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153 Cards in this Set

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  • Back
What is a Corporation?
A corporation is a legal entity distinct from its owners and may be created only by filing certain documents with the state.
1. Limited Liability for Owners, Directors, and Officers
2. Centralized Management: in the board of directors, who usually delegate.
3. Free Transferability of Ownership
4. Continuity of Life: a corporation may exist perpetually and generally is not affected by changes in ownership (i.e., sales of shares).
What is an S Corporation?
S Corps are taxed like partnerships and yet retain the other advantages of the corporate form; not subject to double taxation—profits and losses flow through the entity to the owners.
~ there are restrictions on S corporations: stock can be held by no more than 75 persons, generally shareholders must be individuals, there can be only one class of stock, etc.
What are partnerships?
~ The have little formality: just an intention to carry on as co-owners a business for profit;
~ generally are not treated as legal entities apart from their owners.
~ Partners are personally liable; ownership interests of partners cannot be transferred without the consent of the other partners.
What is a sole proprietorship?
Sole Proprietorships: one person owns all of the assets of the business.
~ There is no entity distinct from the owner.
~ Ownership is freely transferable and the business "entity" cannot continue past the death of the owner; all profits and losses flow directly to the owner.
What is a limited partnership?
A LP provides for limited liability of some investors (called “limited partners”), but otherwise is similar to other partnerships.
~ formed only by compliance with the limited partnership statute.
~ must be at least one general partner, who has full personal liability for partnership debts and has most management rights.
What is a Limited Liability Company?
Is designed to offer the limited liability of a corporation and the flow through tax advantages of a partnership;
~ formed by filing appropriate documents with the state, otherwise flexible: owners may choose centralized management, free transferability or limited transferability.
For Constitutional purposes, is a Corp. a "person?"
Yes - they are entitled to due process, equal protection, and attorney-client privilege
~ but not Fifth Amendment privilege against self-incrimination.
Is a Corp. a "citizen" for purposes of the Privileges and Immunities Clause?
A corporation is not a citizen for purposes of the Privileges and Immunities Clause.
~ For federal diversity jurisdiction purposes, a corporation is a citizen of any state of incorporation and the state of its principal place of business.
Where is a Corp. a "resident?"
A corporation is a resident of its state of incorporation, where it is doing business, and where it is qualified to do business.
Where is a Corp. domiciled?
any state in which it is incorporated.
What is a de jure Corp.?
A corporation is formed by complying with all applicable statutory requirements:
~ A corporation complying with all applicable statutory requirements is a de jure corporation;
~ if all corporate formalities have not been followed, a de facto corporation may result or a corporation might be recognized through estoppel.
Basically, the incorporators must file Articles of incorporation with the secretary of state. They must contain:
Name of corporation, the number of shares that the corporation is authorized to issue, name and address corporation’s registered agent, name and address of each incorporator.
What does the RMBCA presume a corp. is authorized to do?
Absent such a statement, the RMBCA presumes that a corporation is formed to conduct any lawful business.
What is an ultra vires act?
If a corporation includes a narrow business purpose in its articles, it may not undertake activities unrelated to achieving the stated business purpose.
~ Activities beyond the scope of the stated business purposes are said to be "ultra vires."
~ At common law, ultra vires acts were void and unenforceable.
When does the corporate existence begin?
Corporate existence begins upon this filing by the state. The filing is conclusive proof of corporate existence.
What are bylaws?
Bylaws may contain any provision for managing the corporation that is not inconsistent with the articles or law.
~ Generally, bylaws are adopted by directors, but they may be modified or repealed by a majority vote of either the directors or the shareholders.
How does a de facto Corp. compare to a de jure Corp.?
Under the common law, a de facto corporation has all the rights and powers of a de jure corporation but remains subject to direct attack in a quo warranto proceeding by the state.
What are the 3 requirements for a de facto Corp.?
1) A statute under which the entity could have validly incorporated;
2) Colorable compliance with the statute and a good faith attempt to comply; and
3) The conduct of business in the corporate name and the exercise of corporate privileges.

The RMBCA provides that persons who purport to act on behalf of a corporation knowing that there has been no incorporation are liable for all liabilities created in so acting.
~ Thus, the de facto doctrine can be raised as a defense to personal liability only by a person who is unaware that there was no valid incorporation.
What is the Corporation by Estoppel Doctrine?
Under this common law doctrine, persons who have dealt with the entity as if it were a corporation will be estopped from denying the corporation’s existence.
~ The doctrine applies in contract to prevent the “corporate” entity, and parties who have dealt with the entity as if it were a corporation, from backing out of their contracts.
Does the Corp. by Estoppel Doctrine apply to Tort victims?
No, it does not apply to tort victims (who wouldn't know of the corportion's status).
How are the Corp. by Estoppel and De Facto Corp. Doctrines applied?
Generally, if a de facto corporation is found, it is treated like any other corporation for all purposes, except that the state may seek dissolution in a quo warranto proceeding.
~ Corp. by Estoppel applies only on a case-by-case basis.
~ The De Facto Doctrine applies equally in contract and tort situations, but Estoppel generally is applied only in contract cases (on the rationale that a tort victim does not allow himself to be injured in reliance on the business's status as a corporation).
~ If there is no valid incorporation and the facts do not support a de facto or estoppel argument, generally, the courts will hold only the active business members personally liable, and their liability is joint and several.
What is Piercing the Corporate Veil?
The courts will disregard a corporate entity and hold individuals liable for corporate obligations.
What is "Alter Ego"
Where the corporation ignores corporate formalities such that it may be considered the "alter ego" of the shareholders or another corporation, the corporate veil may be pierced.
"~ may arise where shareholders treat corporate assets as their own, fail to observe corporate formalities, etc., and some basic injustice results.
But Note: sloppy administration alone may not be enough to pierce the corporate veil."
Other than "alter ego," what is another instance in which courts will pierce the corporate veil?
Inadequate Capitalization at Time of Formation - The corporate veil may be pierced where the corporation is inadequately capitalized, so that at the time of formation there is not enough unencumbered capital to reasonably cover prospective liabilities.

The corporate veil may also be pierced where necessary to prevent fraud or to prevent an individual shareholder from using the entity to avoid his existing personal obligations.
~ But the mere fact that an individual chooses to adopt the corporate form of business to avoid future personal liability is not itself a reason to pierce the corporate veil.
Who is liable when the corporate veil is pierced?
normally, only shareholders who were active in the operation of the business will be personally liable.
~ Liability is joint and several (each person is liable for the entire damage incurred).
In what types of cases is the corporate veil most likely pierced?
The corporate veil is easily pierced in tort cases, but not in contract cases since parties who contracted with the corporation had an opportunity to investigate its stability.
~ Where the corporation is insolvent, claims of shareholder-creditors may be subordinated to outside creditors’ claims if equity so requires (e.g., because of fraud).

~ Generally, creditors may be allowed to pierce the corporate veil. Courts almost never pierce the veil at the request of a shareholder.
What are authorized shares?
Shares described in the corporation’s articles of incorporation are authorized shares.
~ Those shares that have been sold are issued and outstanding.
~ Those shares that have been reacquired by the corporation through repurchase or redemption are authorized but unissued; but if the articles so provide, the number of authorized shares is reduced by the number of shares repurchased. (Formerly, reacquired shares were authorized, issued. but not outstanding treasury shares.).
~ Shares may be certificated (i.e., represented by a certificate) or undertificated.
If there are different classes of shares, what is required?
Classes and Series Must be Described in the Articles:
If shares are to be divided into classes or series within a class, the articles must:
(i) prescribe the number of shares of each class;
(ii) prescribe a distinguishing designation for each class (e.g., “Class A preferred,” “Class B preferred,” etc.); and
(iii) either describe the rights, preferences, and limitations of each class or series or provide that the rights, preferences, and limitations of any class or series within a class shall be determined by the board of directors prior to issuance.
What are stock subscriptions?
Stock subscriptions are promises from subscribers to buy stock in the corporation.

Under the RMBCA, preincorporation subscriptions are irrevocable for six months unless otherwise provided in the terms of the subscription agreement or unless all subscribers consent to revocation.

Unless otherwise provided, payment is upon demand by the board.
~ Demand may not be made in a discriminatory manner.
~ A subscriber who fails to pay may be penalized by sale of the shares or forfeiture of the subscription and any amounts paid thereon, at the corporation’s option.
What is acceptable consideration for shares?
Under the RMBCA shares may be paid for with any tangible or intangible property or benefit to the corporation.
(the RMBCA greatly expanded what is acceptable consideration for the issuance of shares).

Traditionally, stock could not be issued by a corporation for less than the stock’s stated par value, and the consideration received for par value stock had to be held in a certain account containing at least the aggregate par value of the outstanding par value shares.

The RMBCA has eliminated the concept of par and allows corporations to issue shares for whatever consideration the directors deem appropriate.
~ Consideration received for the issuance of stock need not be placed in any special account. (The concept of par value is completely dead under the RMBCA).
Who are Promoters?
Before a corporation is formed, promoters procure commitments for capital and other instrumentalities that will be used by the corporation after its formation.
What is Promoters' Relationship with Each other?
Absent an agreement to the contrary, promoters are joint venturers who occupy a fiduciary relationship to each other.
~ They will breach their fiduciary duty if they secretly pursue personal gain at the expense of their fellow promoters.
What is the Promoters' Relationship with Corp.?
A promoter’s fiduciary duty to the corporation is one of fair disclosure and good faith.
What if fiduciary relationship is breached due to a sale to the Corp.?
A promoter who profits by selling property to the corporation may be liable for his profit unless all material facts of the transaction were disclosed.
~ If the transaction is disclosed to an independent board of directors and approved, the promoter has met his duty and will not be liable for his profits.
~ If the board is not completely independent, the promoter still will not be liable for his profits if the subscribers knew of the transaction at the time they subscribed or unanimously ratified the transaction after full disclosure.
~ Disclosure must be to all who are contemplated to be part of the initial financing scheme.
~ If the promoters purchase all the stock and subsequently sell their individual shares to outsiders, the promoters cannot be held liable for the profits from the sale of property to the corporation.

Promoters may always be liable if plaintiffs can show that they were damaged by the promoters' fraudulent misrepresentations or fraudulent failure to disclose all material facts.
Under the RMBCA, with Third-Parties-Preincorporation Agreements, what is the promoter's liability?
Under the RMBCA, anyone who acts on behalf of a corporation knowing that it is not in existence is jointly and severally liable for the obligations incurred.
~ Thus, if a promoter enters into an agreement with a third party on behalf of a planned but unformed corporation, the promoter is personally liable on the contract.
~ The promoter’s liability continues after the corporation is formed, even if the corporation adopts the contract and benefits from it.
~ The promoter will be released from liability only if there is an express or implied novation (i.e., agreement among all three parties to release the promoter from liability and substitute the corporation).
What if the agreement expressly relieves the promoter of liability?
If the agreement expressly relieves the promoter of liability, there is no contract;
~ such an arrangement may be construed as a revocable offer to the proposed corporation, and the promoter has no rights or liability under the agreement.

~ A promoter who is held personally liable on a preincorporation contract may have a right to reimbursement from the corporation to the extent of any benefits received by the corporation.
What is the Corporation’s Liability for promoters' contracts in a pre-incorporation situation?
Since the corporate entity does not exist prior to incorporation, it is not bound on contracts entered into by the promoter in the corporate name prior to incorporation.
~ The corporation may become bound by expressly or impliedly adopting the promoter’s contract.
Who is eligible to vote at Shareholders' meetings?
Shareholders of record on the record date may vote at the meeting.
~ The record date is fixed by the board of directors but may not be more than 70 days before the meeting.
~ If directors do not set a record date, the record date is deemed to be the day the notice of the meeting is mailed to the shareholders.
~ Unless the articles provide otherwise, each share is entitled to one vote.
Are proxies irrevocable, how long are they valid for?
A shareholder may vote her shares in person or by proxy executed in writing.
Proxies are valid for 11 months unless they provide otherwise.
~ A proxy is generally revocable by the shareholder unless made irrevocable.
~ A proxy will be irrevocable only if it states that it is irrevocable and is coupled with an interest or given as security.
What are the rules governing proxy solicitation?
(i) there must be full and fair disclosure of all material facts with regard to any management-submitted proposal upon which the shareholders are to vote;
(ii) material misstatements, omissions, and fraud in connection with the solicitation of proxies are prohibited; and
(iii) management must include certain shareholder proposals on issues other than election of directors, and allow proponents to explain their position.
What is a quorum?
A quorum is usually a majority of outstanding shares entitled to vote, unless the articles or bylaws require a greater number.
~ Note also that once a quorum is present, it cannot be broken by withdrawal of shares from the meeting.
What is necessary at a meeting for a matter to be approved?
Absent a contrary provision in the articles, each share is entitled to one vote.
~ The articles may provide for weighted voting or contingent voting.
~ If a quorum is present, shareholders will be deemed to have approved a matter if the votes cast in favor of the matter exceed the votes cast against the matter, unless the articles or bylaws require a greater proportion.
~ Less than a quorum may adjourn the meeting.
How are directors elected?
Unless the articles provide otherwise, directors are elected by a plurality (one with most votes if not majority) of the votes cast.
~ Generally, a shareholder may not cast more than one vote for any one candidate (cannot spread out his votes).
What is cumulative voting?
Instead of the normal one share, one vote paradigm, the articles may provide for cumulative voting.
~ Each shareholder is entitled to a number of votes equal to the number of his voting shares multiplied by the number of directors to be elected. (Ex. 500 shares x 5 directors = 2500 votes)
~ The total number may be divided among the candidates in any manner that the shareholder desires, including casting all for the same candidate.
What if an amendment to the Articles affect only a particular class of stock?
Whenever an amendment to the articles of incorporation will affect only a particular class of stock, that class has a right to vote on the action even if the class otherwise does not have voting rights.
When can shareholders take action without a meeting?
Shareholders may take action without a meeting by the unanimous written consent of all shareholders entitled to vote on the action.
What is a voting trust?
A voting trust is a written agreement of shareholders under which all of the shares owned by the parties to the agreement are transferred to a trustee, who votes the shares and distributes the dividends in accordance with the provisions of the voting trust agreement.
~ A copy of the trust agreement and the names and addresses of the beneficial owners of the trust must be given to the corporation.
~ The trust is not valid for more than 10 years unless it is extended by the agreement of the parties.
What is a voting agreement?
Rather than creating a trust, shareholders may enter into a written and signed agreement providing for the manner in which they will vote their shares.
~ Unless the agreement provides otherwise, it will be specifically enforceable.
~ It need not be filed with the corporation and is not subject to any time limit.
What are shareholder agreements?
The shareholders may enter into agreements among themselves regarding almost any aspect of the exercise of corporate power (e.g., an agreement eliminating the board and vesting board power in one or more persons, establishing who shall be officers or directors, requiring distributions on certain conditions, etc.).

~ To be valid, the agreement must be set forth in the articles, bylaws, or a written agreement approved by all persons who are shareholders at the time of its adoption.
~ Such agreements are valid for 10 years unless they provide otherwise, but will terminate if the corporation’s shares become listed on a national securities exchange or are otherwise regularly traded on a national securities market.
Can there be restrictions on the transfer of stock?
Yes - Stock transfer restrictions must be reasonable (e.g., a right of first refusal).
~ A third-party purchaser is bound by the provisions of an agreement restricting transfer of stock if:
(i) the restriction’s existence is conspicuously noted on the certificate (or is contained in the information statement required for uncertificated shares), or
(ii) the third party had knowledge of the restriction at the time of the purchase.
What are inspection rights?
Under the RMBCA, a shareholder may inspect the corporation's books, papers, accounting records, shareholder records, etc., upon five days’ written notice stating a proper purpose for the inspection.
What are preemptive rights?
Under the RMBCA shareholders do not have a preemptive right to purchase newly issued shares in order to maintain their proportional ownership interest unless the articles of incorporation provide the right.
~ Moreover, even if the articles do provide a preemptive right, shareholders generally have no preemptive right in shares issued:
(i) for consideration other than cash (e.g., for services of an employee),
(ii) within six months after incorporation, or
(iii) without voting rights but having a distribution preference.
What is a direct action against a corporation?
A direct action may be brought for a breach of a fiduciary duty owed to the shareholder by an officer or director.
~ To distinguish breaches of duty owed to the corporation and duties owed to the shareholder, ask:
(i) who suffers the most immediate and direct damage, the corporation or the shareholder; and
(ii) to whom did the defendant’s duty run, the corporation or the shareholder.
~ In a shareholder direct action, any recovery is for the benefit of the individual shareholder.
What is a derivative action?
In a derivative action, the shareholder is asserting the corporation’s rights rather than her own rights.
~ Recovery in a derivative action generally goes to the corporation rather than to the shareholder bringing the action.
~ Nevertheless, the corporation is named as a defendant.
When does the shareholder have standing to sue the corp. in a derivative suit?
To commence and maintain a derviative proceeding, a shareholder must have been a shareholder at the time of the act or omission complained of or must have become a shareholder through transfer by operation of law from one who was a shareholder at that time.
~ Also, the shareholder must fairly and adequately represent the interests of the corporation.
What are the demand requirements in derivative suit?
The shareholder must make a written demand on the corporation to take suitable action.
A derivative proceeding may not be commenced until 90 days have elapsed from the date of demand, unless:
(i) the shareholder has earlier been notified that the corporation has rejected the demand;
(ii) the statute of limitations will expire within the 90 days; or
(iii) irreparable injury to the corporation would result by waiting for the 90 days to pass.
When will a derivative suit be dismissed by the court?
If a majority of the directors (but at least two) who have no personal interest in the controversy find in good faith after reasonable inquiry that the suit is not in the corporation’s best interests, but the shareholder brings the suit anyway, the suit may be dismissed on the corporation’s motion.

To avoid dismissal, in most cases the shareholder bringing the suit has the burden of proving to the court that the decision was not made in good faith after reasonable inquiry.
~ However, if a majority of the directors had a personal interest in the controversy, the corporation will have the burden of showing that the decision was made in good faith after reasonable inquiry.

~ A derivative proceeding may be discontinued or settled only with the approval of the court.
Upon termination of a derivative action, the court may order the corporation to pay the plaintiff’s reasonable expenses if it finds that the action has resulted in a substantial benefit to the corporation.
~ If the court finds that the action was commenced or maintained without reasonable cause or for an improper purpose, it may order the plaintiff to pay reasonable expenses of the defendant.
Who has distribution rights?
At least one class of stock must have a right to receive the corporation’s net assets on dissolution; distributions generally are discretionary.
What are the solvency requirements re distributions?
A distribution is not permitted if, after giving it effect, either:
"(1) The corporation would not be able to pay its debts as they become due in the usual course of business
(i.e., the corporation is insolvent in the bankruptcy sense); or"
(2) The corporation’s total assets would be less than the sum of its total liabilities plus (unless the articles permit otherwise) the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights on dissolution of shareholders whose preferential rights are superior to those receiving the distribution (i.e., the corporation is insolvent in the balance sheet sense).

~ The articles may restrict the board's right to declare dividends (e.g., a creditor might insist that the corporation include in its articles a provision prohibiting payment of any distributions unless the corporation earns a certain amount of profits).
Are Distributions of a corporation’s own shares (i.e., “share dividends” or “stock dividends”) to its shareholders within the definition of a “distribution?”
Distributions of a corporation’s own shares (i.e., “share dividends” or “stock dividends”) to its shareholders are excluded from the definition of “distribution.”
~ Therefore, the above restrictions are inapplicable.
~ However, shares of one class or series may not be issued as a share dividend in respect of shares of another class or series unless one of the following occurs:
(i) the articles so authorize;
(ii) a majority of the votes entitled to be cast by the class or series to be issued approves the issue; or
(iii) there are no outstanding shares of the class or series to be issued.
What are preferred shares?
Preferred shares have a right to receive dividends before common shareholders may receive dividends.
~ The right to the preferred dividend may or may not accumulate if unpaid in a particular year (i.e., “cumulative” vs. “noncumulative” preferred shares), or may accumulate only if there are sufficient current earnings (i.e., “cumulative if earned” preferred shares).
Preferred shares have no right to a share of the distributions made on common shares unless the preferred shares provide that they are “participating.”
What are the shareholders' rights vis-a-vis other creditors to a lawfully declared dividend?
Once a distribution is lawfully declared, the shareholders generally are treated as (unsecured) creditors of the corporation and their claim for the distribution is equal in priority to claims of other unsecured creditors.
~ However, a distribution can be enjoined or revoked if it was declared in violation of the solvency limitations, the articles, or a superior preference right.
Who may receive a dividend?
Dividends are declared payable to persons whom the corporate records show to be shareholders on a specified date - known as the record date.
~ The owner on the record date (not the date of declaration) is entitled to the dividend.
Who has Liability for Unlawful Distributions?
A director who votes for or assents to a distribution that violates the above rules is personally liable to the corporation for the amount of the distribution that exceeds what could have been properly distributed.

~ However, a director is not liable for distributions approved in good faith:
(i) based on financial statements prepared according to reasonable accounting practices, or on a fair valuation or other method that is reasonable under the circumstances; or
(ii) by relying on information from officers, employees, legal counsel, accountants, etc., or a committee of the board of which the director is not a member.
A director who is held liable for an unlawful distribution is entitled to contribution from:
(i) every other director who could he held liable for the distribution (i.e., those who voted in favor of the distribution) and (ii) each shareholder for the amount she accepted knowing that the distribution was improper.
Do shareholders have a fiduciary duty to the Corp.?
Generally, shareholders may act in their own personal interests and have no fiduciary duty to the corporation or their fellow shareholders.
~ Shareholder liability generally is limited to the liabilities discussed above for unpaid stock, a pierced corporate veil, or absence of de facto corporation.

~ If the shareholders enter into agreements that vest some or all of the right to manage the corporation in one or more shareholders, the managing shareholder(s) have the liabilities that a director ordinarily would have with respect to that power.
What duty to shareholders in a close Corp. owe each other?
Shareholders in a close corporation (i.e., a corporation with few shareholders) are generally held to owe each other the same duty of loyalty and utmost good faith that is owed by partners to each other.
What is a controlling shareholder's duty/Limitation?
A controlling shareholder must refrain from using his control to cause the corporation to take action that unfairly prejudices minority shareholders (e.g., a controlling shareholder may be liable for selling the corporation to individuals who subsequently loot the company).
What are the general powers of Directors?
The directors are responsible for the management of the business and affairs of the corporation.
Do Directors have to be shareholders?
In the absence of any requirements by the articles or bylaws, the directors need not be shareholders in the corporation or residents of any particular state.

There need be only one director.
~ The directors are elected at each annual shareholders’ meeting, subject to contrary provisions in the articles.

~ If there are at least nine directors, they may be divided into two or three equal size classes, with terms of office expiring in staggered years from one to three.

~ Vacancies on the board generally may be filled by the shareholders or the directors.
How are Directors removed?
Directors may be removed by the shareholders for cause or without cause.
~ However, a director elected by cumulative voting cannot be removed if the votes cast against removal would be sufficient to elect her if cumulatively voted at an election of directors.
~ Similarly, a director elected by a voting group of shares can be removed only by that class.
How much notice is required for a special meeting of directors?
Directors may act in regular or special meetings.
~ Regular meetings may be held without notice;
~ Special meetings require two days’ written notice of the date, time, and place of the meeting.
~ Attendance constitutes waiver of any required notice unless attendance is for the sole purpose of protesting lack of notice.
What constitutes a quorum for Directors' meetings?
A majority of the board of directors constitutes a quorum for the meeting unless a higher or lower number is required by the articles or bylaws, but a quorum can be no fewer than one-third of the board members.
~ Unlike shareholders, a director can break the quorum by withdrawing from a meeting.

~ If a quorum is present, resolutions will be deemed approved if approved by a majority of directors present.

~ Any action required to be taken by the directors at a formal meeting may be taken by unanimous consent, in writing without a meeting.
Directors Right to Inspect
Directors have a right to inspect corporate books.
May Directors' liability be limited?
The articles may limit or eliminate directors’ personal liability for money damages to the corporation or shareholders for failure to take action.
However, the articles may not limit or eliminate liability for financial benefits received by the director to which she is not entitled, an intentionally inflicted harm on the corporation or its shareholders, unlawful corporate distributions, or an intentional violation of criminal law.
What is the Directors' Duty of Care and the Business Judgment Rule?
Directors have a duty to manage to the best of their ability
~ They must discharge their duties:
(i) In good faith;
(ii) With the care that an ordinarily prudent person in a like position would exercise under similar circumstances; and
(iii) In a manner the directors reasonably believe to be in the best interests of the corporation.

Directors who meet this standard will not be liable for corporate decisions that in hindsight turn out to be poor or erroneous.

~ the person challenging the directors' action has the burden of proving that the statutory standard above was not met.

~ In discharging her duties, a director is entitled to rely on information, opinions, reports, or statements (including financial statements), if prepared or presented by:
(i) corporate officers or employees whom the director reasonably believes to be reliable and competent;
(ii) legal counsel, accountants, or other persons as to matters the director reasonably believes are within such person's professional competence; or
(iii) a committee of the board of which the director is not a member, if the director reasonably believes the committee merits confidence.
Duty of Loyalty - What are Conflicting Interest Transactions?
A director has a conflicting interest with respect to a transaction if the director knows that she or a related person—such as a spouse, parent, child, grandchild, etc., either:
(i) is a party to the transaction;
(ii) has a beneficial financial interest in, or is so closely linked to, the transaction that the interest would reasonably be expected to influence the director’s judgment if she were to vote on the transaction; or
(iii) is a director, general partner, agent, or employee of another entity with whom the corporation is transacting business and the transaction is of such importance to the corporation that it would in the normal course of business be brought before the board (the so-called interlocking directorate problem).
When will a conflicting interest transaction not be enjoined or give rise to an award of damages?
A conflicting interest transaction will not be enjoined or give rise to an award of damages due to the director’s interest in the transaction if:
(i) The transaction was approved by a majority of the directors without a conflicting interest after all material facts have been disclosed to the board;
(ii) The transaction was approved by a majority of the votes entitled to be cast by shareholders without a conflicting interest after all material facts have been disclosed to the shareholders (notice of the meeting must describe the conflicting interest transaction); or
(iii) The transaction, judged according to circumstances at the time of commitment, was fair to the corporation.
What are the Special Quorum Requirements for a vote on a conflicting interest transaction?
For purposes of the vote on a conflicting interest transaction:
(i) at a directors’ meeting, a majority of the directors without a conflicting interest, but not less than two, constitutes a quorum; and
(ii) at a shareholders’ meeting, a quorum consists of a majority of the votes entitled to be cast not including shares owned or controlled directly or beneficially by the director with the conflicting interest.
What are Factors to Be Considered in Determining Fairness?
In determining whether a transaction is fair, courts look to factors such as adequacy of the consideration, corporate need to enter into the transaction, financial position of the corporation, and available alternatives.

~ Despite the statute’s absolute terms, a transaction approved by the board or shareholders might still be set aside if the party challenging the transaction can prove that it constitutes a waste of corporate assets.
What are the remedies for an improper conflicting interest transaction?
Possible remedies for an improper conflicting interest transaction include enjoining the transaction, setting the transaction aside, damages, and similar remedies.
May Directors set their own compensation?
Yes, but unreasonable compensation may breach the directors’ fiduciary duties.
What is the Corporate Opportunities Doctrine?
The directors’ fiduciary duties prohibit them from diverting a business opportunity from their corporation to themselves without first giving their corporation an opportunity to act.
~ This is known as a “usurpation of a corporate opportunity”

A usurpation problem arises only if a director takes advantage of a business opportunity in which the corporation would have an interest or expectancy.
~ A corporation’s interest does not extend to every conceivable business opportunity, but neither are opportunities limited to those necessary to the corporation’s current business.
~ The closer the opportunity is to the corporation’s line of business, the more likely a court will find it to be a corporate opportunity.

Because the board generally makes decisions concerning management of the corporation, it is the board that must decide whether to accept an opportunity or to reject it.
Is Lack of Financial Ability a Defense to the usurpation of a corporate opportunity?
The corporation’s lack of financial ability to take advantage of the opportunity probably is not a defense.
~ The director should still present the opportunity to the corporation and allow it to decide whether it can take advantage of the opportunity.
What are the remedies to the usurpation of a corporate opportunity?
If a director does not give the corporation an opportunity to act, but rather usurps the opportunity, the corporation can recover the profits that the director made from the transaction or may force the director to convey the opportunity to the corporation, under a constructive trust theory, for whatever consideration the director purchased the opportunity.
Duty of Loyalty - May Directors engage in competing businesses?
Directors may engage in unrelated businesses, but engaging in a competing business probably creates a conflict of interest.
What is the Common Law Insider Trading--Special Circumstances Rule?
A director has no common law duty to disclose all facts relevant to a securities transaction between the director and the other party to the transaction.
~ However, courts have found a duty to disclose where a director knows of special circumstances (e.g., an upcoming extraordinary dividend or a planned merger).
Officers' Duties
Officers’ duties are determined by the bylaws or, to the extent consistent with the bylaws, by the board or an officer so authorized by the board.
What determines Officers' powers?
Ordinary rules of agency determine authority and powers.
~ Authority may be actual or apparent.
How do Officers' actions become binding on the Corp.?
Unauthorized actions may become binding on the corporation because of ratification, adoption, or estoppel.
~ The corporation is liable for actions by its officers within the scope of their authority, even if the particular act in question was not specifically authorized.
What is the standard of conduct for Officers?
Officers must carry out their duties in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner they reasonably believe to be in the best interests of the corporation.

~ Despite any contractual term to the contrary, an officer has the power to resign at any time by delivering notice to the corporation, and the corporation has the power to remove an officer at any time, with or without cause.
When is mandatory indemnification required?
Unless limited by the articles, a corporation must indemnify a director or officer who prevailed in defending a proceeding against the officer or director for reasonable expenses, including attorneys’ fees, incurred in connection with the proceeding.
When may a Corp indemnify (Discretionary Indemnification)?
A corporation may indemnify if:
(i) The director acted in good faith; and
(ii) Believed that her conduct was: (a) in the best interests of the corporation (when the conduct at issue was within the director's official capacity); (b) not opposed to the best interests of the corporation (when the conduct at issue was not within the director’s official capacity); or (c) not unlawful (in criminal proceedings).

A corporation does not have discretion to indemnify a director who is unsuccessful in defending:
(i) a direct or derivative action in which the director is found liable to the corporation or
(ii) an action charging that the director received an improper benefit.
Who makes the determination whether to indemnify?
Generally, the determination whether to indemnify is to be made by a disinterested majority of the board, or if there is not a disinterested quorum, by a majority of a disinterested committee or by legal counsel.
~ The shareholders may also make the determination (the shares of the director seeking indemnification are not counted).

~ Officers generally may be indemnified to the same extent as a director.

~ A court may order indemnification when the court feels this is appropriate.

~ A corporation may advance expenses to a director defending an action as long as the director furnishes the corporation a statement that the director believes he met the appropriate standard of conduct and that he will repay the advance if he is later found to have not met the appropriate standard.

~ The RMBCA does not limit a corporation’s power to indemnify, advance expenses to, or maintain insurance on agents and employees.
What is the General Procedure for Fundamental Changes?
The following procedure applies to fundamental changes:
(i) the board adopts a resolution;
(ii) written notice is given to shareholders;
(iii) shareholders approve changes by a majority of the votes entitled to be cast; and
(iv) the changes in the form of articles are filed with the state.

~ note the distinction between shareholder voting on regular issues and shareholder voting on fundamental changes: Regular issues can be approved by a majority of the shares cast at a meeting, as long as there is a quorum, whereas a fundamental corporate change must be approved by a majority of all votes entitled to be cast - not just those cast at a meeting.
May a Corp. Amend its Articles of Incorporation?
The corporation can amend its articles with any provision that would be lawful in original articles.
"There are no appraisal rights. (See E.l., infra.)
~ Certain “housekeeping” amendments (e.g., deleting the names of initial directors named in the articles or changing the number of authorized shares after a stock split) can be made without shareholder approval, but most require approval by the shareholders.
What is a merger?
A merger involves the blending of one or more corporations into another corporation, and the latter corporation survives while the merging corporation(s) cease to exist following the merger.
What is a Share Exchange?
A share exchange involves one corporation purchasing all of the outstanding shares of one or more classes or series of another corporation.
When is approval of a plan of merger by shareholders not required?
When there is no significant change to the Surviving Corporation.

Approval of a plan of merger by shareholders of the surviving corporation is not required if all the following conditions exist:
(i) the articles of incorporation of the surviving corporation will not differ from the articles before the merger;
(ii) each shareholder of the survivor whose shares were outstanding immediately prior to the effective date of the merger will hold the same number of shares, with identical preferences, limitations, and rights;
(iii) the number of voting shares outstanding immediately after the merger, plus the number of voting shares issuable as a result of the merger, will not exceed by more than 20% the total number of voting shares of the surviving corporation outstanding immediately prior to the merger; and
(iv) the number of participating shares outstanding immediately after the merger, plus the number of participating shares issuable as a result of the merger will not exceed by more than 20% the total number of participating shares outstanding immediately before the merger
What is a Short Form Merger of a Subsidiary?
A parent corporation owning at least 90% of the outstanding shares of each class of a subsidiary corporation may merge the subsidiary into itself without the approval of the shareholders of the parent or the subsidiary.
~ The parent must mail a copy of the plan of merger to each shareholder of the subsidiary.
Who needs to approve a share exchange?
Only the shareholders of the corporation whose shares will be acquired in the share exchange need approve a share exchange; a share exchange is not a fundamental corporate change for the acquiring corporation.
What does the Disposition of Property Outside the Usual and Regular Course of Business require?
A sale, lease, exchange, or other disposition of all or substantially all of a corporation’s property outside the usual and regular course of business is a fundamental corporate change for the corporation disposing of the property.
~ Thus, the corporation disposing of the property must follow the fundamental change procedure.
Does the purchaser of another corporation’s property become liable for the seller’s obligations?
Generally, the purchaser of another corporation’s property does not become liable for the seller’s obligations; the seller remains solely liable.
~ However, if the disposition of property is really a disguised merger, a court might treat it as a merger under the de facto merger doctrine and hold the purchaser liable for the seller’s obligations just as if a merger had occurred.
What is the Dissenting Shareholders’ Appraisal Remedy?
If a corporation approves a fundamental change, shareholders who dissent from the change may have the right to have the corporation purchase their shares.
~ This right is known as the “right of appraisal” or “dissenters’ rights.”
The following have a right to the appraisal remedy:
(i) any shareholder entitled to vote on a plan of merger and shareholders of the subsidiary in a short form merger;
(ii) shareholders of the corporation whose shares are being acquired in a share exchange;
(iii) a shareholder who is entitled to vote on a disposition of all or substantially all the corporation’s property; and
(iv) a shareholder whose rights will be materially and adversely affected by an amendment of the corporation’s articles.
What is the procedure for shareholders appraisal remedy?
a. Corporation Must Give Shareholders Notice - If a proposed corporate action will create dissenters’ rights, the notice of the shareholders’ meeting at which a vote on the action will be taken must state that the shareholders will be entitled to exercise their dissenting rights.
b. Shareholder Must Give Notice of Intent to Demand Payment - Before a vote is taken, the shareholder must deliver written notice of her intent to demand payment for her shares if the proposed action is taken.
~ She cannot vote in favor of the proposed action.

c. Corporation Must Give Dissenters Notice:
If the action is approved, the corporation must notify, within 10 days after approval, all shareholders who filed an intent to demand payment.
~ The notice must include the time and place to submit their shares and the other terms of the repurchase.

d. Shareholders Must Demand Payment:
A shareholder who is sent a dissenter’s notice must then demand payment in accordance with the notice given by the corporation.

e. Corporation Must Pay:
The corporation must pay the dissenters the amount the corporation estimates as the fair value of the shares, plus accrued interest.

f. Notice of Dissatisfaction:
If the shareholder is dissatisfied with the corporation’s determination of value, the shareholder has 30 days in which to send the corporation her own estimate of value and demand payment of that amount (or the difference between her estimate and the amount sent by the corporation).

g. Court Action:
If the corporation does not want to pay what the shareholder demanded, the corporation must file an action in court within 60 days of receiving the shareholder’s demand, requesting the court to determine the fair value of the shares.
~ Otherwise, the corporation must pay what the shareholder demanded.
What does the Federal Williams Act regulate?
The federal Williams Act controls tender offers (i.e., offers by a “bidder” to purchase shares from shareholders of a "target” corporation).
Under the Williams Act, when the bidder be regulated?
If a bidder makes a tender offer (a widespread public offering to purchase a substantial percentage of the target’s shares), and the offer will result in the bidder obtaining more than 5% of a class of securities of the target, the bidder must file a schedule 14D containing extensive disclosure regarding:
a) The bidder’s identity, source of funds, past dealings with the target, and plans concerning the target;
b) The bidder’s financial statements if the bidder is not an individual; and
c) Any arrangements made with persons in important positions at the target.
How is the Offer itself regulated under the Williams Act?
Under the Williams Act:
a) A tender offer must be held open for at least 20 days and must be open to all members of the class of securities sought;
b) Shareholders must be permitted to withdraw tendered shares while the offer remains open;
c) If the offer is oversubscribed, the bidder must purchase on a pro rata basis from among the shares deposited during the first 10 days of the offer; and
d) If the offer price is increased, the higher price must he paid to all tendering shareholders.
How is the Target Corp. regulated under the Williams Act?
The management of the target must either:
(i) give its shareholders a recommendation concerning the offer, with a statement of reasons, or
(ii) explain why it cannot make a recommendation.
What is the General Anti-Fraud Provision under the Williams Act?
The Williams Act also prohibits any false or misleading statements or omissions in connection with the offer.
~ Shareholders can sue for damages for any false statements, and the Securities and Exchange Commission may seek to enjoin any false statements.
What are Control Share Acquisition Statutes?
State control share acquisition statutes regulate takeovers by providing that if a designated stock ownership threshold is crossed (e.g., a bidder purchases shares that give him more than 20% of a class of shares), the shares so purchased will not have voting rights unless the holders of a majority of the disinterested shares vote to grant voting rights in the acquired shares.
~ Note that a state may have more than one threshold (e.g., 20%, 33%, and 50%), and crossing from one level of ownership to the next will trigger the statute.

~ To be valid, control share acquisition statutes must be limited to corporations or transactions having a significant connection to the regulating state (e.g., limiting application to purchases where I ,000 shareholders or at least 10% of the outstanding shares are located in the state).
How is dissolution accomplished If shares have not yet been issued or business has not yet been commenced?
If shares have not yet been issued or business has not yet been commenced, a majority of the incorporators or initial directors may dissolve the corporation by delivering articles of dissolution to the state.
~ All corporate debts must be paid before dissolution, and if shares have been issued, any assets remaining after winding up must be distributed to the shareholders.
What is Dissolution by Corporate Act?
The corporation may dissolve by a corporate act approved under the fundamental change procedure.
What is the Effect of Dissolution?
A corporation that has been dissolved continues its corporate existence, but is not allowed to carry on any business except that which is appropriate to winding up and liquidating its affairs.

~ The corporation may revoke a voluntary dissolution by using the same procedure that was used to approve the dissolution.
Can a claim be asserted against a dissolved corporation, even if the claim does not arise until after dissolution?
A claim can be asserted against a dissolved corporation, even if the claim does not arise until after dissolution, to the extent of the corporation’s undistributed assets.
~ If the assets have been distributed to the shareholders, a claim can be asserted against each shareholder for his pro rata share of the claim, to the extent of the assets distributed to him.
~ However, a corporation can cut short the time for bringing known claims by notifying claimants in writing of the dissolution and giving them a deadline of not less than 120 days in which to file their claim.
~ The time for filing unknown claims can be limited to five years by publishing notice of the dissolution in a newspaper in the county where the corporation’s known place of business is located.
What is Administrative Dissolution?
The state may bring an action to administratively dissolve a corporation for reasons such as the failure to pay fees or penalties, failure to file an annual report, and failure to maintain a registered agent in the state.
~ The state must serve the corporation with written notice of the failure.
~ If the corporation does not correct the grounds for dissolution or show that the grounds do not exist within 60 days after service of notice, the state effectuates the dissolution by signing a certificate of dissolution.
~ A corporation that is administratively dissolved may apply for reinstatement within three years after the effective date of dissolution. The application must state that the grounds for dissolution either did not exist or have been eliminated.
~ Reinstatement relates back to the date of dissolution and the corporation may resume carrying on business as if the dissolution had never occurred.
What is Judicial Dissolution?
The attorney general may seek judicial dissolution of a corporation on the ground that the corporation fraudulently obtained its articles of incorporation or that the corporation is exceeding or abusing its authority.

Shareholders and Creditors may also seek dissolution.
When may Shareholders seek judicial dissolution?
Shareholders may seek judicial dissolution on any of the following grounds:
(i) The directors are deadlocked in the management of corporate affairs, the shareholders are unable to break the deadlock, and irreparable injury to the corporation is threatened or corporate affairs cannot be conducted to the advantage of the shareholders because of the deadlock;
(ii) The directors have acted or will act in a manner that is illegal, oppressive, or fraudulent;
(iii) The shareholders are deadlocked in voting power and have failed to elect one or more directors for a period that includes at least two consecutive annual meeting dates; or
(iv) Corporate assets are being wasted, misapplied, or diverted for noncorporate purposes.
What is an Election to Purchase in Lieu of Dissolution?
If the corporation’s shares are not listed on a national securities exchange or regularly traded in a market maintained by one or more members of a national or affiliated securities association, the corporation (or one or more shareholders) may elect to purchase the shares owned by the petitioning shareholder at their fair value.
When may Creditors seek judicial dissolution?
Creditors may seek judicial dissolution if:
(i) the creditor’s claim has been reduced to judgment, execution of the judgment has been returned unsatisfied, and the corporation is insolvent; or
(ii) the corporation has admitted in writing that the creditor’s claim is due and owing and the corporation is insolvent.
What is an LLC?
A LLC is a hybrid business organization that:
(i) is taxed like a partnership,
(ii) offers its owners (called members) the limited liability of shareholders of a corporation, and
(iii) can be run like either a corporation or a partnership.
~ There is no limit on the number of owners (members) as there would be in a Subchapter S corporation (a corporation that is taxed like a partnership under the tax code), and no one has to accept full personal liability for the organization’s debts, as would be required in a limited partnership.

An LLC is formed by filing articles of organization with the secretary of state.
The articles of an LLC must include the following:
a. A statement that the entity is an LLC;
b. The name of the LLC, which must include an indication that it is an LLC;
c. The street address of the LLC ‘s registered office and name of its registered agent; and
d. The names of all of the members.
Who has management control of an LLC?
Management of the LLC is presumed to be by all members, but the articles may provide for some other type of management.
~ If management is by the members:
(i) a majority vote is required to approve most decisions; and
(ii) each member is an agent of the LLC (i.e., the LLC may be bound by the acts of any member apparently carrying on the business of the LLC).
Are Members personally liable for the LLC ‘s obligations?
No, Members are not personally liable for the LLC ‘s obligations.
How are Profits and losses of an LLC split?
Profits and losses of an LLC are split evenly unless an agreement provides otherwise.
What result in An assignment of a member’s interest in an LLC?
An assignment of a member’s interest in an LLC transfers only the member’s right to receive profits and losses.
~ Management rights are not transferred.
~ One can become a member (i.e., management rights can be transferred) only with the consent of all members.
What causes dissolution of an LLC?
Dissociation (e.g., death, retirement, resignation, bankruptcy, incompetence, etc.) of an LLC member generally causes dissolution.
When may a foreign corporation not transact business within a state?
A foreign corporation may not transact business within a state until it has obtained a certificate of authority from the secretary of state.
~ A foreign corporation may not be denied a certificate of authority merely because the laws of its state of incorporation governing its organization and internal affairs differ from the host jurisdiction.
~ If a foreign corporation is doing business in a state and has not obtained a certificate of authority to do business, it generally cannot bring suit in the foreign state, although it can defend suits.
~ However, failure to obtain a certificate does not usually impair the validity of any contract or corporate act.
What is Rule 10b-5?
Rule 10b-5 makes it Illegal for any person to use any means or instrumentality of interstate commerce to employ any scheme to defraud, make an untrue statement of material fact (or omit a material fact), or engage in any practice that operates as a fraud in connection with the purchase or sale of any security.
What are the general elements of a cause of action under 10b-5?
a. Fraudulent Conduct
b. In Connection with the Purchase or Sale of a Security by Plaintiff
c. In Interstate Commerce
d. Reliance
e. Damages
What is fraudulent conduct under 10b-5?
Fraudulent conduct can take a number of forms, e.g., making a material missstatement or making an omission of material fact.
1) Materiality
A statement or omission will be considered material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision.

2) Scienter
To be actionable under Rule 10b-5, the conduct complained of must have been undertaken with an intent to deceive, manipulate, or defraud
~ Recklessness as to truth also appears to be sufficient culpability.
What is the definition of materiality under 10b-5?
1) Materiality
A statement or omission will be considered material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision.
What is scienter under 10b-5?
To be actionable under Rule 10b-5, the conduct complained of must have been undertaken with an intent to deceive, manipulate, or defraud
~ Recklessness as to truth also appears to be sufficient culpability.
Are potential purchasers and those who refrain from selling covered under 10b-5?
If the plaintiff is a private person, the fraudulent conduct must be connected to the purchase or sale of a security by the plaintiff.
~ This excludes potential purchasers who do not buy and people who already own shares and refrain from selling.
Can Non-trading Defendants be held liable under 10b-5?
Nontrading Defendants Can Be Held Liable:
- Note that the defendant need not have purchased or sold any securities;
~ a nontrading defendant, such as a company that intentionally publishes a misleading press release, can be held liable to a person who purchased or sold securities on the market on the basis of the press release.
Reliance under 10b-5
A private plaintiff must prove that he relied on the defendant’s fraudulent statement, omission, or conduct.
~ But note that in cases based on omissions, reliance generally will be presumed if the plaintiff proves that the omission was material.
What are the measure of damages under 10b-5?
A private plaintiff must show that the defendant’s fraud caused the plaintiff damages.
~ Damages are limited to the difference between the price paid (or received) and the average share price in the 90-day period after corrective information is disseminated.
What else does 10b-5 prohibit?
Rule 10b-5: also prohibits most instances of trading securities on the basis of inside information. A person violates rule 10b-5 if by trading he breaches a duty of trust and confidence owed to:
(i) the issuer,
(ii) shareholders of the issuer, or
(iii) in the case of misappropriators, another person who is the source of the material nonpublic information.
What is the definition of insider information?
Insider trading information not disclosed to the public that an investor would think is important when deciding whether or not to invest in a security.
Who may be liable under 10b-5 for insider trading?
1) Insiders
2) Tippers and Tippees
3) Misappropriators
Who are insiders under 10b-5?
Anyone who breaches a duty not to use inside information for personal benefit can be held liable under rule 10b-5 (e.g., directors, officers, controlling shareholders, employees of the issuer, and the issuer’s CPAs, attorneys, and bankers).
When can a tipper be held liable under 10b-5?
If an insider gives a tip of inside information to someone else who trades on the basis of the inside information, the tipper can be liable under rule 10b-5 if the tip was made for any improper purpose
(e.g., in exchange for money or a kickback, as a gift, for a reputational benefit, etc.).
When can a tippee be held liable under 10b5?
The tippee: can be held liable only: if the tipper breached a duty and the tippee knew that the tipper was breaching the duty.
When can missappropriators be held liable under 10b-5?
Under the misappropriation doctrine: the government can prosecute a person under rule 10b-5 for trading on market information (i.e., information about the supply of or demand for stock of a particular company) in breach of a duty of trust and confidence owed to the source of the information;
~ the duty need not be owed to the issuer or shareholders of the issuer.
What does Section 16b require?
Section 16(b) requires surrender to the corporation of any profit realized by any officer, director, or 10% shareholder of a class of the corporation’s stock from the purchase and sale, or sale and purchase, of any equity security within a six-month period.
~ The section applies to publicly held corporations:
(i) with at least $10 million in assets and 500 or more shareholders in any outstanding class or
(ii) whose shares are traded on a national exchange.
Who does Section 16b regulate?
any officer, director, or 10% shareholder.

Officers, directors, and 10% shareholders include not only those actual persons, but also anyone who has deputized one of those persons to act for him.
What is the purpose of Section 16b?
The purpose of section 16(b) is to prevent unfair use of inside information and internal manipulation of price.
~ This is accomplished by imposing strict liability for covered transactions.
What transactions are covered under 16b?
16b covers Purchase and Sale or Sale and Purchase Within Six Months:
The test of whether a transaction is a sale or purchase for purposes of section 16(b) is whether the transaction is one in which abuse of inside information is likely to occur (e.g., forced sales might not be counted).
What is an equity security?
An equity security is any security other than a pure debt instrument, including options, warrants, preferred stock, common stock, etc.
Are Transactions occurring before one becomes an officer or director excluded from section 16(b)?
Transactions occurring before one becomes an officer or director are excluded from section 16(b), but transactions occurring within six months after ceasing to be an officer or director can be covered.
When is share ownership measured?
Share ownership is measured at the time of both the purchase and the sale.
How is the recoverable profit under 16b measured?
The recoverable profit under section 16(b) is determined by matching the highest sales price against the lowest purchase price for any six-month period.
~ Thus, the “profit” can be either a gain or an avoided loss.
What is Actual Authority?
This arises where the Principal's words or conduct reasonably cause the Agent to believe that he or she has been authorized to act.
~ This may be express in the form of a contract or implied because what is said or done make it reasonably necessary for the person to assume the powers of an Agent.
~ If it is clear that the Principal gave actual authority to the Agent, all the Agent's actions falling within the scope of the authority given will bind the Principal. This will be the result even if, having actual authority; the Agent in fact acts fraudulently for his own benefit unless the Third Party was aware of the Agent's personal agenda. If there is no contract but the Principal's words or conduct reasonably led the Third Party to believe that the Agent was authorized to act, or if what the Agent proposes to do is incidental and reasonably necessary to accomplish an actually authorized transaction or a transaction that usually accompanies it, then the Principal will be bound.
What is Apparent or Ostensible Authority?
If the Principal's words or conduct would lead a reasonable person in the Third Party’s position to believe that the Agent was authorized to act, say by appointing the Agent to a position which carries with it agency-like powers, those who know of the appointment are entitled to assume that there is apparent authority to do the things ordinarily entrusted to one occupying such a position.
~ If a Principal creates the impression that an Agent is authorized but there is no actual authority, Third Parties are protected so long as they have acted reasonably. This is sometimes termed "Agency by Estoppel" or the "Doctrine of Holding Out", where the Principal will be estopped from denying the grant of authority if Third Parties have changed their positions to their detriment in reliance on the representations made.
What is Agency by Estoppel?
If a Principal creates the impression that an Agent is authorized but there is no actual authority, Third Parties are protected so long as they have acted reasonably. This is sometimes termed "Agency by Estoppel" or the "Doctrine of Holding Out", where the Principal will be estopped from denying the grant of authority if Third Parties have changed their positions to their detriment in reliance on the representations made.
What is Implied Authority?
This type of authority is considered held by the agent by virtue of being reasonably necessary to carry out his express authority. As such, it can be inferred by virtue of a position held by an agent, e.g. partners have authority to bind the other partners in the firm, their liability being joint and several, and in a corporation, all executives and senior employees with decision-making authority by virtue of their position have authority to bind the corporation.