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139 Cards in this Set

  • Front
  • Back
General Corporation Characteristics
- Is its own legal entity creted by filing with the state
- Limited liability for shareholders, directors, and officers
- Centralized management
- Free transferability of ownership
- Exists perpetually
Taxation of C corp
Tax corp as own entity and tax s'holders on distro
Taxation of S corp
Only tax s'holders upon distro.
What is an S corp
Small, no more than 100 s'holders, only one class of stock
Characteristics of Limited Liability Company
- Has limited liability of corp
- Tax advantages of p'ship
- Created only by filing with state
- Otherwise felxible biz form
Constitutional Characteristics of a Corp
- "Person" entitled to DP, EP, atty/clt privilege, but not self-incrimination priv.
- Citizen for federal jx in state of incorporation and its PPB. Not citizen for Ps/Is
- Resident of state of incorporation, where it does/is qualified to do biz
- Domicile = State of incorporation

- Corp existence begins on filing.

- Create by-laws after articles filed.
De jure corporation
Created by complying with all statutory reqs.

- File articles of incorp w/ sec of state w/ req'd info: name, # authorized shares, agent, incorporators, purpose
Biz purpose
- any lawful purpose
- articles can state particular, otherwise may undertake any act necessary/convenient ot carry on purpose
Ultra vires acts
- Acts outside of corp's stated purpose
- CL - UVA void
- RMBCA - UVA enforceable except that s'holder may sue corp to enjoin proposed UVA, and corp may sue officer/director for damages for approving UVA

- State may bring axn to dissolve corp for UVA.

UVA rules ony apply if articles state a narrow purpose.
De Facto Corp
- Has all rights and powers of de jure.
- Remains subject to direct attack in a quo warranto proceeding by the state
- Reqs to exist:
a) colorable compliance w/formalities and GF attempt to comply.
b) Conduct of biz in corp name and existence of corp.

NO VEIL from personal liability if purport to act on corp's behalf knowing no valid incorporation.
Corp by Estoppel
Persons who have dealt w/entity as if it were a corp estopped from denying corp's existence.

ONLY applies in K cases
Piercing corp veil
- Alter Ego
- Inadequate capitalization at time of formation
- Avoidance of existing obligations, fraud, or evasion of statutory provisions.
Debt securities
- Not an ownership interest
- Arise when corp borrows funds from outside ainvestors and promises to repay.
- May be secured (bond) or unsecured (debenture) and may be payable eiher to the holder of the bond (bearer of the coupon bond) or to the owner registered on the corp's records (registered bond)
Equity Securities (shares)
- Ownership interest in corp.
- Shares described in corp's articles are authorized shares.
- Shares sold are issued and outstanding
- Shares reacquired by corp through repurchase or redemption are authorized by unissued.
- Shares may be certificated or uncertificated.
Classification of shares
- Corp may only issue one type where ea sholder has equal ownership rt.
- May also vary rights with classes of shares or series w/in class.
Classes and series
- Must be described in articles
- # of shares of each class
- distinguishing designation for each class
- Either describe rights, preferences and limits of any class or series OR provide rights, preferences, and limits shall be determined by BOD before issuing.
Stock subscriptions
- Promise to buy corp's stock.
- Pre-incorporation subscription is irrevocable for 6 mo unless otherwise provided in terms OR all subscribers consent to revocation.
- Payment due upon BOD's demand. Failure to pay = sale of shares or forfeiture of subscription
Consideration
Can pay for shares w/any tangible or intangible prop or benefit.

Par value = must pay minimum value.

No par = pay what BOD deems appropriate.
Promoters
- Before corp formed, promoters precure captial, instrumentalities and other commitments to be used by corp after formation.
- Promoter's relationship w/each other = joint venturers in fiduciary relationship.
- Promoters liable for fraud.
Promoters fiduciary relationship w/corp
- Duty of fair disclosure and good faith
- Breach of FD arising from sales of prop to corp.
- Liable for profits unless all material facts of transaction disclosed to all contemplated as part of initial financing scheme.
- If promoters purchase all stock and subsequently sell their individual shares to outsiders, the promoters cannot be liable for profits from sale of property to corp.
Promoters' Liability - pre-incorporation agreements
- Personally liable if enter K w/3P on behalf of unformed corp.
- Liability continues after formation
- Released only by novation
- Exception if agreement expressly relieves promoter of liability. treated as offer to proposed corp.
- Promoters' right to reimbursement from corp if it receives any benefits.
Corp's Liability
- Not bound on Ks promoter enters pre-formation
- Can become bound if adopts.
Shareholder Control over Management
- No direct control over management of corp's biz
- Can agree to dispense w/ BOD and vest mgmt in s'holders.
- Indirect control via voting - elect and remove directors, adopt & modify bylaws, approve fundamental changes in corp structure
Convening meetings
- Annual meetings req'd (court can order if not timely held)
- Special mtgs can be called by BOD, 1/10 or more of all shares entitled to vote or by others authorized by bylaws and articles
Notice of meeting
- Must be given, but can be waived.
Shareholders of record eligible to vote
1 share = 1 vote unless otherwise provided
voting in person or by proxy
- Proxies last 11 months unless provided otherwise.
- Only becomes irrevocable when agreement so says + interest
Statutory proxy control
- Must be full and fair disclosure of all material facts re: any mgmt-submitted proposal upon which will vote
- Material misstatements, omissions, and fraud in connection w/soliciting proxies prohibited.
- Mgmt must include S'holder proposals on issues other than electing directors, and allow proponents to explain position.
Quorum
Majority of outstanding S'holders entitled to vote.

- If quorum --> need majority votes cast in favor to pass.

- Adjorn if no quorum.
Director elections
- By plurality of votes
- Cumulative voting ok if articles allow
- Each s'holder entitled to # of votes equal to # of his voting shares multiplied by # of directors to be elected.
Class voting on article amendments
- Whenever amendment to articles will affect only particular class of stock, that class has right to vote, even if class otherwise does not have voting rights.
May Sh'holders act without a meeting?
Yes, if they have unanimous written consent.
Types of Shareholder Agreements
1. Voting Trust
2. Voting Agreement
3. Sholder Management Agreeements
4. Restrictions on Transfer of stock
Voting Trust
- Written agreement of s'holders
- All shares owned by parties to agreement transferred to trustee who votes & distributes dividends according to agreement
- Copy of agreemeent given to corp
- Trust ltd to 10 years unless parties agree to extend.
Voting Agreement
- Written & signed
- Provides manner in which parties will vote.
- No filing or time limits
- Specifically enforceable
S'holder Management Agreements
- Sholders may enter agreements among themselves re: almost any aspect of the exercise of corporate power.
- Must be set forth in articles, bylaws, or written agreement by all sholders at time of adoption.
- Valid 10 years unless provide otherwise
- Terminates in corps shares regularly traded on ntl securities mkt.
Restrictions on Transfer of Stock
- Must be reasonable.
- 3P purchaser bound if restriction's existence is conspicuous on certificate OR if 3P knew of restriction at purchase
S'Holders' Inspection Rights
- Qualified right to inspect records upon 5 days notice w/proper purpose.
- Unqualified right for certian records for any purpose.


Articles/bylaws
Board resolutions re: classification of shares
Minutes of sholder mtgs for last 3 yrs
Communications sent by corp to sholders over last 3 yrs
List of names and biz addresses of corp's current director's/officers
Copy of corp's most recent annual report
Pre-emptive rights?
No preemptive rights to purchase newly issued shares unless expressly granted.
Shareholder Suits
- Direct or derivitave
Direct actions
For breach of FD that director or officer owes sholder.
- Recovery to s'holder
Derivative actions
- S'holder asserting corp's rights
- Recovery to corp
- Standing if sholder at time of wrong
- Must first make written demand
- Suit dismissed if found not in corp's best interest
- Discontinuance or settlement requires ct approval
- Court may order payment of expenses
Notice Reqs for Derivative Suit
Must make written demand and then wait 90 days unless sholder notified that corp rejects demand OR irreparable injury to corp if wait 90 days.
Payment of expenses
To P if suit is substantial benefit to corp.

To D if suit w/o r/able cause or for improper purpose
Rights to Distribution
- At least one class of stock must have right to receive corp's net assets on dissolution; otherwise distro discretionary.

- Declearation of distro generally solely w/in BOD discretion (sholders have no right to compel)
Limits on Board to Distro
- Solvency requirements
- Restrictions in the articles to declare distro ok
- Share dividends not in the definition of distro.
Solvency reqs
No distro after:
- corp would not be able to pay its debts as they became due OR
- Corp's total assets would be less than the sum of its liability plus amount to satisfy preferential rights on dissolution of sholders whose preferential rts are superior to those receiving distro
Defining which shares to distribute
- Share dividends = distros of corp's own shares to its sholders.
- Shares of one class or series may not be issued as share dividends in respect of shares of another class or series unless:
----------- articles authorize
------------ majority of votes by class or series approves, OR
------------ No outstanding shares of class/series to be issued
K rights in regard to distro
- Preferred shares receive distro before common shares.
- S'holders rights after declaration of distro. Claim for distro equal in priority to claims of othre unsecured creditors.
Shareholder of record on record
receives distro
Director liability for approving unlawful distro
Personally liable for amounnt exceeding what could've been properly distro'ed unless approved in GF
GF
Based on financial statements prepared according to r/able accounting practices , or

By relying on info from officers, ees, legal counsel, accountants, etc., or a committee of the board of which director not member
Contribution for liable directors?
Yes from all other liable directors and any sholders who knew improper
Shareholder liabilities
Generall, no FD to corp or other sholders.

Liability limited to liabilities for unpaid stock, pierced corp veil, or absence of de facto corp.
Liability pursuant to sholder agreement that gives mgmt power
Managing sholders have liabilities that director would have.
Close corps
Owe each other pship GF and loyalty duties
Limits on controlling sholders
Cannot unfairly prejudice minority sholders
BOD
- Has general powers to manage biz and affairs of corp.
- Do not need to be a sholder unless articles require.
- Delegation of authority to committees or officers ok, but directors must supervise
- Directors have right to inspect corp books/records
Number, election, and term of offices for BOD
- At least 1, but no max
- Elected at annual mtg
- If more than 9 can split into classes and stagger elections
- sholders and directors fill vacancies
Removal of Directors by Sholders w/ or w/o Cause
- Director elected by cumulative voting cannot be removed if votes cast against removal would be sufficient to elect her if cumulatively voted on at election.
- Director elected by a voting group of shares can be removed only by that class
Directors' Meetings
- Regular mtgs do not req notice
- Special mtgs req 2 days written notice which can be waived.
- Quorum = majority of BOD. Director can break Q by w/drawing from meeting.
- Approval of axn by majority of present directors if have quorum.
- Any action required to be taken by directors at formal meeting may be taken by unanimous consent, in writing, w/o meeting
Director personal Liability
- May be limited by articles for damages.

- May not limit liability for financial benefits received by director to which she is not entitled, an intentionally inflicted harm on the corp or its sholders, unlawful corp distros, or an intentional crime.
Duty of care to manage to best of their ability
- Good Faith
- With the care that an ordinarily prudent person in a like position would exercise under similar circs. (biz judgment rule)
- In a manner the directors r/ably believe to be in best ints of the corp
- Burden on challenger to prove directors do not meet standard
Direcotr may rely on reports or other info meeting duty if prepared or presented by:
- Corp officers/ees whom director r/ably believes reliable and competent.
- Legal counsel, accountants, or others as to matters director r/ably believes are w/in such persons' professional competence
- Committee of the board of which director is not a member, if director r/ably believes committee merits confidence.
Conflicting Interest Transactions
- When director knows he or a relative:
1. is party to the transaction
2. Has financial interest in, or is closely linked
3. Is a director or high up in an entity w/whom corp transacting
Conflicting interest transaction not enjoined or give rise to damages if:
- Approved by majority of directors w/o conflict whn all material facts disclosed
- Approved by majority of votes entitled to be cast by sholders w/o conflict when all material facts disclosed
- Is fair to corp
Special Quorum Reqs for Vote on C/I
- Majority of directors w/o conflicting interest at dirs meeting
- Majority of votes entitled to be cast except those of a director w/conflict at sholder mtg
- Fairness factors = adequacy, corp's needs, alts, corps, finances
Waste of Corporate Assets?
Set aside even if directors or sholders approve
Remedies for Improper C/I?
Enjoin transaction, set it aside, damages.
Compensation of directors
They can set it themselves, but must be r/able amount or breach of FD.
Corporate Opportunity Doctrine
Directors' FDs prohibi diverting a biz opportunity from their corp to themselves w/o first giving their corp an opp to act.
- Corp must have interest or expectancy in the opp for doctrine to apply
- Corp's lack of financial ability to take advantage of opp not a defense.
- BOD generally decides whether to take opp
Remedies for Breach for Corp Opp Doctrine
Recover profits director made from transaxn or force director to convey opp to the corp under constructive trust
Competing Businesses
Can relate in unrelated biz
Common Law Insider Trading Special Circs Rule
Director has no CL duty to disclose all facts relevant to a securities transaction btw director and other party.

Court found duty where director knows special circs.
Officers
Decided by the bylaws.

One person can hold multiple offices.

Duties determined by bylaws, by BOD if bylaws allow.
Powers of Officers
- Rules of agency determine
- Authority may be actual or apparent
- Unauthorized actions binding on corp via ratification, adoption, or estoppel
- Corp liable for actions by officers w/in scope of authority
Standard of Conduct of Officers
- GF
- Care of RP in the position/circs
- Manner r/able believe in best interests of the corp
Resignation & Removal of Officers
- May resign at any time if give corp notice
- Corp may remove any time w/ or w/o cause.
- Damages if resign/removal is br/K but being officer not per se K rights.
Mandatory Indemnification of Directors, Officers, and EEs
- Director or officer who prevails in defending a proceeding.
Discretionary Indemnification of Directors, Officers, and Ees
- For costs when unsuccessfully defend suit against director if:
1. Director acted in GF and believe that the conduct was a) in the best interests of the corp, b) not opposed to direct interests of corp, or c) when not unlawful
Exceptions for discretionary indemnification
No indemnity when director not successful in defending action where liable to corp or where recieved improper benefit.
Who decides to indemnify?
Disinterested majority of BOD or majority of disinterested committee or atty or sholders decide to indemnify or not.
Can indemnification be court ordered?
Yes, if the court feels it's appropriate.
Can there be advances?
Yes, if the director furnishes statement that he believes he met standard and will repay advance if found to not have.
Can there be indemnification of agents and ees?
Yep.
General procedure for fundamental changes to structure
BOD adopts resolution

Written notice to s'holders

Sholders approve changes by majority of votes entitled to be cast

Changes in form of articles filed w/state.
Amendments to Articles of Incorporation
OK w/any provision that would be lawful in original acts

Most require sholder approval
Merger
Blending 1 or more corps into another.

Latter corp survives while merging does not.
Is approval req'd by surviving corp?
- Approval by s'holders of surviving corp not req'd IF: 1) The articles of surviving will not change., 2) each sholder of surviving will hold same # of shares, with same preferences, limits, rights, and 3) voting power of shares issued as a result of merger comprise no more than 20% of voting power of the shares of survivor.
Short form merger of subsidiary
- Parent corp owning 90% or more of outstanding shares of subsidiary may merge w/subsidiary w/o subsdiary sholder/director approval.

Must mail each sholder of subsidiary copy of merger plan.
Share exchange
One corp purchasing all oustanding shares of one or more classes or series of another corp.

Only need approval of sholders of corp whose shares will be acquired.
Conversion
Change from one type of entity to another. Same procedure as merger.
Disposition of Property Outside Usual & Regular Course of Biz
- Sale, lease, exchange or other disposition of all/substantially all corp's property = fundamental change for disposing corp.

- Purchaser is not liable for seller's obligations unless transaction was a disguised/de facto merger.
What if a sholder doesn't want the change?
- Corp may buy their shares. Available to:
- Any sholder entitled to vote on plan of merger and sholders of subsidiary in short-form merger.
- Sholders of corp whose shares being acquired in share exchange
- Shodler entitled to vote on disposition of prop
- Sholder whose rights will be materially and adversely affected by an amendment of corp's articles.
Procedure for corporate share buy-back
1. Corporation must give sholders notice that actrion giving rise to dissenting rights will happen at mtg.
2. Sholder must give written notice to corp of intent to demand payment bfore vote taken.
3. Cannot vote in favor of proposed action.
4. Corp must give dissenters notice w/in 10 days of approval.
5 Sholder must demand payment per notice's terms
6. Corp must pay fair value plus interest
7. Sholder has 30 days to contest
8. Go to ct if can't agree
The Williams Act
Controls tender offers.
Regulation of bidder in Williams Act
If purchase = bidder obtaining 5%+ of class, must file disclosures.
- Identity, source of $, past dealings w/target, plans re: target
- Financial statements if not individual
- Arrangements made w/persons at target
Regulation of the Offer by the Williams Act
- Must be open at least 20 days to all class members
- Sholders can w/draw tendered shares while offer open
- If over-subscribed, bidder to purchase on pro rata basis among shares deposited during first 10 days.
- If offer price increases, higher price must be paid to all tendering sholders.
Regulation of the Target by Williams Act
Either give sholders recommendation re: offer or explain why cannot.
General anti-Fraud provision in Williams Act
No false/misleading statements/omissions in connection w/offer. Damages for Sholders.
State regulation - control share acquisition statutes
- Regular takeovers
- If a designated stock ownership threshold is crossed, shares so purchased have no voting rights unless holders of a mamjority of disinterested shares vote to grant rights in acquired shares.

State may have more than one threshold and crossing from one level of ownership to another will trigger statute.

The statute must not be limited to corps or transaxns w/significant connections w/state
Voluntary Dissolution
1. Disso by majority of incorporators or initial directors if shares not yet issued or biz not yet commenced.
2. Disso by corporate act approved under fundamental change procedure.
Disso before stocks issued/biz commenced
- By delivering articles of disso to sec of state
- All corporate debts must be paid and if shares issued, any assets left after wind up distro'ed to sholder
What can a corp do after disso begins?
Nothing except winding up.
Can a claim be asserted against a disso corp?
Yes, to the extent of the corp's undistro'd assets. Can make claim even if it doesn't arise until after disso.
Who do you make claims against if the assets distro'd?
Claim against each sholder for his pro rata share to extent of assets distro'd to him.
Can you cut short the time to bring known claims?
Yes. By notifying in writing of disso and giving them a deadline to file.

Can limit time for bringing unknown claims to 5 years by publishing notice of disso.
Can you revoke a voluntary disso?
Yes. Via the same procedure as used to approve vol. disso.
Administrative disso - axn by state
- For failure to pay fees or file report, maintain agent in state.
- Corp has 60 days to cure defect or prove no grounds for disso.
- Can apply to reinstate
Judicial Disso
Action by Atty General if corp obtained articles by fraud or is exceeding/abusing its authority
Grounds for actions by Sholders
- Directors deadlocked, sholders can't break, and irreparable injury to corp or can't function bc of deadlock.
- BOD does illegal oppressive or fraudulent thing
- Sholders deadlocked and failed to elect director for 2 annual mtgs
- Corp assets being wasted, misapplied, diverted.
Action by Creditors
If corp insolvent AND
1) Creditor's claims reduced to judgment, execution of the judgment has been returned unsatisfied, or
2) Corp has admitted in writing the creditor's claim is due and owing.
Limited Liability Companies
- Taxed like Pship
- Run like corp or pship
- Owners have limited liability
- Formation by filing articles w/ sec of state.
Management of LLC
- By all members unless articles say otherwise.

If mgmt by memnbers, majority vote required to approve decisions

Each member is an agent of the LLC
Sharing of profits/losses
Evenly unless agree differently.
Transfers of interest
Only the right to profits and losses. Does not transfer mgmt rights unless all members consent.
Dissolution of LLC
By dissociation of a member
Professional Corporations
- By statute only
- Professionals create corp for purpose of practicing profession
- Limit share ownership to licensed professionals
- Professionals practicing in corp still personally liable for own malpractice
Foreign (out of state) Corporations
- May not transact biz w/in a state until obtains cert. from sec of state.
- Many not be denied cert merely bc law of state of incorpration differs from host jx
Securities Regulation 10b-5
Illegal to use interestate commerce to operate a fraud in connection w/purchase or sale of any security
Elements of COA that Private P Must Prove for 10b-5
1) Fraudulent conduct by D
a) Material if substantially likely a r/able investory would consider important.
b) scienter (intent to deceive
2. In connection w/purchase or sale of a security by P
3. In interstate commerce (simple fraud is enough)
4. Reliance on fraud
Damages in 10b-5
Difference between price paid and average price when fraud was made.
Insider Trading
Violates 10b-5 if by trading br/duty of trust and confidence owed to

issuer
sholders of issuer
another person who is source of the material nonpubli inco in the case of misappropriators
Insider Liability
Anyone breaching duty not to use inside info for personal benefit
Tipper and Tippee Liability
- If insider gives tip of inside info to 3P who trades on basis of the info, liable if tipped for improper purpose
- Tippee only liable if knew tipper was br/a duty
Misappropriator Liability
Gov't prosecutes under 10b-5.
- Trading on market info in br/duty of trust and confidence owed to source of info
Section 16(b)
- Requires surrender to corp of any profit realized by any director, officer, or sholder owning more than 10% of class from the purchase and sale, or sale and purchase, of an equity security w/in a 6mo period.
To whom does 16(b) apply?
- To publicly held corp
- With more than $10M in assets and 500 or more sholders in any outstanding class, OR
- Whose shares are traded on a national exchange.
What kind of liability?
Strict liability for covered transactions.
Elements of 16(b) COA
1. Purchase and sale or sale and purchase w/in 6mo.
2. Equity security = any security other than a pure debt instrument
3. Officer, director, or more than 10% sholder (measured at time of purchase and sale)
How is the profit realized determined?
By matching the highest sales price against the lowest purchase price for any 6mo period.
Sarbanes-Oxley Actr of 2002
Public Company Accounty Oversight Board. Regulates corporate responsibility, accountability.
Corporate responsibility
Requires a public company audit committee made up of BOD members, req'd for each corp.

Must disclose if member of audit committee is a financial expert.
Corporate responsibility for Financial Reports
- Filed under act
- Officer to certify that he has reviewed report, report is true and does not contain material omissions.

The signing officer is responsible for establishing internal controls, has designed such controls to ensure material info made known to officer, and has evaluated the controls w/in 90 days prior to report.
What happens if there's misconduct?
CEO and CFO foreit bonuses and profits if misconduct in the reports.
Prohibition against insider trades during pension blackout periods
Directors and executive officers may not purchase or sell company's stock during period when persons participating in company's pension plan cannot sell.
Prohibition against personal loans to the executive except
To the extent that the loans are made in the ordinary course of corp's consumer credit biz and on terms no more favorable than corp offers to general public.
Corporate and criminal fraud
- Criminal penalties for destruction, alteration, etc., of doc w/intent to impede fed investigation.
- Criminal penalty for destruction of corp audit recodes before 5 years
- SOL for fraud = 2 yrs after discover or 5 yrs after action accrued
- Defrauding sholders and the public = felony
Whistleblower protection
COA for persons discharged for whistleblowing