California Corporations For July 2009 California Bar Exam Essays

Front 1

Corp formation
What are promoters? Subscribers?

Back 1

Promoters are persons acting on behalf of a corp not yet formed

Subscribers are persons or entities who make written offers to buy stock from a corp not yet formed

Front 2

Corporations

What are the six testable issues?

Back 2

Corporate formation

Issuance of stock

Action by and liability of directors and officers

Rts of shareholders

Fundamental corporate changes

Fed securities laws

Front 3

Corp formation

What is corp liability on promotor's preincorp K?

Is promoter absolved of liability then?

Back 3

Corp becomes liable on promoter's preincorp K when corp ADOPTS the K by:

EITHER express BOD resolution

OR IMPLIED adoption by knowledge of K + acceptance of the benefits

**

NO; MUST have NOVATION to replace promoter (i.e.  all parties corp, 3P and promoter agree to..)

Front 4

Corp formation
What if promoter enters K and corp is never formed?

What if promoter enters preincorp K, the corp is formed, and corp merely adopts the K?

Back 4

Promoter ALONE is liable on K; NOT corp

**

Corp becomes liable AND promoter remains liable until novation

Front 5

Corp formation

What are consequences of promoters being fiduciaries?

Back 5

Promoters are fiduciaries of each other and corp, so they owe a duty of loyalty that prohibits:

1 Self dealing
2 Usurping opportunities
3 Secret profits to corp's detriment

Front 6

Corp formation

Promoter and secret profits problem; if promoter sells his own property to corp, what can corp recover?

What tool to use for recovery?

Back 6

IF promoter sell to corp property acquired BEFORE becoming promoter: profit recoverable by corp ONLY IF sold for more than fair mrkt value

IF promoter sell to corp property acquired AFTER becoming promoter: any profit recoverable by corp

Profit recovery happens via DISGORGEMENT

Front 7

Corp formation

Can a subscriber revoke offer to buy stock in not yet formed corp?

Back 7

IGNORE K LAW

Preincorp offer to buy stock in a not yet formed corp is NOT REVOCABLE for SIX months

Front 8

Corp formation
What is an incorporator?

Back 8

Merely one who signs and files the articles of incorp with the state

Front 9

Corp formation

In articles of incorp, what is the relationship btw purpose and duration in the purpose requirement? What is the default position? What are consequences of going beyond narrow purposes?

Back 9

General purpose AND perpetual duration: valid AND presumed in absence of specific purpose and/or limited duration

**

If the purpose is specific, and there's an ultra vires activity?

1 State can enjoin ultra vires activity
AND/OR
2 Corp may sue its own directors/officers for losses caused by the activity

Front 10

Corp formation

How to obtain de facto corp status?

Back 10

Organizers have made good faith attempt to comply w/corp formalities
AND
Have NO knowledge of lack of corp status

Front 11

Corp formation

What is legal significance of corp?

Back 11

Corp is a SEPARATE legal person, so shareholders and directors/officers are NOT personally liable for corp debts (unless corp veil pierced)

I.e. limited liability

Front 12

Issuance of stock
When does issuance occur?

Back 12

- ONLY when corp is selling its own shares of stock; NOT when 3rd parties buy/sell stock on after mrkt

 

- at BOD's discretion

Front 13

Issuance of stock

What constitutes consideration for most stock issuance?

Back 13

Par value: minimum issuance price, so corp can never receive less than par value

Front 14

Issuance of stock

What is treasury stock? What is consideration for treasury stock?

Back 14

Treasury stock is stock that previously issued and then reacquired by corp

Any valid consideration deemed adequate by BOD is okay (no par value)

Front 15

Issuance of stock

Can property be used as consideration?

Back 15

Any valid consideration may be received IF BOD values it at least par value

Front 16

Issuance of stock

What if par value is required, but corp issues shares for less than par value? Can corp recover? From whom can it? From whom can't it?

Back 16

YES; corp can recover from directors personally for authorizing a below par issuance b/c that is ultra vires per se

Can also recover from shareholders b/c shareholders are ALWAYS liable for paying full consideration of their shares, so BUYER is liable too

Must choose BOD OR BUYER to sue; NOT BOTH

Front 17

Issuance of stock

What are preemptive rts? Can they be presumed if not granted in articles of incorp?

Back 17

Rt of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock for cash

**

NO; must be express grant of preemptive rts

Front 18

Directors and officers
Statutory requirements for directors?

Back 18

BOD with at least one member

Shareholders elect directors

Shareholder can remove director before term expiration for NO cause

Valid meeting for ALL BOD behavior

Front 19

Directors and officers to their own corp and shareholders

What is limitation on director liability? What is the way to impose liability?

Back 19

Business judgment rule, presumption that directors manage corp in good faith so innocent mistakes are okay

BUT, directors are FIDUCIARIES and have duties of care and loyalty

 

**BJR = GF + Rational and Reasonably Informed Basis

Front 20

Directors and officers to their own corp and shareholders

What are the directors' two duties?

Back 20

DUTY OF CARE

Act w/care of a prudent person in GF and best interests of corp. UNLESS articles of incorp have limited liability for breach of duty of care

DUTY OF LOYALTY

Director canNOT receive unfair benefit to detriment of corp or its shareholders UNLESS there has been material disclosure AND independent ratification

1 NO self-dealing by interested directors w/o disclosure and approval by majority of disinterested directors
2 NO usurping corp opportunities
3 NO secret profits

Front 21

Directors and officers to their own corp and shareholders

How can director defend against claim of breach of duty of loyalty?

Back 21

By obtaining DISCLOSURE + INDEPENDENT RATIFICATION via MAJORITY VOTE of:

1. of Independent directors
2. of a committee of at least 2 independent directors; OR
3. of shares held by independent shareholders

Front 22

Directors and officers to their own corp and shareholders

What are the duties of officers?

Back 22

Same as directors

Front 23

Directors and officers to their own corp and shareholders

What is relationship of directors to officers?

Back 23

Directors can fire officers at will

Front 24

Directors and officers to their own corp and shareholders

Can directors/officers seek indemnity from corp for litigation costs? Whom can a corp indemnify for sure? Maybe? Never?

Back 24

Corp can NEVER indemnify director/officer IF they lost a suit to their OWN corp

Corp MUST ALWAYS indemnify IF directors/officers WON a lawsuit against any party, including their own corp

Corp MAY indemnify IF:

1 Liability to third parties or settlement with corp
OR
2 Director/officer shows that she acted in good faith and that she believed her conduct was in corp's interest

Front 25

Directors and officers to their own corp and shareholders

Who may determine whether to grant indemnity if it's a maybe situation?

Back 25

1 IF majority of independent directors approves indemnity

2 Committee of at least 2 independent directors approves indemnity

3 Majority of shares held by independent shareholders can vote

4 Special lawyer's opinion can recommend it

Front 26

Rts of shareholders
What is shareholder derivative suit?

Back 26

Shareholder sues to enforce the corp's cause of action

ALWAYS ask, could corp have brought this suit itself?

 

Threshold Req: 

1. Own stock when COA arose AND throughout litigation

2. Written demand to BOD + wait 90 days for rejection

Front 27

Rts of shareholders

What are all shareholder rts?

Back 27

Shareholder derivative suit

Voting

Examine books/records of corp (5 days written notice + proper business purpose)

Dividends IF directors/officers are really misbehaving

Front 28

Rts of shareholders

Who has right to vote at upcoming meeting where voting occurs?

Back 28

ONLY the RECORD DATE OWNER votes

Record date is the voter eligibility cut-off date set by the BOD within the 70 day period leading up to the meeting period

Therefore, you must own a share by the record date; no matter the meeting date

 

ONE SHARE = ONE VOTE

Front 29

Rts of shareholders

When can shareholders vote by proxy? Proxy must...(5)

Back 29

1. In writing
2. Signed by record sharedholder
3. Directed to secretary of corp
4. Authorizes another to vote shares
5. Valid for ONLY 11 months unless otw stated

Front 30

Rts of shareholders

Are proxies revocable? Exception?

Back 30

Proxies are revocable UNLESS:

1 Labeled irrevocable
AND
2 Coupled w/an interest in the shares themselves

Front 31

Rts of shareholders

Where do shareholders vote? Two kinds of meetings.

Back 31

Properly noticed annual voting at which at least one director slot is open to election, so time/place required

Specially noticed special meeting:

called by BOD, the president OR holders of 10% of voting shares;

Purpose: vote on proposal or fundamental corp Notice Req: not >60 or <10 days + time/place + special purpose of the meeting b/c meeting is LIMITED to that purpose

Front 32

Rts of shareholders

What is quorum?

Back 32

A majority of all outstanding shares (NOT people) must be represented when the meeting begins, unless otw provided in articles of incorp

 

Min of 1/3 of shares outstanding

Front 33

Rts of shareholders

What is required for voting to produce a winner?

Back 33

Votes cast in favor must simply exceed those cast against by one share

NO abstentions

Front 34

Rts of shareholders

What is alternative voting method to increase voting power? What two ways to achieve it?

Back 34

Pooled/block voting; two ways to do this

VOTING TRUST: formal delegation of voting power to voting trustee for 10 years unless extended by agreement (in writing)

SHAREHOLDER VOTING AGREEMENT: Agreement in writing to vote shares as required by the agreement

Front 35

Rts of shareholders

What is cumulative voting of directors?

Back 35

Multiply shares by number of open director slots, but ONLY if agreement allows for it

Front 36

Rts of shareholders

Relationship of dividends to solvency?

Back 36

NO dividends issued IF

Corp is insolvent
OR
Dividend issuance would render corp insolvent

BOD members are liable personally if they issue wrongly

Front 37

Rts of shareholders

What is the dividend priority of distribution, depending on share type?

Back 37

COMMON STOCK

Get paid last AND equally

COMMON STOCK + PREFERRED STOCK

Preferred stock get dividends first

COMMON STOCK + PARTICIPATING AND PREFERRED STOCK

Participating preferred stock get paid TWICE b/c they get preferred treatment, and common treatment after

COMMON STOCK + PREFERRED CUMULATIVE STOCK

Preferred cumulative stock gets paid for yrs when there were no dividends

Front 38

Rts of shareholders

Do shareholders have a rt to dividends?

Back 38

NO; BOD has discretion

UNLESS directors have behaved very badly

Front 39

Rts of shareholders

How can shareholder agreement eliminate corp formalities (closely-held corps)? Two benefits??

Back 39

Unanimous shareholder election in writing
AND
Some reasonable share transfer restriction

Benefits:

1 NO piercing the veil, EVEN IF failure to observe formalities
AND
2 Possible Subchapter S corp status; therefore, deemed partnership for tax status

Front 40

Rts of shareholders

What are two elements of S corps?

Back 40

100 or fewer shareholders
AND
ONLY one class of stock

Front 41

Rts of shareholders

What is a professional corp?

Back 41

Licensed professionals MUST be shareholders and ONLY practice one designated profession

Front 42

Rts of shareholders

Shareholders usually have no liability for corp. Exceptions? (3)

Back 42

Piercing the corporate veil to render shareholder liable

CONTROLLING SHAREHOLDERS owe fiduciary duty to minority shareholders

CONTROLLING SHAREHOLDERS are liable for selling corp to a party who loots the corp, UNLESS reasonable measures were taken to investigate buyer's reputation and plans for the corp

Front 43

Fundamental corp changes

What are the five types of fundamental corp changes?

Back 43

For sure:

1. merger (A + B = B)

2. consolidation (A + B = C)

3. dissolution

Maybe:

4. fundamental (not ministerial) amendment of articles of incorp

5. sale of majority of corp's assets

Front 44

Fundamental corp changes

Four step process to effectuate any fundamental change

Back 44

1.  Resolution by BOD at valid meeting
2.  Notice of special meeting
3.  SH approval by majority of:

         - all shares entitled to vote (NOT just a quorum)  

         - of each voting group that is adversely affected by the change EXCEPT short-form merger where 90% parent of sub merges with sub

4.  File Notice Change w State 

 

Note: If corp approves of fundamental change, dissenting SHs have a right to force the corporation to buy their shares at fair value
 

Front 45

Fundamental corp changes

How does a dissenter shareholder perfect rt of appraisal? (3)

Back 45

1. BEFORE VOTE -->File written notice of objection and intent to demand payment 

2. During vote: vote against or abstain

3. After vote: Make prompt written demand to be bought out

Front 46

Fed securities laws

Insider trading

Back 46

Who is liable?

Insiders (missappropriation)

Tippers (of material info)

Tippees ONLY IF tipper breached duty AND tippee knew of breach

TIPPERS CAN BE VICARIOUSLY LIABLE EVEN IF THEY DIDN'T SELL/BUY STOCKS THEMSELVES

Front 47

Fed securities laws

IF it's a private 10b-5 action by private investor, 6 elements

Back 47

1 Fraudulent conduct
a Materiality
b Scienter

2 Connected to sale/purchase of security

3 In interstate commerce

4 Reliance

5 Damages

Front 48

Fed securities laws

Section 16(b); when does it apply?

Back 48

-Big corp (reporting corp)
OR
-Big D (officer, director, 10%+ shareholder) AT THE TIME OF SALE/PURCHASE (no application to firms who were not prior shareholders)

AND

-Type of transaction: buying/selling stock within single six-month period (NO fraud OR deception required)

STRICT LIABILITY

Front 49

Fed securities laws

Consequences of 16(b)

Back 49

All profits from short-swing trading are recoverable by corp

IF, within six months before/after any sale, there was a purchase at a lower price than the sale price, there is PROFIT actionable by 16(b)

Front 50

Shareholder Rts

 

[CONTROL]

Back 50

NO DIRECT CONTROL

 

INDIRECT: 

1. Elect and may remove directors w/ or w/out cause

2. may modify bylaws

3. MUST approve fundamental corp. changes