Corporations

Front 1

Introduction to Corporate Law

Back 1

(a) Nature of MS Business Corporation Act

(b) Importance of Caselaw

(c) American Law Institute

(d) Federal Securities Law

Front 2

Corporation Requirements

Back 2

(1) Articles of Incorporation

(2) Filing w/ Fee

Front 3

Requirements for Articles of Incorporation

Back 3

(1) Name of Corporation (must include: inc., corp., co., limited)

(2) Number of Authorized Shares

(3) Name/Address Registered Agent/Office

(4) Names of Incorporators

(5) May contain anything else not inconsistent with the law

Front 4

Board of Directors Meeting

Back 4

(1) Adopt Bylaws (internal operating rules)

(2) Elect Officers (only required officer is the corporate secretary)

(3) Adopt share certificates and authorize issuance to shareholders

Front 5

Powers of a Corporation

Back 5

**May do anything a human being may do

Front 6

Corporation Characteristics

Back 6

(1) Limited Liability: Shareholders cannot be held liable for corporate debts

(2) Continuity of Existence: corporation in existence after death of incorporator ("perpetual existence")

(3) Free Transferability of Ownership Interests: sale of stock in corporate transfers all of seller's interest to buyer

(4) Centralized Management: corporation management central/not managed by SH

Front 7

Promoter Liability (Common Situations)

Back 7

(1) Promoter signs contract knowing Corporation doesn't exist--Promoter is personally liable/Corp is not

(2) Promoter signs contract thinking the Corporation exists, but it doesn't--Promoter is not liable as long as they had no knowledge it was not formed as planned/Corp not liable.

Front 8

Liability of Others Working with Promoter

Back 8

**Joint/Several Liability

MS: if promoter working with passive investor, they escape liability

Front 9

Corporation Liability in Promoter Situations

Back 9

Not liable b/c not formed unless ratifies the K once formed

(implicit or explicit)

Front 10

Piercing the Corporate Veil: Possible Situations

Back 10

(a) Undercapitalization

(b) Torts/K cases

(c) Fraud/Misrepresentation

(d) Lack of Corporate Formalities

Front 11

Piercing the Corp Veil: Undercapitalization

Back 11

If corporation SH do not provide sufficient capital, piercing might be appropriate.

**Capitalization is SH responsibility.

**Must have enough to satisy creditors.

Front 12

Piercing the Corp Veil: Tort or K cases

Back 12

Tort creditors are involuntary while K creditors are voluntary.

K creditors have opportunity to check capital but courts require more than with tort creditors.

Front 13

Piercing the Corp Veil: Lack of Corporate Formalities

Back 13

(1) SH treats corp as mere extension of person (alter ego theory) [ex. intermingling of funds]

(2) SH simply does not check corp formalities [ex. no annual SH meeting or yearly filings]

Front 14

Piercing the Corp Veil: Limited Liability Corporations

Back 14

SAME AS CORPORATIONS!!!!!

Front 15

Equitable Subordination/"Deep Rock" Doctrine

Back 15

In bankruptcy, Court can send creditor to "end of the line" because of bad acts

Front 16

Numbers of Shares:
Closely Held v. Publicly Traded

Back 16

Close: Small number of SH (50 or less in MS)

Public: Traded on public exchange (ex NYSE)

Front 17

SH Powers

Back 17

**Voting on "big ticket" items
(1) Election of BOD

(2) Amendment of the articles

(3) Fundamental Corp Changes (ex. merger/sale of substantially all corp assets)

(4) Voluntary Dissolution of Corp

(5) Anything else defined in articles, including supermajority votes if so designated

Front 18

Voting Trusts/Pools/Agreements

Back 18

Different forms of agreements by SH where they agree to vote shares in a particular way OR appoint a trustee to vote shares in a particular way

**Enforced through specific performance

Front 19

Shareholder Agreements

Back 19

**IF see one on Exam, ENFORCE IT!

(1) Useful only in closely held corp

(2) Must be signed by all SHs

(3) The agreement may alter just about any rules in the MSBCA as long as the provision doesn't violate public policy

(4) Closely held corporations are customizable under MSBCA

Front 20

Preferred Stock

Back 20

Corp may designate one or more classes.

Stock that givens SH a preference with regards to voting distribution or priority in liquidation.

Front 21

Rights of Stock Ownership

Back 21

(a) Vote on Big Ticket Item

(b) Dividends (or Distributions)

(c) Residue of Corporations when it is "wound up"

Front 22

SH Action

Back 22

(1) SH meetings: SH vote at meetings where a quorum is present

(2) Unanimous written consent: only of use in a closely held corporation

(3) Sharehold Cumulative voting: MS is an "opt in" state--each SH gets same # of votes as BOD positions that are open

Front 23

Issuance of Stock

Back 23

It must:

(a) be authorized in article

(b) be approved by BOD

**May be issued for any consideration (ex. past/future consideration)

**Must simply be approved by BOD

MS: the concepts of par value, watered stock, and bonus stock are irrelevant

Front 24

Preemptive Rights

Back 24

Ability of existing SH to insist on purchasing a proportionate share of any new issue of stock

**To prevent SH interest from being deluded.

MS: must be in articles

**Not frequently found

Front 25

Dividends/Repurchases of Stock

Back 25

Dividends: Distribution of corporate assets

Repurchase: purchase of stock by corp from existing SH

Front 26

MBCA Straight Insolvency Test

Back 26

No dividend or repurchase if:
(a) Corp wouldn't be able to pay off debts as they come due as a result
OR
(b) Corp's assets would be thereafter less than its liabilities plus the total liquidation preference of shares superior to those being repurchased or upon which the dividend is being paid.

Front 27

Inspection of Corporate Books and Records

Back 27

Cannot be abolished or limited by the Articles

Two situations:
(1) on 5 days notice to corporation, the SH acting in good faith may inspect just about any corp record not a trade secret
(2) With no routine, SH may inspect routine corporate documents

**Underlying accounting documents used in balance sheet: Not a trade secret.

Front 28

Dissolution of a Corporation

Back 28

Voluntary: accomplished by votes of SH & BOD

Involuntary:
(a) by the state: corp. failure to observe corp. formalities
(b) by a court at SH request: for cause

Winding Up the Corporation: creditors must be paid first, SH then can recieve residue distributions

Front 29

Board of Directors

Back 29

(1) Hold Residual Power in Corporation

(2) Elected by SH at annual meeting

(3) They act at BOD Meetings or by Unanimous Consent

(4) Staggered Board Elections (found in the articles: only a certain # of directors replaced per year)

Front 30

Indemnification of Directors/Officers

Back 30

(1) Expenditures for Corporate Purposes: if directors/officers spends personal funds for corporate purpose, they are always reimbursed.

(2) Litigation: Sued in corporate capacity
(a) Officer wins: corporate must reimburse expenses
(b) Officer loses: in a case by outsider, corp may reimburse if acting in good faith in belief of best interest of the corp and it was not illegal. In a derivative suit, officer may not be reimbursed by corp.

Front 31

Officers

Back 31

**True agents of corporation---apply agency principles

**Deal on behalf of the corporation with 3rd parties

Front 32

Director/Officer Fiduciary Duties

Back 32

(1) Duty of Care
(2) Duty of Loyalty

Front 33

Director/Officer Fiduciary Duty of Care

Back 33

The officer/director shall discharge their duties
(i) in good faith
(ii) with the care of a reasonably prudent person under the circumstances
(iii) in a manner they deem to be in the best interest of the corporation

(A) Nonfeasance Case
(B) Misfeasance Case

Front 34

Duty of Care: Misfeasance Cases

Back 34

**The Business Judgment Rule (BJR): directors have acted to inform themselves but made a wrong decision. They are protected as long as reasonable person would do that in making the same decision.

Omnibank Case: Initial burden on P to show BOD didn't follow reasonable procedure or directors not disinterested, or had a personal stake. IF P does show this, burden shifts to D to show reasonable necessity and if can't, they are personally liable.

Front 35

Director/Officer Fiduciary Duty of Loyalty

Back 35

Common cases:
(1) Usurping business opportunity
(2) Competing directly with corporation
(3) Any compensation arrangement between corporation and director.

To uphold: the director or officer must prove FAIRNESS, FULL DISCLOSURE, AND APPROVAL.

**Safe Harbor: if fairness breached, then director excused from liability. Ct will objectively and independently analyze.

Remedy: damages for violation