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282 Cards in this Set

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agency:

One person (agent) consents to act on behalf of and subject to the control of another (the principle).
agency relationship rule
agency:

1. Consent: both parties must consent to an agency relationship.
a. Implied consent: conduct can manifest consent even when no words have been exchanged.
2. Benefit: An actor is an agent of another only if it is agreed that he is to act primarily for the benefit of the other and not for himself.
3. Control: Agent must respond to the directions of the principal.
three elements of agency relationship
agency:

i. Dawn did all of the collection work for rainbow, paid all the bills and sent back to rainbow any profit that was left over. In the contract it said that rainbow is not the agent of dawn. Rainbow then entered into a contract with morris. Rainbow then went bankrupt, and it owed morris money. Issue: Morris sued and asking the court if rainbow was acting as an agent of dawn? Court Said: that you cannot by contract remove a relationship that is already there, it is more important how they acted and they acted like an agency relationship. There was an undisclosed relationship. If the agency relationship was there the agent bound the principal unless the creditor (3rd) party was aware of the contract between the agent and principal. Dawn v. Morris
limits on an agents authority case law
agency:

even if the principal has not authorized the agents act, the principal can be liable if after knowing all the facts the principal ratifies them.
limits on an agents authority:

ratification
agency:

i. Fully Disclosed Principle: with a disclosed principal the third party knows that there is a principal and knows who it is.
ii. Partially Disclosed Principal: knows that there is an agency relationship but doesn’t know who the principal is.
iii. Undisclosed Principal: The third party doesn’t even know that there is an agency relationship in this situation. The principal is still liable even if the 3rd party doesn’t know that there is an agency relationship.
three type of principles
agency:

1. Express: Principal tells the agent exactly what to do.
2. Implied: Powers are implied and can be incurred from many different thing, words that are used; from custom and practice; relationship between the parties.
a. Incidental Authority: the authority to do incidental acts to accomplish the authorized transaction. This is a sub category of implied.
3. (If we are able to find actual authority then the principal is liable for the debt (contract or tort) incurred by the agent.)
authority:

actual authority
agency:

1. This is always discussed in terms of a third party. To find apparent authority have to find that some words or conduct of a the principal would lead a reasonable person to believe that the principle had authorized those acts.
authority:

apparent authority
agency:

1. Third party has changed position based on reasonable belief that there was an agency relationship and the principal either intentionally or carelessly caused this belief to exist. Or the principal did not take reasonable steps to notify the third person of the facts.
authority:

agency by estoppel
agency:

1. Its an equitable or fairness type of concept, there has to have actually been an agency created. Principal tells agent to do something, but the agent does something else. Had no authority, so this is protect 3rd parties who have dealt with the agent in good faith. For the undisclosed principal the third party thought that the third party was only dealing with an agent and did not know that there was an agency at all, the principal is going to be liable if the agent act is done in a usual manner or its necessary to authorize the transaction. This stuff is on page 11 of the book.
2. Disclosed Principal: principal will be liable if the 3rd party to deal with the agent as an agent then the principal will be liable.
authority:

inherent authority
agency:

i. Express Ratification: after the fact that principal manifested the intention to treat the agents conduct as authorized.
ii. Implied Ratification: in conduct justified only if the conduct was authorized.
iii. Acquiescence: Ratification by failure to object.
ratifications: creates liability when there isn't any
agency:

i. Anyone can terminate the agency relationship, principal or agent, even though the contract states that it is irrevocable.
ii. Power Coupled with An Interest Exception: not important till later.
terminating an agency
agency:

i. An agent can bind a third party to a principal.
ii. General Rule: if the principal is liable on the contract then the third party is liable on the contract.
iii. Exception: undisclosed principal and if the third party would not have dealt with the principal then the third party is not liable.
circumstances where a 3rd party is bound
agency:

i. If the principal is bound then the answer to whether the agent is individually liable to this third party depends on whether the principal was undisclosed or partially or fully disclosed. The agent is liable if we have a partially disclosed principal. For undisclosed the Principal, then the Agent will be bound. If the agent does not want to be liable then he will have to fully disclose his principal.
is the agent ever bound to the third party
agency:

i. If the agent takes an action that he does not have an actual authority, the agent is liable to the principal for damages.
exceeding authority
agency:

i. If the agent acted in his actual authority and has made payments out on behalf of the principal the principal must indemnify and payback for authorized and necessary acts.
ii. Can also occur if the agent commits a negligence tort to a 3rd party while under the scope of employment, the agent will create liable to the 3rd party on behalf of principal.
when is principal liable to agent
partnership:

i. Two or more persons associate as co-owners of a business and take no steps to formalize their relationship, they have created a partnership. No docs need be written or filed.
creating a partnership realtionship
partnership:

i. Association: organized body of persons who have some purpose in common
ii. Persons: includes not only individuals but also corporations and other partnerships
iii. To carry on as co-owners of a business: the power of ultimate control.
iv. For Profit: the operation of the act should be confined to associations organized for profit.
elements of partnership relationship
partnership:

i. RUPAz: Two Presumptions:
1. Property purchased with partnership funds is partnership property, even if not acquired in the partnership name.
2. Property acquired in the name of one or more partners without an indication of the person’s status as a partner and without use of partnership funds is presumed to be separate property, even if used for partnership purposes.
when is property partnerhsip property
partnership:

i. Conduct or the statements of the parties can modify the partnership agreement.
oral modification
partnership:

e. A partnership is an entity separate from the partners.
f. Indemnification: If a partner A pays for something on behalf of the partnership, A can indemnify partner B.
g. Contribution: A partner is responsible to the partnership for his share of the partner debts.
creation of a partnership
partnership:

i. RUPA: absent contrary agreement, a RUPA partner is authorized to make those commitments that are incidental to, usually accompany, or are reasonably necessary to accomplish all tasks within the ordinary course of the business of the partnership. If a partner knows or has reason to know that another partner would object to a proposed commitment, the first partner has no actual authority to commit the partnership, unless the partnership agreement provides otherwise or the partners have already voted on the matter.
ii. Partner is actually authorized to act with the express or implied consent of his fellow partners.
contract powers of partners:

actual authority
partnership:

iii. TEST TO DETERMINE EXISTENCE AND SCOPE OF ACTUAL AUTHORITY: Was the acting partner reasonable in assuming that he was authorized to act?
1. Authority is Implied
a. Reasonable interpretation of the language of the partnership agreement
b. Customary way the business is run
c. Prior Authorization
d. Ratification of similar acts
contract powers:

actual authority
partnership:

i. RUPA: any difference arising as to ordinary matter connected wit the partnership business, may be decided by a majority of the partners; but no act in contravention of any agreement between the partners may be done rightfully without the consent of all partners.
1. Acts outside ordinary Business: fills the gap by adding the words “an act outside the ordinary course of business of the partnership” to the clause requiring unanimity among partners.
contractual powers of partnership:

partnership disagreement
partnership:

i. When a partnership contains even number of partners and the split evenly on a matter. Look at whether the matter at issue involves a change in the business or a mere continuation of an already established way of doing business.
1. If the partners are equally divided, those who forbid a change must have heir way.
2. On the other hand the activities within the scope of the business should not be limited.
contractual powers of partnership:

deadlock
partneship:

i. Every partner is an agent for the partnership for the purpose of its business, and the act of any partner for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership, UNLESS he is unauthorized and the person with whom he is dealing has knowledge of the fact that he has no such authority.
contractual powers of partnership:

apparent authority
partnership:

i. RUPA: A partnership or master becomes liable for tortuous conduct by an agent or partner. All that claimant needs to show is that (1) that the partner or servant agent incurred tort liability and (2) and that the partner and partnership stand in a relationship together.
ii. Fraud: RUPA: Partnership is liable for the partners wrongful act done with authority of the partnership, is intended to include a partners apparent as well as actual authority.
contractual powers of partnership:

tort liability
partnership;

i. Fiduciary Duties: The only fiduciary duties a partner owns to the partnership are the duty of loyalty and the duty of care
ii. Duty of Loyalty: A fiduciary is required to be loyal to and act in the best interest of the partnership, duty applies to partners.
partners rights and duties
partnership:

iii. Leaving the Business: Common law: cannot while still a partner solicit customers of the firm for his business, nor can he conspire with other partners or employees to depart en masse in a way that will materially damage the partners business.
iv. Duty of Care: A partner’s duty of care to the partnership and the other partners in the conduct and winding up of the partnership businesses is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law.
partners rights and duties
partnership:

v. Duty of Full Disclosure:
1. RUPA: similar language except that it also expressly requires each partner and the partnership to furnish info concerning the partnership business reasonably required for the proper exercise of a partners rights and duties without demand, a result courts reached by judicial decision under UPA.
2. Full Disclosure: Full disclosure of all material facts is required under circumstances where a partner reasonably knows or should know that the other partners would want the info.
parnters rights and duties
partnership:

vi. Duty of Good Faith and Fair Dealing (RUPA): includes the duty of good faith and fair dealing in its list of obligation of a partner and declares it a mandatory duty.
vii. Managing Partner: partner who manages the business bears an even greater duty of full disclosure and denial of self interest, doubtless because his fellow partners are more dependant on him for info and place greater trust in him than in a partnership in which control over the business is shared equally.
viii. Right to Accounting: Shows detailed financial business transactions.
partners rights and duties
partnership:

i. A partner may be sued or be sued in the name of the partnership.
suits by and against a partner
partnership:

i. The only transferable interest of a partners in a partnership is the partner’s share of the profits and losses of the partnership and the partner’s right to receive distribution.
transfer of interest
partnership:

i. Rights against Partnership Assets: Partnership may be sued in the partnership name, and it declares that property acquired by a partnership is property of the partnership and not of the partners individually.
ii. Rights against the Personal Assets of individual Partners: Creditor can obtain a judgment against any partner it chooses and execute against the personal assets of the partner until satisfaction of the underlying claim is achieved.
claims by creditors of the partnership
partnership:

upon application by a judgment creditor, a court order “charges” the interest of a partner with the amount of the judgment, redirecting any future payments of profits or surplus to the judgment creditor until the judgment is paid. Creditor may foreclose on the interest of a partner if it appears unlikely that distribution of income and surplus will satisfy the judgment of income and surplus will satisfy the judgment in a reasonable period of time.
claims by personal creditors of a partner against the partnerhisp interst of the partner:

charging order
partnership:

a. Dissociation: the separation of a partner from the partnership
b. Dissolution: the point at which a partnership stops functioning as a forward looking enterprise and begins to wind up its business.
dissociation and dissolution of partnerhsip
i. Express will of a partner to withdraw, partnership must have notice.
ii. Event specified in the partnership agreement causing dissociation.
iii. Expulsion as provided by the partnership agreement or by a unanimous vote of the other partners.
iv. Partner’s ability to participate in the partnership affairs comes to an end or
v. The partner’s stake in the partnership comes to an end.
dissociation and dissolution:

events causing dissociation
partnership:

i. Incoming partner is liable for existing debts of the firm but that such liability shall be satisfied only out of partnership property, unless there is agreement to assume all or part of the existing debts.
dissociation and dissolution:

liability of incoming partners (dissociation)
partnership:

i. Withdrawing partner remains liable to the creditor who extended credit at the time the partner was a member of the firm, assuming the firm was not a full shield LLP. If the creditor and the remaining partners agree to a material alternation of the original debt without the consent of the withdrawing partner, she is released.
dissociation and dissolution:

liability of withdrawing partner (dissociaiton)
partnership:

i. Winding up the partnership business entails selling its assets; paying its debts; and distributing the net balance, if any, to the partners in cash according to their interests.
dissociation and dissolution:

dissolution winding up
partneship:

i. Any partner leaving a partnership is entitled to his share of the partnership.
ii. A partnership can continue despite the loss of the partner.
iii. As long as the debt is created before the dissolution or withdrawal then they are responsible.
dissociaiton and dissolution:

withdrawing partnership
corporate formation:

This has a wide ownership of stock and can be held by more then one person. Publicly held if shares are freely held and exchangeable.
publicly held corporation
corporate formation:

has few share holders. In many states there is a limit on the shareholders.
closed corporation
corporate formation:

Unless restricted by agreement among the shareholders they can be sold inherited, seized by creditors. They are freely transferable unless there is an agreement otherwise.
certified shares
corporate formation:

Often shares of stock are just noted electronically on the books of the corporation. Freely transferable absent an agreement otherwise.
uncertified shares
corporate formation:

this is considered separate and apart from its owners and continues its existence after one of its owners dies, absent an agreement otherwise.
A corporation
corporate formation:

if the corporation is a legal person the most important consequence is that, it can be sue and be sued. It can own property in the name of the corporation.
entity status
corporate formation;

: limited market to the shares of the corporation. Point out that there are other possibilities for small companies.
privately held enterprise
corporate formation:

a. The laws of those states are written in such a way where shareholders will not have as much power as other states. A corporation incorporates in only one state and one state alone.
selecting the state of inorporation
corporate formation:

Incorporation can be one person or a lot of people
incorporation
corporate formation:

Shareholders have limited liability. If there aren’t enough assets, then the shareholders do not have any liability for the corporate debt. The shareholders own a certain percentage of ownership. The most a shareholder can loose is their share of ownership.
incorporation

shareholders
corporate formation:

are entitled to be paid before any shareholders.
incorporatoin:

creditors
corporate formation:

Managers do not have liability for the corporate debts
incorporation:

managers
corporate formation:

A business owner can transfer his assets, so it becomes corporate assets, and he can exchange it for shares.
incorporation:

business owner
corporate formation:

The secretary of the state is where you file the article so incorporation. Important to know
i. The name must include company, corp., inc., or limited. The name is only reserved for the state in which it is filed.
ii. Any corporation incorporate in a different state but doing business in California is a foreign corp.
incorporation:

secretary of state
corporate formation:

Every year a corp. has to file a statement of information.
incorporation:

statement of information
corporate formation:

Want to authorize more shares then you are initially going to sell, and if you don’t and want to issue out more shares if you don’t have any left then you have to go back and amend the articles.
incorporation:

shares
corporate formation:

: articles authorize a certain number of shares to be issued. When shares of a corporation are sold to a person, we say that they are issued. These are shares sold by the corporation. Board of directors have the power to issue stock at the price the board determines. Board cannot issue its stock at a lower price to board members only.
two main ways to get money into the corporation:

issueing shares
corporate formation:

Money borrowed from a lender comes in a lot of different forms:
i. Can borrow from a bank, another person, typical types of borrowing could be a promissory note. Lenders can be people with a simple promissory note. It continually borrows money from the bank until it reaches its maximum line of credit.
ii. Bonds and Debentures: Bond is a loan, it is a physical thing that looks almost exactly like a shares certificate. Bonds pay interest at an amount.
two main ways to get money into the corporation:

borrowed money from a lender
corporate formation:

a. Preferred Stock: this is more like a stock then a bond. The most usually class of share is called common stock. But there is another stock that is called preferred stock and this cost more. Preferred stock comes with a right to dividend (this is a profit from the corporation and this is first paid to the preferred stock members and then to common stock). Has a right that says until all of our dividends have been paid to us common stock receives no dividends.
b. Convertibles: They tend to be bonds that have a right attached to them, that at any time in exchange for what is owed, can convert the bond back and convert it into stock.
c. Derivative: Is something other then a stock or bond that gives the holder of the derivative a right to something with respect to the corporation. Example gives the holder of a stock option a right to purchase shares from the corporation into the corporation.
d. A Warrant: this is the same as a stock option, a warrant is an option to purchase shares.
other ways to get money into the corporation
corporate formatoin:

Adoption, sometimes called ratification. This is not the same meaning as they are in agency. The corporation excepts the acts of the promoter and assumes the contract rights. Another theory is that the contract is not the contract at all, but an offer to the corporation and the corporation accepts that after incorporation.
what makes a corporation liable
corporate formation:

promoter remains liable on the contract even after the corporation is formed. For debt incurred before corporation is formed.
a. Exception: where the other contracting party knew that the corporation did not exist and agreed to look solely to the corporation for performance.
promoter
corporate formation:

If the corporation not properly formed will they have personal liability or be protected by the corporate veil.
stock holders have personal liability
formation and defetive operation:

I. Corporations are created by complying with state corporate law. A corporation formed in accordance with law is a de jure corporation. If all corporate laws have not been followed, a de facto corporation might result or a corporation might be recognized through estoppels.
formation
formation and defective:

To create a de jure corporation, the incorporators must comply with all applicable statutory requirements.
de jure rule
formation and defective:

b. Incorporator(s) (at least one) – People:
i. Can be a person or entity/corporation.
ii. Signs and files the articles of incorporation
c. Articles of Incorporation (publicly filed) – Paper:
i. Articles are required to set out certain basic information about the corporation and may contain any other provision that the incorporators deem appropriate.
ii. Articles of Incorporation Must Contain:
1. The Name of the Corporation: which must include the word corporation, incorporated, company, limited, or the like.
2. Number of Shares: the number of shared the corporation is authorized to issue.
3. Name and Address of Each Incorporator.
4. Name of Registered Agent and Address of Registered Office.
d. Act
i. Articles must be received and filed with the Secretary of State, who issues a certificate of incorporation (conclusive proof of formation). Then we will have a De Jure Corp.
de jure
formation and defective:

i. Under the common law, a de facto corporation has all the rights and powers of a de jure corporation but remains subject to direct attack in a quo warranto proceeding (action by the state for exceeding its powers) by the state. For a de facto corporation to exist, there must have been:
1. A statute under which the entity could have validly incorporated;
2. Colorable Compliance with the incorporation laws (good faith attempt to comply with the state law)
3. Corporation must act like a corporation, conduct of business in the corporate name and the exercise of corporate privileges.
defecive formation: de facto corporatoin
formation and defective:

i. Under the common law doctrine of corporation by estoppel, persons who have dealt with the entity as if it were a corporation will be estopped from denying the corporation’s existence. The doctrine applies in contract to prevent the “corporate” entity, and parties who have dealt with the entity as if it were a corporation, from backing out of the contracts. However, it does not apply to tort victims.
defective formation: corporation by estoppel
formation and defective:

a. If a corporation includes a narrow business purpose in its articles of incorporation, it may not undertake activities unrelated to achieving the stated business purpose. When the corporation enters into a contract that goes beyond the scope of its stated powers and purposes = ultra vires act. Raised in three situations:
i. A shareholder may sue the corporation to enjoin a proposed ultra vires act;
ii. The corporation may sue an officer or director for damages for approving an ultra vires act; and
iii. The state may bring an action to dissolve a corporation for committing an ultra vires act.
ultra vires act
formation and defecive:

a. Facts: stockholders challenged a donation by the corporation to Princeton University. Rule: Corporations have common law and statutory powers to make reasonable donations to private academic institutions even absent an express authorization in its articles of incorporation. A.P. Smith v. Barlow Pg. 108
b. California Code Section 207(e): A corporation may make donations regardless of any specific benefit.
ultra vires case law
formation and defective:

Bylaws may contain any provision for managing the corporation that is not inconsistent with the articles or law. Generally, bylaws are adopted by directors, but they may be modified or repealed by a majority vote of either the directors or the shareholders.
bylaws defintiion
formation and defective:

Directors and officers are held to a standard of care under the common law, and it is possible to state what the parties have agreed to state the standard of care for what the directors are held.
i. Inside Directors: work for the company.
ii. Outside Directors: Do not work for the company.
by laws:

standard of care and liability
formation and defective:

i. Need a minimum of 1 director. What is the difference between an even number of directors and odd number? Even number of directors can result in a deadlock.
bylaws:

number and qualitifcation of board
formation and defecitve:

i. Removing director: Cause he is not acting in the interest of the company. A vacancy created by a removal can only be filled by the shareholders.
bylaws:

vacancies
formation and defective:

i. Can have a special meeting anywhere we want.
ii. General meeting at office
iii. Conference call is ok as long as all directors can speak and hear all of the others.
iv. Annual Meeting: its followed by board of directors meeting. Its after because the shareholders elect the board and the shareholder meeting is before the board of directors meeting.
bylaws:

baord meeting
formation and defective:

f. Advisory Directors
i. Possible to get someone outside to perform a special assignment.
g. Officers
i. Ones that are called principle officers are elected by the board.
ii. Board can empower the president to appoint and remove officers, but they can’t appoint or remove the principle officer.
iii. Officers can be removed with or without cause by a majority of the directors.
h. President
i. On the board and on the committee.
i. Shareholders
i. Elect the directors.
ii. Not physically present by person or proxy.
bylaws
corporate strucutre:

: this one with a few shareholders.
closed corporations
corporate structure:

: they are publicly held if they have wide ownership, if there are a lot of different shareholders
publicly held corporation
corporate structure:

a. 401k Plan: retirement plan that the corporation has for you and you can add into yourself, but you have power on where this money goes to.
b. Mutual Fund: Money is pulled together with other people who sent there money to a mutual fund and they take from this giant fund and buys stocks. Because it has so much money it can spread its pull of money to all sorts of stocks, give us DIVERSIFICATION (owning a lot of different stocks).
c. Diversification: it allows for changes in the market, so if one stock drops then you are not going to lose a lot of profit, or not screwed so to speak.
d. Dow Jones: company in New York that publishes the wall street journal. They also create things called averages. They have chosen 30 companies known as the industrial stock. They come up with an average that varies second by second. The prices of the thirty industrials determine second by second who is trading with who and determines the average we see in the papers.
publicly held corporation
corporate structure:

a. It is a small number of investors who’s money is managed by a manager, known as a hedge fund manager. Cannot market a hedge fund to the public because they are operated under the FCC.
hedge funds
corporate structure:

a. They are very involved in corporate governance
i. Voting on management or shareholder proposals
ii. Vote on shareholders proposals, but to make shareholder proposals.
iii. Institutional investors probably get more done through consultation than through voting on management or shareholder proposals.
institution involvement
corporate structure:

a. Facts: The shareholders of Charlestown (p) brought suit against its directors claiming the director should have done what the shareholders wanted them to do. Rule: Shareholders have no power over the management of a corporation and cannot order the directs to take particular actions in managing the business of the corporation. Charlston v. Dunsmore Pg. 127
allocation of legal power between management and shareholders
corporate structure:

superior court of the county can, if there is a suit of shareholders holding at least 10% of the outstanding shares is held by those people files suit.
removing a director: removal for cause
corporate structure:

any or all of the directors can be removed without cause if the removal is approved by the outstanding shares (approved by an affirmative vote of the majority of the outstanding shares allowed to vote).
removing a director: removal without cause
corporate structure:

the board cannot get rid of a director unless, the board may declare vacant the office of a director who had been declared of unsound mind by an order of a court or convicted of a felony.
removing a director: shareholdres aren't acting
corporate structure:

Only for fraudulent or dishonest acts, gross abuse of authority or discretion with reference to the corporation.
removing a director:

removal by the court
corporate structure:


c. Facts: Directors advanced the date of the annual shareholders meeting in an attempt to stifle a proxy fight. Rule: Even if authorized by statute, the directors of a corporation cannot advance the date of the shareholders’ meeting when this action would effectively eliminate the chances of a successful proxy fight. Schnell v. Chris.
d. Facts: the incumbent board of Atlas (d) sought to prevent Blasius (p) from gaining control of the corporation by increasing the number of board members. Rule: The board of directors may not take action for the primary purpose of interfering with a stockholders’ vote, even if taken in good faith. Compelling Justification: a compelling justification Blasius v. Atlas Pg. 133
allocation of legal power between management and shareholders case law
corporate structure:

Investor which can be a human or company solicits the shareholders of another company (asks or makes an offer to), to purchase the shareholders shares. This is done with or without the consent or recommendation of the existing board of directors. Board approval is not needed,
takever
corporate structure:

corporation makes a public offer to purchase stock in corporation B, up to states amount and subject to certain conditions. The offer is for a price invariably well above the prevailing market price for B’s stock.
takeover:

hostile takeover
corporate structure:

so the board at this point does not desire to have the stock concentrated in the hands of the person making the offer, it is called a tender offer.
takeover:

tender offer
corporate structure:

1. Unocal: (1) reasonable grounds to believe the tender offer presented a danger without corporate policy and effectiveness. Board has to show its good faith and reasonable investigation, then it has to show that its response was proportionate to the threat and not an over reaction (draconian measure). If it is not draconian the boards reaction has to be in a range of reasonable response to the threat.
takeover:

board can adopt certain defensive measures
corporate strcuture:

1. When a corporation is formed or the shares are specified the attributes, boating and dividend rights are specified for each class. With class voting each class elects a certain amount of directors. Regardless of how many shares there are in class A,B, or C. Weighted voting: each class votes for all the directors but each share of stock cares a different number of votes.
classes of stock within a stock:

common stock
corporate sturcutre:

g. MM companies sued Liquid Audio, challenging the defendant’s decision to expand its board of directors and appoint two new directors to impede MM’s takeover attempts. MM wanted to take over liquid audio. Rule: when a plaintiff establishes that the primary purpose for board action was to impede or interfere with the effectiveness of the shareholder’s vote, the burden shifts to the board to prove a compelling justification for the board’s actions. MM v. Liquid Audio Pg. 144
allocation of legal power between mangement and shareholders case law
corporate structure:

Structure Shareholder elect the directors and the directors advise. Corporation has relationship with creditors and suppliers. Advisors that advise the corporation. Corporation has a special relationship with its employees. Another corporation (witch owns), CMI corporation in hour chart owns another corporation, which is called CMI on tour inc. This is a subsidiary corporation.
legal structure:

stcuture shareholders
corporate structure:

When one corporation owns or controls the stock of another corporation the relationship is that of what is called apparent corporation owns the subsidiary corporation.
legal structure:

subsidiary corporation
corporate strucutre:

i. Getting Executive Officers: the board higher and fires the chief executive officers, sets the salary, and reviews the CEO plans.
ii. To review or approve or disprove financial objectives, strategies and the plans for the corporation. It is the board who advises the shareholders whether to vote yes or no.
iii. To advise and counsel top management of the company.
iv. To select and nominate members of the board and recommend board members to shareholders. Select, nominate and recommend.
v. The board reviews the internal controls looking for embezzlement or non compliance with the law. The board fixes its own compensation. If shareholders don’t like it they can elect a different board.
board of directors:

5 funcations grantedb y statute ot hte board of directors
corporate structure:

i. The board needs to hold regular or special meetings either within or outside the state. Unless otherwise provided in the articles or bylaws, the board may permit any or all directors to participate in a regular or special meeting by, or conduct the meeting through, the use of any means of communication by which all directors participating may simultaneous hear each other.
board of directors meetings
corporate strucutre:

Regular board meetings may be held without notice. special meetings require at least two days notice of the date, time, and place of the meeting, but a purpose need not be included in the notice.
1. Notice May be Waived: A director may waive notice in writing. If the director appears at the meeting notice is waived, unless the director states otherwise.
board of directors meetings:

notice of meetings
corporate structure:

In order for a meeting to be valid a Quorum must be present:
1. A quorum of the board is the majority of the full board.
2. Once a quorum is present a majority of those present wins.
3. Members of the board may abstain from the vote, so vote yes or no.
4. For voting there needs to be a quorum present to be valid.
board of directors meetings:

quorum
corporate structure:

1. If a quorum is present, resolutions will be deemed approved if approved by a majority of directors present.
2. An action acting as a single board member cannot bind the corporation even if they have all agreed with this one person, there has been no authorization for the act and they act as a board = as a group.
3. Action required or permitted to be taken at a directors meeting may be taken without a meeting if the action is taken by all directors, and provided written consent then action valid. .
4. Shareholders can ratify a board actions even if it was not properly taken.
board of diretors meeetings:

approval of action
corporate strucutre:

1. Definition: The board of director is not expected to participate in the daily business affairs of the corporation. Rather, they usually delegate management functions for daily business affairs to executive committees or to officers.
board of directors meetings:

notes on comittees
corporate structure:

2. Executive Committee: Empowered by the board to act for the board between meetings.
3. Compensation Committee: approves salaries and benefits and negotiates with the highest ranking officers. Recommends to the board.
4. Audit Committee: assures that books and records are accurate.
5. Nominating Committee: selects candidates to the board and recommends them to the full board.
6. Special Litigation Committee: Reviews the issues that are raised in shareholders derivative suits. Shareholder makes a demand that the corporation should sue because they have been wronged in some way and have not taken action. Generally they will review any request by shareholders to bring suit. They also review internal misconduct. They often higher outside council to do this.
board of directors meetings:

notes on comittee
corporate structure:

filling a vacancy on the board (shareholders do this). To adopt, to amend, or repeal the bylaws (considered by the board as a whole). Board cannot add a non director on the committee as a voting member. The committee are allowed to have advisors to the committee.
board of directors meetings:

duties not able to delegate
corporate strcuture:

the board may be setting there own compensation. Inside directors are the corporations own executives.
board of directors meetings:

isnide director
corporate structure:

They are not affiliated with the corporation, but they might own shares of the corporation. Have to have a majority of independent outside directors and the entire nominating, compensation and auditing committees all have to be outside directors.
board of directors meetings:

outside directors
corporate formation:

i. Some cases say they are entitled to unlimited access to the records. The board of directors has a fiduciary duty. Some courts hold otherwise and have to have a proper purpose. Right to inspect has to be reasonably related to the position as a director. So have to know what jurisdiction you are in to see if this would be proper.
directors right to inspect
corporate formation:

Extent of authority is spelled out through the bylaws. Authority is also spelled out by the job description or though the officers of a high rank. A corporation shall have the officers described in its bylaws or appointed by the board pursuant to the bylaws.
authority of officers: in general
corporate formation:

1. President: has apparent authority in the usual course of business, but not to contracts of an extraordinary nature.
a. Extraordinary: economic magnitude of the action in relation to assets and earnings, extent of risk involved, the time span of the actions effect, and the cost of reversing the action.
2. CEO: almost always higher then the president.
3. Vice President: Not much authority today.
4. Treasurer: person who only has the power to sign checks.
authority of officers:

certain courts associate different powers with different titles
corporate formatoni:

5. CFO/Comptroller: this is the person that is concerned with financial policy and may serve on the board of directors. This person has the power to borrow on behalf and invest on behalf of the corporation.
6. Corporate Secretary: keeps the corporate seal and the signature of the person.
7. Director: does not always been board of directors, could be directors of human resources and would probably be able to hire and fire by director of human resources.
authority of officers:

certain cours associate different powers with different titles
corporate structure:

If an officers has acted outside the authority the board can ratify the acts of the officer acting outside the officers authority.
authority of officers:

outside authority
corporate structure:

Required that a corporation have an annual shareholders meeting and time and place fixed in the bylaws. Notice is needed
formalities required for shareholder action: meeting and notice

annual meeting
corporate strucutre:

called by the board. The bylaws or the articles can spell out who can call the special meeting. Some states allow a certain percentage of shareholders to call a special meeting. Notice is needed. Some states say that the notice must be given 7 days before the meeting, unless the bylaws say otherwise. California allows the bylaws to specify that it needs no notice. Shareholders do not need notice in the bylaws unless the statutes say otherwise. Notice of Special Meeting: requires descriptions of the special meeting.
meeting and notice:

special meetings
corporate structure:

iii. All shareholders can vote at the meeting on the record date.
meeting and notice
corporate structure:

Generally a majority of the shares entitled to vote is necessary for a quorum. Unless articles of incorporation sets a higher or lower figure. If a quorum of shareholders is present and some people representing shares leave and there is no longer a quorum the meeting of the shareholders may continue. Differs from board meetings, since there has to be a quorum when voting occurs.
ii. Passes when the majority of the shares voting passes an action unless it is specified otherwise. But in a small vote then if people abstain then it can be a no vote. Like 5 members, and 2 vote positive and the rest abstain this will not pass.
quorum of hte shraeholders meetings quorum
corporate structure:

i. Require any corporation to have a shareholder vote. Amend the certificate of incorporation, merger, sale of the corporations assets, and dissolution of the corporation. Articles can provide that it requires more then a majority, a super majority.
voting:

fundamental change
corporate structure:

a. If there are 5 positions open and 7 people are running then the 5 with the most votes wins.
shareholder election of directors
corporate strucutre:

i. Rule: A shareholder has one vote per share (x) the number seats that we are voting for, and can cast no more then the number of shares he holds for any candidate.
ii. Ex: Paul has 1000 shares, 5 board seats and 8 candidates. This person must pick at most 5 people to vote for and for each person he can cast a maximum of 1000 votes. The shareholder who has 2000 shares decides to vote for different people and can vote 2000 shares each to these candidates, so he has a higher amount of votes.
iii. The smaller shares will never have the power to elect anyone to the board without the agreement to the majority shareholders.
shareholder election of director:

straight voting
corporate structure:

i. Rule: Shareholder has one vote per share times the number of seats. But, can cast from zero the total number of votes that the shareholder has for any one or more candidate. The shareholder can divide his or her votes among the candidates as she sees fit. Allows a majority shareholder to have some representation on the board.
ii. Ex: X owns 300 shares, 9 directors = 2700 votes. 2700 votes for one candidate or in an manner you choose.
shareholder election of director:

cumulative voting
corporate structure:

a. If Cumulative Voting is allowed then to remove a director there must be cumulative voting.
shareholder removing director
corporate structure:

: If a corporation is the “alter ego”, “agent”, or “instrumentality” of a sole proprietor or of another corporation, its separate identity may be disregarded.
limited liability exceptions:

alter ego
corporate structure:

if the shareholders treat the assets of the corporation as their own, use corporate funds to pay their private debts, fail to keep separate corporate books, and fault to observe corporate formalities, courts often find that the corporate entity is a mere alter ego of the shareholder.
alter ego:

individual shareholders
corporate structure:

a. Rule: In some circumstances, even though a corporation has been validly formed, the courts will hold the shareholders, officers, or directors personally liable for corporate obligations because the corporation is abusing the legislative privilege of conducting business in the corporate form. This is frequently called piercing the corporate veil.
limited liability exceptions:

piercing the corporate veil
corporate structure:

b. Facts: Walkovsky (P) was hit by a taxicab and sought to hold the stockholder personally liable for his injuries. Rule: For personal liability to attach to stockholders, it must be shown that the stockholders were actually carrying on the business in their individual capacity for personal rather than corporate ends. Walkovsky v. Carlton Pg. 178
c. Facts: the Mintons’ (p) daughter drowned in a pool owned by Seminole Hot Springs Corporation. They sought to hold Seminole’s director liable for her death. Rule: The corporation veil can be pierced where the shareholders undercapitalize the corporation and activity participate in the conduct of corporate affairs. Minton v. Cavaney Pg. 183
piercing the corporaet veil case law
corporate structure:

i. If they treat there assets of the corporation as there own.
ii. If for some reason they hold themselves out a the corporation.
iii. Inadequate capitalization (putting the money in at the beginning of the corporation or letting it come undercapitalized by taking it out themselves) and actively participate in corporate affairs.
piercing the corporate veil:

owners are personally liable when
corporate structuer:

e. Facts: After losing on remand, Marchese (d) appealed the court’s finding that injustice would result if the corporate form was respected. Rule: Manipulating corporate funds to avoid creditors and unjust enrichment are sufficient showing of additional wrongs to justify piercing the corporate veil. Sealand v. Pepper Pg. 186.
piercing the corporate veil case law
corporate struccture:

(1) there must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist; and (2) circumstances must be such that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice.
piercing the veil
corporate strucutre:

g. Some direct action by someone in the parent that would make them an owner or operator. We are looking at the difference between the owners oversight of the subsidiary v. operating. Activities that are consistent with investor status this is overseeing. But once they begin to direct actions they become an operator. United States Pg. 191
piercing the corporate veil case law
corporate structure:

When a corporation is in bankruptcy, debt claims that a controlling shareholder has against the corporation may be subordinated to the claims of other persons, including the claims of preferred shareholders, on various equitable grounds. This comes into play when the corporation cannot pay its debts. If the corporation cannot pay its debts, the creditors will be paid in full before the shareholders will receive anything. If assets are not enough to pay the creditors then each creditor will get a proportion of the debt.
equitable subordinatio
corporate structre:

Special kind of status. All creditors must be paid in full before a debt to s shareholder creditor is paid.
creditors as shareholders
corporate structure:

V. When there is a creditor of a corporation and the corporation doesn’t have sufficient money to be paid then the creditor will not get paid, unless the reason the corporation has insufficient assets is that it transferred its assets (to a shareholder or anyone to hold) out without adequate consideration and an intent to hinder creditors. If a creditor can show this has happened, the creditor can get those assets that have been transferred, so the transfer is reversed.
fraudulent transfers
shareholder rights:

I. Rule: Shareholders that hold at least 5% aggregate (any group of people getting together) or 1% of voting shares (anyone owning 1%) and have filed a schedule has a right to inspect and copy the shareholders books and records. They could inspect upon request if they had a proper purpose.
a. Proper purpose: Are those purposes reasonably related to the person’s interest as a shareholder.
shareholder right to inspect books and records
shareholder rights:

II. Annual Report: the board shall cause the annual report to be sent to the shareholders not later then 120 days after the close of the fiscal year.
III. Any communication from the corporation to the shareholders for the past three years must be available. Names and addresses of current board members and officers and the most recent annual report.
shareholder right to inspect books and records
shareholder rights:

I. Public Offering: when shares are available to the general public and sold by the company in exchange for money.
II. Stock Exchange: matching a buyer at a willing price to a seller who is willing to sell. When the sale takes place the broker or dealer has to give the name of the new owner to the company.
stock market
shareholder rights:

a. SEC: an independent federal agency that is charged with responsibility for the enforcement and administration of the federal securities laws.
b. Financial Reporting By Public Companies: Requires registration with the SEC of any company that is traded on a national securities exchange and that has total assets exceeding 10 million and more then 500 owners/shareholders.
SEC and Security Exchange Act: Corporate Reporting
shareholder rights:

II. Rule: a shareholder may vote his shares either in person or by proxy executed in writing by the shareholder or his attorney in fact.
proxy voting rule
shareholder rights;

proxies are valid for 11 months unless they provide otherwise. A proxy is generally revocable by the shareholder and may be revoked by the shareholder attending the meeting to vote himself or by subsequent appointment of another proxy. A proxy will be irrevocable only if it states that it is irrevocable and is coupled with an interest or given as security.
proxy voting:

duration
shareholder rights:

proxies are subject to federal control under the SEC. Requirements:
a. Full and Fair Disclosure of all material facts with regard to any management submitted proposal upon which the shareholder are to vote.
b. Material misstatements, omissions, and fraud in connection with the solicitation of proxies are prohibited; and
c. Management must include certain shareholder proposals on issues other than the election of directors and allow proponents to explain their position.
proxy voting:

statutory control
shareholder rights:

: covered by SCC rules, whether the proxy solicitation is done by management or a shareholder they have to disclose (applies to large companies that have to register with the SCC and solicitation).
a. The proxy holder is the person who has the proxy from another person and can vote on their behalf. The proxy itself or the written instrument. Proxy can be in the form of consent, authorization (can take form of failure and object).
b. The process is called the proxy solicitation. The proxy statement is a specific form of statement regulated by the SEC. All together this is called the proxy material.
c. A communication to security holders (stock and bond holders) under circumstances reasonably calculated to result in the procurement, withholding, or revocation of a proxy.
proxy voting:

proxy solicitation
shareholder rights:

i. Requirements: Dates and deadlines of submission of shareholder proposals, whether and how proxy are revocable, and if proxy solicitation is by management or outside. IF the proxy is the elect directors, then it must explain the nominees relationship to the corp. Must also state record date. It must disclose senior executives compensation, and the annual report.
ii. Exception: not solicitation if it is a statement by a person who does not otherwise engage in proxy solicitation, and the statement stating how the person will vote if the statement is made in forms of speeches, press releases, public forums, broadcast media, or bona fide publication made on a regular basis.
iii. Any solicitation has to be filed to the SEC and false or misleading statements carry criminal penalties.
proxy voting:

proxy soliciation
shareholder rights:

a. Facts: A corporations minority shareholders brought a derivative action to set aside a merger between the corporation and the corporation that was its majority shareholder by charging that the proxy solicitation for the merger was materially incorrect in that it failed to mention the corporation’s board of directors was controlled by majority shareholder corporation. Rule: where there has been a finding of materiality, a shareholder has made a sufficient showing of causal relationship between the violation and the injury if he proves the proxy solicitation was an essential link in the accomplishment of the transaction. Mills v. Electric Pg. 217
proxy rules (ii): private actions under the proxy rules case law
shareholder rights:

i. Standard Revised: Substantial likelihood shareholder would consider important, plus showing of the link. Don’t have to show it absolutely affected vote.
proxy rules (ii): private actions under the proxy rules
shareholder rights:

b. Facts: A shareholder, who withheld her proxy in a merger vote, sought damages from the bank holding company that acquired her shares, claiming that proxies were solicited by means of materially false or misleading statements because the board of directors did not believe their own assertion that the tender price was high. Rule: (1) knowingly false statements of reasons, opinion, or belief, even though conclusory in form, may be actionable under Section 14(a) as misstatements of material fact; and (2) Minority shareholders whose vote is unnecessary to complete the transaction at issue must prove causation of damages in a Section 14(a) suit. Virginia v. Sandberg
proxy rules (ii): private actions under hte proxy rules case law
shareholder rights:

i. Negligence: Negligence is enough for liability. But no liability for innocent misrepresentation.
ii. Statements of opinion or belief: opinion is not a basis if they are true. If they are false or material, the main fact that they are an opinion does not protect them.
iii. Material Statement or Omission: Provides ground for a cause of action.
iv. If the minority shareholders vote is not required to pass the transaction there is not causation under a section 14 action.
proxy rules (ii) private actinos under the proxy rules
shareholder rights:

an opinion by the staff of the SEC that comes back to the company that says that if you don’t include this in your proxy letters then we will take no action. Second one can say that if you do this we might.
proxy:

no action letter
shareholder rights:
proxy rules: shareholder proposals
shareholder rights:

b. Rule: A company may exclude a shareholder’s proposal from the annual meeting proxy materials under the “ordinary business operation” exception if the proposals relates to the timetable for implementing corporate policy.
proxy rules: sharehodler proposals case law
shareholder rights:

shareholders proposals are in unless, a proposal can be excluded if it is not otherwise significantly related to the corporations business. Even if it is not economically significant to the company, ethical and social significance can also determine whether it’s significantly related.
proxy rules: shareholder proposals: exceptions
sharehodler rights:

i. Improper subject under state law,
ii. Promotion of violation of federal law,
iii. Contrary to SEC proxy rules (materially false or misleading)
iv. redress of a personal claim or grievance,
v. Relevance of business,
vi. Beyond the corp.’s power to put into effect,
vii. Proposing alternative candidates for board of direction,
viii. Contradicting management proposals,
ix. Mootness,
x. Duplication,
xi. Resubmission – if proposal is similar with one submitted within five and less than certain percent of votes, and
xii. Relates to paying a specific dividend.
proxy rule: shareholder proposals:

corporation is not required to include shareholder proposal if
shareholder rights;

a. A stockholder brought a derivative action seeking to compel the return of monies paid out of the corporate treasury to reimburse both sides in a proxy contest for their expenses. Rule: in a contest over policy, as compared to a personal power contest, corporate directors acting in good faith have the right to make reasonable and proper expenditures from the corporate treasury for the purpose of persuading the stockholders and soliciting their support; and shareholders have the right to ratify reimbursement for such expenses incurred by non directors. Rosenfield v. Fairchild. ?????????????
proxy contests
closely held corporatoins:

a. Public corp. – shares freely traded
b. Private corp. – shares not publicly traded
c. Closed corp. – type of private corp. with a small number of shareholders. Characterized by small number of shareholders, owner management, and transfer restrictions.
i. Statutory closed corp. – a corp. has automatic protections under the statute.
corporations: three types
closely held corporatoins:

a. Governance:
i. Partners have equal rights in management and conduct of business;
ii. Matters of ordinary course of business are decided by majority;
iii. Matters outside requires unanimous approval.
b. Authority: Shareholders have no apparent authority, partners in partnerships do.
c. Distribution: no partner can have salary and profits are shared equally; for shareholders, profits distributed in proportion to ownership and salaries allowed.
d. Term: usually limited term for partners, for corp. exist in perpetuity
closed corporation
closely held corporation:

e. Fiduciary duty: partners owe duty, shareholders do not
f. Liability: shareholders not liable.
g. Closed corp. was created to partners who wanted to change partnership to corp.
i. Characteristics: No more than 35 people, husband and wife count as one, the shares can’t be sold/transferred in such a way that the number of shareholders go over 35, the stocks need to state it is a closed corp., shareholders agreements govern the corp., and the shareholder’s agreement is the governing doc., and overcomes provisions in the corp. code, any shareholder can file suit to dissolve the corp. if it’s reasonably necessary for protection of the rights or interests of the complaining shareholder.
closed corporation
closely held corporatoin:

h. Statutory closed corp. A corp. that can qualify but decided not to be a closed corp. Do they have the same privileges? It depends on the state and what their statute provides. (p. 258) CA says yes, if it is really close, then it will apply the law, but DE is opposite.
i. The shareholders agreement governs almost everything.
i. Buy-out agreements.
ii. §158 closed corp. requirements
closed corporation
closely held corporation:

i. §705 Proxy voting
ii. A proxy that is irrevocable is revocable under §706 (voting agreements): Agreement may provide that shares shall be voted as provided by agreement
shareholders agreement proxy
closely held corporations:

1) restrictions or eliminating board of directors; 2) when and how dividends will be paid; 3) who are the officers and directors; and 4) giving authority to one or more people to exercise corporate powers.
shareholder agreement proxy:

shareholder agreements usually provide for:
clsoely held corporation:

By statute, a shareholders agreement must be in the articles or in the bylaw (it can be the bylaw), must be written, signed by shareholders at time of agreement, and unanimous. In order to amend, the amendment must be unanimous unless the agreement provides otherwise. The agreement can restrict the transfer of shares.
shareholdesr agreements:

statutory requirements for sharheolder agreements
closely held corporation:

: occurs when shareholder A wants to sell and has found a buyer. Shareholder A must first offer shares to corp. or other shareholders before they can sell it at same price and terms.
shareholder agremenet:

right of first refusal
closely held corporation:

Two ways of working: 1) A wants to sell and the corp. or other shareholders must purchase; or 2) if A dies or leaves employment, then A must sell.
shareholder agreement:

mandatory buy out
closely held corporatoin:

A offers to sell shares to shareholder B at a specific price and terms, then B gets the right to sell his shares to A instead. If A offers to buy B’s shares for a certain price, then B can buy A’s shares for the price A offered to buy.
shareholder agreement:

shootout
closely held corporatoin:

g. There can be restrictions that corp. must approve to sell shares. The restriction has to be reasonable though.
h. Shareholder Agreement: The shareholders agreement is unanimous. If it is not, then it is called a voting agreement.
shareholder agreement
closely held corporatoin:

i. Shares can be transferred to someone disinterest giving them the right to vote for a time not to exceed 10 yrs. The voting trust is commonly used for politicians, often called a blind trust. A voting trust is irrevocable for a period of time and separates voting from shareholders and it can be one or more shareholders. In CA, voting trust have to be on file with corp. and open for inspection while shareholder agreements do not. Voting trusts are used in public corps. also.
ii. Requirements: (1) entering into a signed agreement setting forth the trusts terms and (2) transferring legal ownership of their shares to the trustee.
shareholder agreements;

voting trust
closely held corporatoin:

1. Common stock – 1 vote per share. Common stock can have different classes.
2. The board of directors decided on the class of shares.
3. The different class of shares could cost different or have different dividends
voting trust:

different class of stock
closely held corporatoin:

1. Laramin: There were three classes of stock: AC, AL, and AD. AD cost $10, not entitled to dividends and was created for voting in case of deadlocks. It was given to the lawyer. When the company went public it issued more shares that couldn’t vote. The lawyer took over the corp. and Laramin sued. Laramin contended that the AD was a voting trust. The court held that it was not against public policy to have a minority share holding a lot of power.
2. Facts: After being voted off the board of directors and removed as an officer of a closely held corporation, a minority shareholder sued to enforce an agreement requiring the controlling shareholders to use their best efforts to keep him in office. Rule: An agreement among shareholders of a corporation to restrict their discretion as directors of the corporation is invalid and unenforceable as against public policy. McQuade Pg. 77 HC
voting trust:

agreements controlling matters within the board's discretion case law
3. Dodge induced Clark to come into the company for Clark’s secret formula for 25% of the company. The court held that the agreement of Dodge voting for Clark as the director, so long as he was faithful, efficient and competent was valid. Clark would always receive 25% of the salary and dividends. The court distinguished this from McQuade since there was an attempt to sterilize the board. (Overruled McQuade) The court held this agreement was valid so long as it doesn’t sterilize the board. There are statutes that along this agreement. Generally, they allow a shareholders agreement that restricts the director’s powers also restricts their duty to act in the corp.’s best interest. If there is provision, then it relieves directors of duty. Note on Clark Pg. 274
voting trust:

agreements controlling matters within the board's discretion case law
closely held corporatoin:

4. Facts: The widow of one of two principal shareholders of a closely held corporation sued the other principal shareholder seeking to enforce an agreement prescribing how the shareholders would vote for corporate offices and requiring the declaration of annual dividends and the payment of a widow’s pension. Rule: A shareholder agreement limiting the discretion of the board of directors of a close corporation will be upheld where no minority shareholder is prejudiced, neither the corporate creditors nor the public are injured, and no clearly prohibitory statutory language is violated by its enforcement. Galler
voting trust:

agreements controlling matters within the board's discretion case law
clsoely held corporation:

1. For board, you need more than half.
2. For shareholders, it is one vote per share. It is a quorum of the shares.
super majority voting:

quorums
closely held corporatoins:

B. Facts: The controlling shareholders of a closely held corporation sued to compel a minority shareholder/director of the corporation to sign an amendment to the corporation’s certificate of incorporation striking a provision requiring unanimous shareholder approval, including for any amendment of the certificate. Rule: A unanimity provision of a corporation’s certificate of incorporation may not be amended by a less than unanimous vote of the shareholders of the corporation. Sutton
super majority voting case law
closely held corporatoin:

A. Rule: In public corp. fiduciaries don’t owe duty to other shareholders.
fiduciary obligations in closed corporatoin
closely held corporations:

1) duty of acting like prudent person; 2) (Closed) view furthering interests of one another in good faith; 3) duty to disclose; and 4) not to use personal knowledge for personal gain. Rosenthal Pg. 286
fiduciary obligations in closed corporatoins:

duties owed, in close corporations
closely held corporatoins:

C. Wilkes: (Majority oppression) Wilkes, Quinn, Rich, and Conner each owned 25% and each received salary. Quinn got the other directors to freeze out Wilkes by Wilkes voted to the board again. Q, R and C voted W out of the board and fired him. W had no power and just was a holder of shares. W had no right to dividend since there was no money. W claims breach of fiduciary duty as a shareholder. The standard is utmost good faith and loyalty Defense: The majority must show that it was a legitimate business purpose, unless minority shareholder can prove less harmful ways of taking action. The court found that there was no legitimate business purpose. The court awarded W his salary.
fiduciary obligations in closed corporatoins case law
closely held corporatoins:

D. Facts: Three or four equal shareholders in a close corporation sued to remove the fourth shareholder from the board of directors, after the fourth shareholder used a supermajority veto power contained in the corporation’s articles of organization to prevent the company from declaring any dividends. Rule: A minority shareholder in a close corporation, whose conduct is controlling on a particular corporate issue, is held to the same fiduciary duty to which a majority shareholder would be held. Smith pg. 293
fiduciary obligations in closed corporatoins case law
closely held corporations:

E. Facts: An at will employee and minority shareholder of a closely held corporation sued the corporation and its majority shareholder, alleging a breach of fiduciary duty for terminating the minority shareholder’s employment without cause. Rule: the mere fact that a close corporation, without cause, terminates the employment of a minority shareholder who is an employee in the corporation will not automatically constitute a breach of fiduciary duty to the minority shareholder. Exergen pg. 294
fiduciary obligations in closed corporatoins case law
alternative forms of business:

all partners are all liable and all partners can bind the partnership.
partnership
alternative forms of business:

the shareholders are not personally liable for debts of the corporation.
a. Exceptions: Piercing of the Corporate veil or if the corporation was improperly formed.
corporation
alternative forms of business:

i. Requires a filing with the secretary of state.
ii. Has one ore more general partners and one or more limited partners.
LP:

requirements to form LP
alternative form of business:

General partners have the same unlimited liability as if it was the same as a general partnership. The limited partners had liability like shareholders had. There liability is limited to there investment. For limited partners would not have any other assets at risk.
general partners in LP
alternative forms of business:

: Limited partners can’t bind the partnership, they have no liability unless they participate in control of the partnership business. Limited partners do not have fiduciary duties that general partners have.
limited partners
alternative forms of business:

d. Facts; when a limited partnership defaults, its unpaid supplier sues a limited partner, contending it actually controlled the partnership. Rule: Under RULPA, limited partners are not personally liable for their limited partnerships’ debts unless they either (i) exercised enough control to make them substantially the same as the general partner, or (ii) exercised lesser control and the creditor knew of the limited partners’ control before the extending creditor. Gateway Pg. 352
limited partnership case law
alternative forms of business:

An LLC is an entity eligible to be taxed like a partnership while offering its owners the limited liability that shareholders of a corporation enjoy. It is taxed like a partnership, offers its owners the limited liability of a shareholders of a corporation, and can be run like either a corporation or a partnership. May have a single person as a member. Owners are called members. Limited liability like a corporation.
LLC
alternative forms of business:

a. An LLC is formed by filing articles of organization with the secretary of state: Articles must include:
i. a statement that the entity is an LLC:
ii. the name of the LLC, which must include an indication that it is an LLC;
iii. The street address of the LLC’s registered office and name of its registered agent; and
iv. the names of all the members.
LLC formation
alternative forms of business:

a. All of the LLC statutes provide that the members and managers of an LLC are not liable for the LLC’s debts, obligations, and other liabilities.
LLC liability
alternative forms of business:

V. Profits and Losses:
a. Profits and losses of an LLC are split evenly unless an agreement provides otherwise.
VI. Dissolution
a. Dissociation (e.g. death, retirement, resignation, bankruptcy, incompetence, etc.) of an LLC member generally cause dissolution.
LLC
alternative forms of business:
I. Liability is only in the amount that they invested in.
LLP
duty of care and good faith:

Directors owe a fiduciary duty to the corporation. Making a decision to not act is an action.
directors duty
duty of care and good faith:

A director who exercises the care of an ordinarily prudent person in a like position under similar circumstances cannot be held liable for the outcome of business decisions absent fraud, illegality, or conflict of interest.
business judgment rule
duty of care and good faith:

a. Facts: when a corporation directors ordered in-kind dividends which did not utilize available tax deductions, some shareholders sued, contending the directors carelessly wasted corporate assets. Rule: Corporate directors’ decisions on dividends are not actionable as breaches of care, absent fraud, self dealing, bad faith, or oppression. Kamin Pg. 396
b. Facts: When a corporate CEO convinces the Directors to sell the corporation with out calculating its value, shareholders allege they breached their duty of care. Rule: Corporate directors who sell the corporation without determining its true value have breached their duty of care. Smith Pg. 402
directors duties:

business judgment rule case law
duty of care and good faith:

a. Facts: When a corporation charged with health care bribery is forced to pay $250 million and promise better management in a settlement with government agencies, angry shareholders request the court reject the settlement and permit them to sue the directors for negligently permitting bribery. Rule: Corporate directors have a duty to make good faith efforts to institute a corporate monitoring system they believe will alert them of material events, but are not liable if the system fails to detect wrongdoing. In re Caremark International. pg. 420
the duty to ensure that hte corporation has effective internal controls
duty of loyalty:

I. Rule: A director owes the corporation a duty of loyalty. He must act in good faith and in a manner he reasonably believes to be in the corporations best interest.
duty of loyalty (directors)
duty of loyalty:

If a director has a personal interest in a transaction in which her corporation is a party, a conflict of interest arises. A director has a conflicting interest with respect to a transaction or proposed transition if the director knows that she or a related person:
i. Is a party to the transaction
ii. Has a beneficial financial interest in or closely linked to the transaction.
iii. Is a director, general partner, agent, or employee of another entity with whom the corporation is transaction business and the transaction is of such importance to the corporation.
duty of loyalty - directors:

conflicting interst transcations
duty of loyalty:

stockholders v. interested director)
i. A breach of the duty of loyalty is inferred whenever a director (or his business or close relative) obtains any personal benefit at the corporation’s expense
ii. The deal between the corporation and the interested director is set aside/invalid (and the director is liable for damages) unless:
1. The deal is fair to the corporation when entered; OR
2. His interest is disclosed and the deal is approved by a majority of disinterested directors or shareholders
a. Some states count the interested director for purposes of determining quorum and others do not (he cannot vote though)
iii. In some states, even if the deal is approved, a court may still insist on a showing that the deal was fair to the corporation
duty of loyalty = directors:

self dealing/interested director scenario
duty of loyalty:

II. SLE CASE: The person sued for waste of corporate asset. If the directors waste corporate assets on a self interest thing, then they have to pay. Once a conflict of interest is shown, the directors can’t apply the business judgment rule. The person sued for waste of corporate asset. If the directors waste corporate assets on a self-interest thing, then they have to pay. Rule: Once a conflict of interest is shown, the directors can’t apply the business judgment rule. The burden of proof shifts to the directors.
a. One way to validate approval of interested board member of something, is to get full disclosure and have director not vote.
b. The board authorizes in good faith without vote of interested director.
c. A mere common directorship does not constitute a material financial interest.
d. Overlapping directorship permissive if:
i. Full disclosure,
ii. Board authorizes in good faith, or
iii. Contract is just and reasonable.
e. Cookies: In CA, even if there was compliance, the court still has to find that it is fair and reasonable.
duty of loyalty directors case law
duty of loyalty:

a. Unless the articles or bylaws provide otherwise, the board may set director compensation. Cannot set an unreasonable compensation cause will breach directors fiduciary duty.
executive compensation
duty of loyalty:

F. Rogers v. Hill: ATC had a bylaw that if they made over a certain amount, the excess would go to the executives. The majority shareholders can’t vote to give away corporate property
executive compensation case law
duty of loyalty:

a. (state GDL) then “A director may not “usurp” (divert a business opportunity from their corporation to themselves) a corporate opportunity in which the corporation has an interest or expectancy”. Must first give their corporation an opportunity to act.
i. “Corporate Opportunity”
1. An opportunity that is “necessary” to the corporation (in some courts);
2. **An opportunity the corporation would reasonably be interested in; or
3. An opportunity in the corporation’s line of business
the corporate opporutnity doctrine
duty of loyalty:

i. Disclose it to the board; and
ii. Give the board the opportunity to accept or reject
opportunity doctrine:

before taking advantage of a corporate opportunity, the direector must
duty of loyalty:

The corporation’s financial inability to take advantage of a particular opportunity is not a defense to liability
i. If it is a deal that the corp wants, it will come up with the funds!
the corporate opportunity doctrine:

financial inabiilty
duty of loyalty:

i. If director still has it, he must sell it to the corporation at his costs
ii. If sold at profit, corporation will get as constructive trust.
the corporate opportunity doctrine:

financial inability
duty of loyalty:

e. Facts: A country club sued one of its former directors claiming that the directors efforts to purchase and develop land adjacent to the club amounted to a breach of her fiduciary duty to refrain from taking a corporate opportunity for herself. Rule: a director must make a full disclosure prior to taking advantage of any corporate opportunity, and failure to do so is a per se breach of the director’s fiduciary duty. Northeast Harbor Pg. 472
corporate opportunity doctrine case law
duty of loyalty: sharehodlers:

Duty exists when a controlling shareholder sells a number of shares that effectively transfers control to someone. This raises duty to fiduciary duty.
controlling sharehodlers
duty of loyalty sharehodlers:

b. Facts: a minority shareholder in a wholly owned subsidiary sued the parent corporation for causing the subsidiary to pay excessive dividends and for breach of contract. Rule: when the transaction involves a parent and a subsidiary, with the parent controlling the transaction and fixing the terms, the test of intrinsic fairness, with its resulting shift of the burden of proof, is applied. Sinclair Pg. 489
controlling shareholders case law
duty of loyalty shareholders:

a. Facts: a steel company’s minority stockholders brought a derivative action against the corporation’s former controlling stockholder for selling his controlling bloc at a premium to a group of buyers who were solely interested in using the corporation’s supply of steel during a tight market. Rule: Where a call on a corporation’s product commands an unusually large premium, a fiduciary may not appropriate to himself the value of this premium. Perlman Pg. 514
sale and control case law
insider trading:

Makes it illegal for any person intend (intent is needed) to use any means or instrumentality of interstate commerce to employ any scheme to defraud, make an untrue statement of material fact (or omit material fact), or engage in any practice that operates as a fraud in connection with the purchase or sale of any security.
rule 10b=5
insider trading:

i. General Elements of Cause of Action (a private plaintiff must show the following elements to recover damages under this rule:
1. Fraudulent Conduct
a. The plaintiff must show that the defendant engaged in some fraudulent conduct. This can take a number of forms, e.g., making a material misstatement of making an omission of material fact.
i. Materiality: A statement or omission will be considered material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision.
ii. Scienter: to be actionable under rule 10b-5 the conduct complained of must have been undertaken with an intent to deceive, manipulate, or defraud. Recklessness as to truth also appears to be sufficient culpability.
rule 10b-5
insider trading:

If the plaintiff is a private person, the fraudulent conduct must be connected to the purchase or sale of a security by the plaintiff. This excludes potential purchasers who do not buy and people who already own shares and refrain from selling.
rule 10b-5:

the connection with the purcahse or sale of a security by plaintiff
insider trading:

Note that the defendant need not have purchased or sold any securities; a nontrading defendant, such as a company that intentionally publishes a misleading press release, can be held liable to a person who purchased or sold securities on the market on the basis of the press release.
rule 10b-5:

nontrading defendants can be held liable
insider trading:

The fraudulent conduct must involve the use of some means of interstate commerce; however, something as simple as use of the telephone or the mail will suffice.
rule 10b-5:

in interstate commerce
insider trading:

: a private plaintiff must prove that he relied on the defendant’s fraudulent statement, omission or conduct.
rule 10b=5 reliance
insider trading:

A private plaintiff must show that the defendant’s fraud caused the plaintiff damages. Damages are limited to the difference between the price paid (or received) and the average share price in the 90 day period after corrective information is disseminated.
rule 10b-5 damages
insider trading:

a. If 90% or more is owned by another corporation we call this is a subsidiary, but there may be other stock holders here, and the fact is that a merger of this subsidiary into this corporation, this corporation will be able to create such a merger. The fact is that it still requires a vote of the shareholders, but if they don’t want a vote, they can do a shorter form merger.
b. Short Form Merger: there is no vote of the shareholders. They are required to give notice to the other shareholders that it has occurred. when they give notice it has to be within 10 days after the merger takes place. A dissatisfied shareholder has rights under state law and those rights include: asking the court for appraisal rights for what they receive from the merger (fair price).
rule 10b-5

short form merger
insider trading:

misstatement caused person to enter into transaction, but it s rebuttable by showing the actual news had been received by the market
rule 10b-5:

transcation causation
insider trading:

: Instead of a sale before a price goes up, there is a purchase before the price goes down. The plaintiff has to show that the reason the plaintiff had the loss was that she relied on the misstatement. There can be other reasons other then the misstatement could have caused the price to drop. So have to show the link between the misstatement and the loss in price.
rule 10b-5 lost causation
insider trading:

anyone who breaches a duty not to use inside information for personal benefit can be held liable under rule 10b-5, (directors, officers, controlling shareholders, employees of issuers, and the issuers CPA’s, attorneys, and bankers).
insider trading:

insiders
insider trading:

If an insider gives up a tip of inside information to someone else who trades on the basis of the inside information, the tipper can be liable under rule 10b-5 if the tip was made for any improper purpose. The tippee can be held liable only if the tipper breached a duty and the tippeee knew that the tipper was breaching the duty.
insider trading:

tippers and tippees
insider trading:

Under the misappropriation doctrine, the government can prosecute person under rule 10b-5 for trading on market information in breach of a duty of trust and confidence owed to the source of the information; the duty need not be owed to the issuer of shareholders of the issuer.
misappropriates
insider trading:

a. Rule: There is no need for anyone to show that there was actual use of insider information, it is strict liability. There also might be liability under 10(b)(5).d
disgorgement of profits
insider trading:
b. Facts: a shareholder of a corporation brought a derivative action on behalf of the corporation under state law against two corporate insiders, alleging that they had breached their fiduciary duty to the corporation by trading in the corporation’s stock on the basis of material inside information. Rule: an insider can be liable to his corporation for breach of fiduciary duty as a result of trading corporate stock on the basis of material inside information, even in the absence of actual tangible harm to the corporation. Diamond Pg. 624
disgorgement of profits case law
16b

Requires surrender to the corporation of any profit realized by any director, officer, or shareholder owning more than 10% of a class of the corporation’s stock from the purchase and sale, or sale and purchase, of any equity security within a six month period. The section applies to publicly held corporations (i) with more than 10 million in assets or 500 or more shareholders in any outstanding class or (ii) whose shares are traded on a national exchange.
section 16(b)
16(b)

The purpose of Section 16(b) is to prevent unfair use of inside information and internal manipulation of price. This is accomplished by imposing strict liability for covered transactions
16(b)

strict liability
16(b):

1. Purchase and Sale or Sale and Purchase within Six Months:
a. Test: Whether the transaction is one in which abuse of inside information is likely to occur.
2. Equity Security
a. An equity security is any security other than a pure debt instrument, including options, warrants, preferred stock, common stock, etc. Applies to only purchases and sales of equity securities.
3. Officer, Director, or More than Ten Percent Shareholder
a. Officers, directors, and more than 10% shareholders include not only those actual persons, but also anyone who has deputized one of those person to act for him. Transactions occurring before one becomes an officer or director are excluded from section 16(b), but transactions occurring within six months after ceasing to be an officer or director can be covered. Share ownership is measured at the time of both the purchase and sale.
16(b)

officer, directors, or more than ten percent shareholder
16(b):

The recoverable profit under section 16(b) is determined by matching the highest sales price against the lower purchase price for any six month period. Thus, the profit can be either a gain or an avoided loss.
16(b)

profit realized
SOX:

I. Introduction: SOA was enacted in 2002 in response to corporate financial scandals. SOA primarily affects companies registered under the 1934 act (those whose shares are traded on a national securities exchange or that have at least 500 record shareholders and more than 10 million in assets).
surbane oxley (sox)
sox:

a. Only registered with the Oversight Board may prepare or issue audit reports of “reporting companies”
public accounting board
sox:

i. Must establish audit board
ii. Members must be independent from company – i.e. can only receive compensation for this specific position
iii. Duties:
1. establish confidential/anonymous procedures for dealing with complaints about accounting & audit procedures
2. must have authority to hire independent advisors & must have sufficient funds to hire public accounting firm
corporate responsibility:

company audit committees
sox:

i. CEO/CFO must certify that:
1. Officer has review reports
2. based on officer’s knowledge, the report is true and does not contain any material omissions
3. report fairly presents the financial position of the company; and
4. signing officer is responsible for establishing controls to make sure that material information is made known to officer, and officer has checked controls w/in 90 days of report
corporate responsibility:

financial reports
sox:

i. If a company has to restate a financial report because of misconduct, the CEO/CFO must reimburse bonuses rec’d within 12 months
corporate responsbility:

forfeiture of bonuses
sox:

i. Cannot trade stocks rec’d for services during blackout, otherwise profits go to company
corporate responsibility:

prohibition against insider trades during pension blackout
sox:

e. No personal loans to executives
f. Code of Ethics for Senior Financial Officers
i. Company must disclose if it has a code of ethics. If it doesn’t it must state reasons why.
corporate responsibility
sox:

a. Destruction or altering docs
i. 20 years if knowingly destroy, alter, mutilate, falsify a document or record with intent to impede federal investigation
b. Destruction of Corporate Audit Records
i. Accountant who conducts audit can go to jail if willfully fails to keep all work papers related to the audit for 5 years
c. SOL – 2 years for private suits after discovery of the facts giving rise to COA
d. Whistleblower protection
i. Statutory COA if discharged b/c lawfully provided info to supervisors or Feds regarding any conduct they reasonably believed to be a violation
e. Defrauding shareholders
i. Criminally liable for securities fraud.
corporate crime or fraud
sox:

a. General: Appears and practices in front of the SEC. means direct contact with the SEC, providing advice on federal securities questions, conducting an investigation called for by SOX, and supervising an attorney who is appearing and practicing before the SEC. Anyone who acts for the issuer but is employed by a subsidiary and has no direct attorney client relationship with the parent company is evidence.
attorney duties
sox:

Attorney ahs an obligation to report violations up the latter, this means to the corporations chief legal officer or equivalent, or both the chief legal officer and the chief executive officer.
attorney duties:

violations up the latter
sox:

must conduct a reasonable investigation to determine if wrongdoing has occurred.
ii. After the investigation CEO concludes that there is a material violation, he or she has to take reasonable steps to insure that the corporation takes remedial measures.
iii. If they conclude that there was no material violation then the CLE or CEO reports down the ladder that no material violation was found.
iv. If the reporting attorney believes this was an adequate response then no further responsibility. But if the reporting attorney believes that there has not been an adequate response then the reporting attorney must report it to the audit committee or any A committee of independent directors, or the whole board of director’s
attorney duties:

violations up the latter
sox:

i. reporting lawyer can report it to this committee.
attorney duties:

qualified legal compaliance committee
shareholder suits:

In a derivate action, the shareholder is asserting the corporation’s rights rather than her own rights. Recovery in a derivate action generally goes to the corporation rather than to the shareholder bringing the action.
derivative actions
shareholder suits:

To commence and maintain a derivative proceeding, a shareholder must have a been a shareholder at the time of the act or omission complained of or must have become a shareholder through transfer by operation of law from one who was a shareholder at that time.
derivative:

shanding - owerhisp at time of wrong
sharehold suits:

The shareholder must make a written demand on the corporation to take suitable action.
derivative actions:

demand requirement
shareholder suits:

If a majority of the directors (at least 2) who have no personal interest in the controversy find in good faith after reasonable inquiry that the suit is not in the corporation’s best interests, but the shareholder brings the suit anyway, the suit may be dismissed on the corporation’s motion.
derivate ations:

will be dissmissed if found not in corporations best interests
shareholder suits:

a derivative proceeding may be discontinued or settled only with the approval of the court.
derivate actions:

discontinuance of settlement requires court approval
shareholder suits:

upon termination of a derivative action, the court may order the corporation to pay plaintiff’s reasonable expenses if it finds that the action has resulted in a substantial benefit to the corporation.
derivate actions:

court may order payment of expenses
shareholder suits;

Creditors cannot bring derivative actions, only to shareholders. If the corporation is insolvent then creditors could probably bring an action against directors for violation of fiduciary duty. Plaintiff must post a bond to cover corporations expenses. In a derivative suit it is never plaintiff v. corporation, it is plaintiff v. corporation plus wrongdoers.
derivative actions class rules
shareholder suits:

b. Facts: A minority shareholder in a closely held corporation sued the majority shareholder in a direct action, accusing him of behavior that reduced the value of the corporate stock. Rule: Shareholders in a closely held corporation may be able to sue in a direct action (rather than being required to maintain a derivative action) for damage to the corporation. Barth
derivate actions case law
sharheolder suits:

; the court pays the recovery to the plaintiffs instead of the corporation in proportion to their shares.
derivate actions:

pro rata recovery
shareholder suits:

e. Facts: Without first making a demand on the directors to initiate suit, a shareholder brought a derivative action against the board of directors for overcompensating the corporation’s executives and outside directors. Rule: Since directors are self interested in their own compensation, any demand on the board to initiate a suit for overcompensation of the directors would be futile. Marx Pg. 227 HC
derivative actions:

demand excuseed - demand futility
shareholder suits:

i. If a majority of the directors are interested in the transaction (can be self interest; other directors controlled by a self interested director),
ii. If the plaintiff is able to show in the complaint that the directors failed to inform themselves to a degree reasonably necessary about the transaction.
iii. When directors failed to exercise there business judgment.
derivative actions:

demand futility: three different test to find if demand is futile
shareholder suits:

Directors are self interested where they will receive a financial interest in the transaction which is different from the shareholders generally.
derivate actions:

demand excused - self interested directors
shareholder suits:
i. A direct action may be brought for a breach for a breach of a fiduciary duty owed to the shareholders by an officer or director.
direct action
sharheolder suits:

a. Rules: The loser does not get the fees paid by the other side. For shareholders derivative suits, plaintiffs gets nothing so its to encourage this type of suit. A derivative suit is a class action type of suit. Majority apply reasonable percentage of the fund method.
attorney's fees
shareholder suits:

i. A bond is an assurance that the money will be paid. The plaintiff pays a premium, and bond company puts assurance with court. If bonding company ahs to pay, it seeks money from plaintiff. No bonding company will issue a bond unless plaintiff can pay.
attorney's fees: bond
shareholder suits:

i. Facts: Defendants prevailed in a derivative action brought by corporate shareholders and were awarded their attorneys’ fees, even thought the shareholders had not posted any security to cover the expenses of litigation. Rule: Attorney’s fees cannot be awarded to the defendants in a derivative action except out of the security for expenses. Alcott
attorney's fees;

once defendant is successful how much in derivate fees can be won
shareholder suits:

I. Rule: If it is incurred by the agent the principle pays back the agent. any time a person gets sued for any reason other then a derivative suit then the corporation can pay back the employee. Pay back for: Expenses, Judgments, Fines, Settlements, and other amounts actually and reasonably incurred.
indemnifcation
shareholder suits:

a. if director is held liable to the corporation OR held to have received an improper personal benefit (against public policy)
1. i.e. if he loses a derivative suit brought by a shareholder for wrongdoing
no indemnification
shareholder suits:

a. A director or officer is entitled to reimbursement from the corporation for funds spent for corporate purposes, and is entitled to legal expenses incurred if the director is successful in defending the suit
i. “wholly successful” in most jurisdictions – won 5 of 5
ii. “to the extent he is successful” in others – won 2 of 5 – can get reimbursed for cost associated with the 2 won!
mandatory indemnifcation
shareholder suits:

a. Settlement:
i. If director acted in good faith & with reasonable belief that her actions were in the company’s best interest
ii. disinterested directors or shareholders or independent counsel determines if the director/officer meets above standard
permissive indemnification
shareholder suits:

V. Court can order indemnification if it is justified in view of all circumstances
a. usually limited to Costs & Attorneys’ fees
indemnification
shareholder suits:

VI. Articles can provide for limitations on, or elimination of, director liability for damages, but not for breach of the duty of loyalty, intentional misconduct, or improper personal benefit
a. Some states extend this to officers as well
VII. Corporation may purchase director and officer insurance
indemnification
shareholder suits:

I. Rule: Cannot be settled without court approval. Is it fair and reasonable to all the parties.
settling derivative suits
shareholder suits:

a. Has to be arms length negotiations,
b. Experienced Council in Similar Cases,
c. Sufficient discovery for Council to Act Intelligently, and
d. Number of Objectives is small or there relevant interest is small
settling derivative suits:

factors to show fairness
shareholder suits:

a. Likelihood of Success on the Merits, and
b. Likely Recovery
settling derivatieve suits:

factors of reasonability
structural changes:

I. What rights do stockholders have when the board wants to change the corporation in some fundamental manner
corporate combinations
structural changes:

Acquiring company acquires the target company. When the surviving company takes over a target in a merger, all the assets and liability of the target company become the surviving companies.
merger: surviving company
strcutural changes:

Two companies become one company.
merger consolidation
structural changes:

Target corporation is owned by shareholders. Acquiring corporation purchases from the shareholders all of the shares in exchange for money or shares in the acquiring corporation but they don’t merge. The target corporation is owned by surviving corporation, but the relationship is a parent and subsidiary. Acquiring corporation can buy the shares on the open market.
merger: share acquisition
structural changes:

Acquiring corporation makes a general offer to the shareholder of the target corporation. First step in a merger.
merger

tender offer
structural changes:

Target corporation has lots of assets, but also has liability (owes money to people), the acquiring corporation. The target company sells its assets to the acquiring company and the acquiring company pays with cash or with stock in the acquiring company. Target corporation retains its liabilities because all they bought was the assets.
merger

asset acquisition
structural changes:

All the above are called reorganizations in California. Also has an exchange reorganization: This is the same as what we call a share acquisition. When reorganization occurs shareholders of the target corporation must approve the change (shareholder approval). This is 50% +1 of the outstanding shares that must approve.
merger

california corporations code
structural chagnes:

when a parent corporation owns 90% or more of a subsidiary corporation, the parent corporation can cause a short form merger. This does not require any vote of the subsidiary share members. It is done without any approval of the director or shareholders of the subsidiaries.
merger:

short form merger
structural changes:

viii. Sale here was a fundamental change requiring shareholder approval. if sale of all or substantially all assets then it requires shareholder approval. Substantially all is 75% of assets, or if it substantially affects the existence and purpose. Court Says: that a sale of assets requires shareholder consent if the assets to be sold are quantitively vital to the operation of the corporation… and substantially affects the existence and purposes of the corporation. Gimbel Pg. 728
structural changes case law
structural changes:

i. Proof of value by any technique other than block method, generally considered acceptable is an ok standard
1. Standard: fair value determined by all relevant factors test, including damages
2. Dissenting shareholder has appraisal rights
a. They must give notice that they don’t agree, an once sale is approved corporation, notifies dissenters and notifies dissenters of price paid and their rights.
b. Shareholders demands amount and corporation pays what it thinks is a fair value. If dissatisfied, the appraisal process is done by court and court hears evidence of value and makes ruling.
ii. Block Method: elements of value assigned particular weight then added up to determine value of share.
merger: appraisal rights
strcutrual changes:

i. usual situation for a freeze out, is that we have an 80% stockholder and 20% stockholder. the 80% guy determines that they want to get rid of the 20% guy.
1. Cash Out Merger: This happens if the 80% owner is a corporation, and this corporation owns 80%, so we call this a parent corporation and we call the other one the subsidiary. But we still have 20% owners out here. Will propose that the subsidiary be merged into the parent corporation. It will offer that they will exchange shares of corporation A, or give you cash in exchange for your 20% interest in corporation A. It Requires: Approval by a majority of the minority, disinterred shareholders. (80% not allowed to vote because they have an interest)
freeze out techniques
strcutural changes:

ii. Facts: A class of minority shareholders of a subsidiary corporation challenged the terms of a cash-out merger of the subsidiary into its corporate parent asserting that the terms of the merger were unfair. Rule: A majority shareholder in a cash-out merger has the burden to show that it completely disclosed to the minority shareholders all material facts relevant to the truncation, in order to uphold a majority vote of the minority shareholders approving the merger. Weiberger Pg. 750
freeze out techniques: case law
strcutrual changes:

iii. If the merger was approved by a majority of the disinterested shareholder:
1. Burden is on plaintiff to show that it was unfair.
2. Fairness has two aspects (1. fair dealing: it isn’t fair if it wasn’t candid. Need to give all facts necessary. (2. fair price.), could give them appraisal rights or damages.
freeze out techniques
structural changes:

iv. Facts: Unocal Corporation (d) filed a short form merger to eliminate the minority shareholders of its subsidiary corporation. Rule: with a statutory short form merger, controlling fiduciaries of the parent corporation do not owe a duty of entire fairness to the corporate subsidiary’s minority shareholders. If there is form merger, unless there is fraud or illegality, plaintiff’s exclusive remedy is appraisal rights. Glassman Pg. 766
freeze out technique case law
vocab:

Where a publicly owned corporation becomes privately held.
going private
vocab:

: person that makes a tender offer that is invidious.
raider
vocab:

the recipient whose shares the raider or bidder seeks to acquire is referred to as the target.
target
vocab:

: often the management of a target realizes that it will be taken over, but prefers a takeover by someone other than the original bidder. The management therefore solicits competing tender offers from other corporation. These more friendly corporations are known as white knights.
white knight
vocab:

: is a device to protect the white knight. against competition by other bidders. The favored bidder is given an option to acquired selected assets (usually lesser price), or a given amount of shares, of the target at a favorable price under designated conditions.
lock up
vocab:

Is an acquisition for cash or non-convertible senior securities of the business of a public corporation, by a newly organized corporation in which members of the former management of the public corporation will have a significant equity interest, pursuant to a merger or other form of combination.
management buy out
vocab:

LBO Is an MBO that is highly leveraged- that is, in which the newly organized acquiring corporation has a very high amount of debt in relation to its equity.
leverage buy out
vocab:

a junk bond I a bond that has an unusually high risk of default, but correspondingly carries an unusually high yield.
junk bond
vocab:

: a board of a corporation that neters into an agreement for am merger or other corporate combination may agree that it will recommended t hat combination to its shareholders, that it will not shop around for a more attractive deal, or both.
no shop clauses
vocab:

: A raider has come in and the corporation wants to make itself less attractive as a takeover target. So its board of directors issues to its shareholders rights. the rights the shareholders get are the right to purchase additional shares in the corporation. So we give the shareholders the rights to buy more stocks for half the price of the market price up, and only ripens if the company is sold.
poison pill
vocab:

a target may seek an accommodation with a shareholder who has acquired a significant amount of stock, under which the shareholder agrees to limit his stock purchases, hence standstill.
stand stil
vocab:

Offers money or shares, from raider to the shareholders. Usually the price is well above that then the price that is being offered by the market. Tender offer can be made by the corporation as well to buy back the shares.
i. Federal Law (Williams Act): anybody that acquires more then 5% of any class of equity has to file with the SEC. File background, source of funds, plans for major changes in the target, and any relations with other people. Shareholder can withdraw offer.
ii. Regulation 14(d): Any purchase that gives the purchaser more then 5%, applies to registered companies, and when the shareholder reaches 5% must make detailed disclosures to the potential seller.
iii. 14(e): applies even if the offer is less then 5%. Also for companies not registered with the SEC. Management has to distribute to the stockholders a statement of whether management approves or disapproves.
tender offers