capital surplus = $45,000 ($50,000 total consideration received for the stock less $5,000 stated capital) Example 3: $.01 par stated capital = $5 ($.01 par value per share x 500 shares issued) capital surplus = $49,995 ($50,000 total consideration received for the stock less $5 stated capital) |
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Legal Capital: minimum payment for shares
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minimum consideration is par value
Del: the board's determination of value is valid absent actual fraud |
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Legal Capital; acceptable consideration for shares
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Del 152:cash, personal property, real property, leases of property, and past services
Cal: promissory note is good consideration IF adequately secured by collateral other than shares acquired Del 162 (assessability): if SH does not pay full amount, SH can be held liable for the remainder of the consideration promised |
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Legal Capital: Restrictions on dividends
Delaware |
Del section 170
directors may declare and pay dividends either 1) out of its surplus, or 2) out of its net profits for the fiscal year in which dividend is declared or the preceding fiscal year Redemption Ban: Del 160a1 no corporation shall purchase or redeem own shares when the capital of the corporation is impaired or will be impaired capital is impaired when there is less in the SH equity account than in stated capital |
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Legal Capital: Restrictions on dividends
California |
Cal section 500a
permits the payment of dividends out of retained earning only |
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Legal Capital: Restrictions on dividends
Model Act Insolvency Tests |
MBCA section 6.40c
prohibits distributions that would 1. prohibit the corp from paying debts as they come due (equity insolvency debts) OR 2. the corporation's total assets would be less than its total liabilities plus any sum needed to satisfy the claims of preferred stockholders (balance sheet insolvency test) |
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Legal Capital: Nimble Dividend Statutes
Delaware |
Del section 170a2
if dont have surplus, cannot pay dividends but if have profits for the year the dividend can be paid up to amount of those profits |
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Legal Capital: Nimble Dividend Statutes
California |
Step ONE Cal 500b1; total assets must at least equal 1.25 x total liabilities
Step TWO Cal 500b2: two formulas 1) if the corporations average annual earnings for the 2 preceding years was less than its average annual interest expense for the 2 preceding year, then the corporations current assets must at least equal 1.25 x current liabilities 2) if the corporations average annual earnings for the 2 preceding years was equal to or greater than its average interest expense for the 2 preceding years, the corporations current assets must at least equal the corporations current liabilities |
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Legal Capital: Personal liability of directors for unlawful distributions
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if directors have declared and paid unlawful dividends, the recourse is they are liable
Del 174: directors are jointly and severally liable to corporation or its creditors for amounts unlawfully paid as dividend (or as stock redemption), up to the full amount of the unlawful distribution plus interest - must show willful or negligent payment - if director was absent or dissented in vote, may be exonerated from liability - any director against whom the claim may be made may be subrogated against SH who received dividend with knowledge of facts indicating that such dividend was unlawful |
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Alternative to Limited Liability: Fraudulent Conveyance
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to set aside transactions that defraud creditors, applies transaction to the debts of creditors
requirements for constructive defraud 1. a transfer 2. without receiving equivalent value, and 3. either - the debtors assets remaining after the transfer were unreasonably small in relation to business, or - the debtor intended to, believed, or should have believed that the debtor would incur debts beyond the debtors ability to pay as they come due |
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Management and Control: Shareholders Rights
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- right to elect directors
- power to remove directors - right to vote on fundamental corporate transactions (i.e., merger, amendments to incorporation) |
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Management and Control: Directors
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manage corporation
- board may delegate day to day responsibilities to corp officers and employees |
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Management and Control: Officers Sources of authority
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all power exercised by corp officers derive from the statutory power assigned to the board of directors
courts assume CEO has authority to bind the corporation in transaction entered in the "ordinary course of business" - exception: contracts of an "extraordinary" nature agency principles 1. actual authority 2. apparrent authority 3. inherent authority 4. estoppel or ratification |
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Management and Control: Agency Principals
Actual Authority |
general rule: agents power to affect the legal relations of the principal when the principal manifests consent
- express: when the agents authority to bind the principal is granted explicitly - implied: through course of conduct between agent and principal that reflects agent had authority to act for principle look to: bylaws, minutes, agents title, agents place in hierarchy, course of dealings with corporation, conduct of the board |
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Management and Control: Agency Principals
Apparent Authority |
focuses on the relationship between the principal and the 3d party
general rule: conduct that, reasonably interpreted, causes a 3d party to believe that the principal consents to have the act done on her behalf by the agent note: some cases say that corporate officers have apparent authority because a person dealing with the corporation reasonably believes the officer has authority |
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Management and Control: Agency Principals
Inherent Authority |
looks to how the principal would ordinarily conduct her business
if the agent or purported agent is acting generally within the scope of authority there is a penumbra of agency that binds the principle what a president can do |
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Management and Control: Agency Principals
Estoppel or Ratification |
the agent did not have authority to bind the principal but because of equitable reasons the court will bind the P
Ratification: a principal can become obligated to a 3d party by ratifying the act of another who at the time of the act lacked the power to bind the principal - inferred from words or acts of the principal showing intention to ratify and need not be made to the agent or even to another party Estoppel: if principal fails to immediately repudiate agents actions then principal can be estopped from later repudiating the act of the purported agent |
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Management and Control: Agency Principals
Lee v Jenkins Bros Case Scientific Holding co v Plessy |
Lee v Jenkins Bros: a life pension offered by companys president to attract new executive was within the presidents apparent authority
Scientific holding: officers authority to sign the amendment was unclear. but even if he lacked authority, the corporations failure to repudiate the amendment for lack of authorization estopped it from doing so later. the amended agreement stood |
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Management and Control: Directors
sources of authority |
Del 141a: directors are responsible for running the corporation
- choose officers - declare dividends - issue stock previously authorized - adopt or amend bylaws - decisions about major financing |
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Management and Control: Directors
procedural rules for board meetings |
Del 141b
board takes formal action by vote at a meeting - each director has one vote - directors cannot vote by proxy quorum: number needed to be present to conduct business - presence can be physical or telephonic - default rule: mere majority to pass an action, need simple majority of quorum informal board action -unanimous director approval -emergency -unanimous shareholder approval |
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Management and Control: Directors
committees |
committees are delegated the full decision-making authority from board for a particular issue
cannot authorize fundamental transactions or amend bylaws types 1. executive committee: full authority of the board in all but a few transactions; vehicle through which board acts between meetings 2. audit committee: required to have outside directors, independent and financial experts 3. compensation committee: has to be independent. decides salaries and other compensation of officers and directors, must be made up of outside directors |
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Management and Control: Directors
election |
SH act at regularly scheduled annual meetings where must consider the election of directors
SH can run proxy contests to throw out sitting directors all directors up for election at annual meeting unless articles provide for staggered board |
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Management and Control: Directors
Election - staggered board vs class designated |
staggerd board
different directors are up for election each year provision has to be in certificate or bylaws class-designated board: refers to classes of stock - each class of stock can have different voting procedures and can elect different directors - each class is entitled to some representation on the board note; a board can be staggered and class desginated |
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Management and Control: Directors
election - straight voting |
every voting share of stock has a vote. what matters is the number of shares, not the number of shareholders
Del 216: plurality of votes case at meeting having a quorum is sufficient to elect a director Delawares default rule is straight voting |
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Management and Control: Directors
election - cumulative voting |
shareholder gets to vote number of shares x number of director positions
formula used to determine number of shares needed to elect the desired number of directors NS= (ND x TS)/(TD + 1) + 1 NS number of shares needed ND number of directors that SH wants to elect TS total shares authorized to vote TD total number of directors to be elected in California cumulative voting is default - if not a listed corporation, then cannot opt out of cumulative voting |
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Management and Control: Directors
Removal |
Del 141k
general rule: directors may be removed by majority of SH with or without cause exceptions 1) Del 141k1: if class designated SH may effect removal only for cause 2) Del 141k2: cumulative voting removal requires minority SH to join |
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Management and Control: Directors
Filling vacancies |
general rule: Del 223a1 vacancies and new directorships are filled by remaining directors in office even if less than quorum
class designated board: director is elected by the class for that vacancy if director will vacate at future date he may participate in election of successor if less than a majority of the board remains, SH with at least 10% of voting requests a court to order election by SHs |
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Shareholders in Corporate Governance: Right to Inspect
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general SH have a right to inspection of books and records
Del: must be a shareholder of record to exercise right must have a proper purpose: a purpose reasonably related to such a person interest as a stockholder - ascertaining information related to shares or dividends - ascertaining information related to mismanagement or litigation - to communicate with other SH in their capacities NOT a proper purpose - to sell to catalogue company - to get info so can later compete with company - to pursue social policy goals |
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Shareholders in Corporate Governance: Right to Inspect
State ex rel v Honeywell (proper purpose) |
(protest of vietnam fragmentation bombs must be accompanied by economic goals constituting a proper purpose).
Social policy goals must be accompanied by economic goals that constitute a proper purpose |
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Shareholders in Corporate Governance: Calling a meeting
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date of annual meeting is typically fixed in bylaws
special meetings may be called by authorized persons |
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Shareholders in Corporate Governance: Notice
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all SH of record need written notice of meeting so they have a chance to vote
directors need to set record date |
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Shareholders in Corporate Governance: Quorum
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general rule: quorum is majority of the voting shares
quorum must be represented at the meeting (either physically or by proxy) can draft around the default rule for setting quorum, but lowest is 1/3 of voting shares |
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Shareholders in Corporate Governance: Action by Written Consent
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under Del law SHs can act by written consent in lieu of a meeting
assuming all voting shares are present and voting, then quorum in that instance; this is the number needed to approve an action absent a meeting |
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Shareholders in Corporate Governance: What actions can SHs initiate?
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1. amend articles/certificate (board must authorize)
2. amend bylaws -- unilaterally okay 3. removal of directors 4. resolution proposals to the board 5. vote on fundamental changes |
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Shareholders in Corporate Governance: What actions can SHs initiate?
Auer v Dressel |
Fight to control the board. The purposes of the meeting were:
(1) to endorse the former president and demand his reinstatement. This was a proper purpose because this was “precatory,” just a recommendation The shareholders had a remedy; they could get rid of the board. (2) to amend certificate and bylaws to provide that vacancies be filled by the class that originally elected the director. Majority dismissed the dissent’s concerns (3) to vote on the removal of 4 class a directors for cause. Shareholders have a right to do this. To vote for their successors. Shareholders also have the right to do this. The majority reasoned that if the removal was improper, it could be challenged in court. This would be done by proxy before the directors could defend themselves. Potential due process concern. The directors’ defenses have to be distributed with the proxy materials. (4) amend bylaws to change quorum requirement for board action. the majority said this would result in no change of substance and that the shareholders could do this. |
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Shareholders in Corporate Governance: Board responses to shareholder initiatives
Blasius Industries case |
Takeover artist seeking a cash cow to fund junk bond payments; don’t thwart shareholder votes to interfere with a shareholder vote, the board must show it has a compelling justification.
Atlas board knew what blasius owned from 13(d). Blasium had to specify his intentions there. Investment strategy. Focus on 13(d) filings to determine likely acquisitions. Atlas was afraid blasius, takeover artist, would get enough shareholder consents to elect a new majority on the board and shove through a new agenda that atlas believed, in good faith, was bad for atlas. The board held a telephonic board meeting and amended the bylaws to provide for a 9 person board, then elected 2 new members. The atlas incumbent board technically acted consistently with statute and the articles of incorporation. If the directors had had bad intentions this would be an easy duty of loyalty case. See elements infra. The atlas board could not deprive the shareholders of the power of the vote. Issues related to the shareholder vote are unique. The directors committed an inadvertent breach of the duty of loyalty notwithstanding their motivations. |
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Shareholder Voting: Federal Proxy Rules
which corporations are subject to the federal proxy rules? |
reporting companies
- companies whose stock is traded on national securities exchange and companies with at least 500 SHs and $10 million worth of assets |
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Shareholder Voting: Federal Proxy Rules
what do the proxy rules govern? |
the process of SH voting in public corporations, including the dissemation of information and the completeness and accuracy of the information about the issues voted on
not creating substantive rights |
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Shareholder Voting: Federal Proxy Rules
Definition of solicitation |
it is unlawful to solicit any proxy or consent authorization in respect of any security without doing all the things that the rules say you have to
the terms solicit and solicitation include 1. any request for a proxy whether or not accompanied by or included in a form proxy 2. any request to execute or not to execute, or to revoke, a proxy; or 3. the furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy |
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Shareholder Voting: Federal Proxy Rules
is public advocacy solicitation? |
Lilco v Barbash
Newspaper ad was a proxy solicitation even though it targeted customers, not shareholders. An exemption can take you out of this trap for the unwary. |
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Shareholder Voting: Federal Proxy Rules
what has been excluded from definition of solicitation? |
solicitation is excluded from proxy rules when it is sought by or on behalf of a person who does not, at any time during such solicitation, seek the power to act as a proxy or request a form of revocation abstentation, consent or authorization
just dont ask for proxies |
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Shareholder Voting: Federal Proxy Rules
Rule 14a-3 Requirements |
the proxy statement must contain
- information about the person soliciting proxy - nominees for directors - compensation of management - interests of certain people in transactions to be voted on - any litigation that would effect the corp or SH |
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Shareholder Voting: Federal Proxy Rules
Rule 14a-8 SH proposals |
SH have a right to make proposals at the annual meeting
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Shareholder Voting: Federal Proxy Rules
Rule 14a-9 False or misleading statements |
not allowed to put in any false or misleading statements with respect to any material facts in proxy statements. cannot omit material fact
a fact is material if there is a substantial likelihood that a reasonable SH would consider it important in deciding how to vote |
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Shareholder Voting: Federal Proxy Rules
Rule 14a-11 Proxy contests |
anybody wanting to offer alternative nominees for director must mount a full-scale proxy contest
must satisfy disclosure and fileing requirements must bear full costs of contest |
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Shareholder Voting: Federal Proxy Rules
Shareholder Proposal: what are the eligibility requirements? |
1. the proponent must be a record or beneficial owner of at least 1% or $2000 of the securities entitled to vote
- must hold for one year at least 2. procedural requirements - must personally attend meeting - proposal must be submitted at least 120 days before proxy statement is released - may only submit one proposal - statement can only be 500 words |
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Shareholder Voting: Federal Proxy Rules
Excluding shareholder proposals |
the only way the company can refuse a shareholder proposal is if an exclusion applies
1. the proposal is not a proper subject for action by SH 2. the proposal relates to operations which account for less than 5% of the corps total assets and less than 5% net earnings or gross sales 3. the proposal concerns a matter pertaining to the ordinary course of business 4. proposal would require corp to violate law 5. proposal would require corp to violate proxy rules 6. proposal relates to personal grievance 7. proposal is beyond the power of the corp to implement 8. proposal conflicts with the corps own proposal 9. company has already substantially implemented the proposal 10. the proposal duplicated someone elses proposal 11. the proposal has been submitted in the past without much support |
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Duty of Care
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the duty of care focuses on board decision-making where director investors are aligned with those of the corporation
directors owe a duty to act in the corporations best interests and to exercise reasonable care in making decisions and in overseeing the corporations affairs |
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Duty of Care: Business Judgment Rule
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rebuttable presumption that the board acted in good faith and in best interest of corporation, and that the board was fully informed in decision making
how it works: board makes a decision and the BJR immediately attaches to the decision 1. court will presume directors exercised reasonable diligence and acted in good faith 2. P bears burden of rebutting this presumption by showing that the directors engaged in self-dealing, acted in bad faith, or that the decision was not a proper exercise of business judgment 3. if rebutted then courts will look to inherent fairness of decision - fair dealing - fair price (charitable contribution is reasonableness, reasonable purpose and amount) |
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Duty of Care: BJR standard
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gross negligence
directors are liable is grossly negligent rule: whether directors have informed themselves prior to decision |
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Duty of Care: Business Judgment Rule
Smith v Van Gorkum |
What was wrong
1. The court did not like the way the defense calculated the premium. 2. The board members did not receive any documentation. They relied on van gorkom’s 20-minute oral presentation. 3. The board did not raise questions tax implications or the sale price calculation. 4. They did not know where the $55 share price came from he was the CEO, after all - but he never told anyone where the figure came from. 5. The board did not put the business up to the highest bidder. counter. The board did entertain other offers. 6. The directors did not know the purpose of the meeting before it took place. 7. The board “forced a quick decision.” 8. Senior management was not present at the board meeting. 9. The CEO signed the amendments without consulting the board or fully understanding them. 10. The board approved the deal without reading it |
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Duty of Care: Business Judgment Rule
Take-Over Situation |
Unocal Corp v Mesa
"enhanced duty of care" applies in takeover context where board adopts defensive measures duty: must conduct a good faith, reasonable investigation measure must be reasonable in relation to threat |
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Duty of Care: Business Judgment Rule
Breakup/Change in control |
Revlon Case
when breakup or change in control is inevitable board becomes auctioneers with duty to get highest price for the target corporation |
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Duty of Care: Business Judgment Rule
Inherent Fairness standard |
Weinberger case
fairness includes fair dealing and fair price fair dealing: consider how transaction was timed, initiated, structured, negotiated and disclosed fair price: court must value the business |
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Duty of Care: relationship between duty of care and duty of good faith and loyalty
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BJR leads to liability only when action was in abscence of good faith
Stone v Ritter failure to act in good faith results in 1) liability, but only indirectly and 2) the fiduciary duty of loyalty encompasses cases where fiduciary fails to act in good faith |
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Duty of Loyalty
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the duty of loyalty arises when a director has personal interests that are contrary to those of the corporation and requires a director to place the corporations best interests above his own
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Duty of Loyalty: Interested Director transactions
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when the corporation itself enters into a transaction with a director OR the director is on both sides of the transaction
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Duty of Loyalty: Interested Director transactions
Analysis |
is a transaction an interested director transaction?
1. if no, BJR applies 2. if yes - directors lose BJR protection did interested director disclose the interested director transaction and get approval by shareholders? 1) if no, interested director must prove the intrinsic or inherent fairness of the transaction 2) if yes, the legal effect of the disclosure and approval is not clear and may vary from jdx to jdx possible legal consequences of disclosure and approval Possibility #1. the court must consider the fairness of the transaction despite disclosure and approval. interested director has burden of proof to show fairness of transaction Possibility #2. the court must consider the fairness of teh transaction, but approval of the transaction by disinterested directors or disinterested shareholders shifts burden of proof on fairness back to P Possibility #3. approval of transaction by disinterested directors or disinterested shareholders causes the interested director to regain protection of BJR. the P has burden of proving that the transaction constituted corporate waste. |
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Duty of Loyalty: Interested Director transactions
State statutes |
Delware 144 (like old Cal 820)
if director is on both sides of a transaction, an interested director transaction is not void solely because interested if: 1. there is full disclosure to the board and the DISinterested directors approve it OR 2. full disclosure to the SHs and the SHs approve it, OR 3. the transaction is fair based on evaluation of neutral 3d party Cal 310 interested director transaction not void if 1. full disclosure to SHs and DISinterested SHs approve it in good faith, OR 2. disinterested directors approve after full disclosure OR 3. director proves fairness of transaction under current section 310 it is unclear whether a court woudl still require a showing of fairness |
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Duty of Loyalty: Interested Director transactions
cases |
Remillard Brick
Sales function outsourcing contracts were interested director transactions because interested directors were the reason for the shareholder approval. Compliance got the interested director nothing. held unfair to minority SHs (like possibility 1) Fliegler v Lawrence Court tests interested director transaction for fairness and defendant has bop. Compliance gets interested director nothing. Marciano v Nakash |
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Duty of Loyalty: Corporate Opportunity doctrine
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prohibits a director or officer from diverting to herself a business opportunity that belongs to the corporation
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Duty of Loyalty: Corporate Opportunity doctrine
what is a corporate opportunity? |
one that the corporation can financially undertake, is within the line of business of the corp business and is advantageous to the corp, and is one the corp has an interest or resonable expectancy in
tests applied 1. interest or expectancy: a corp opp in which the corp has an interest or expectancy or which is essential to corp 2. line of business: opp offered is something that corp might say yes to because it is in the line of business of corp (includes need for expansion) 3. fairness, alone or in conjunction with other standards |
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Duty of Loyalty: Corporate Opportunity doctrine
when may a corp manager take a corp opportunity for herself? |
Del 122(17): corp may renounce any interest or expectancy of the corp in specified business opportunities or specified classes of business opportunities
Defenses 1. the opp came to manager in her personal capacity 2. the corp was unable to take advantage of the opportunity - economic capacity 3. disinterested directors or SHs rejected the opp after it was disclosed by manager |
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Duty of Loyalty: Corporate Opportunity doctrine
remedies for usurping corp opp |
imposition of constructive trust on the opportunity
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Insider Trading: Rule 10b-5
elements |
1. interstate commerce
2. in connection with the purchase or sale of a security 3. material misinformation - fact is material if reasonable investor woudl consider it as altering the total mix of information in deciding whether to buy or sell - deception requirement 4. scienter 5. reliance 6. causation |
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Insider Trading: Remedies
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actions can be brought by the SEC or justice department and private parties
types of remedies - rescission of transaction - disgorgement damages; recover Ds profits - out of pocket damages: price at which P bought or sold and the true value of stock - NO punitive damages - criminal penalties include fine or prison |
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Insider Trading: SoL
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Rule 10b-5 action must be brought within 3 years after violation and 1 year after discovery of facts constituting violation
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Insider Trading: Classic Insider Trading
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material misrepresentation: a breach of the duty to abstain or disclose satisifed the misrepresentation requirement
duty to shareholders with whom the insider transacts duty applies to constructive insiders |
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Insider Trading: Classic Insider Trading
Tippers and Tippees |
Tippees assume an insiders fiduciary duty to SH if:
1. the insider breached the duty to the SH by disclosing the information to the tippee, and 2. the tippee knows or should have known that there was a breach Tipper breached duty by disclosing information to tippee if the insider benefited from the disclosure |
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Insider Trading: Classic Insider Trading
Chiarella v US |
The case of the nosy printer who owed the shareholders no duty
Names are filled in on deal documents at the 11th hour The printer deciphered who was involved and traded. This was nonpublic material information but the printer did not violate rule 10(b)(5) Because the printer did not owe a duty to the shareholders of the companies in whose stock he traded. He was a stranger who dealt in an impersonal transaction. |
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Insider Trading: Classic Insider Trading
Dirks v SEC |
The well-intentioned whistleblower.
Acompany’s assets were overstated. A whistleblower with a laudable motive wanted dirks to investigate. Dirks investigated and did not trade but repeated the allegation to others. Some sold their positions based on the bad news in reliance. The sec censured dirks on the theory that he was a tippee of material nonpublic information, and that as such he had to abstain from trading or disclose the information. Court. No. Dirks owed the company’s shareholders no duty. Seacrist was not breaching because he was no longer an officer. The possession of information with no duty is not a violation. Chiarella. Tippee liability. |
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Insider Trading: Classic Insider Trading
Eavesdroppers |
SEC v Switzer
Where coach overheard insider unintentionally disclose inside information, neither was liable. Coach owed shareholders no duty. Insider did not benefit. |
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Insider Trading: Outsider Misappropriation
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alternative theory under 10b-5
violated when a person misappropriates confidential information for securities trading purposes in breach of a duty owed to the source of the information |
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Insider Trading: Outsider Misappropriation
Tipper and Tippee |
Tippee assumes misappropriaters duty to the source of the information if:
1. the misappropriator has breached his duty to the source of the information by disclosing the information to the tippe; and 2. the tippee knows or should have known that there has been a breach of the duty |
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Insider Trading: Outsider Misappropriation
US v Chestman |
Patriarch told wife, who told daughter, who told husband about pending tender offer. Husband called broker and broker traded. Husband pled. Trader was indicted.
Classic insider trading did not apply. Keith was not an insider. He owed no duty to waldbaum shareholders. Misappropriation. Whether he breached a duty to the source, his wife’s family. Misappropriation need not be applied on its own; it may be applied with tippee liability. Dirks combines classic insider trading with tippee liability Chestman combines misappropriation and tippee liability. Court. No. Being a family member was not enough to establish a duty. Duty owed comes only from a fiduciary-like relationship; A relationship of trust or confidence between the parties. Ee misappropriating from er. Wsj reporter. Ee steals information while printing documents. Family is different. |
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Insider Trading: Tender offer
Rule 14e-3 |
during course of a tender offer, anyone who has material nonpublic information about the tender offer is prohibited from trading if he knows or has reason to know that the information was obtained from the bidder or the target
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Insider Trading: Criminal Liability
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only when person willfully violated the provision
US v O'Hagan |
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Insider Trading: Duty of trust and confidence
Rule 10b5-2 |
in non-business relationships there is a duty created when a person receives material nonpublic information under any of the following circumstances (making them liable under misappropriation theory)
1. recipient agree to maintain the information in confidence 2. persons have a communication history, pattern or practice of sharing confidence 3. communicator of the information was a parent, spouse, child or sibling of the recipient; unless recipient shows no reasonable expectation of confidentiality based on relationship |
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Insider Trading: Section 16(b)
under what circumstances does 16(b) apply? |
applies to trading in the stock of a reporting company
applies to officers, directors, and shareholders who beneficially own more than 10% of any class of corp securities |
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Insider Trading: Section 16(b)
mechanical rule |
requires officers, directors and 10% shareholders to disgorge to the corporation any profits they make by purchasing and selling the corporations stock during a 6 month period
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Insider Trading: Section 16(b)
How does the rule work? |
look to see if there has been a profit from matching any purchase by the insider with any sale by the same insider within a six month period
if there is any profit the insider must return it to the corporation |
