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78 Cards in this Set
- Front
- Back
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Corporations: big picture
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- formation
- stock - stock transfer liability - duties & rights - corporate merger & dissolution |
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was the corporation validly created? (list)
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DE JURE:
- articles of inc. stamped by SOS - substantial compliance DE FACTO: - good faith attempt to incorporate - use of corporate powers ESTOPPEL: - 3rd party treated them like a corp, now can't attack their existence. |
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If the corp wasn't valid, stockholders & management may be personally liable!
when can the corporate veil be pierced? |
You can pierce the veil when it's been FUSED:
- FRAUD - UNDERCAPITALIZATION - corporation is merely alter ego of SHAREHOLDERS - ENTERPRISE liability theory (two corps, same stockholders) - "DEEP Rock" Doctrine |
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"Deep Rock" Doctrine
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Loans from controlling shareholders are subordinated to loans from outside creditors when:
- undercapitalized - bad faith - fraud - gross mismanagement |
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stock issues
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- subscriptions
- valid issuance - classification of stock - dividends - repurchase/redemption |
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stock subscriptions
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Agreements to purchase stock issued by corp. IS IT ENFORCEABLE/REVOCABLE?
- pre-inc. subscriptions are irrevocable for 6 mo (unless parties agree otherwise) - post-inc. subscriptions: Fed: revocable any time before acceptance! (CA: NO) - corp can enforce against subscriber but not BFP transferee - enforceable against subscriber even if corp is insolvent! - release of subscription: only where stockholders & subscribers consent & no harm to creditors |
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requirements for issuance of stock
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- authorized by Articles of Inc + Board of Directors
- adequate consideration - par value or stated value (unless good faith decision by Board) - stockholders may have preemptive rights to purchase |
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What counts as adequate consideration for purchasing stock?
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Modern: pretty much anything! Just need good faith determination by Board.
- bonuses - watered stock - discount stock - any tangible/intangible property of benefit to the corp |
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classes of stock
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- preferred stock: might have priority for dividends, liquidation, convertible
- treasury shares: issued & repurchase - outstanding shares: issued but not repurchased |
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dividends: requirements
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SPRAID:
- corp can't be insolvent or lack adequate SURPLUS - can't violate rights of PREFERRED class - power to REVOKE: Directors (until record day) - can't violate ARTICLES of Inc. - power to ISSUE: Directors - can't DISCRIMINATE between members of same class of stock |
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Dividends: if unlawfully issued
Who is liable? |
+ Directors can be personally liable
+ stockholders must return dividends if: - they made corp insolvent - stockholders knew of illegality |
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repurchase / redemption
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repurchase: at SHAREHOLDER'S option
redemption: at CORPORATION'S option - illegal if corp is/will be INSOLVENT SPRAID: - corp can't be insolvent or lack adequate SURPLUS - can't violate rights of PREFERRED class - power to REVOKE: Directors (until record day) - can't violate ARTICLES of Inc. - power to ISSUE: Directors - can't DISCRIMINATE between members of same class of stock (like dividends) |
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repurchase
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Corp agrees to buy back shares at stockholder's option. Stockholder may enforce as long as corp has available funds!
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redemption
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Corp may acquire outstanding shares pursuant to its Articles.
- Can't do it if only one class of stock is outstanding! - Directors cannot discriminate between classes of stock. |
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stock transfer liability: issues
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- common law
- Rule 10b-5 - Section 16(b) - Section 11 - Sarbanes-Oxley |
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stock transfer liability: common law
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- director, officer or key employee liable in tort for lie or half truth
- insider liability - duty to corporation |
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stock transfer liability: insider liability
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TRADITIONAL/MINORITY: insider has no duty to disclose!
MAJORITY: insider must always disclose material info before buying or selling. Special Facts Doctrine: if privity between buyer & seller, insider must disclose what he knows to his seller before he buys |
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insider stock transfer liability: duty to corporation
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Officer & director cannot use material non-public info re. corp's business to make profit or avoid loss.
Insider must disgorge profits to corp! |
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Rule 10b-5
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Prohibits:
- manipulative or deceptive device in connection with purchase or sale of security. - scheme to defraud, misrepresentation, or non-disclosure of material fact. Elements: - damages - reliance - standing - jurisdiction - misstatement - omission - material fact - scienter - defenses - tipper/tippee liability |
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Rule 10b-5: damages
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- individual damages: what they should have gotten/paid
- SEC: injunction, triple profits, criminal fines, jail |
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Rule 10b-5: reliance
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Need reliance?
- misrepresentation: yes - non-disclosure: no |
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Rule 10b-5: standing
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- Must have actually purchased/sold. No standing if you refrained!
- Purchase/sale must be connected with alleged fraud. |
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Rule 10b-5: jurisdiction
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Must have used instrumentality of interstate commerce (mail counts!)
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Rule 10b-5: scienter
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Mere negligence is not enough. Need at least recklessness!
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Rule 10b-5: defense
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Intentional or reckless failure to investigate!
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Rule 10b-5: tipper/tippee liability
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Tipper liable if tip made for improper purpose.
Tippee liable if they knew. |
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Section 16(b): elements
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If insider buys & sells within 6 months, must pay back profits. No scienter, no defenses!
- jurisdiction: big corp (national stock exchange, $10 million, or 500 shareholders) - who is liable: officer, director, 10% shareholder - who can sue: corp or shareholder derivative - damages: highest sale - lowest purchase price within 6 mo |
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Section 11
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Liable for any misstatement of material fact on a registration statement (for sale of securities)
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Sarbanes-Oxley
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WHO: CEO or CFO who knowingly causes false report to be filed
WHERE: corp with at least $10 million and 500 shareholders WHAT: register auditing firm with oversight board PENALTY: personally liable for $5 million in fines or prison! |
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promoters: duties
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A promoter is a person who helps organize the corp.
- duty to disclose his interest and all material facts in transactions - duty not to exchange overvalued property for shares - preincorporation contracts - ultra vires |
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Promoters: duty to disclose his interest and all material facts in transactions.
If he doesn't? |
Corp can rescind contract but must restore consideration.
MAJORITY: recover unfair profit MINORITY: recover entire profit! |
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Promoters: duty not to exchange overvalued property for shares
What liability if they do? |
FED: if no other shareholders, then no liability!
MAJORITY: if it is contemplated that more of corp's stock will later be sold to others, then liability! |
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Promoters: preincorporation contracts
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Promoter is always liable until novated.
Corp is not liable unless it accepts contract (express or implied) |
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Ultra vires
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Contract is "ultra vires" if it goes beyond scope of powers stated in Articles of Incorporation.
- shareholders can unanimously approve - many states have abolished this doctrine! |
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shareholders: what they can do
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- make & amend bylaws
- elect & remove directors - approve fundamental changes - right to a portion of assets upon liquidation - inspect records - bring derivative suits |
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shareholders: meetings
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- must have annual meeting
- may have special meeting - written notice required: 10-60 days before meeting. Can be waived by express waiver or by attending - quorum required (MAJORITY) - can have action without meeting if written consent (MINORITY) |
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shareholders: voting rights
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- elect & remove directors
- only shareholders as of record date can vote - decide major decisions: fundamental changes require majority of all outstanding shares! |
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shareholders: pooling agreement
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Shareholders may enter into enforceable contract to vote their shares as a unit! Court may grant specifric performance, unless K not in best interests of corp.
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shareholders: voting trust
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Voting right is vested in trustee rather than beneficial owners. Enforceable!
Requirements: - legal title in shares transferred to trustee - writing & filing with corp required - open to inspection - max. 10 years! |
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shareholders: stock transfer agreements
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Reasonable restriction to keep stock from being freely transfered. Enforceable!
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shareholders: derivative suits - issues checklist
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- proper purpose?
- requirements |
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shareholders: derivative suits - proper purpose?
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- compel declaration of a DIVIDEND
- enforce preemptive RIGHTS - enforce the APPRAISAL remedy - redress injury caused by stock FRAUD - enforce INSPECTION rights - enforce REDEMPTION agreement - compel DISSOLUTION - prevent DILUTION of voting rights |
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shareholders: derivative suits - requirements
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- shareholder owned stock at time of act
- continuous ownership of stock throughout suit (unless predecessor suffered from continuing wrong or was contemporaneous owner) - demand of Director (unless futile) - attorney's fees available! |
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shareholders: controlling shareholder's fiduciary duties
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- cannot take action detrimental to minority shareholders or corp
- must investigate buyer to prevent looting & corporate raiding - selling corporate asset: must share premium with minority shareholders - cannot exploit corporate assets |
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shareholders: inspecting corporate records
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- PROPER purpose
- if denied: may obtain writ of mandamus & recover damages! |
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directors: powers & authorities
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- unfettered discretion in making management DECISIONS (as a board!)
- selection, removal & compensation of OFFICERS & AGENTS with or without cause - incur DEBT - declare DIVIDENDS - fill VACANCIES on board (majority vote) - make/amend LAWS (as allowed by law or shareholders) - DELEGATION of duties (officers or executive committees) - BUY & SELL corp. property & stock - reasonable COMPENSATION: must be authorized by shareholders, bylaws, or independent Board |
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directors: meetings
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- failure to comply with formalities makes meeting void
- regular meetings: no notice required - special meetings: notice, waiver, or appearance required - quorum required at all meetings - action taken without meeting: requires unanimous written consent of all directors |
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directors: duties
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- duty of CARE
- duty of LOYALTY - duty not to USURP corporate opportunity - duty not to engage in insider TRADING - duty not to COMPETE with corp |
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directors: duty of care
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Reasonable prudent person standard! Consider special expertise.
Defenses: - reliance on expert advice - age, inexperience & non-residence - absence from meeting where misconduct occurred - unanimous ratification by shareholders - Business Judgment Rule! |
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Business Judgment Rule
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Directors/officers not liable for losses arising from a GOOD FAITH business judgment arrived at through the use of REASONABLE CARE.
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directors: duty of loyalty
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Director/officer always puts corp's interest above his own!
Good faith: SUBJECTIVE Loyalty: can be inferred when director/officer obtains personal benefit at corp's expense |
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directors: Interested Director Doctrine
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COMMON LAW: if Director has interest in a contract, it's voidable at option of corp
MODERN: contract between Director and corp invalid unless: - director discloses, BOARD approves (director can't vote but can count in quorum) - director discloses, SHAREHOLDERS approve - contract is FAIR regardless of disclosure |
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directors: duty not to usurp corporate opportunity
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Test:
- corp has expectancy - opportunity within corp's business - corp has means to buy it Unless: corp already rejected. Remedy: constructive trust! |
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directors: duty not to compete with corporation
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Director must not divert customers or employees.
Remedies: - damages - injunction - both |
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directors: removal
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COMMON LAW: only by majority vote of shareholders, with cause
STATUTE: majority vote of shareholders WITHOUT cause! |
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directors: inspection of corporate records
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Director may inspect corporate records at any reasonable time.
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Officers
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- CHOSEN by directors
- may be REMOVED without cause - corp. not liable for CONTRACT made by officer without actual, inherent, or apparent authority - entitled to reasonable & fair COMPENSATION and reimbursement for corp. expenses |
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ways of terminating/changing corporate structure
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- merger
- sale of all assets - sale of all shares - dissolution |
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merger
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MODERN:
- majority of Board adopts resolution - notice sent to all shareholders - majority of ALL shareholders (not just the ones who show up) - formalized in the Articles If no significant changes to surviving corp, shareholder approval not required! |
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sale of all corporate assets
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Requires approval by majority of shareholders
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sale of all corporate stock
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Requires approval by Board of ACQUIRING corp!
File with SEC if more than 5%, $10 million, or 500 shareholders |
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dissolving the corporation
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Voluntary:
- shareholder & director consent - certificate of dissolution filed with state OR merger Involuntary: - shareholders file petition with good cause - state action: failure to comply with law Must notify creditors before distributing corp's assets to shareholders. |
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formation: DE JURE:
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- articles of inc. stamped by SOS
- substantial compliance |
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formation: DE FACTO:
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- good faith attempt to incorporate
- use of corporate powers |
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formation: ESTOPPEL:
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- 3rd party treated them like a corp, now can't attack their existence.
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formation issues
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- corporation validly created?
- can the corporate veil be pierced? |
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Who has rights & duties in a corporation?
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- promoters
- stockholders - directors - officers |
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forming a corporation: de jure
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- articles of inc. stamped by SOS
- substantial compliance |
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forming a corporation: de facto
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- good faith attempt to incorporate
- use of corporate powers |
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forming a corporation: estoppel
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3rd party treated them like a corp, now can't attack their existence.
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voluntary dissolution
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- shareholder & director consent
- certificate of dissolution filed with state OR merger |
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involuntary dissolution
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- shareholders file petition with good cause
- state action: failure to comply with law |
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16(b): jurisdiction
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big corp:
- national stock exchange - $10 million - 500 shareholders) |
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16(b): who is liable
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- officer
- director - 10% shareholder |
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16(b): who can sue
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- corp
- shareholder derivative |
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16(b): damages
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highest sale - lowest purchase price within 6 mo
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Dividends: if unlawfully issued
Director liability |
Directors can be personally liable
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Dividends: if unlawfully issued
stockholders |
stockholders must return dividends if:
- they made corp insolvent - stockholders knew of illegality |
