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123 Cards in this Set

  • Front
  • Back
Seven test issues
1. corporate formation
2. issuance of stock
3. action by and liability of directors and officers
4. rights of shareholders
5. Alternative Business organizations
6. fundamental corporate changes
7. federal securities laws
Promoters
promoters are persons acting on behalf of a corporation not yet formed
the corporation becomes liable on a promoter's pre-incorporation contract when the corporation accepts the contract by:
1. Express Board of Directors resolution OR
2. Implied acceptance through knowledge of K and acceptance of its benefits
The promoter remains liable on preincorporation contracts until there has been a ___________
NOVATION
an agreement between the promoter, corporation, and the other contracting party that the corporation will replace the promoter under the K
If a promoter enters a K, and the corporation is never formed, who is liable?
The promoter alone is liable (corporation can't accept it)
If the promoter enters a pre-incorporation K and the corp merely accepts the K? Who is liable?
Corp is liable and promoter is also liable (until a novation occurs)
Promoters are fiduciaries of each other and the corporation. Therefore promotoers cannot make a
secret profit on their dealings with the corporation (i.e., sale of property at profit to corp w/o disclosure)
Subscribers
persons or entities who make written offers to buy stock from a corporation not yet formed
preincorporation subscription agreements are
irrevocable and good for 6 months
Incorporators
merely sign and file articles of incorporation with the state
The articles must include:
APAIN
1. # of Authorized Shares
2. Purpose
3. Agent
4. Incorporators
5. Name of Corporation
Authorized shares means
the maximum # of shares the corp is authorized to issue
Purpose
1. Can be general (engage in all lawful activity). This is valid and presumed in the absence of a specific purpose clause.
2. A specific purpose clause (there can be ultra vires activities--beyond the purpose activities)
Consequences of ultra vires activitires
1. the state can enjoin the ultra vires activities
2. The corporation may sue its directors and officers for losses caused by the ultra vires activities
Agent
and address of registered office (registered agent is the corporation's official legal representative--authorized to accept service of process)
Incorporators
names and addresses
Name of the corporation
Name must contain some indicia of corporate status
By-laws
a corporation need not adopt by-laws (need not be in the articles of incorporation0
the board has the power to
adopt and amend the by-laws (unless the articles give the power to the shareholders)
De Facto Corporation Doctrine
a business failing to achieve de jure corporate status is nontheless treated as a corporation if the organization made a GOOD FAITH, COLORABLE ATTEMPT to comply with the formalities and have NO KNOWLEDGE of the lack of corporate status
For de jure corporate status need
1. incorporators
2. filed articles of incorporation
Piercing the corporate veil
General Rule
A shareholder is not liable for the debts of a corporation
Piercing the corporate veil
Exception
"Piercing the corporate veil" to avoid fraud or unfairness
1. Alter Ego
2. Undercapitialization
Alter Ego
failure to observe sufficient corporate formalities
Undercapitalization
failure to maintain sufficient funds to cover foreseeable liabilities
Spotting an issuance of stock question?
When the corporation sells its own stock (not 3d parties selling)
Par value means
the minimum issuance price
No par means
no minimum issuance price. Therefore, any valid consideration may be received, if deemed adequate by the board
Treasury stock
TS is stock that was previously issued and had been reacquired by the corporation. It can then be sold. It is like no-par stock, and if selling treasury stock, the corp must receive any valid consideration, if deemed adequate by the board
acquiring property with the par value stock
Any valid consideration may be received if the board values, in good faith, the property to be worth at least par value
consequences of issuing par stock for less than par value
1. Directors are liable for authorizing a below par issuance
2. the purchaser/buyer of those shares is also liable to pay full consideration for the shares--the par value of the shares
Corporation has an election to sue one or the other. It can't recover twice.
Preemptive rights
preemptive right is the right of an existing stockholder to maintain her percentage of ownership by buying whenever there is a new issuance of stock for cash
(maintain ownership percentage)
If the articles of incorporation are silent, then ...
no preemptive rights (unless expressly granted in the articles of incorporation)
Statutory req's for directors
1. corp must have a board with at least 1 director
2. shareholders elect directors
3. shareholders can remove a director before her term expires with or without cause
4. Valid Meeting
Valid Meeting
1. unless all directors consent in a writing to act w/o a meeting, a meeting is req'd
2. notice of directors' meeting can be est in by laws
3. proxies are not allowed, also no voting agreements
4. quorum
5. to pass, majority only of those who are present
quorum
must have majority of all directors to do business (unless a different percentage is req'd in bylaws)
Liability of Directors to their own corporation and shareholders
1. Duty to manage the corporation
2. In managing the corporation, directors are protected from liability by the business judgment rule (explain).
3. Directors, however, are fiduciaries who owe the corporation duties of care and loyalty
4. Duty of Care
5. Duty of Loyalty
Business judgment rule
The BJR is a presumption that the directors manage the corporation in GOOD FAITH and in the BEST INTERESTS of the corporation and its shareholders. As Such, directors will not be liable for innocent mistakes of business judgment
Duty of care
a director owes the coporation a duty of care. She must act with the care that a prudent person would use with regard to her own business
Duty of loyalty
a director owes the corporation a duty of loyalty. a director may not receive an UNFAIR benefit to the detriment of the corporation or its shareholders, unless there has been material DISCLOSURE and INDEPENDENT RATIFICATION
Three subparts of the duty of loyalty
1. Self-dealing
2. Usurping corporate opportunities
3. Ratification
Self-dealing
director who receives an unfair benefit to herself (or her relative, or another one of her businesses) in a transaction with her own corporation
Usurping corporate opportunities
director receives an unfair benefit by usurping for herself an opportunity which the corporation would have persued
Ratification
directors may obtain INDEPENDENT ratification through:
A. a majority vote of independent directors
B. a majority vote of a committee of at least 2 independent directors OR
C. majority vote of shares held by independent shareholders
HYPO: H, a director of Hedonists' Hot Tubs, Inc., after studying the issue thoroughly, votes to hire a religious singing ensemble to promote the company's line of hot tubs with built-in wine coolers and video cameras. The idea is a disaster. Has H breached his duty of care?
1. No, H has not breached his duty of care (conclusion)
2. Directors have a duty to manage the corporation. In managing the corporation, the directors are protected by the BJR. The BJR is a presumption that the directors manage the corporate in good faith and in the best interests of the corporation and its shareholders. As such, directors will not be liable for innocent mistakes of business judgment. Directors, however, are fiduciaries who owe the corporation duties of care and loyalty. Under the duty of care, as a director, H must act with the the care that a prudent person would use with regard to her own business (rule)
3. In this case, H studied the matter throughly and made an innocent mistake of business judgment. (analysis)
4. Therefore, he will not be liable for a breach of a duty of care (conclusion)
HYPO: Alice, one of ten directors of Diamond Merchants, inc. spots choice diamonds and buys them for herself at $1 M. She then resells those diamonds to her corporation for $2 m. A, however, disclosed her conduct to the board, and at a board meeting attended by 9 board members, 5 of the members voted to ratify her transaction. What liabilities, if any, does alice have?
Alice has no liabilities. Directors have a duty to manage the corporation. In managing the corporation, they are protected by the BJR. the BJR is a presumption that directors manage the corporation in good faith and in the best interests of the corporation and the shareholders. As such directors will not be liable for innocent mistakes of business judgment. Directors, however, are fiduciaries who owe the corporation duties of care and loyalty. Under the duty of loyalty, a director may not receive an unfair benefit to the detriment of the corporation or its shareholders, unless there has been a material disclosure and independent ratification. In this case, alice did receive an unfair benefit by profiting in a self dealing transaction with her own corporation and also by usurping the corporation's opportunity to buy the diamonds. Therefore, she breached her duty of loyalty. Nonetheless, alice will not be liable b/c she disclosed her conduct and received independent ratification by a majority vote of independent directors
Indemnification
D&O seeking reimbursement from the corporation for costs, attorneys' fees, fines, etc incurred by the D&O
The corporation may never indemnify a director who:
is held liable to their own corporation (loses)
The corporation must always indemnify if:
D&O wins a lawsuit against any part
The corporation may indemnify if:
1. liability to third-parties or SETTLEMENT with the corporation
2. BUT, the D&O must show that he acted in GOOD FAITH and that he believed his conduct was in the Corp's BEST INTEREST
3. Decision must be made to grant permissive indemnity
Who may determine whether to grant permissive indemnity?
1. A majority of independent directors
2. a committee of at least 2 independent directors
3. a majority of shares held by independent shareholders
4. a special legal counsel's opinion can recommend it
Derivative suit
a shareholder suing to enforce the corporation's cause of action
with a derivative suit, always ask:
could the corporation have brought this suit? if so, its a derivative suit
What are the requirements to bring a shareholder derivative suit?
1. contemporaneous stock ownership
2. must generally make demand on directors that they cause their own corporation to bring suit
Contemporaneous stock ownership means
must own at least 1 share of stock when the claim arose and throughout the entire litigation
make demand on directors means
demand must be made and rejected or at least 90 days have passed since demand was made
Who has the right to vote at an upcoming meeting where voting occurs?
Only the owner of VOTING SHARES on the RECORD DATE has the right to vote
Record date means
the voter eligibility cut-off date set by the board on any day within the 70 day period leading up to the meeting
Shareholder Voting by Proxy definition
a proxy is a
1. writing
2. signed by record shareholder
3. directed to secretary of corp
4. authorizing another to vote the shares
5 valid for only 11 months
On June 2, S, who is the record owner on the record date, sends a signed letter to secretary of C Corp. authorizing Gomer Pyle to vote her shares. Can Gomer vote S's shares at the annual meeting in July?
Yes, this is valid b/c it is in writing, it is signed by the record owner, it was directed/sent to the secretary of the corporation, it authorized another to vote the share (Gomer), within 11 months
What if, prior to the meeting, S writes to the secretary of the C corp that she now wants Eddie Haskell to vote her shares at the meeting?
S can change its mind b/c proxies are revocable unless 1) they say conspicuously irrevocable on them AND 2) they are coupled with some other interest
Can S revoke her proxy even thought it states that it is irrevocable?
Yes. Merely saying its irrevocable, does not make it so. To be irrevocable it must be coupled with an interest
S (the record owner) sells B her shares after the record date but before the annual meeting. S gives B an irrevocable proxy to vote the shares at the annual meeting. Can S revoke this proxy?
No, this proxy cannot be revoked b/c it is both conspicously irrevocable and coupled with an interest. S gave the proxy and the shares themselves.
Where do shareholders vote?
1. properly noticed annual meeting
2. specially noticed special meeting
1. properly noticed annual meeting
every corp must have an annual meeting of the shareholders at which at least 1 director position/slot is open for election
Notice must include the time and place for the annual meeting
2. specially noticed special meeting
are meetings of shareholders to vote on proposals or FUNDAMENTAL CORPORATE CHANGES
Notice must includes the special purpose of the meeting (why? b/c nothing else can take place at the meeting or it is void)
There must be a quorum present at the meeting.
a quorum is a majority of outstanding shares (NOT SHAREHOLDERS) in person or proxy, unless otherwise provided in the articles
X corp has 120k shares outstanding and 700 shareholders. What or who constitutes a quorum?
a quorum constitutes a majority of all shares represented (which would be at least 60,001 shares must be represented)
Vote: If a quorum is present, action is approved if ...
the votes cast in favor of the proposal exceed the votes cast against the proposal
X corp has 120k shares outstanding. 80k shares are represented at the meeting, but only 50k shares vote on a particular proposal. How many shares must vote for the proposal in order for it to be accepted by the shareholders.
There is a quorum b/c there is a majority of shares represented.

The votes cast in favor of the proposal must exceed the votes cast against the proposal. So 25,001 votes are required. (there were 30k abstainers, but they are irrelevant)
Pooled or block voting methods
shareholders who own relatively few voting shares decide that they can increase their influence by agreeing to vote alike via:
1. Voting Trusts
2. Shareholder Voting Agreements
Voting Trust
a formal delegation of a voting power to a voting trust
Voting Trust requirements
a. written trust agreement
b. filed with corporation
c. transfers shares to voting trustee
d. shareholders get trust certificates AND
e. shareholders retain all other rights except for voting
DURATION: 10 years, unless extended by agreement
Shareholder Voting Agreements
owners of a stock can agree in writing to vote their shares as dictated by the agreement
it is binding and enforceable on all signers
You own 1,000 shares of C Corp. C Corp. C Corp has 9 directorships open for election. You believe Martha should be director of C. Corp. Under Cumulative voting, how many votes can you cast for Martha?
9,000 votes for Martha. Cumulative voting permits shareholders to cast all their votes for one candidate (# of shares times # of positions)
The articles of C Corp are silent as to whether shareholders can vote cumulatively. Can C's shareholders still vote cumulatively?
No. if articles silent, then no cumulative voting
Right of shareholder to examine the books and records of the corporation
any shareholder shall have access at proper times
Dividends
are declared in the Board's discretion unless the corporation is insolvent or would be rendered insolvent by the dividend
The board directors of C Corp decide to declare dividends totaling 400k.
Who receives dividends if the outstanding stock is--
100,000 shares of common stock
common stock gets paid last and equally...and so each share gets $4.
100,000 shares of common and 20,000 shares of preferred with $2 dividend preference
preferred first.
First, 20,000 shares of preferred must get $2 each. (40k must be paid first to preferred) (only 360k left). So each common share gets $3.60.
100,000 shares of common and 20,000 shares of $2 preferred that is participating
participating shares get paid twice (once as preferred, and again as if common shares). 20,000 preferred shares each get $2 each (so 40k spent) (only 360k left). So now there are 120k shares to worry about (100k common and 20k participating preferred). So common shares get $3. And participating again
participating preferred gets another $3. So in total participating preferred gets $5 per share.
100,000 shares of common and 20,000 shares of $2 preferred that is cumulative (and no dividends in the three prior years)
cumulative add up and up and up
Cumulative shares have the right to receive prior, unpaid years + the current year dividend. 4 years to pay at $2/year is $8/share (so 160k spend) (so 240k left). So each common share gets $2.40
Shareholder agreements to eliminate corporate formalities (to become a closely held corp) require:
1. unanimous shareholder election to eliminate formalities in the articles OR the by-laws OR filed agreement in writing
2. some reasonable share transfer restriction
Result of shareholder agreements to eliminate corporate formalities:
- No liability even if the veil is pierced
- possibility of beneficial tax treatment
S-Corporations
- 100 or fewer shareholders who are individuals
- and just 1 class of stock
LLCs - Original Purpose
the limited liability of a corporation and the tax status of a partnership
Requirements for LLC
1. Organizers file articles of ORGANIZATION
2. members = shareholders; managers = directors
3. The company has the limited liability of a corporation and two partnership characteristics:
- limited duration
- limited liquidity
Limited duration
must have an event that will dissolve the company in the articles
limited liquidity
unanimous consent req'd for the transfer of a full membership interest
members may retain management power, or
may delegate that power to a team of managers
Therefore, LLCs =
Limited Liability +
Limited Life +
Limited Liquidity +
Limited Tax
Fundamental Corporate Changes
1. Merger, Consolidation, Dissolution
2. Fundamental (not ministerial) amendment of the articles (like increase in # of authorized shares)
3. Sale (not purchase) of substantially all the corporation's assets [for seller, not buyer]
Procedure Steps for Fundamental Corporate Changes
1. Resolution by Board at Valid Meeting
2. Notice of Special Meeting
3. Approval by MAJORITY of ALL SHARES ENTITLED TO VOTE and by a MAJORITY of ANY VOTING GROUP ADVERSELY AFFECTED by the change
4. Possibility of dissenting shareholder right of appraisal
5. File notice with the State (i.e., articles of merger)
Dissenting shareholder has right to
force the corporation to buy her shares at fair value
to perfect this right, the dissenting shareholder must
1. before the shareholder vote, file written notice of the objection and intent to demand payment
2. do not vote in favor of the proposed change
3. make prompt written demand to be bought out
What happens if the shareholder and the corporation cannot agree on fair value?
The court has the power to appoint an expert appraiser to value the shares AND the appraisal is binding on the parties
10(b)=
1. Scienter - intent to deceive
2. Deception - material misrepresentation or misappropriation of material nonpublic information
3. In connection with the actual purchase or sale of securities
Ronco Corp intentionally issues a misleading press release that Pickens has expressed interest in acquiring a major block of stock. The release fails to indicate that it is Slim Pickens and not Boone Pickens who is interested. Because of this press release, Conviser does not sell his Ronco stock. Does Conviser have a section 10(b) cuase of action?
No. Although there is scienter (an intentional act) and deception (a misleading release), nonetheless, there is no liability because Conviser did not actually buy or sell stock.
16(b) only applies to
1. Big Corporations (listed on national exchange OR 500 shareholders and $10M in assets)
2. Big Shot defendants: Directors, officers, and 10% shareholders
3. A bigshot may never buy and sell stock within a single six-month period
16(b) does not require
fraud or inside information
What happens when 16(b) applies
All "profits" from such "short-swing trading" are recoverable by the corporation. If within six months before or after any sale, there was a purchase at a lower price than the sale price, there is a profit.
Sarbanes Oxley Act of 2002
a. Reporting Corporations
b. CEO and CFO must certify that based on the officer's knowledge, reports filed with the SEC:
- do not retain material misrepresentations or omissions and
- fairly present the financial position of the company
Willfully certifying a false report could bring
$5 M in fines and 20 years
If false reports have to be restated, the corporation (directly or derivatively) may ...
recover the Officer's profits made from trading the company's securities within 12 months after the false reports were filed, and may recover incentive-based compensation received during the period
Corporations (directly or derivatively) may also
recover profits made by officers from trading corporatoin's stock during "black out" periods of at least 3 days when at least 50% of the employees are prohibited from trading in their retirement plan's securities.
SOX bottom line
No knowingly false filings +
No benefits during falsehoods or blackout periods
MINI REVIEW
Formation
- Promoters Liable until Novation
- Subscriptions Irrevocable for 6 months
- Articles --> APAIN (Authorized shares, Purpose, Agent, Incorporaters, Name)
- S/H not liable, unless: Pierce Veil
MINI REVIEW
Issuance
Par Value = min issuance price
Preemptive rights = maintain ownership percentage
MINI REVIEW
Dir./Off/Liability
1. Duty to Manage
2. BJR
3. Fiduciaries --> Care (prudence) + Loyalty (no unfair benefits, unless disclosure + independent ratification)
MINI REVIEW
Shareholder Rights
1. Deriviative Suits
1. Contemporanous Ownership
2. Demand
MINI REVIEW
Shareholder Rights
2. Voting
Only Record Date Owner Votes
MINI REVIEW
Shareholder Rights
3. Proxies
Revocable unless, CONSPICUOUS + COUPLED WITH INTEREST
MINI REVIEW
Shareholder Rights
4. Quorum
Majority of all SHARES
MINI REVIEW
Shareholder Rights
5. Vote
Votes for exceed votes against
MINI REVIEW
Shareholder Rights
6. Cumulative Vote
Shares times slots
MINI REVIEW
Shareholder Rights
7. Dividends
Discretionary unless insolvency
1. Common - pay last
2. Preferred - pay first
3. Participating - pay then
4. Cumulative - up and up and up
MINI REVIEW
Shareholder Rights
8. Eliminating formalities
1. Unanimous election AND
2. Share transfer restriction
=
no piercing + limited tax
MINI REVIEW
Shareholder Rights
9. LLCs
LLCs =
Limited Liability
Limited Life
Limited Liquidity
Limited Tax
MINI REVIEW
Fundamental Changes
1. Board resolves
2. special notice
3. majority of ALL SHARES
4. dissenter's rights
5. notice to state
MINI REVIEW
Federal Securities Laws
1. 10(b)
Scienter + Deception + Actual purchase or sale
MINI REVIEW
Federal Securities Laws
2. 16(b)
No trading profits w/in 6 months
MINI REVIEW
Federal Securities Laws
3. SOX
No knowingly false filings +
no benefits during falsehoods or blackout periods