Corporations

Front 1

Formation

Back 1

De jure:
• Incorporators,
• must file articles of incorporation,
• in substantial compliance w/ statutory requirements.

De facto:
• good faith attempt to incorporate
• coupled with use of corporate powers

By Estoppel:
• person who dealt with corp, believing it was a corp
• is estopped from attacking its corporate existence
• Effect on personal liability: Insulates against personal liability of shareholders

Front 2

Pierce the Corporate Veil

Back 2

Pierce the “Corporate Veil” – [FUA]
• Generally, S/H not personally liable for debts of a corporation. The court might PCV and hold the S/H liable if they have abused the privilege of incorporation and fairness requires it. PCV, where…

Fraud
Undercapitalization
Alter-ego theory

Front 3

Rule 10b-5 Anti Fraud

What's the cross over legal issue?

And what are it's elements?

Back 3

Torts - Misrepresentation

(1) D makes misrepresentation

(2) Knows it to be false or reckless disregard

(3) Intended to induce plaintiff(s) to act in reliance upon misrepresentaiton

(4) Actual reliance

Front 4

Rule 10b-5 Anti Fraud

Back 4

Plaintiff must prove that - D intended - to make a misrepresentation of a material fact - in connection with the sale or purchases of securites; and must involve using an instrumentality of interstate commerce.

- Intent
- Misrepresentation of material fact or - misappropriate material non-public information to deceive
- In connection with the sale or purchases of securities*
- and must involve some means of Interstate commerce

Front 5

Liability for Corporation President's statement of a (wrong) fact to a newspaper

- liability?
- cross over issue?

Back 5

10b-5, must be a
- material misrepresentation
- interstate commerce instrumentality
- in connection with purchase or sale of security

Here, since neither the S/H, Pres, nor directors bought or sold stock, their liability for the statement will be limited to CL misrepresentation (torts)

Front 6

Cross over issue- Misrepresentation

Back 6

Torts - Misrepresentation

CL fraud requires
- misrepresentation by D
- intent to induce reliance on misrepresentation,
- causation & justifiable reliance (did reasonably rely)
- damages

Front 7

Shareholder's Suit to Compel Dividends

[Issue: Shareholder's right to receive dividends] where for past 5 yrs Exco has not paid dividend or made any other distribution to shareholders; planned so that Exco will have substantial retained earnings to enhance chances of sale to another company.

Back 7

Declaration of dividends are within discretion of Board and strong case required to induce court of equity to order Board to declare dividend.

Absent other facts, mere fact the board chose to direct proftis in areas other than distribution of dividends is insufficient. They are attempting to increase value / assets for purpose of selling the corp. A profitable sale would benefit the shareholders. Because directors are acting for a proper corporate purpose, P's suit will be denied.

Compare - Improper purpose --> directors act for their own benefit @ expense of shareholders.

Front 8

Director's responsibilities re: Sale of Exco to Morocorp

Back 8

1) Duty of Care

2) Duty of Loyalty

3) Fundamental Changes in Corporate Structure

[See next cards]

Front 9

(1) Duty of Care

Rule?

Back 9

1. Director/ officer owes a duty of care,
- must act in good faith
- (fiduciary duty) do what prudent person would do w/ regard to her business
- Business judgment rule: director d/n breach standard of care by making a harmful business decision if it was made in GOOD FAITH, INFORMED, RATIONALLY BASED

*Causation required: liable only if caused loss to bus.

Front 10

(1b) Business judgement rule - defense

Back 10

-BJR: D did not breach duty of care if decision made in good faith, and well-informed w/ a rational basis.

*must prove director caused losses to business
*absent fraud and irrational decisions, courts won't second guess judgments.

Front 11

(2) Duty of Loyalty

Back 11

A director owes the corporation a duty of loyalty. She must act in GF and with a reasonable belief that her actions are in the corporation's best interest.

She cannot profit at the corporation's expense.

Front 12

(2b) Defense/ Duty of Loyalty

Back 12

K between director + corp invalid due to director's interest unless:

(1) Disinterested director approval (quorum) after material disclosure;
(2) Majority SH approval after full disclosure; OR
(3) K was FAIR regardless of disclosure

Front 13

(3) Fundamental changes to a corporate structure

Here, the sale of a corporation - requirement

Back 13

Requires the board adopt a resolution setting forth the proposed action and submitting it for a vote at a shareholder's meeting (requires approval by a majority of s/h)

Front 14

QUESTION 2 - Part 1 -
- Shareholder wants to rescind contract with "XYZ" where one of the directors contracted with XYZ (which he co-owns); and while he disclosed his interest in the dealing, he did not fully disclose that he was charging twice the market price.

Back 14

Part 1: List of issues:
- Shareholder derivative suit
- Duty of Loyalty
- Duty to Disclose
- Duty of Care
- Doctrine of Waste
- BJR
- Then in calculating liability (Duty of Care and BJR again)

Front 15

Shareholder derivative suit

Back 15

A shareholder may sue on behalf of the corporation if:
1. the s/h owned stock at the time of the alleged wrong until the end of the suit
2. the s/h demands board enforce the corp's rights and is refused OR show it'd be futile to make demand
3. suit is one where s/h can ratify the wrong.

Front 16

Removal of Directors

Back 16

CL: removed only by SH majority vote + cause

Modern statutes: removal of director or entire board by majority vote of SH without cause

Front 17

Merger

Exception: parent-subsidiary mergers

Back 17

Requires SH approval of plan of merger.

Parent-subsidiary mergers exception when the parent owns at least 90 % of the outstanding shares of each class of the subsidiary. SH approval not required b/c parent corporation owns a sufficient number of shares (would easily prevail in any SH vote, anyway)

Front 18

Appraisal rights/ Dissenters rights

Back 18

allow SH to force the corporation to pay fair value for their shares in event of fundamental changes

if corp cannot agree with SH, court will decide based on testimony of independent financial advisor stating fair value of sub shares

Front 19

Promotor

Back 19

who signs a K in the name of a proposed corp is PERSONALLY LIABLE on the K unless the parties agree otherwise.