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46 Cards in this Set

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What are the two types of corporations?
Publicly held and Closely held
What are the critical attributes of corporations?
(1) Legal personality
(2) Limited liability
(3) separation of ownership and control
(4) liquidity
(5) flexible capital structure
How are bondholders paid?
Through a "stream" of (usually fixed) payments over a period of years, and then the return of the principal
What are the three main benefits of being a stockholder?
ownership in the corp, profits, and control of the corp (limited)
Explain the "Race to the Bottom" theory
DE essentially gave managers everything they wanted, and allowed manager to exploit agency costs and take advantage of shareholders.

Each state will stoop as low as it can go to get the business. Bad for shareholders, good for managers.
Explaint "race to the top" theory
DE is the best for the corporation which is why it is so popular. There are important constraints on managers, and SHs can make decisions at the time of initial incorporation.
What is a corporate "promoter"?
Someone who purports to act as an agent of the business prior to its incorporation.
When does a promoter's fiduciary duty to a corporation end?
Once he sells the corporation
When can a court treat an improperly incorporated firm as a corp?
If organizers:
(1) intended to incorporate;
(2) had a legal right to incorporate; and
(3) acted like they were incorporated
Corporation by Estoppel
Court will treat firm improperly incorporated as a corporation if 3d parties:
(1) thought the business was a corporation; and
(2) would earn a windfall if they were now allowed to deny that the business was a corporation
What do most courts require to pierce the corporate veil?
Some affirmative fraud or wrongdoing by the SH, or a gross failure to follow formalities of the corporate existence

Cts check if SH has ignored the existence of the corporation - co-mingling funds for personal use
Alter-ego theory
When corporation is acting on behalf of SH as an agent. Courts are reluctant to find this because purpose of corporations is to limit liabilty.
What is enterprise liability?
When various interrelated corporations are viewed as being a single enterprise - Court disregards corporate formalities.
What must be shown for court to find enterprise liability?
Corporations acted as one, and all acted for the same purpose.

Sign: When funds are transferred from 1 corp to the other w/o observing formalities.
Requirements of enterprise liability
(1) high degree of unity of interest b/w entities
(2) treating entities as separate would sanction fraud or promote injustice
What is a court more likely to do - find enterprise liability or pierce the corporate viel
Crts more likely to allow a creditor to collect from assets of many corps collectively than to pierce the veil against an individual SH.
Where does reverse piercing get you?
You pierce upwards to get to the SH and then downwards to get to one of the SHs other companies
What do you have to prove to reverse pierce?
(1) unity of interest and ownership (lack of formalities, commingling of funds, undercapitalization, use by 1 corp of assets of another); and (2) would sanction fraud of promote injustice if not done
Is a parent liable for the actions of the subsidiaries it controls?
Yes
Are sister-subsidiaries liable for the actions of eachother?
NO.
If corporation commits a tort, and Plaintiff tries to pierce the veil to get to the SH, does Plaintiff have to prove fraud/injustice?
NO. Therefore its easier to pierce the veil under tort law because Plaintiffs in Tort law aren't as sophisticated as those in contract law.
What is a Shareholder Deriviative action?
When a SH sues on behalf of the corporation (in the corporation's own interest) on the theory that the corporation has been injured by the wrongdoing of a 3d person, the corporation, or directors to force them to do something.
What is the main prereq to filing a deriviative suit?
Must post bond to cover corp's legal fees if suit is deemed frivolous.
What are the requirements to be a plaintiff in shareholder derivative suit?
(1) you must be a SH at the time of the alleged wrongdoing and at time of filing ("contemporaneous ownership" rule)
(2) named plaintiff must be a fair and adequate representative
(3) demand requirement - you must demand that the bd does what you want before you bring the suit (unless there is an exception)
What is the Business Judgment Rule?
Absent fraud, illegality or conflict of interest, the Bd's judment is not second guessed by the Ct. Therefore - may only challenge for breach of fiduciary duties - DoC and DoL
What are the three ways a corporation may review a demand?
(1) if independent directors consittute quoarom - the demand may be reviewed by the bd.
(2) in all cases, the ind. directors may appoint by majority vote a committee of two or more ind. directors to review thd emand.
(3) upon motion by the corp, the court may appoint and ind. panel
Who bears the burden of proof to show that the review of the demand was in good faith and included a reasonable investigation?
(1) when majority of bd is indp - then the BoP is on the SH.
(2) when the majority of the bd is not independent, then burden is on teh corp.
What does the demand requirement allow a board to do?
The board can either take over teh Cause of action, and sue directly, or it may resist the suit. Decision is up to the Business judgment of the directors.
What is the demand futility exception?
Where the directors cannot be expected to make a fair decision - demand would be futile and is therefore excused.
What is the DE standard for the Demand Futility Requirement?
Demand is excused if P shows a rxble doubt that either (1) a majority of the bd has a material financial or familial interest; (2) a majority of the bd is incapable of acting independently for some other reason such as domination or control; or (3) the underlying transaction is not hte product of a valid exercise of business judgment
When trying to get demand futility exception - what must a Plaintiff show in order to prove that the underlying transaction was not the product of valid business judgment?
(1) bd members didn't follow adequate procedures; OR
(2) Bd's decision was so irrational as to be outside the bounds of rxble business judgment
What is a Special Litigation Committee?
If demand is excused, a corp can set up an independent group (SLC) and it will investigate and make its own decision on whether to proceed on its claims. Corp hopes that Ct will defer to business judgment of SLC.
IN NY: When will an SLCs decision be protected under the BJR?
(1) if SLC was disinterested and independent
(2) if SLC followed adequate procedures: (i) Good faith; (ii) not pro forma; (iii) completeness
In DE: Who's business judgment does a court apply
It's own.
Difference between Direct and Deriviative suits:
Direct suit: no money would go to the corporation;
Deriviative: plaintiff asks for money to go to the corporation
What are "authorized" shares?
Shares specified in the AoI
What are "outstanding" shares:
Shares the corp has sold and not repurchased
What are "authorized but unissued" shares:
Shares authorized by the charter but which have not been sold by the firm.
What are treasury shares
Shares that were once issued and outstanding but have been repurchased by the corporation
What do preferred shares provide?
Owners of preferred shares receive a certain amount of dividends before any dividends can be distributed to the holder of the other shares
What is a convertable bond?
A bond that can be converted into stock
What is a warrant?
A security issued by the corporation giving the holder the right to purchase by a certain day, a share for certain price. Always isued by the corporation
What is an "option"
A secuirity issued by a third party giving the holder the righ tto purchase by a certain day, a share for certain price.
What is the shareholder wealth maximization norm
The normative goal of corporate law should be to make as much money for shareholders as possible.
What is a defense to the shareholder wealth maximizaton norm?
Other laws beside corporate law are designed to protect the constuencies.
Does a corporation need to have a specific authority to make a valid charitable contribution?
No - but the Bd is still confined by its need to advance the corporate purpose