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132 Cards in this Set

  • Front
  • Back
Formation of corporation requirements
1. incorporators
2. articles of organizatoin
3. supplemental form

-then organizational meeting to adopt bylaws and select officers
What is the legal significance of corp?
Liability limited to amt invested in corp
What law governs ma corps?
ma law, regardless whether the corp does business in ma or not
How are corps formed?
1. corp de jure
2. corp by estoppel
3. de facto corp
foreign corp
formed outside of MA

domestic corp formed in ma
Rules for elections of directors
o Board can be staggered – articles can divide the board by halves or thirds with 2 or 3 year terms respectively so some portion of the board is elected every year
 Publicly traded corps must have a staggered board w/3 classes
o SH elect directors at annual meeting
How does board act
1. unanimous written consent

2. meeting that satisfies quorum and votiing reqs

3. later ratification
interested director transaction
– any deal btw corp and director or another business of the director’s
 Director is OK if he shows deal was fair to the corp when entered OR
 His interest and the material facts were disclosed or known and the deal was approved by:
• Majority of all disinterested directors (at least 2) OR
• Majority of all disinterested shares (not SH)
• Quorum for this is majority of disinterested directors (at least 2) or majority of disinterested shares
 Approval by SH or board DOES NOT automatically mean the deal is valid, just means it isn’t automatically invalid
 Directors can set their own compensation as long as it’s reasonable; unreasonable = waste
Job of promoters
1. procure commitments for capital. Enter into stock subscription contracts.

2. Enter into contracts for goods and services to be provided to new incorp.
Duties of promoters
1. fiduciaries to one another. Can't secretly pursue personal gain at the expense of other promoters or corp.

2. Once incorporated, promoters owe fiduciary duties to corp and investers.

- includes can't breach fiduciary duty by personally profiting on sale of property to corp

-Includes fair disclosure and good faith.

-Can;t commit fraud or misrepresentation.

-Can't obtain unpaid stock.
What can promoter profit on sale of property to corp?
1. Liable to corp for profit or forced to rescind sale unless

- disclosed all material facts of transaction

a) to independent board of directors, not under control of promoter

b) Or by gaining approval of all shareholders or subscribers, including those contemplated as part of initial financing scheme

c) or, all subscribers knew of transaction when subscribed

d) or all shareholders unanimously ratified transaction after full disclosure

e) or promoter intends and does purcharse all stock not for resale, then can't be liable for breach of fiduciary duty if they do subsequently sell shares to outsiders
How do promoters commit fraud?
1. fraudulent misrepresentations

2. fraudulent failure to disclose all material facts
Who is liable for a contract entered into by promoter prior to incorporation?
1. Promoter jointly and severally liable UNLESS

a) novation

b) implied novation from conduct of third party and corporation

2. Corporation may also be bound on contract, even absent novation, IF

(a) accepts benefits under the continuing offer theory

(b) accepts benefits under the implied contract theory

(c) corp adopts contract, but no novation. Then promoter may have right of indemnification from corp if promoter held liable on contract

**promoter remains liable absent novation
When agreement between parties expressly indicates that promoter not to be bound
No contract between promoter and third parties.

The agreement may be construed as revocable offer to proposed corporation

Promoter has no rights or liabilities here
When is a corporation liable before incorporation?
No liability before incorporation. No liabilityf or contracts entered into by promoter in corporations name UNLESS novation, implied novation, acceptance under continuing offer theory, acceptance under implied ocntract theory
Uniform Securities Act
1. plaintiff must prove that d knowingly engaged in fraudulent conduct
- typically material misrepresentation or ommission re corp's worth

2. Applies to all securities of MA corporations, including offers to sell and actual sales

3. Corps selling securities to more than 25 persons whose shares not listed on natl securities exchange must file resgistration statement with state secretary who can bar sale of security in MA if fraud in statement
Enforcement mechanisms
1. Uniform securities act
- anti-fraud

2. Chapter 93A
- applies when corp fails to disclose material info
- doesn't apply to corporate gov issues
- doesn't apply after sale, then fiduciary duties responsible

3. Fiduciary duties
Ch. 93A of MCPA
1. Prohibits use of unfair or deceptive practices in conduct of any trade or business

2. Ganerally applies when fails to disclose material info.

3. Doesn't apply after stock purchased bc existence of fiduciary duties between shareholder and corp's direcotrs and officers precludes ch 93A suit.

4. Recovery for sale of any security is limited to p's actual damages (NO double, treble, or atty's fees)

5. Must write demand letter before brining suit. If corp replies w/in 30 days with reasonable settlement offer, p cannot recover more than offer.
When does stock purchaser have cause of action against law firms?
1. When firms issue statements attesting to legality of particular offering or certifying truth of info disclosed by offeror

2. action for negligence if:

(a) info is untruthful or misleading

(b) shareholder relies on info in purchase

(c) firm could foresee that shareholder would rely on info
Shareholder control over management
1. elect and remove directors, with or without cause

2. modify, repeals, adopt, bylaws

3. approve fundamental corporate changes

4. may enter agreements concerning management of corp, including vesting powers of board in one or more shareholders
Meetings
1. corps must hold annual meetings for shareholders to elect board of directors

2. board can call special meetings during year when need shareholder apporval

3. Meetings can be anywhere, but written notice of place, day, hour (sometimes purpose) must be sent 7-60 days before mtg.

4. When notice improper, action at mtg can be set aside UNLESS

(a) shareholder waives notice in signed writing

(b) attends meeting and doesn't object to notice at beginning of meeting
Effect of improper notice of meetings
When notice improper, action at mtg can be set aside UNLESS

(a) shareholder waives notice in signed writing

(b) attends meeting and doesn't object to notice at beginning of meeting
Record date and

shareholders' list
1. Bylaws or board must specify record date before mtg. Can't be more than 70 days before meeting requiring determination of shareholders
--default is day before first notice of mtg sent to shareholders. If no notice sent, then day before mtg

2. After record date, corp must prepare alphabetical list of all shareholders entitled to notice , including addresses and numbers of shares held

3. List must be available for inspection two days after notice of meeting and through meeting.
- if corp doesn't make available, superior court can order it or postpone meeting
- this doesn't affect validty of actions taken at mtg
How are shares held by corp in fiduciary capacity voted?
Can be voted by the corp.
Voting entitlement of shares
Unless otherwise provided in articles of organization, one vote per share.
Validity of proxy votes (signatures from representatives)
1. valid for 11 months unless provided otherwise

2. Revocable by shareholder by voting in person, writing, later apt of another proxy, etc.
--only irrevocable if form conspicuously states this AND apt is coupled with interest

3. death or incapacity of shareholder only extinguishes proxy when officer tabulating votes gets written notice of death or incapacity prior to vote
when is proxy vote irrevocable
1. conspicuously states this

AND

2. coupled with interest, including the following appts

(a) secured party

(b) person who purchased or agreed to purchase shares

(c) creditor of corp who extended credit to corp under terms requiring appt

(d) employee of corp whose employment contract requires appt

(e) party to voting agreement
Record date and

shareholders' list
1. Bylaws or board must specify record date before mtg. Can't be more than 70 days before meeting requiring determination of shareholders
--default is day before first notice of mtg sent to shareholders. If no notice sent, then day before mtg

2. After record date, corp must prepare alphabetical list of all shareholders entitled to notice , including addresses and numbers of shares held

3. List must be available for inspection two days after notice of meeting and through meeting.
- if corp doesn't make available, superior court can order it or postpone meeting
- this doesn't affect validty of actions taken at mtg
How are shares held by corp in fiduciary capacity voted?
Can be voted by the corp.
Voting entitlement of shares
Unless otherwise provided in articles of organization, one vote per share.
Validity of proxy votes (signatures from representatives)
1. valid for 11 months unless provided otherwise

2. Revocable by shareholder by voting in person, writing, later apt of another proxy, etc.
--only irrevocable if form conspicuously states this AND apt is coupled with interest

3. death or incapacity of shareholder only extinguishes proxy when officer tabulating votes gets written notice of death or incapacity prior to vote
when is proxy vote irrevocable
1. conspicuously states this

AND

2. coupled with interest, including the following appts

(a) secured party

(b) person who purchased or agreed to purchase shares

(c) creditor of corp who extended credit to corp under terms requiring appt

(d) employee of corp whose employment contract requires appt

(e) party to voting agreement
Quorum requirement for shareholders
Stautory minimum is:

Majority of votes entitled to be cast on matter
Voting by a group
MBCA requires approval by certain groups of shares differently under some circs (e.g. when will be significantly affected)
How are directors elected?
By plurality of votes cast

at meeting with quorum


--meaning candidate with most votes wins
cumulatie voting of directors option
each share may cast as many votes as there are board vacancies to be filled

--may cast all votes for one vacancy if want
Class voting
1. defined
2. when applicable
1. Class given right to vote on amendment even when otherwise not permitted to vote at shareholders mtg

2. should be used when proposed amendment to articles of organization has any effect on holders of the class
Can shareholders act without meeting?
Yes

1. unanimous written consent of all shareholders entitled to vote

OR

2. Consents of shareholders tat would be enough to approve if all shareholders entitled to vote were present at mtg
Types of shareholder agreements
1. voting trusts
2. voting agreements
3. shareholder management agreements
4. restrictions on transfer of shares
5. agreements affecting action by directors
Voting trusts
to ensure that a group of shares will be voted a particular way in the future, sharholders:

(1) enter into signed agreement setting forth trust's terms

(2) transfer legal ownership of shares to trustee

(3) file with corporation
Voting agreements
Shareholders enter written and signed agreement that provides ofr manner that will vote. It is specifically enforceable unless provides otherwise.

--need not be field with corp
Shareholder management agreements
Agreement on any apsect of management is valid if:

(1) set forth in articles or bylaws

(2) approved and written agreement by all shareholders at time of agreement

(3) written agreement filed with corp


--must then be noted conspicuously on corps share certs

--valid for 10 years unless otherwise provided
How long are shareholder management agreements valid?
10 years unless otherwise provided

terminates when corp listed on national securities exchange or regularly traded in market
enforceability of shareholder managemnt agreements
enforceable by and against any party to agreement

--purchaser without notice can rescind

--not grounds for personal liability on shareholder for acts or debts of corp, even if no formalities observed, etc.
restrictions on transfers of shares by shareholders

1. rule
2 permissible restrictions
3. enforceability
1. agreement among shareholders can restrict transfer of shares for any reasonable purpose

2. MBCA permits restrictions that:
- obligate shareholder to first offer shares to corp or other person
- obligate corp or other person to acquire restricted shares
- require approval by any person if not manifestly unreasonable
- prohibit transfer to designated person or class if not manifestly unreasonable

3. only enforceable against holder if
(a) restriction noted conspicuously on cert or in information statemnet
OR
(b) holder had knowledge of restriction
Agreement affecting action by directors
shareholders can impose limitations on board's authority to manage business and exercise corporate powers via the articles or a shareholder's agreement
When may a shareholder inspect corporate books and records?
1. Regardless of purpose, can inspect articles, bylaws, board resolutions re classification of shares, minutes from past threeyears, communications from corp to shareholders for past threeyears, list of names and addresses of directors nad officers, copy of corps most recent annual report

2. Can inspect other docs if proper purpose, meaning reaosnalby related to person's interest as shareholder

3. Must give five days written notice of request

--shareholder may send others to inspect
--right can't be limtied by articles/bylaws
--court may order inspection
Does shareholder have preemptive right to purchase stock to maintain proportional voting strength?
No, not under MBCA, unless in articles or contract.
Types of shareholder suits
1. direct action
- enforce shareholder claim against corp, officers, directors, or majority shareholders

2. derivative action
- enforce corporate causes of action when corp or diretors have not

* shareholders can sue for herself and for others similarly situated in either direct or derivative action
Direct action
When breach of duty owed to shareholder

(1) When shareholder suffers the most immediate and direct damage (not corp)

2) when defendant's duty runs to shareholder (not corp)

--recovery to individual shareholder or class in class actoin
How to determine whether cause of action should be direct or derivative?
1) Who suffers the most immediate and direct damage?

2)To whom did the defendant's duty run?
Reqs for derivative action
1. Standing
- shareholder must have been shareholder at time of act or omission OR
- shareholder through transfer of operation of law from shareholder at time of act or omisssion

2. Must make written demand on corp to take action. Must wait 90 days to commence suit unless (1) shareholder notified earlier that corp rejected demand or (2) irreparable injury to corp would result

3. Must name corp as party defendant

**Majority of directors or shareholders with no personal interest can dismiss suit if found "in good faith after reasonable inquiry" not in corps best interest.
- P has burden of proof to show not good faith decision unless majority of directors had personal interest in controversy

- Can only be discontinued or settled with court approval
* Recovery goes to corporation
When may a shareholder inspect corporate books and records?
1. Regardless of purpose, can inspect articles, bylaws, board resolutions re classification of shares, minutes from past threeyears, communications from corp to shareholders for past threeyears, list of names and addresses of directors nad officers, copy of corps most recent annual report

2. Can inspect other docs if proper purpose, meaning reaosnalby related to person's interest as shareholder

3. Must give five days written notice of request

--shareholder may send others to inspect
--right can't be limtied by articles/bylaws
--court may order inspection
Does shareholder have preemptive right to purchase stock to maintain proportional voting strength?
No, not under MBCA, unless in articles or contract.
Types of shareholder suits
1. direct action
- enforce shareholder claim against corp, officers, directors, or majority shareholders

2. derivative action
- enforce corporate causes of action when corp or diretors have not

* shareholders can sue for herself and for others similarly situated in either direct or derivative action
Direct action
When breach of duty owed to shareholder

(1) When shareholder suffers the most immediate and direct damage (not corp)

2) when defendant's duty runs to shareholder (not corp)

--recovery to individual shareholder or class in class actoin
How to determine whether cause of action should be direct or derivative?
1) Who suffers the most immediate and direct damage?

2)To whom did the defendant's duty run?
Reqs for derivative action
1. Standing
- shareholder must have been shareholder at time of act or omission OR
- shareholder through transfer of operation of law from shareholder at time of act or omisssion

2. Must make written demand on corp to take action. Must wait 90 days to commence suit unless (1) shareholder notified earlier that corp rejected demand or (2) irreparable injury to corp would result

3. Must name corp as party defendant

**Majority of directors or shareholders with no personal interest can dismiss suit if found "in good faith after reasonable inquiry" not in corps best interest.
- P has burden of proof to show not good faith decision unless majority of directors had personal interest in controversy

- Can only be discontinued or settled with court approval
* Recovery goes to corporation
Types of distributions
1. cash or indebtedness
2. redeem shares when redemption right
3. repurchase shares in voluntary sale
4. liquidating distributions when corp dissolved
how are disbribution rights distibuted?
1. at least one class of stock must have right to receive net assets at disolution

2. otherwise articles provide for all distributions and whether or not to declare them is within director's discretion (unless changed by shareholder agreemnnt)


3. some restrictions
- when distributions wouldn't allow corp to pay debts
- when abuse of discretion
- when intended to maintian control or feeze out
- when limited by articles
Solvency restrictions on board's discretion to declare dividends
**doesn't apply to distributions to shareholders (dividends)

(a) no distribution is permitted if corp wouldnot be able to pay debts as they became due in normal course of business

(b) no distribution permitted if corps total assets would be less then sum or total liabilities plus amt needed to satisfy preferential rights of sharholders on dissolution
Equitable limitations on distributions in close corporations
1. share can't be repurchased from some shareholders unless identical offer made to all shareholders

2. Majority can't freeze-out minority. Compel them to sell shares back to corp at less than fair market value, in order to freeze him out of benefits he would ordinarily receive from corp.

e.g. refusal to declare dividends, drain corp earnings w/ excessive salaries, deprive of employment, sell assets at inadequate price to majority

* remedy: cause of action against directors, compel corp to repurchase shares at fair market price
Limitations on distributions when directors attempting to repurchase shares for corp to maintain incumbent directors in office
Not permitted unless directors:

(1) found justifiable business purpose served

(2) adequately investigated threat of outsiders taking control

--e.g. when challenging shareholder has past record of looting firms
Duty of disclosure in distributions
Directors and majority shareholders have duty to disclose all material circumstances surrounding proposed transaction.

Duty breached if minority shareholder sells at inadequate price.

Remedy to recover damages based on inadequate price and fair value
Abuse of discretion by directors in omitting a dividend
Shareholders have suit to compel dividend if directors do not act in good faith omitting a dividend

--when no business justification for the omission

--courts more likely to find abuse of discretion for omitting dividends in close corporations
noncumulative preferred shares
1. shares entitled to a fixed amoutn of money a divdend is declared

2. gets distribution before nonpreferred share

3. noncumulative means dividend preference for particular year is extinguished if no dividend declared for that year
cumulative preferred share
1. shares entitled to a fixed amoutn of money a divdend is declared

2. gets distribution before nonpreferred share

3. cumulative means dividend preference for particular year is accumulated if no dividend declared for that year. Holder has right to accumulation before any nonpreferred shares may be paid any dividend
cumulative if earned shares
1. dividends for any one year only cumulate if the corps total earnings for tha tyear exceed the total amount of preferred dividends that would have to be paid out for that year
participating shares
have right to recieve what nonpreferred shares recieve

in addition to the preference
right of shareholder to distribution
1. no general right to distribution. At discretion of board

2. but if distribution declared, shareholders are creditors of corp and have equal claim as other unsecured creditors

3. shareholders on corporate records on record date are entitled to distribution. If sale not on record, ubyer must look to seller for payment
Who can be held liable for unlawful distributions?
1. director sho votes for or assents to violating distribution is personally liable for amount that distribution exceeds what could have been properly distributed
- not liable for distributions approved in good faith (based on financial statements or info from officers, etc)
- entitled to contribution from other directors and shareholders who could be held liable

2. shareholders who received distribution knowing that it was made improperly

3. shareholders receiving improper liquidating distribution w/in 3 years of dissolution are liable to corp for any claim against corp that corp can't pay--even if shareholder didn't know that distribution was improper
--limited to amount received at liquidation and to each shareholder's pro rata share
When are shareholders held liable?
1. unpaid stock

2. pierced corp veil

3. absence of de fact corp when shareholder knew no incorp

4. shareholders vested with management power based on shareholder agreement

5. shareholders in close cors owe duty of loyalty and good faith
- can't pursue any corp policy that will harm a minority shareholder when less harmful alt is available
- can't sell seats on board of directors
- liable for damages when sell controlling interest to individuals who loot co unless took reasonable measures to investigate
Duty of shareholders and directors in close corp
duty of loyalty and good faith
- can't pursue any corp policy that will harm a minority shareholder when less harmful alt is available
Who can be held liable for unlawful distributions?
1. director sho votes for or assents to violating distribution is personally liable for amount that distribution exceeds what could have been properly distributed
- not liable for distributions approved in good faith (based on financial statements or info from officers, etc)
- entitled to contribution from other directors and shareholders who could be held liable

2. shareholders who received distribution knowing that it was made improperly

3. shareholders receiving improper liquidating distribution w/in 3 years of dissolution are liable to corp for any claim against corp that corp can't pay--even if shareholder didn't know that distribution was improper
--limited to amount received at liquidation and to each shareholder's pro rata share
When are shareholders held liable?
1. unpaid stock

2. pierced corp veil

3. absence of de fact corp when shareholder knew no incorp

4. shareholders vested with management power based on shareholder agreement

5. shareholders in close cors owe duty of loyalty and good faith
- can't pursue any corp policy that will harm a minority shareholder when less harmful alt is available
- can't sell seats on board of directors
- liable for damages when sell controlling interest to individuals who loot co unless took reasonable measures to investigate
Duty of shareholders and directors in close corp
duty of loyalty and good faith
- can't pursue any corp policy that will harm a minority shareholder when less harmful alt is available
Powers and qualifications of directors
1. general responsibility for the management of the business and affairs of the corp

2. articles or buylaws may prescribe qualifications, otherwise none
Requirements for minimum number of directors
If one shareholder, 1 dir.
If two shareholders, 2 dir.
If three shareholders, 3 dir.
requirements for terms of directors
1. expire at annual shareholders meeting following election except

2. directors with staggered terms (2 or 3 year terms) remain in office until successor elected and qualifies

**publicly-held corps must stagger directors into three groups
How does a director resign?
delivers written notice to board, chair, or corp.

takes effect when notice delivered unless says otherwise
How are directors removed?
with or without cause by shareholders when

1) d elected by cumulative voting has enough votes cast against removal that wouldhave been sufficient to elect her if cululatively voted at election of the boar

2. when director elected by voting group, only shareholders of that roup vote

3. majority of directors may remove director FOR CAUSE, and if director elected by voting gropu, only directors elected by that group may vote to remove
How can director's meetings be conducted?
By any means of communicatoin by which all directors participating may simultaneously hear each other.

--action can be taken without meeting by unanimous written consent
Requirements for directors' meetings

1. notice

2. quorum

3. approval of actions
1. regular mtgs-no notice
special mtgs-2 days notice
--notice waived unless director objects to mtg at beginning and doesn't thereafter vote or assent

2. Determined at time of vote
Default is 2/3
No fewer than 1/3

3. default is approval of majority
How can director dissent to action?
1. object at beginning of meeting to holding meeting or transacting business there

2. dissent entered into minutes

OR

3. director delivers written notice of dissent before adjournment or immediately thereafter
Requirements for creation of committeee by directors
1. each committee must have at least one member of board

2. creation and member apptmt must be approved by greater of (1) majority of directors or (2) number of directors required to take action under bylaws/articles

3. committes may not:
- authorize distributions
- approve or submit actions requiring shareholder approval
- change size of board, remove directors, fill vacancies
- amend articles or bylaws
- authorize reacquisition of shares except by formulat prescribed by board
Can directors inspect corporate books?
Yes
How can director's meetings be conducted?
By any means of communicatoin by which all directors participating may simultaneously hear each other.

--action can be taken without meeting by unanimous written consent
Requirements for directors' meetings

1. notice

2. quorum

3. approval of actions
1. regular mtgs-no notice
special mtgs-2 days notice
--notice waived unless director objects to mtg at beginning and doesn't thereafter vote or assent

2. Determined at time of vote
Default is 2/3
No fewer than 1/3

3. default is approval of majority
How can director dissent to action?
1. object at beginning of meeting to holding meeting or transacting business there

2. dissent entered into minutes

OR

3. director delivers written notice of dissent before adjournment or immediately thereafter
Requirements for creation of committeee by directors
1. each committee must have at least one member of board

2. creation and member apptmt must be approved by greater of (1) majority of directors or (2) number of directors required to take action under bylaws/articles

3. committes may not:
- authorize distributions
- approve or submit actions requiring shareholder approval
- change size of board, remove directors, fill vacancies
- amend articles or bylaws
- authorize reacquisition of shares except by formulat prescribed by board
Can directors inspect corporate books?
Yes
Directors duties
1. duty of care
2. duty of loyalty
3. duty to protect the interests of the other intracorporate parties
In what situations CAN'T the corp limit directors personal liability?
1. breach of duty of loyalty

2. acts or omissions not in good faith

3. acts or omissions that involve intentional misconduct or knowing violation of law

4. improper distributions

5. any transaction from which the direcot derived an improper personal benefit
Duty of good care

1. defined
1. Directors must discharge duties
(a) in good faith
(b) with the care that an ordinarily prudent person in a like position would exercise under similar circumstances

(c) in a manner the directors reasonably believe to be in the best interests of the corporation
business judgment rule
Directors that meet duty of good care won't be personally liable for decisions that turn out to be poor or erroneous in hindsight

1. Directors must discharge duties
(a) in good faith
(b) with the care that an ordinarily prudent person in a like position would exercise under similar circumstances

(c) in a manner the directors reasonably believe to be in the best interests of the corporation
Who may directors rely on for information AND satisfy the duty of good care?
1. corp officers and employees who director reasonably believes to be competent

2. legal counsel, accountants, or other persons that the director reasonably believes are within the person's professional competence

3. committee of board of which director not member if it merits confidence
What breaches a director's duty of care?
1. Wasting corporate assets by overypaying for property or employment services

2. irrational decisions: no business justification

3. failure to know facts

4. failure to heed warnings

5. failure to supervise
- size of corp controls
Duty of loyalty
director not permitted to profit at the expense of the corporation
conflicting interest transactions:

When is a director's transaction in which had a material personal interest NOT autotically voidable?
Transaction automatically voidable unless:

1. approved by majority of directors without conflicting interest after all material facts disclosed to board

2. approved by majority of votes entitled to be cast by shareholders without conflicting interes

3. judged according to circs at time of transaction, it was fair to the corporation
--consider corp. need, financial position of corp., alternatives, adequacy of consideration

--can still be invalid under other doctrine like waste, just not automatically voidable
Effect of an interested director being present at t ameeting where vote taken on director's conflicting interest transaction?
Irrelevant
Quorum in meetings to determine whether conflicting interest transaction voidable

1. directors mtgs
2. shareholders mtgs
1. majority of directors without conflicting interest

2. majority of votes entitled to be cast, not including shares owned by director with conflicting interest
Remedies for improper conflicting interest transaction
enjoin transactoin
set aside transaction
damages
Who sets directors compensation?
Directors, but unreasonable compensation breaches directors' fiduciary duties
corporate opportunity doctrine

1. defined

2. rule

3. liability
director's duty of loyalty prohibits personal diversion of busines opportunity in which

corp may reasonably be interested

without first giving corp an opportunity to act

* unless director's opporunity existed prior to director's involvement in corp

2. Unfairness rule: director held to have misappropriated a corporate opporunity when court finds ahtat the corporation justly called for protection

3. liable for any profits made
Competing business rule
A director may not engage in a business in direct competition with the corporation he directs.

- Can engage in unrelated business
- Can after completely dissasociating self from corp
Officers
1. required officers
2. duties
1. president, treasurer, and secretary are required
--can hold more than one office

2. duties determined by bylaws or by board or appt officer
Power of officers
1. actual authority
--expressly granted

2. implied authority
--in MA, president's implied authority is extremely limited and pres can't sign contract with third party in absence of authorization
- sec has implied authority only to keep corp records
- treasures has implied authority to receive and keep corp funds and execute checks and promissary notes

2. apparent authority
- when corp holds out officer as possisseing authority
- inducing reasonable belief of authority in others
- officer has apparent authority to bind coproation, even though not actually granted to officer

4. ratification when full knowledge of facts AND
- by express resolution of boar dor shareholders OR
- by acquiescence or acceptance of benefits
Recordable instrument purporting to affect an interest in real estate signed by teh pres or vp AND treasurer is bindingto people relying on it in good faith
exception to limited implied authority of officers
Authority when officer possessed authority and it was terminated w/out third party knowledge?
yes apparent authority exists to create enforceable agreement
Standard of conduct for officers
Duty of care: carry out duties in good faith, with care of ordinarily prudent person in like position, and in manner reasonably believes to be in best interests of the corp.
Removal of officers
Can be removed at any time by corp with or without cause

--even if contractual term to contrary (although then nonbreaching party gets damages)
Resignation of officers
Can resign at any time with notice to corp, even if contractual term to contrary (although if breach of contract, corp has cause of action)
Indemnification of officers and directors
1. mandatory
- when director of officer prevailed in defending proceeding against him

2. discretionary
- for reasonable expenses in unsuccessfully defending suit when (a) d acted in good faith; (b) believed that conduct was in teh best interests of the corp, not opposed to best intersts of corp, or in crim case not unlawful.

3. Can't indemnify when unsuccessful in defending against
- breach of loyalty
-improperdistributions
- transaction from which d derived improper personal benefit

**decided by disinterested majority of board
board committee
special legal counsel
shareholders

4. court ordered
- wheneverappropriate

5. liability insurance is okay in all situations

6. corp may advance expenses to d defenidng action when d furnishes statement that believes met appropriate standard of care
AND
will repay advance if found not to hav emet standard.
fundamental corporate changes
1. amendments of articles

2. mergers

3. share exchanges

4. conversions

5. dispositions of substantially all property outside usual and regular course of business

6. dissolution
General procedure for fundamental change
1. majority of board adopts resolution recommending change

2. notice of proposed change sent to all shareholders
--descibes change
--informs of vote
--7-60 days before meeting

3. change approved by 2/3 of all votes entiteld to be cast
AND
2/3 of any voting group entitled to vote as a group

4. change formalized in articles filed with state
procedure for amendment of articles

1. before shares issued

2. after shares issued
1. board can make any amendment

2. apply fundamental change procedure

- except can approve these amendments with only majority of shares: change in name, authorized number of shares

* classes of stock otherwise not entitled to vote must approve articles amendment by requisite majority when their rights or powers will be impaired
Merger

1. defined

2. process for merger
1. blending of one or more corps into another

2. approval by stockholders of surviving corp not required if:

(a) articles of surviving corp won't differ

(b) each shareholder of survivor will hold same number of shares with same preferences, limitations, rights AND

(c) voting power of any class of shares as result of merger will comprise more than 20% of voting power of same class in surviving corp
Share exchange

1. defined

2. process for share exchange
1. one corporatoin purchases all outstanding shares of one or more classes/series of another corp.

2. approval by stockholders of surviving corp not required if:

(a) articles of surviving corp won't differ

(b) each shareholder of survivor will hold same number of shares with same preferences, limitations, rights AND

(c) voting power of any class of shares as result of share exchange will comprise more than 20% of voting power of same class in surviving corp
short form merger
1. when parent company owning at least 90% of outstanding shares of each clas sof a subsidiary

merges subsidiary into itself

without approval of shareholders or directors of subsidiary

**valid, but parent must give subsidieary's shareholders notice that merger has become effective w/in 10 days of effective date
freeze-out merger
when surviving corp in a merger issues cash in exchange for stock of nonsurviving corp

--allows controlling shareholders to freeze out minority shareholders


--Court determines whether merger is fair. Likely unfair if controlling shareholder/director precipitated merger solely for own personal benefit.
conversion

1. defined

2. process for conversion

3. effect of conversion
1. domestic business corp becomes another type of business entity

2. use fundamental change process

3. all property, responsibilities, liability, etc remains the same.
de facto merger doctrine
De facto merger when:

1. continuation of the enterprise

2. continuation of shareholders

3. seller corp quickly ceases to exist as legal entity

4. purchasing corp assumes the obligation sof the seller that are necessary for uninterrupted continuation of normal business
freeze-out merger
when surviving corp in a merger issues cash in exchange for stock of nonsurviving corp

--allows controlling shareholders to freeze out minority shareholders


--Court determines whether merger is fair. Likely unfair if controlling shareholder/director precipitated merger solely for own personal benefit.
conversion

1. defined

2. process for conversion

3. effect of conversion
1. domestic business corp becomes another type of business entity

2. use fundamental change process

3. all property, responsibilities, liability, etc remains the same.
de facto merger doctrine
De facto merger when:

1. continuation of the enterprise

2. continuation of shareholders

3. seller corp quickly ceases to exist as legal entity

4. purchasing corp assumes the obligation sof the seller that are necessary for uninterrupted continuation of normal business
what remedies are available for a shareholder who disapproves of a fundamental corporate change?
1. Appraisal remedy: dissatisfied shareholders usually permitted to compel corp to buy their shares at a fair value
- when appraisal right available, shareholder may generally not challenge completed corporate action
- e.g. can't challenge value of appraisal offer
Who can dissent from a fundamental corporate change?
1. shareholders entitled to vote on plan of merger

2. shareholders of subsidiary in short form merger

3. shareholders of corp being acquired in share exchange

4. any shareholder entitled to appraisal rights in conversion

5. any shareholder entitled to vote in disposition of all or substantially all of corp's property outside usual and regular course of business

5. Shareholders whos rights will be materially and adversely affected by amendment to articles
Process for proper dissent
1. corp must give shareholders notice when proposed corporate action will create dissenter's rights

2. shareholder must give written notice of intent to demand payment before vote is taken. Shareholder can't vote in favor of proposed action.

3. corporation must give all shareholders who gave notice of intent to demand payment notice w/10 days after proposed action is approved. Notice must tell shareholders terms of repurchase

4. Shareholders must demand payment in accordance with that notice

5. corpoation must pay dissenters

6. Dissatisfied shareholders have 30 days to send corp own estimate of value and demand difference

7. if corp doesn't pay shareholder demand, corp must file action in corut w/in 60 days after recieving demand requesting court to determine fair value of shares
Dissolution
1. defined

2. types
termination of corporate existence

2. voluntary
administrative
judicial
Voluntary dissolution

(1) defined

(2) how done?

(3) effect

(4) revocable?
1. Dissolution by corporate action without judicial proceedings

2.
(a) dissolution by majority of incorporators or intial directors if shares not issued or business not commenced. Deliver articles of dissolution to secretary of state.

(b) dissolution by corporate act via board and shareholder approval. use fundamental corporate change rules

(3) Can only wind up and liquidate assets. Can't do other business Must not distribute assests to shareholders until provide for creditors. Director who authorizes this will be personally liable.

4. revokable within 120 days of effective date by using same procedure used to approve dissolution
Administrative dissolution

1- how done?

2- revocable?
1. sec of state brings action to dissolve for:
(a) failure to file required reports or file or pay taxes for two consecutive years

(b) corp has become inactive

(c) dissolution would be in public interest

2.
- corp has 90 days from service to show that groudns for dissolution don't exist
- corp can apply for reinstatement at any time.
judicial dissolution

How done?
1. by atty general
- when corp fraudulently obtained articles
- when corp exceeding or abusing authority

2. shareholders holding at least 40% of voting power
- directors deadlocked in management, shareholders can't break deadlock, irreparable injury to cop is threatened

- shareholders are deadlocked in votin gpower and have failed to elect one or more directors for period that includes two annual meeting dates and irreparable injury threatened or suffered

3. creditors
- when creditors claim been reduced to judgment and not satisfied, and corp is insolvent
- when corp admitted in writing that creditor's claim due and corp is insolvent

4. corporation--court supervises voluntary dissolution