Corporations

Front 1

what does it take to form a coporation

Back 1

1. people

2. paper

3. act

Front 2

What role to people play in the formation of a corporation?

Back 2

1. incorporator = one or more (person 18+, corporations cannot be incorporators)

2. incorporatore duties =

a. execute articles

b. deliver to sec. of state

c. holds the organizational meeting

Front 3

What is the applicable papering that needs to be done to form a corporation, and what roles does that paper play?

Back 3

1. Articles (Certificate) of incorporation is the contract between the corporation and shareholders and between the corporation and state.

2. The Articles of incorporation must contain:

a. name and addresses

i. corporate name (must include Corp. Inc etc)

ii. name/address of each incorporator

iii. name/address each initial director

iv. name registered agent/ address registered office

b. statement of purpose

c. capital structure

Front 4

What are the requirements for a corporate name?

Back 4

1. must include magic words (or abbreviation)

a. corporation

b. company

c. incorporated (inc.)

d. limited

Front 5

Who is the registered agent for a corporation?

Back 5

1. legal representative of company

2. registered office address = service done there

Front 6

What if Articles of incorporation don't have duration of company

Back 6

1. Perpetual existence

Front 7

What is the effect of a statement of purpose in Articles of incorporation?

Back 7

Permissible to say "all lawful activity after first obtaining state agency approval"

The statement of purpose can also be limited and specifi with ultra vires rules. At common law, if corporation engaged in ultra vires activity, the articles of incorporation were void.

Modern: ultra vires contracts would be voidable.

Shareholders can seek injunction

Responsible managers liable to corp. for any losses when do ultra vires.

Front 8

What is "authorized stock"?

Back 8

Maximum number of shares corporation can sell

Front 9

What is issued stock?

Back 9

Number of shares corporation actually sells

Front 10

What is outstanding stock?

Back 10

Shares that have been issued and not "reaquired"

Front 11

What forms part of the capital structure of a corporation and what must be included in the certificate?

Back 11

Capital Structure includes

1. Authorized Stock

2. Issued Stock

3. Outstanding Stock

The certificate must include:

1. Authorized Stock

2. Number of shares per class

3. Information on voting rights and preferences and limitations of each class

4. Information on series of preferred shares

NOTE: At least one class of stock or bonds must have unlimited voting rights and at least one class of stock must have unlimited dividend rights.

Front 12

What are the Acts required to incorporate a corporation?

Back 12

1. Notarized articles delivered to Sec. of State

2. Pay fees

3. If sec. state accepts = conclusive proof of valid formation (de jure corporation)

4. After = board of directors hold organizational meeting

Front 13

organizational meeting

Back 13

1. after filling articles

2. board of directors holds

3. what do:

a. select articles

b. adopt bylaws

c. etc.

Front 14

what law governs internal affiars of corporation

Back 14

1. internal affiars rule = governed by law of state of incorporation

Front 15

corporation entity character

Back 15

1. sue/be sued

2. holds property

3. be a partner/partnership

4. charitable contributions

5. pays income tax on profits (shareholders taxed on distributions)

Front 16

corporation to avoid pay income tax at corporate level

Back 16

1. S corporation

a. no more than 100 shareholders

i. human

ii. US citizens/residents

b. one class of stock

c. not publicly traded

Front 17

liabilty for corporation action

Back 17

1. directors/officers = No

2. shareholders(owners) liable = no

a. limited liability = shareholders only liable for price of their stock

3. who is liable?

a. corporation itself (even if only 1 shareholder)

Front 18

de facto corporation

Back 18

1. unaware of failure to form de jure corporation

2. relevant incorporation statute

3. good faith attempt to comply with statute

4. + excercise of corporate privilege (act like have corporation)

5. results = court can apply this =

a. treated as corporation for all purposes except --- action by the state (quo warranto)

Front 19

corporation by estoppel

Back 19

1. unaware of failure to form de jure corporation

2. one who treats business as a corporation may be estopped from denying that it is a corporation

a. applicable to corporation acting like corp but claiming not corp, or person treat corp. like corp (but not de jure corp).

3. result = only applies in K case

Front 20

status of de facto corporation and corporation by estoppel in many states

Back 20

1. abolished

Front 21

by laws

Back 21

1. outline internal governance

2. not filed w/ state (internal)

3. adopted by board at organizational meeting

4. amend/repeal =

a. shareholders

b. many states = board also can

5. if conflict w/ articles = articles wins

Front 22

pre-incorporation contracts: promoter

Back 22

1. person acting on behalf of corporation not yet formed (can enter K on behalf of corporation-not-yet-formed)

Front 23

pre-incorporation K: liability

Back 23

1. corporation:

a. not liable until adopts the K

2. promoter:

a. unless K says otherwise = liable until novation (even liable if corp. adopts K, but no novation = both liable)

Front 24

how corporation adopts per-incorp. K

Back 24

1. express: board takes action to adopt

2. implied = corp. accepts benefits of the K

Front 25

novation

Back 25

1. agreement of:

a. promotoer + corporation + other K party that corporation replaces promoter under the K

Front 26

foreign corporation

Back 26

1. any corporation incorporated outside of the state

2. must qualify and pay prescribed fees to transact business in state

a. transact = regular course of intrastate (not inter) business = not occasional/sporadic activity or own property

Front 27

qualify foreign corporation

Back 27

1. gets certificate of authority from sec. of state

a. gives info. from articles + proves good standing where incorporated

b. must have registered agent in this state + pay fees

Front 28

consequences of foreign that transacts w/out qualifying

Back 28

1. civil fine +

2. cannot sue in this state (can be sued and defend)

Front 29

what is an issuance

Back 29

1. corporation sells its own stock

2. way for corporation to raise capital

Front 30

subscription

Back 30

1. written offer to buy stock from a corporation

Front 31

revocation of pre-incorporation subscriptions

Back 31

1. irrevocable for 6 months unless:

a. says otherwise OR

b. all subscribers agree to let you revoke

Front 32

revocation of post-incorporation subscriptions

Back 32

1. revocable until accepted by corporation

a. when board accepts the offer

Front 33

consideration: what must corporation receive when it issues stock: form of consideration

Back 33

1. form of consideration:

a. money, tangible/intangible property, services already performed = always good

b. split authority = promissory note, future services

Front 34

consideration for issuance: amount of consideration

Back 34

a. par = minimum issuance price (can get it for more

b. no par = board of directors set price

c. treasury stock = company issued and then reqaquired = corporation can resell = board sets issuance price

d. if issuance for property/past services = board determines value of property/service

i. conclusive valuation if don ein good faith

Front 35

water stock

Back 35

1. when sell stock for below par

2. liability:

a. directors = if knowingly authorized issuance

b. purchaser = yes - no defense and charged w/ notice of par

c. subsequent purchaser third party = TP not liable if:

i. not know about the water (GFP)

Front 36

pre-emptive rights

Back 36

1. right of existing shareholder to maintain percentage of ownership by buying stock when:

a. issuance of stock for money

b. treasury stock issuance = split authority if applies or not

2. if articles are silent = pre-emptive right : split authority

Front 37

statutory requirements for directors: election and number

Back 37

1. 1/+ (set in bylaws, by shareholders action or by board)

2. election = initial usually named in articles - after = shareholders elect at annual meeting

a. entire board elected each year unless staggered board (usually outlined in articles) (Classified board)

Front 38

When can the shareholders remove directors before the expiration of their term?

Back 38

The majority of shareholders are entitled to vote to remove a board member.

Shareholders are always entitled to remove for cause. Board can remove for cause if granted power in articles or bylaws.

Shareholders can remove without cause only if articles or bylaws permit. If silent, cannot. Directors can never remove other directors without cause.

2. bases = with or w/out cause

a. if staggered board = w/ cause only

Front 39

How is a vacancy on board filled midterm/

Back 39

General Rule: remaining directors select someone to complete the remainder of the term. Can be selected by shareholders

If director is removed by shareholders without cause, shareholders select replacement.

Front 40

Board of directors acting as a group

Back 40

1. only happens in two ways

a. unanimous agreement in writing to act OR

b. at meetings (satsifying quorum and voting requirements )

2. conference call counts as meeting - all participants must be able to simultaneously hear each other. (unless articles say no conference calls)

Front 41

notice for board meetings

Back 41

1. regular meetings = no notice

2. special meeting = yes notice (set in bylaws):

a. MUST HAVE time, place (not need general purpose)

b. failure of notice = voids what happens at meeting unless non-notified waives:

i. in writing (at any time before or after meeting)

ii. go to meeting w/out objecting

Front 42

individual director an agent of corp?

Back 42

1. no = no authority to speak for or bind corporation = must act as group

a. officers = agents

Front 43

Can directors use proxies or enter voting aggremeents?

Back 43

1. void

2. directors owe corporation non-delegable fiduciary duties

NOTE: Shareholders can vote by proxy and enter voting agreements. Some directors are also shareholders watch for this.

Front 44

Quorum for meetings of board and vote necessary

Back 44

1. quorum = generally majority of entire board, not just those serving

2. vote for resolution = majority of vote of those present once quorum is achieved

3. can lose/break quorum if people leave during meeting = can't take any further action

Note: Quorum can be changed in articles or bylaws, but never less than 1/3 of directors. Increase, by articles only.

Majority of those present for passing resolution can't change.

Front 45

role of directors

Back 45

1. manages business of corporation

a. sets policy, supervises officers, declares distributions, decides when issue stock, recommends fundamental corporate changes

2. can delegate to committee of one or more directors, but committe can't:

a. Amend, repeal or adopt by-laws

b. declare dividends

c. set director compensation

d. fill board vacancy

e. submit fundamental corporate changes to shareholders.

3. committee can recommend such things to board

Front 46

What is a director's duty of care?

Back 46

A director is a fiduciary with a duty to discharge her duties in good faith and with that degree of diligence, care and skill that an ordinarily prudent person would exercise under like circumstances, in like position.

Burden will be on the plaintiff to show a breach.

Front 47

duty of care: nonfeasance

Back 47

1. director does nothing

2. prudent person would do stuff (attend meeting/do some work)

3. only liable if breach = caused loss to corporation

Front 48

duty of care: misfeasance

Back 48

There will be a breach of the duty of care if the board does something that hurts the corporation

2. Duty of care standard (prudent person)

3. Director not liable if meets the business judgment rule = Court will not second guess a business decision if it was made in good faith, was reasonably informed, and had a rational basis.

a. if made in good faith

b. informed

c. rational basis

Front 49

Director's duty of loyalty

Back 49

Burden is on the plaintiff to demonstrate a breach of the duty of loyalty.

Standard: Director owes corporation duty of loyalty = act in good faith + with reasonable belief that what she does is in corporations best interest - (conscientiousness, fairness, morality and honesty)

Business judgment doesn't apply b/c can't apply when conflict of interest.

Front 50

Violation of the duty of loyalty: interested director transaction

Back 50

1. deal b/w corporation and one of directors (or close relative of director/business of director) (SELF DEALING)

2. interested transaction SET ASIDE unless director shows:

a. deal was fair to corporation when approved OR

b. director's interest + relevant facts disclosed or known and deal approved by either:

i. majority of quorum when disinterested directors only vote (don't count interested directors) or unanimous vote of disinterested directors if too many interested directors.

ii. majority of disinterested shareholders

Front 51

special quorum rule: interested directors

Back 51

1. in many states interested directors count toward a quorum BUT not towards the vote on issue

a. some courts also require a showing of fairness

Front 52

interested director: setting own compensation

Back 52

1. Directors can set their own compensation as directors or officers BUT

a. must be reasonable + in good faith (if not = waste of corporate assets = breach of duty of loyalty)

UNLESS articles or bylaws say they can't.

Stock options as incentives must be approved by shareholders of private corp. or in accordance with exchange rules if publicly traded.

Front 53

Duty of loyalty: competing ventures

Back 53

1. Directors can't compete directly w/ her corporation (as director or by founding competitor)

2. Remedy:c

a. Constructive trust on Director's profits from competing corporation (account for profits)

b. Damages may be available if competitor hurts corporation's interests.

Front 54

Duty of loyalty: corporate opportunity

Back 54

1. Director can't usurp corporate opportunity

a. can't take opportunity until:

i. tells board about it +

ii. waits for board to reject the opportunity

2. what is corporate opportunity:

a. something in the corporates business line (logically related)

b. something company has a need, interest or expectancy in OR

c. something found under company time or w/ company resources

3. company's financial inability to pay not a defense

4. REMEDY = Constructive Trust: If director still has opportunity = must sell to corporation; if not have opportunity = corporation gets profits

Front 55

Other bases of director liability

Back 55

1. ultra vires acts outside articles = if causes losses to Corp.

2. Watered Stock

3. Improper distributions

4. Improper loans (directors can loan money from corporation to another director if reasonably expected to benefit the corporation (send director to school, etc.)) Must be approved by board, or shareholders.

Front 56

Sarbanes-Oxley Act

Back 56

1. forbids loans to executives in large, publicly-traded corporations

2. requires:

a. board of large company establish audit committee + oversee work of registered public accounting firm

b. chief executive + financial officers must certify accuracy and compelteness of financial reports

Front 57

director liabilty for board actions

Back 57

1. presumed to concur w/ board unless:

a. dissent/abstention noted in writing in corporate records:

i. in the minutes

ii. delievered in writing to presiding officer at meeting

iii. or written dissent to corporation immediately after meeting

2. can't dissent if voted for resolution

Front 58

director liability for board action exceptions

Back 58

1. Absent director not liable for stuff done at meeting missed if registers dissent within reasonable time after learning of action.

2. Good faith reliance on info. presented by officer, employee, committee, (if director is not a member of committee) or professional lawyers, accountants reasonably believed competent

Front 59

Officer's Duties

Back 59

1. Same as directors - care and loyalty

Front 60

Officer's Status?

Back 60

1. agents of corporation

a. corporation = principal; officer = agent

2. whether can bind corporation depends on authority given to do so (presidents generally have inherent authority) or apparent authority.

3. normally must have: president/secretary and treasurer - (can have others)

a. same person can hold multiple offices

Front 61

officer selection and removal

Back 61

1. selected and removed by board

2. board sets officer compensation

3. removal =

a. officer loses the job but corporation may be liable for breach of employment contract damages

4. As a general rule, Shareholders DO NOT HIRE/FIRE OFFICERS

(unless articles permit shareholders to do so, then usually only they have the power)

Front 62

When can an officer or director seek indemnification (reimbursement) for legal costs incurred (fees, fines, judgments or settlements) in their role?

Back 62

Prohibited: If held liable to corporation OR found to have receieved improper personal benefit

Of Right: If successful in defending on merits/otherwise = wins judgment = corp reimburses (not if suit is against corp).

Permissive: If not in 1 or 2 (negative outcome or settled) Must show:

i. acted in good faith +

ii. reasonable belief that actions were in company's best interest (duty of loyalty)

b. elibigility determined by: disinterested directores/shares/ or independent legal counsel

NOTE: Indemnification for Action by or for someone other than the corporation is permissible if director or officers acted in good faith and for a purpose reasonably believed to be in the best interest of the corporation.

Front 63

Court order reimbursement for Director/Officer

Back 63

1. director/officer sued

2. if justified in view of all circumstances

3. if held liable to corporation = limited to costs and attorney fees

Front 64

Articiles limiting liability of director/officer

Back 64

1. can eliminate liability in duty of care cases (EXCEPT for breach of duty of loyalty = bad faith, intentional misconduct, usurping corporate opportunities, unlawful distributions, improper personal benefit)

2. some states = can be only for directors

Front 65

close corporation

Back 65

1. few shareholders

2. stock not publicly traded

Front 66

who manages close corporation?

Back 66

1. generally board

2. shareholders can eliminate board and run corporation:

a. change in articles + approved by ALL shareholders OR

b. unanimous shareholder agreement (Written)

c. result = duties of care/loyalty to corporation owed by managing shareholders

Front 67

sharholders duty to each other in close corporation

Back 67

1. must treat each other with utmost good faith

2. courts apply partner's fiduciary duties to each other b/c function like a partnership

3. = if oppression of minority shareholder = can sue controlling shareholders for breach of duty (ie when controlling acts so that minority gets no return on investment (fires them, not declare dividents, refuse to buy their stock)

Front 68

incorporation of professionals

Back 68

1. must have: PC or PA and articles must state purpose is to practice particular profession

2. directors/officers/shareholders usually must = licensed professionals

3. each professional personally liable for own malpractice (generally not liable for corporate obligations/other professional malpractice)

Front 69

Shareholder liability for acts/debts of corporation?

Back 69

1. generally no (corporation liable for what it does)

2. can pierce the corporate veil (hold shareholders liable personally) if:

a. close corporation

b. requirements:

i. shareholder abused corporation +

ii. fairness must require holding them liable (avoid fraud or unfairness by shareholder)

c. sloppy administration isn't enough

Front 70

When court likely to pierce corporate veil?

Back 70

1. Alter ego (two shareholders and one does bad stuff and abuses corporation that = creditor can't get bills from corpoation = can sue shareholder individually)

2. Undercapitazliation = when formed shareholders failed to invest enough to cover prospective liabilities

3. More willing to PCV for tort than K claim

4. PCV to impose liabilty on shareholders for corporate debt (shareholder another corporation - parent corporation forms subsidiary to avoid obligations)

Front 71

Shareholder derivative suits: Shareholder as plaintiff

Back 71

1. Shareholder suing to enforce corporation's claim (C didn't do it)

a. if corporation could have brought suit = derivative

2. if wins = money goes to corporation

a. shareholder recovers costs and attny fees

3. if loses = recovers nothing (no costs/attny fees + may be liable to D if sued w/out reasonable cause)

4. other shareholders can't later sue same D on same transaction

Front 72

shareholder derivative suit: requirements

Back 72

1. stock ownership when claim arose + throughout suit (if aquired by operation of law (divorce/inheritance) = meets this if existed at time of claim)

2. adequate rep. corporations interest

3. written demand on corpoation to have them bring suit (many have to wait 90 days after demand)

a. many states = not need make this if it would be futile (ie suing board)

b. must plead with particularity attempts to get board to do right.

4. corporation joined as Defendant Makes no sense but is rule.

Note: Directors or Officers cannot bring a derivative suit, but can sue another D/O to compel to account for violation of duties or misappropriation of corporate assets.

Front 73

settling/dismiss derivative suit

Back 73

1. only w/ court approval

2. court may give/require notice to shareholders and get their input

3. corporation can move to dismiss on showing that independent investigation showed the suit was not in corporations best interest (low chance of success, cost exceed recovery)

a. who investigates = independent directors OR court appointed panel of 1/+ independent persons

4. dismiss if independent investigate + reasonable investigation

Front 74

shareholders: who votes

Back 74

1. record shareholder as of record date has right to vote

2. record shareholder = person shown as owner in corporate records

3. record date = voter eligibility cut off

4. Exceptions:

a. treasury stock (reaquired) = corporation not vote with this even if aquired as of record date

b. death of shareholder after record date = executor can vote

Front 75

shareholders voting: proxies

Back 75

1. writing (fax/email ok)

2. signed by record shareholder (email ok if ID sender)

3. Directed to secretary of corporation

4. authorizing another to vote the share

5. = good for 11 months unless says otherwise

Front 76

shareholder: revocation of proxy

Back 76

1. in writing or

2. attend meeting and vote

3. not irrevocable even if says unless:

a. states that irrevocable +

b. proxy-holder has some interest in the shares other than voting (option to buy, etc.)

Front 77

shareholders: voting trusts

Back 77

1. 10 year max (extendable within last 6 months)

2. written trust agreement, controlling how shares will be voted

3. copy to corporation

4. transfer legal title to voting trustee

5. original shareholders receive trust certificates + retain all shareholder rights except voting

Front 78

shareholder: voting agreement

Back 78

1. writing + signed

2. enforceable: split authority (some places will enforce, others will not)

Front 79

where do shareholders vote

Back 79

1. usually at meeting

2. can act by unanimous written consent signed by holders of all voting shares

Front 80

share holder meetings

Back 80

1. annual = if not held w/in 15 mths = shareholder can petition court to order one

a. elects directors

2. special meeting:

a. called by: board/president/holders of at least 10% voting share/anyone authorized in bylaws

Front 81

notice for meetings

Back 81

1. written notice to every shareholder entitled to vote

a. deliver b/w 10-60 days b4 meeting

2. contents = time/place

a. special = purpose of meeting (can only do what the purpose of the meeting is for)

3. failure = action at meeting = void unless non-notified waive notice (express - writing; implied attent w/out object)

Front 82

how do shareholders vote

Back 82

1. what vote on:

a. elect directors

b. remove directors

c. fundamental corporate changes

2. quorum = majority of outstanding shares (can't lose if people leave meeting - not about number of shareholders!)

Front 83

what amount of vote required by shareholders

Back 83

1. elect director = plurality

2. remove director = majority of shares entitled to vote

3. approve fundamental corporate change = majority of shares entitled to vote

4. other = majority of shares that actually vote

Note: Shareholders do not remove officers!

Reducing Quorum: Articles, can't be less than 1/3 of voting shares

Increasing Quorum: In Articles, Supermajority

Approval requirements: never lower than 50%, Supermajority stipulation must be in articles.

Front 84

Shareholder votes and cumulative voting

Back 84

1. only applicable when elect directors

2. multiply number of your shares by number of directors to be elected (if 1,000 shares & 3 directorships = 3,000 votes you can put all towards one or divide)

3. if articles of C corp. silent as to cumulative voting = generally not allowed

Front 85

Stock transfer restrictions:

Back 85

1. Ok if reasonable (no undue restraint on alienation)

2. if valid, enforced vs. transferee if:

a. restrictiopn conspiciously noted on stock certificate OR

b. transferee had actual knowledge of restriction

Examples:

1. Right of First Refusal: price offered must be reasonable to be valid

2. Approval right of Corp. unlikely to be valid - may be UNDUE RESTRAINT

3. Forced alienation: OKAY

2.

Front 86

right of shareholder (self or agent) to inspect and copy books and records of corporation

Back 86

1. standing = any shareholder on 5 day written demand

2. procedure = written demand stating docs desired and purpose for inspection

a. purpose must be related to interest as shareholder

3. if corporation refuses = court order = corporation pays for costs and attny fees incurred in making motion

4. only for shareholders; directors have unfettered access

To access minutes of shareholders meetings and shareholders records, corporation can demand affidavit from shareholder - purpose is in interest of corp, and hasn't tried to sell in 5 years

Front 87

Distributions

Back 87

1. payments by corporation to shareholders

a. dividends

b. repurchase shareholder's stock

c. redemption (forced sale to corporation at price set in articles)

Not Stock Split: gives more shares, but reduces the value of each.

Front 88

when does sharheolder have right to dividend/distribution?

Back 88

1. when board declares it (board has discretion)

a. to compel must show abuse of discretion = bad faith or dishonest purpose (strong case - profits and board refuses while gives self bonus)

b. suit to compel = direct, not direvative

Front 89

which shareholder gets dividends

Back 89

1. common = divide equally

2. preferred = paid first

3. Preferred participating = get paid again

3. preferred that is cumulative = accrues year to year = 4 years not paid and $2 preferred = $8/share

Front 90

for distribution, which funds can be used

Back 90

1. traditional view:

a. earned surplus

b. capital surplus = if inform shareholders

c. never = stated capital

2. modern view =

a. can't distribute if corporation insolvent or if distributions make corporation insolvent

Insolvent: unable to pay debts as they come due.

Front 91

earned surplus

Back 91

1. generated by business activity = earnings - losses - distributions previously paid

Front 92

stated capital

Back 92

1. generated by issuing stock

2. par value goes to capital excess = capital surplus

3. no-par issuance = board allocates consideration b/w stated capital and capital surplus

Front 93

capital surplus

Back 93

1. generated by issuing stock

2. payment in excess of par + amounts allocated in no-par issuance

Front 94

insolvent

Back 94

1. corporation unable to pay its debt as they come due OR

2. total assets < total liabilities (include preferential liquidation rights)

Front 95

liability for improper distributions

Back 95

1. directors are jointly and severally liable (unless good faith reliance)

2. shareholder = personally liable only if:

a. knew distribution was improper when received it.

Front 96

fundamental corporate change

Back 96

1. extraordinary = board can't do it alone

a. amend articles

b. sell off all assets

c. merger/consolidation

d. transfer stock in share exchange

Front 97

what need for extraordinary corporate change

Back 97

1. board action adopting resolution

2. board submits proposal to shareholders w/ written notice

3. shareholder approval (majority of shares entitled to vote)

4. deliver document to sec. of state (in some)

Front 98

dissenting shareholder right of appriasal

Back 98

1. right to force corporation to buy your stock for fair value

a. exclusive remedy if shareholder doesn't like fundamental change (unless fraud)

2. if company doing:

a. merger/consolidation

b. transfer substantially all assets not in ordinary course of business or

c. transfer stock in share exchange

d. some amendments to certificate

3. no appraisal if stock listed on national exchange OR company has 2,000(+) shareholders (really only w/ close corporation)

Front 99

perfecting right of appraisal

Back 99

1. before shareholder vote, file corporation written notice of objection and intent to demand payment

2. abstain/vote vs. proposed change +

3. after vote, w/in time set by corporation = make written demand to be brought out and deposit stock w/ corporation

4. = fair value purchase

a. if can't agree on faire value = corporation sues court and court may appoint appraiser

Front 100

What is required to amend the articles of incorporation?

Back 100

1. Minor Changes (address, agents etc) can be made by board alone.

2. Board Voting Requirements: directors action and majority of shareholders

3. Supermajority quorum or voting requirement for shareholders: director approval and 2/3 voting shares

If approved, amended articles delivered to Sec. State for filing.

Front 101

When will a dissenting shareholder's right of appraisal be triggered on an amendment of articles?

Back 101

If amendment:

1. Alters or Abolishes Shareholder Preferences

2. Changes Redemption Rights

3. alters/abolishes Pre-emptive rights or

4. limits voting rights.

Front 102

Mergers (A merges into B)

Consolidation (A and B form C)

Back 102

1. Board of director action (both corporations) + notice to shareholders

2. shareholder approval (generally both) - majority shares of entitled to vote

a. Not need shareholder approval if: 90%+ owned subsidiary is merged to parent corporation (short form merger)

3. surviving corporation delivers articles to sec. of state

4. right to appraissal = yes, even if short-form

Front 103

effect of merger/consolidation

Back 103

effect of merger/consol = surviving corp succeeds all rights/liabilities of constituents (creditor of old can sue new = successor liability)

Front 104

transfer of all of substantially all of assets not in the ordinary course of business or share exchange (one company acquires all stocks of another)

Back 104

1. substantially all = at least 75% assets

2. only fundamental change for seller corporation (not for buyer)

3. requirements:

a. board action (both corporations) + notice to seller shareholders

b. approval by seller shareholders (majority of entitled shares) (buyer not need approval)

4. right to appraisal = yes for shareholder of seller (not for S of buyer) unless sale for cash, to be paid

5. deliver to sec. of state (usually no filing)

6. no successor liability unless:

a. buyer is mere continuation of seller (same management, shareholders, etc.)

Front 105

voluntary dissolution

Back 105

1. board action + approval by majority of shares entitled to vote

2. file notice of intent to dissolve w/ Sec. of State

3. notify creditors so they can make claims

4. remain existence until after wind up

Front 106

involuntary dissolution

Back 106

1. court order

a. shareholder can petition b/c:

i. director abuse, waste of assets, misconduct

ii. internal dissention: director deadlock that harms corporation/shareholder deadlock OR

iii. shareholders failed at consecutive annual meetings to fill board vacancy

2. court might order buyout in alternative (especially for close corporation)

b. creditor petitions:

a. corporation is insolvent +

i. creditor has unsatisfied judgment OR corporation admits the debt in writing

Forced Sale: Corp or non-complaining shareholders can avoid dissolution, if buy out petitioners at fair market value within 90 days.

Front 107

dissolution: wind up

Back 107

After dissolution, the corporation remains in existence to liquidate:

1. Liquidating =

a. gather all assets

b. convert to cash

c. pay creditors

d. distribute remainder to shareholders, pro-rata by share unless there is liquidation preference (pay first - MUST BE IN ARTICLES)

Front 108

debt securities

Back 108

1. investor lends capital to corporation to be repaid as specified agreement

a. creditor = not owner of corporation, owns debt

2. secured by corporate assets = bond

3. unsecured = debenture

Front 109

equity securities

Back 109

1. investor buys stock from corporation which = capital

2. equity holder = owner, not creditor

Front 110

rule 10b-5

Back 110

1. aimed at deceit.

2. prohibits fraud/misrepresnetation (ommission) in connection w/ purchase/sale of any security

Front 111

rule 10b-5 elements

Back 111

elements:

a. instrumentality of interestate commerce (mail, phone, trade on national exchange)

b. type of transactions:

i. misrepresentation of material information

ii. insider trading

iii. tipping

c. misrep concerns material fact

d. scienter (D had intent to decive, manipulate/defaurd; recklessness may suffice)

e. reliance = said to be sepearte element, but presumed in public misrep/nondisclosure cases

Front 112

insider trading

Back 112

1. trading on basis of material inside info.

2. MUST be person who has duty to either abstain from trading or to ensure disclosure so everybody's on same footing:

i. insider = one w/ relationship of trust and confidence w/ the shareholders

Front 113

tipping

Back 113

1. insider passes on material inside information for wrongful purpose

2. w/out tippor can't have tippee (ie if person overhears something)

Front 114

10b-5 Insider Trading: possible plaintiffs

Back 114

1. SEC

2. private action for damages by:

a. MUST BE buyer or seller of securities

b. who was defrauded

c. bought/sold security based on D's fraud

d. remedy if bought stock that seller knew would fall in value = can recover difference of value and what paid for

3.

Front 115

10b-5 Insider Trading: possible defendants

Back 115

1. company that issues misleading info.

2. buyer/seller of securities who misrep. material info.

3. buyer/seller of securities who trades on material inside info. (insider trading)

4. tipper or tippee

a. (tipper b/c passed on matieral inside info in breach of duty + benefitted;

i. benefit can be make a gift or enhance reputation

b. tipee = traded on tip + knew or should have known that info. was improperly passed

Front 116

SEC Rule 16b =

Back 116

prohibits short-swing profits (from any purchases and sales within any six-month period) made by corporate directors, officers, or stockholders owning more than 10% of a firm's shares.

1. aimed at speculation by directors/officers/10%shareholders = strict liability

2. recorvery by corporation of profits gained by insiders

3. applies: ONLY to reporting corporation

4. types of D's

a. director (either when bought OR sold)

b. officer (either when bought OR sold)

c. shareholder owning 10% (BOTH when she bought & Sold)

Front 117

reporting corporation

Back 117

1. at least 500 shareholders

2. listed on national exchange

3. at least $10 million in assets

Front 118

16(b) elements

Back 118

1. buying AND selling stock

2. w/in single 6 month period (short-swing trading) - not need fraud or inside info.

Front 119

result of 16b

Back 119

1. profits recoverable by corporation if:

2. w/in 6 mths before OR after any sale purchase at a lower price = profit (order of buy and sale irrelevant - can sell high and buy low)

a. to calculate remedy amount = multiply profit by largest number of shares she bought and sold w/in 6 months (if sold 200 but bought 600 = use 200)

Front 120

What is a freeze-out merger?

Back 120

Where the minority shareholders vote to merge the company with a company that they own in order to solely cash out the minority shareholder.

Court will look to:
1. whether the deal is tainted by self-dealing or fraud

2. whether the minority shareholders are dealt with fairly

3. whether there is a legitimate business reason for the merger.