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92 Cards in this Set

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What are the five major issues in Corporations?
1) Formation Issues
2) Stock Issues
3) Stock Transfer Liability
4) Duties & Rights of Promoters, Shareholders, Directors & Officers
5) Corporate Merger & Dissolution Issues
What are the corporations characteristics?
>may contract, own property, sue and be sued, be liable for crime and torts;
>Shareholders and management not personally liable for corporate debt
>ownership shares may be transferred
>citizen principal place of business and incorporation
>centralized management & perpetual existence.
(FORMATION ISSUES)

What are the two major formation issues?
1) Was the corporation validly created?

2) Can the corporate veil be pierced?
There are three methods of creating a corporation. What are they?
1) De jure--articles of incorporation, stamped by secretary of state and substantial compliance with statutory requirements;
2) De facto--good faith attempt to incorporate coupled w/ use of corporate powers;

3) by estoppel--person who dealt w/ corporation believing it was a corporation is estopped from attacking corporate existence.
What can happen if the corporations formation is defective?
Shareholders and management may be personally liable for corporate debts.
Can the corporate veil be pierced? If so, how and for what reasons?
1) Fraud

2) Undercapitalization

3) Corporation is merely the alter ego of shareholders;

4) Enterprise liability theory--where same shareholders own stock of two corporations engaged in same enterprise, creditor of one corp. can reach corp. assets of other;

5) "Deep Rock" Doctrine: loans to corp. by controlling shareholders may be subordinated to claims of outside creditors when corp. is undercapitalized, & bad faith, fraud, gross mismanagement involved.
(STOCK ISSUES)

What are the five major areas regarding stock issues?
1) Stock Subscriptions

2) Valid Stock Issuance

3) Classification of Stock

4) Dividends

5) Repurchase/Redemption
What are stock subscriptions?
Agreements to purchase stock to be issued by the corp.
major ISSUE regarding stock subscriptions?
Is the stock subscription revocable/enforceable by corp./creditor?
Whether the stock subscription is revocable/enforceable depends on five factors
1. Pre-incoporation? subscriptions are revocable until expressly accepted by corporation except where mutality exists or where irrevocable under statute;

2) Post-incorp. Subscriptions are irrevocable;

3) Enforcement by corporation: can enforce as against subscriber but not a BFP transferee w/o notice;

4) Enforcement by creditor: if corporation is insolvent, subscriber's obligation is enforceable in equity;

5) Release of subscription--only where SH and subscribers consent & no harm to creditors.
What are the three requirements for VALID ISSUANCE of stock?
1) Proper authorization and issuance: authorization in Articles and issuance by Board of Directors required.

2) Adequate Consideration Paid for stock?
*Quality and Quantity
Quality--stock may be issued for money paid, labor done or property actually acquired
Quantity--stock must be sold for par value or stated value unless good faith decision by Board of Directors that stock cannot be sold at par or stated value (N/A to treasury stock)

3) Premptive right issue: SH may have rt. to purchase proportionate number of shares before newly authorized stock is offered to outsiders
What are the three ways that stock is CLASSIFIED?
1) preferred stock--receive dividends before common stockholders, may have preference as to liquidation & may be convertible into another class of stock.

2) Treasury shars--stock issued & repurchased by corp.

3) Outstanding shares--stock issued but not repurchased.
What are dividends?
Dividends are the distribution of shares, property or cash to shareholders
What are the requirements for valid dividend distribution?
1) Power to issue? Directors have the power to revoke until record day.

2) From what source? earned surplus, reduction surplus, paid in surplus, revaluation (rare)

3) Dividends may not be issued from stated capital or where corporation is insolvent!
What are the liabilities incurred for unlawful issuance of dividends?
Directors are personally liable for negligent issuance of dividends and SH must return dividends to corp. if corp. became insolvent upon distribution or SH knew of illegality.
What is a repurchase?
Repurchase occurs when the corporation decides to buy back shares at the SH's option and SH may enforce if corp. has available funds.
What is a redemption?
corporation can acquire outstanding shares pursuant to its Articles. If corporation is or will become insolvent, repurchase/redemption is illegal. From what source? Same as above (D)2 except some states allow redemption funds taken from stated capital
(STOCK TRANSFER LIABILITY)

Common Law
1) Traditional View: Director, officer or key employee liable in tort for lie or half truth in stock transaction
What is the common law view with respect to insider liability?
The traditional view is that the insider has no duty to disclose. This is the current minority view.
What is the majority common law view with respect to insider liability?
The majority view is the insider must always disclose material info before buying or selling stock.
What is the special facts doctrine?
The special facts doctrine states that if there is privity between the buyer and seller, insider w/ knowledge of special facts must disclose such facts to his seller when buying company stock;
What is the common law view regarding a duty to the corporation?
Officer or director cannot use material non-public information re corp's business to make a profit or avoid a loss. Insider must disgorge any profits to corp.
(STOCK TRANSFER LIABILITY)

RULE 10 B-5
Rule 10 B-5 prohibits any manipulative or deceptive device in connection w/ purchase or sale of a security. 10b5 prohibits any scheme to defraud, misrepresentation or non-disclosure of material fact.
D =
Damages
Individual damages (seller gets what he shouldn've got and buyer pays what he should have paid or recission); SEC (injunction, penalty of triple the profits; criminal fines and jail sentences)
R =
Reliance

P must buy/sell securities in reliance on misrepresentation but not in non-disclosure cases.
S =
Standing

P must be purchaser/seller of stock & purchase/sale must be in connection with alleged fraud; SH can sue for injunctive relef if she was within a group of persons who was targeted by fraud; no standing where person refrains from buying or selling due to improper non-disclosure.
J =
Jursidiction

D must have used mails or insturmentality of interstate commerce in connection with the transaction.
M -
Mistatement
O =
Omission

or failure to disclose (special duty required)
M =
Material fact:

Would a reasonable person consider information important?
S =
Scienter
D must know material information had been misrepresented and mere negligence is not enough. Better rule: reckless is enough!
Defenses to Rule 10b5 for defendant?
If Plaintiff is in pari delicto w/ Defendant; intentional or reckless failure to investigate.
SECTION 16(B)

General Rule Regarding 16(B)
Requires that insiders of certain corps return to corp. any profit they made by trading in corp's equity securities if they occur w/ in six month period. No scienter is required and no defenses apply.
What is the jurisdiction of Rule 16(B)?
Corps listed on National Sec. Exchange OR corps having 5 million dollars in assets & at least 500 SH.
Who are the general defendants in a 16(B)action?
Officer or director status at time of purchase or sale; 10% owner of equity securities at time of purchase and sale.
Who are the general plaintiffs in a 16(B) action?
Corporation or shareholder on behalf of corporation when lawsuit is filed.
How are the damages determined?
Match lowest purchase price w/ highest sale price within six months.
What is Section 11 and what does it hold?
Section 11 holds that any person who signs a REGISTRATION STATEMENT (which requires filing of all information relevant to a sale of securities) is LIABLE for damages caused by any MISTATEMENT or MATERIAL FACT.
(DUTIES AND RIGHTS OF PROMOTERS, SHAREHOLDERS, DIRECTORS AND OFFICERS)

What is a promoter?
Those who organize the corporation.
What can promoters genrally do?
1) May enter K's on behalf of the corporation
What is the MAJOR ISSUE surrounding promoters?
Has the promoter breached a duty owed to the corporation?
What are the 1st general duty the promoter owes to the corporation?
1) Owes a duty to DISCLOSE HIS INTEREST & ALL MATERIAL FACTS involved in the transaction

Measure of recovery due to breach = (MAJ) Any unfair profit (MIN) all profits; and rescind contract but must restore consideration
What is the 2nd general duty the promotoer owes the corporation?
Duty not to exchange overvalued property for shares

FED: no liability if no other SH exist
Is the promoter liable for the preincorporation K?
Promoter is always liable to 3rd party for preincorp K until novation unless otherwise intended; corp. is not liable until it expressly (by resolution) or impliedly (by knowingly accepting K benefits) accepts K. Promoter who is held for preincorp K is entitled to reimbursement from corp.
What is the ultra vires doctrine and what is its relation to the promoter?
K is "ultra vires" if beyond the scope of corporate powers stated in Articles of Incorporation, except where SH unanimously approve K, where such powers may be implied, where k excecuted. Many states have abolished this doctrine.
(SHAREHOLDERS)
Those who own corp. stock
What can shareholders generally do in their capacity?
1) Make/amend bylaws from corp;

2) Elect & Remove Directors

3) Approve fundamental Changes

4) Right to a portion of assets upon liquidation;

5) Inspect records;

6) Bring derivative suits.
What are the rules regarding meetings and shareholders?
1) Must have annual meeting and may have special meeting

2) Written notice required "30/50 rule: notice must be given within 30 days of meeting and no more than 50 days prior to meeting; notice can be waived by express waiver or attending meeeting;

3) SH quorum required (MAJ); can have action w/o meeting if written consent (in same states).
What are shareholder voting rights?
1) SH elect directors and may remove them

2) Only SH as of record date can vote.

3) SH decides major changes and decisions: Ordinary changes require the presence of a MAJ of SH, while fundamental changes require MAJ of all outstanding SHs

4) Proxy Votes: a proxy vote is a power of attorney to vote shares
What are the rules regarding proxy voting?
Proxy agreements must be in writing, signed by the SH and terminates upon express termination, issuance of subsequent proxy agreement, death or incompetence of SH, by lapse of time (11 months, unless stated otherwise), personal attendance at meeting, or transfer of stock ownership to BFP w/o knowledge of proxy.
What are the rules regarding solicitation of proxies (common law)?
CL- proxies obtained by fraud are void.
What are the rules regarding solicitation of proxies (section 14(a))?
Section 14(a)-only applies to corporations traded on stock exchanges, or having more than $5 million in assets AND at least 500 SH. Proxy statements that contain material mistatements or omissions are void; proxy statement must include pertinent facts, be filed with SEC and cannot contain material mistatements or omissions.
Remedy for Section 14 violation?
SEC can get injunction; private "can ejoin voting proxies, cancel election or receive money damages.
(Closed Corporations and SH Agreements)
Are they Valid
Valid if for a "proper purpose"
What are the proper purposes?
1) Pooling Agreement

2) Voting Trust

3) Stock Transfer Agreement
What is a pooling agreement?
SH May enter into enforceable K to vote their shares as a unit in connection w/ SH matters if agreement is in a signed writing; Ct may grant specific performance unless K not best interest of corp.
What is a voting trust?
K wherein the right to vote is vested in trustee rather than beneficial owners is valid. Requirements: Legal title in shares transferred to trustee; writing and filing w/ corp. required; open to inspection; cannot exceed 10 years.
What is a stock transfer agreement?
Resonable restrictions to keep stock from being freely transferred will be enforced.
(Straight and Cumulative Voting for Directors)

What is straight voting?
Straight voting is one vote per share.
What is cumulative voting?
Cumulative voting is number of SHs x number of directors to be elected. Cumulative voting may be avoided by staggering terms for directors (unless cumulative voting is mandatory under the law), allowing MAJ to remove a director w/o cause & reducing the size of the board.
(Shareholder Derivative Suits)

What is a Shareholder Derivative Suit?
Suit brought by SH on behalf of corp to:
-compel delcaration of dividend
-enforce premptive rights
-enforce the appraisal remedy
-redress injury caused by stock fraud
-enforce inspection rights
-enforce redemption agreement
-compel dissolution
-prevent dilution of voting rights.
What are the requirements for a shareholder derivative suit to be brought?
Only proper if SH owns stock at time of act complained of; continuous ownership of stock throughout suit (unless predecessor suffered from continuing wrong or was a contemporaneous owner); demand on & bad faith denial by director or where demand would be futile, attorneys fees are available.
(controlling Shareholders Fiduciary Duty)
Controlling shareholder has a fiduciary duty to corp & other SHs and cannot take any action to its benefit & detriment of other minority SHs or to corp;
What must the controlling SH due when attempting to sell controlling shares?
1) Controlling SH must investigate buyer to prevent looting and corporate raiding (or may be personally liable)
What must the controlling SH do if he receives a premium for selling the controlling shares?
He must share any premium with the minority SHs.
Can a Shareholder inspect corporate records?
SH may inspect corporate records if 1) for a proper purpose (relating to SH economic interest; 2)if improperly denied a writ of mandamus and damages may be recovered.
(DIRECTORS)

What are directors' powers and authorities?
1)Unfettered discretion in making management decisions
2)selection, removal, compensation of officers, agents w/ or without cause
3)incur debt
4)declare dividends
5)fill vacancies on Board by majority vote
6)make/amend by laws where statute so provide or where SH grant the power;
7)delegation of duties;
8)Buy and sell corp. property and stock
9)D entitled to reasonsable compensation if authorized by SH vote, by-laws or independent BoD AND reimbursement for corp. expenses.
What are the rules for BoD meetings?
Failure to comply w/ formalites makes action taken at meeting void.
Is a notice of regular board meetings required?
Notice of regular board meetings IS NOT required.
Is a notice of special board meetings required?
Yes, a notice of special board meetings is required unless express waiver of attendance.
Can an action be taken without a meeting?
Yes, only with UNANIMOUS WRITTEN CONSENT by all directors.
What is required for a BoD meeting to be valid?
A quorum of directors is required at meetings.
Board of Directors Duties

What are the five primary duties?
1) Duty of Care
2) Duty of Loyalty
3) Duty not to usurp coporate opportunity
4) Duty not to engage in insider trading
5) Duty not to compete w/ Corp.
1) What is the Duty of Care?
The Director or officer must discharge his duties w/ the degree of care, skill and diligence that the ordinary prudent person would exercise under the same or similar circumstances. (special expertise is considered)
What is the key factor in determining whether there was a breach?
Look to fair market value of business decision. Was it worth it? Causation
Defenses to a violation of Duty of Care allegation?
-Reliance on expert advise;
-Age, inexperience & non-residence'
-Absence from meeting where misconduct occurred;
-Unanimous ratification by SH
-Business Judgment Rule: Directors/Officers not liable for losses arising from good faith business judgment arrived at through the use of reasonable care.
What is the BUSINESS JUDGMENT RULE? How do you use it as a key defense to a breach of the Duty of Care?
Directors/Officers not liable for losses arising from good faith business judgment arrived at through the use of reasonable care.
2) What is the Duty of Loyalty?
The Duty of Loyalty centers around fairness. The duty of loyalty or good faith requires that the director or officers always put the corp's interest before her own. Good Faith: determined by subjective standard (Fiduciary's actual intent). Loyalty: breach can be inferred whenever the director or officer obtains any personal benefit at corp's expense.
What is the "interested director doctrine" and what is its relation to the Duty of Loyalty
ML: K between director and corp. invalid due to director's interest unless (1) BOARD APPROVED of K after DISCLOSURE by director; director cannot vote but can be counted in determining whether quorum exists;
(2) SH APPROVAL after disclosure or;
(3) where K IS FAIR K regardless of disclosure.
3) What is the Duty not to usurp corporate opportunity?
When corp. officer/director learns of an opportunity in which the corp. has an expectancy, the corp. must be given chance to obtain that opportunity before agent.
What is the test for determiing whether a corp. opportunity exists?
1) Does Corp have expectancy?
2) Is the the opportunity w/i the corp's business?
3) Does corp. have means to buy it?
4) Has corp. rejected it?

REMEDY: Constructive trust can be imposed
4) What is the Duty Not To Engage in Insider Trading?
Just what it says HA HA HA
5) What is the Duty Not To Compete w/ Corporation?
Director must not divert customers, employees
What are the remedies for competing with the corporation?
damages, injunction or both
How can Directors be removed?
At C/L, directors could be removed only by majority vote of SH & only for cause but statutes now permit removal of a director or entire board by a majority vote of SH w/o cause.
Is there a right to inspection for Directors?
Directors may inspect corp. records at any reasonable time.
(OFFICERS)

what is the officers' general purpose?
To manage the corp. on a day-to-day basis
Who are Officers chosen by?
The Directors
Can officers be removed w/o cause?
Yes
Is the corporation liable for K made by officer w/o actual, inherent or apparent authority to enter K for corp?
No
What are officers entitled to in their service to the corp?
Entitled to reasonable & fair compensation & reimbursement for corp. expenses.
(TERMINATING/CHANGING THE CORP. STRUCTURE)

What are the four methods of termination/changing the corporate structure?
1) Merger or the acquisition of assets of another corp. by existing corp
2) Sale of all corp assets requires approval by a MAJ of SH
3) Sale of all corp. stock by SH requires approval by directors of acquiring corp.
4) Corp may be dissolved voluntarily if SHs and Directors consent & Certificate of dissolution is filed w/ the state or by merger.