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71 Cards in this Set

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De Jure Corp
1. Corp created in compliance with all statutory requirements
Articles of Incorporation Requirements
1. File w/Sec of State
2. Name
3. Number of shares authorized to issue
4. Name/address of registered agent
5. Name/address of incorporators
6. Business Purpose - if not included - then to conduct any lawful business
Ultra Vires Act
1. Act outside business purpose
2. At CL - void
3. Modern - no effect unless
- Shareholder can sue to enjoin act
- Corp can sue officer / director for damages
- State can bring action to dissolve corp
Bylaws
1. Created after incorporation
2. Can be anything as long as does not conflict with A of C
3. Modified/repealed by majority of either shareholders OR directors
De Facto Corp - Requirements
1. Statute of incorporation
2. Colorable compliance and good faith attempt to comply
3. Conduct of business as corp
4. State can seek quo warranto dissolution
Corporation by Estoppel
If you dealt with corp as corp, estopped from arguing itis not
(Unless tort V)
Piercing Corporate Veil - Elements
1. Alter Ego - corp ignores corporate formalities; shareholders treat assets as their own
2. Inadequate capitalization at time of formation
3. Avoidance of existing obligations, fraud, Evasion of statutory provisions
- really has to be existing (not future) obligations
What result if corporate veil is pierced?
When is likely to be pierced?
1. Shareholders are individually and personally liable
2. Piercing more common in TORT cases (b/c contracting parties have chance to investigate)
What is a promoter?
Before corp is formed - promoters get commitments for capital and other instrumentalities for use after formation
Promoter Relationship with each other
Joint veturers - have fiduciary duty to each other
Promoter's relationship with corporation
1. Duty of fair disclosure and good faith
2. Sales to corp - disclosure to independent BOD (all who are part of initial financing scheme (subscribers)) and approval
- If no disclosure - then liable for profit
3. Always liable for fraud causing damage
Promoter's Lability on Preincorporation agreement
1. Promoter liable on any Ks entered into on behalf of planned but unformed corp
2. Liability continues after formation unless express / implied novation - even if corp adopts K
3. Promoter may have right to reimbursement if found personally liable on K - to extent corp benefitted
If agreement expressly relieves promoter of liablity
1. No Contract
2. Just revocable offer to corp
When is corp bound on preincorporation agreement?
When expressly or impliedly adopts
Do shareholders have any control over management of corp?
Generally - NO
But if A of C allows - can enter into agreement to remove BOD and vest management pwr in SH
Shareholder Meetings
1. Annual Meetings
2. Special Meetings
Notice to SH of meetings
1. Not less than 10 or more than 60 days before meeting
2. Must state place, time
3. If special meeting - must state purpose
4. Notice can be waived by writing or attendance
SH eligibility to vote at mtng
1. SH of RECORD on record date (not more than 70 days before)
2. Each share entitled to one vote
Proxies
Shareholder can vote in person or by proxy
Proxies are generally revocable unless states irrevocable and either coupled with an interest or given as a security
Requirements
1. Full/fair disclosure of all material facts re: management proposals
2. No material mistatements of fact
3. Management must include cerain shareholder proposals
Voting at Meeting - Requirements
1. Quorum - majority of oustanding shares entitled to vote
- Once there is a quorum, not broken by withdrawal
2. Shareholders deemed to approve measure where votes in favor exceed votes against
SH action w/o meetings?
Unanimous written consent of all SH entitled to vote on action
Shareholder agreements
1. Voting Trust
2. Voting agreement
3. Shareholder management agreement
4. Restrictions on transfer of stock
Voting trust
1. Written agreement of shareholders
2. All shares are transfered to trustee
3. Trustee votes shares and distributes dividends
4. Not valid for more than 10 yrs
5. File with corp
Voting agreement
1. Written and signed agreement providing how they will vote their shares
2. Specfically enforceable
Shareholder Management Agreements
1. Only if permitted in A of C
2. Agreement b/t SH on almost any aspect of corp management
3. 10 yr limit
4. Terminated if corp listed on national exchange
Restriction on Transfer of STock
1. Must be reasonable
2. Third party purchaser only bound if restriction is on face of certificate OR actually knew about it
Shareholder's Inspection Rights
1. Qualified right to inspect books,papers, accting records, SH records
2. Unqualified right - A of C, bylaws, communications from BOD to SH; minutes of shareholder meetings
Do shareholders have preemptive rights to purchase newly issued shares?
1. Generally no - not to maintain proportional interest unless A of C says so
Direct Shareholder Action
Brought for breach of fiduciary duty owed to SH by officer or director
Any recovery is for benefit of SH
Derivative SH action
Elements
SH asserting corps rights; corp recovers
1. SH at time of wrong
2. Make written demand to corp to take action UNLESS futile
3. Must wait 90 days after demand
When can BOD dismiss derivative action?
1. Majority of disinterested directors decides that suit is not in corp's best interest (after good faith reasonable inquiry)
2. SH will then have burden of proof to show they were wrong
3. Unless directors were interested
Can shareholder get expenses of litigation from corp?
If Ct finds action resulted in substantial benefit to corp
Can SH compel distribution of dividends?
NO - complete discretion of BOD
When is the BOD prevented from distributions?
1. Distribution would make corp insolvent
2. A of C restrictions
3. Share dividends
If any of these apply - can enjoin distribution
1. Preferred Shares
2. Preferred participating
3. Cumulative
4. Cumulative if earned
1. Right to get dividends before common shareholders
2. Shares get paid dividends first and then paid again with common
3. Right to preferred dividence may accumulate if unpaid
4. Only accumulates if sufficient current earnings
Which funds can be used for distribution?
1. Earned surplus
2. Capital surplus (if inform SH)
Earned surplus
Generated by business activity
Stated capital
Generated by issuing stock
1. Par issuance - par value into stated capital; excess into capital surplus
2. No Par ISsuance - BOD allocates b/c stated capital and capital surplus; if no allocation, into stated capital
Capital Surplus
Generated by issuing stock - excess of par value; allocated
Who is liable for unlawful distributions?
1. Directors - personally liable
2. SH who received - if knew it was unlawful
How are directors removed?
By SH - with or without cause
Directors Meetings
1. Regular (no notice); Special (2 days notice)
3. Quorum - majority of BOD - broken if director withdraws
Approval of Action
Directors do not have the authority to bind corp in contracts unless actual authority to act
1. Proper notice for mtng; quorum present; majority voted
2. Unanimous written consent
Personal Liability of Directors
1. A of C can limit or eliminate
2. Exceptions - cannot eliminate
- Liability for financial benefits received by D to which he is not entiteld
- Intentionally inflicted harm on corp
- Unlawful distributions
- Intentional violation of criminal law
Duty of Care
1. In good faith
2. With care of reasonably prudent person in like position
3. In manner reasonably believe to be in best interests of corp
4. Duty Not to WASTE - overpay for property or employment services
poorly
5. Can rely on reports if prepared by corp officers/ employees, legal counsel, committee of BOD - reasonably believe competent and reliable
Business judgment rule
if comply w/duty of care (make informed careful decision), then BJR and not liable for decisions that turned out
Duty of Loyalty
Director Owes a duty of loyalty to corp
1. Conflicting interest transaction
2. Corporate opportunity doctrine
3. Competing Business
4. CL Insider Trading
Duty of Loyalty
Conflicting Interest Transaction - when does one exist?
If Director KNOWS that she or related person:
1. Is a party to the transaction
2. Has beneficial interest in OR so closely related that interest is reasonably expected to influence judgment
3. Is director/general partner/agent or employee of another entity w/whom corp is transacting business AND transaction is one which would normally be brought before BOD
Duty of Loyalty
Conflicting Interest Transaction
Std for Upholding
Transaction OK if
1. Approved by majority of disinterested directors after all material facts disclosed
- quorum is majority of disinterested directors
2. Approved by majority of votes entitled to be cast by disinterested SH after all material facts disclosed (in notice)
- quorum majority of votes entitled to be cast not incl. interested D's shares
3. Transaction, judged by circumstances at time of commitment, was fair to corp
-adequacy of consideration, corp's need and financial position; alternatives
*Might still be overturned if proved to be waste*
What are remedies for conflicting interest transaction?
1. Set aside
2. Enjoin transaction
3. Damages
Duty of Loyalty
Corporate Opportunity Doctrine
1. Directors cannot divert business opportunity from corp to themselves w/o first giving corp a chance to act
2. Corp must have interest or expectancy
3. Lack of financial ability not a defense
Duty of Loyalty
Remedies for Corporate Opportunity Doctrine violation
1. Recover profits corp made (restitution)
2. Constructive trust - force director to convey opportunity to court
Duty of Loyalty
Competing business
Directors may engage in related business but if it compete w/corp then violation of duty of loyalty
Duty of Loyalty
Common Law Insider Trading - special circumstances
1. Director has no CL duty to disclose all facts relevant to securities transaction b/t director and other party
2. UNLESS director knows of special circumstances - then duty to disclose
Mandatory Indemnification
Corp must indemnify director or officer who prevailed in defending proceedings against him
- reasonable expenses and attny fees
Discretionary Indemnification
Corp MAY indemnify for reasonable expenses even if unsuccessful if
1. Director acted in GOOD FAITH
2. Believed conduct in best interest of corp; not opposed to corp; not unlawful
No Indemnification
1. Director found liable to corp in direct / derivative action
2. Director liable in action charging director received unlawful benefits
General PRocedures for Fundamental Change in Corp
1. BOD adopts resolution
2. Written notice to SH
3. SH approve by majority of ALL votes entitled to be cast
4. Changes in form of articles are filed by state
Types of Fundamental Corp Changes
1. Amendment of A of C
2. Merger
3. Share Exchange
4. Sale of assets /Disposition of property
When do not all shareholders need to approve a fundamental change?
1. Merger - where there is no significant change to surviving corp, SH of survivor not required to approve
2. Short form merger subsidiary - parent owns 90%; approval of SH of subsidiary not required
3. Share Exchange - only SH whose shares are being acquired have to approve
Sale of Assets
1. Fundamental Corp change for corp disposing of assets
2. Purchaser of another corps property not liable for their obligations (unless disguised merger)
Dissenting SH Appraisal Remedy
1. For any shareholder entitled to vote on fundamental corp change or affected by change
2. Entitled to have corp buy back shares
Procedure to Get Appraisal
1. Corp must give SH notice
2. SH must give notice of intent to demand payment - cannot vote on action
3. If action approved - BOD must give dissenters notice of when and where to submit shars
4. SH must demand payment
5. Corp must pay fair value
6. If SH dissatisfied w/ value - notice of dissatisfaction
7. If Ct does not want to pay - file action in CT
Ways of Dissolution
1. Dissolution by Incorporators or initial directors
2. Dissolution by corporate act
3. Administrative dissolution - by state for failure to pay fees; file annual rpt
4. Judicial dissolution
Judicial dissolution by Attny General
Fraudulently obtained articles OR abusing its authority
Judicial dissolution by SH
- BOD deadlocked and irreparable injury to corp threatned
- BOD acting illegally, oppressively, fraudulently
- SH deadlocked and failing to elect directors
- Corporate assets being wasted
Judicial Dissolution by Creditors
1. Creditor’s claim has been reduced to judgment
2. Execution of judgment returned unsatisfied and
3. Corporation is insolvent OR corp has admitted in writing that creditor’s claim is due and owing and corp is insolvent
Rule 10b-5 Element
1. Material misrepresentation or omission
2. Made with scienter (intent / recklessness to defraud)
3. Fraud effected through instrumentality of interstate commerce
4. Fraud in connection with purchase or sale of security
5. Someone relied on fraud
6. Damages caused by fraud - but for and proximate
What is MATERIALITY under 10b-5?
Substantial likelihood that a reasonable investor would consider it important in making an investment decision
Insider Trading Under 10b-5
Violate 10b-5 if by trading he breaches a duty of trust and confidence owed to
(1) issuer; (2) shareholders of the issuer; (3) in the case of misappropriators, antoher preson who is source of material nonpublic info
Rule 16(b)
1. Publically held corps with more than 10 million in assets and 500 or more shareholders in any outstanding class OR whose shares are traded on the national exchange
1. Strict Liability
2. Purchase and Sale OR sale and purchase
3. W/in 6 months
4. Equity Security
5. Officer, director or more than 10% shareholder - and anyone who has deputized one of those persons to act for him
7. Transaction occurring w/in 6 months of ceasing to be officer or director can be covered
8. Share ownership is measured at tiemof both the purchase and the sale