Corporations Law (De Specific)

Front 1

What is the procedure for forming a corporation?

Back 1

1. reserve name with Secretary of State
2. File certificate of incorporation (comes into existence upon this or up to 90 days from filing if in doc)
3. preparation and adoption of bylaws
4. appointment of initial BOD by incorporator
5. organizational meeting

Front 2

Who can be an incorporator?

Back 2

Any person, partnership, association or corporation

Front 3

What are the rules for preparing, adopting and amending laws?

Back 3

1. incorporator can
2. initial BOD before consideration for stock is received or after consideration if certificate provides
3. stockholders after payment received

Front 4

How can the initial BOD be appointed?

Back 4

1. in certificate of incorporation
2. incorporator’s statement

Front 5

What is the organizational meeting?

Back 5

Purpose
1. bylaws
2. elect directors and officers
3. other necessary organizing
Notice
At least 2 days and in writing (time, place, purpose)
- Can avoid if incorporator or director sign document stating action taken

Front 6

What is required to be in a certification of incorporation?

Back 6

1. name of corporation (must include a word including corporation or business; techs may not have to)
2. name and address of registered agent in DE
3. nature of business – can say will engage in any lawful activity for which a corporation may be formed (can not confer academic or honorary degree or form a bank)
4. capitalization – number of shares authorized, class with series, and par value; certificate of designation for preferred stock
5. name and address of incorporator
6. names and address of initial BOD

Front 7

What is permissible in a certificate of incorporation?

Back 7

1. any provision governing management of business or conduct of the affairs of the corporation
- cumulative voting – here only; applies to election of BOD
- classified board – can also be in bylaws; stagger elections
- elimination of the ability to act by written consent – cannot be in bylaws
- fair price provision – pay fair price in merger/buyout
2. provision granting stockholders preemptive rights (enable to maintain proportionate ownership) – requires provision to give; cannot be in bylaws
3. supermajority vote provision for stockholders
4. provision limiting duration of corporation
5. provision granting BOD power to adopt, amend or repeal bylaws – cannot be in bylaws; cannot take away the power from stockholders
6. provision limiting or eliminating BOD’s liability to the corporation or stockholders for money damages for breach of fiduciary duty

Front 8

What BOD liability cannot be eliminated?

Back 8

Only for duty of care – can say “limits liability to fullest extent permitted by DE law”
- allows getting costs and attorney’s fees to enforce

Cannot indemnify for:
1. breach of duty of loyalty
2. acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law
3. unlawful payment of dividend or unlawful stock repurchase or redemption
4. any transaction from which the director received an improper personal benefit

Front 9

How is the certificate of incorporation corrected?

Back 9

File a certificate of correction to correct errors or inaccuracies

Retroactive to original filing except to persons adversely affected

Front 10

How is the certificate of incorporation amended?

Back 10

Must be approved by BOD and then by majority of all stockholders entitled to vote (unless no consideration received yet or no capital stock)

Can be amended so long as the amendment would have been lawful and proper in original

Front 11

When is a majority of all shareholders entitled to vote required?

Back 11

1. amend
2. merger
3. dissolution
4. sale of all or substantial all assets
5. removal of BOD

Front 12

How can bylaws be adopted?

Back 12

1. incorporation
2. BOD (if authorized in certificate of incorporation)
3. stockholders

Front 13

What can bylaws contain?

Back 13

Any provision, not inconsistent with law or certificate of incorporation, relating to the business of the corporation, conduct of its affairs, and its right or powers or the rights and powers of its stockholders, directors, officers and employees

Ex. notice requirements, authority to call meetings, record date, number of directors, quorums, committees, officers and responsibilities, indemnification

Front 14

How are bylaws amended?

Back 14

1. may be amended by stockholders (meeting or written consent)
2. BOD if certificate of incorporation grants power
3. implication where uniformly and consistently disregarded

effective when adopted unless says otherwise

Front 15

What do stockholders do?

Back 15

exercise indirect control through the selection of BOD, approval of certain significant transactions and bylaw and certificate amendments

Front 16

What are the rules for stockholder meetings?

Back 16

1. may be held outside DE if in bylaws
2. may attend in person, proxy, or electronic media (have interactive opportunity)
3. held annually to elect BOD and to transact business – Chancery can order after 13 months
4. election of BOD by written consent if (1) unanimous or (2) were vacant and were filled by consent (50 +1)
5. special meetings – may be called by BOD or others authorized in certificate or bylaws

Front 17

When and who can challenge stockholder votes?

Back 17

Stockholders and BOD can challenge the validity of a contested election and appoint, removal or resignation of any director or officer

Stockholders can challenge actions at meeting which required a vote

Front 18

What are the notice requirements for stockholder meetings?

Back 18

1. can be in writing or by email if the stockholder has consented
2. must state place, date, hour, and if special, purpose
3. give to stockholders entitled to vote not less than 10, not more than 60 days before meeting
a. minimum notice 20 days – vote on merger or vote on sale of all or substantially all assets
4. adjournments – new notice not required is for less than 30 days and date, time, place announced prior to adjournment

Front 19

What is a quorum?

Back 19

majority unless bylaws or certification state otherwise (must be at least 1/3 entitled to vote)

Must have!!!

Front 20

What are the other voting rules?

Back 20

1. BOD elected by plurality of those present
2. all other matters – majority of shares present (unless major transaction)
3. class votes – majority of outstanding for quorum and majority present to win

Front 21

What are the voting rights for shareholders?

Back 21

1.One vote for each share held (can be altered in certificate)
2. Can give proxy – valid for three years when signed and dated by shareholder; latest date controls
3. Not required to vote
4. voting trust – agreement among shareholders which vests voting rights in a trustee; must file with corporation
5. voting agreements – agreement between stockholders to vote shares in a specified way

Front 22

What is the record date for voting and stockholders meeting?

Back 22

For notice and voting at stockholders’ meeting:
1. Cannot be less than 10 days or more than 60 days before the meeting if record date set by BOD; can be 20 days to 60 days
2. No date is fixed by BOD, close of business on the day before notice is given
3. Can set separate dates for notice and voting, but must specify
4. Can set new record date for adjourned meetings and must if new notice required

Front 23

What is the record date for dividends and other distributions?

Back 23

For distributions and dividends:
1. if fixed by BOD, cannot precede date of resolution fixing the date and cannot be more than 60 days prior to date of distribution
2. if no date fixed, it is date of BOD resolution approving distribution

Front 24

When can the rules for voting by written consent?

Back 24

1. Can be expressed on paper or by electronic transmission (effective when delivered) - signed
2. Can be done for any action which can be taken by shareholders at a meeting (works like a proxy)
3. Can be limited or eliminated by certificate, but not bylaws
4. Deliver to corporation at registered office, principal place of business, or agent or officer having minutes WITHIN 60 days of delivery of first consent
5. notice of action must be given to those not exercising

Front 25

What is the record date for written consents?

Back 25

1. may not be prior to or more than 10 days after the date BOD passes resolution fixing record date
2. no record date set, date on which first signed consent is delivered to the corporation

Front 26

What are the powers of the BOD

Back 26

Business and affairs managed by or under discretion of BOD

Front 27

What is the make-up and qualification of BOD?

Back 27

1. consist of one or more members
2. no statutory qualifications

Front 28

How are BOD appointed or elected?

Back 28

1. certificate can appoint until first meeting of stockholders
2. organizational meeting of incorporator, can appoint until first meeting of stockholders
3. stockholders elect
- can use cumulative voting if provided in certificate
- can use all votes for one BOD or separate votes
4. vacancies and newly created – may be filled by majority of remaining directors until next election

Front 29

What are the terms of BOD

Back 29

Until successors are elected and qualified or until resignation, removal or retirement

Can be classified – staggered election

May resign whenever if provide notice to corporation

Front 30

How can BOD be removed?

Back 30

1. other directors cannot remove
2. with or without cause by majority of shareholders entitled to vote
3. if classified, can only be removed for cause unless certificate says otherwise

Front 31

How can a BOD take action?

Back 31

1. by meetings
2. by consent (must be unanimous!)

Front 32

What are the rules for BOD meetings?

Back 32

1. necessary for BOD action to be valid
2. may held outside DE
3. may be by conference call
4. notice requirements – provided for in bylaws
- invalid without unless person shows up
5. must have quorum – no proxies; majority or if set by bylaws or certificate can be 1/3 or more

Front 33

When can there be consent in writing?

Back 33

Must be unanimous

Can act in this way unless certificate or bylaws restricts

Front 34

When can the BOD delegate to committees?

Back 34

1. Can establish one or more committees and delegate certain responsibilities to it – must be specific
2. may exercise full powers of BOD except –
- to vote to amend the certificate of incorporation
- adopt an agreement of merger
- recommend to stockholders the sale or lease of all or substantially all of corporation’s asset
- recommend to stockholders dissolution or revocation of dissolution
- amend bylaws
- declare dividend, authorize issuance of stock

Front 35

When can the BOD delegate to officers

Back 35

1. delegation of management is permitted, but BOD maintains oversight (includes information and reporting systems for compliance with law and business performance)
2. look to bylaws
3. may not delegate to officers duties specifically imposed on the BOD by statute or the certificate of incorporation
4. may delegate to outside experts
5. can rely on honesty and integrity of their subordinates until something occurs to put them on suspicion

Front 36

What is the procedure for a long term merger?

Back 36

1. adoption of merger agreement
2. BOD approval of provisions of agreement prior to submission to shareholders
3. notice to all stockholders of constituent corporations, even if not entitled to vote, at least 20 days prior to meeting
4. vote of stockholders of non-surviving corporation – majority of shares entitled to vote
5. execution and acknowledgment
6. filing and recording
may file certificate of merger or consolidation instead

Front 37

What is the procedure of a short term merger?

Back 37

1. between parent and subsidiary
2. parent must own at least 90% of subsidiary’s stock
3. may go upstream or downstream
4. stockholder vote not required if merge into parent
5. BOD adopts resolution
6. certificate of ownership and merger is filed

Front 38

What fiduciary duties does the majority stockholder owe to the minority stockholder?

Back 38

No duty to make the terms fair to the minority who are cashed out

Only has to give notice and full disclosure

Absent fraud or illegality, appraisal is exclusive remedy

Front 39

What is required for the sale of assets?

Back 39

If all or substantially all - approval by majority of the outstanding stockholders; no BOD action necessary

All or substantially all – facts and circumstances test
- quantitatively vital to the operation of the corporation and is out of the ordinary and substantially affects the existence and purpose of the corporation

Front 40

What fiduciary duties does a director/officer/majority shareholder/controlling shareholder owe a corporation and its stockholders?

Back 40

1. duty of due care
2. duty of loyalty (includes good faith)

Front 41

What is required by the duty of care?

Back 41

- duty to act on an informed basis – consider all material information
- two areas of focus
1. duty to exercise care in the decision making process
2. duty to exercise care in all other aspects
- liability predicated upon gross negligence
- not penalized for honest mistake if they acted with good faith after reasonable investigation if judgment reasonable at time decision made
- fully protected in relying in good faith on records of corporation and information presented by officers and employees or experts

Front 42

Do BOD have a right to inspect the company’s books and records?

Back 42

Yes – can go to Chancery to enforce

Must be reasonably related to the directors’ role as a director

Front 43

What if the P shows the director violated the duty of care?

Back 43

Shifts burden to director to show that transaction was entirely fair to the company and its shareholders – price and dealing

Front 44

What does the duty of loyalty require?

Back 44

1. implicated where he has a substantial self-interest which is not consistent with the interests of the corporation
2. best interest of the corporation and its stockholders take precedence over any interest possessed by the director, officer or controlling shareholder and not shared by the stockholders generally
- when a shareholder owns a majority interest in a corporation, or exercises actual control over the corporation’s business and affairs, the shareholder takes on the status of fiduciary to the corporation and its minority shareholders
3. self-dealing transactions must be entirely fair to the corporation

Front 45

What if the P shows the director violated the duty of loyalty?

Back 45

Transaction must be entirely fair – price and dealing

Front 46

How does the duty of loyalty relate to director compensation?

Back 46

1. directors may fix their own compensation
2. must be reasonable in relation to the value of services provided
- look to what other directors similarly situated are paid, whether bears reasonable relationship to corporation’s performance and director’s ability

Front 47

How does the duty of loyalty relate to transactions between corporation and a person who exercises control over the corporation?

Back 47

1. one who controls corporation cannot exercise control to the detriment of the corporation or the minority stockholders – entire fairness standard
2. controlling stockholder who effects a cash out merger bears burden of proving entire fairness unless approved by independent committee of directors or informed majority of minority shareholders

Front 48

How does the duty of loyalty relate to corporate opportunities?

Back 48

Opportunity belongs to corporation and director or officer cannot take unless:
1. the corporation is financially able to take advantage of the opportunity
2. the opportunity is within corporation’s line of business
3. the corporation has an interest or a reasonable expectation in the opportunity; and
4. by taking the opportunity for his or her own, the corporate fiduciary will thereby be placed in a position inimical to his duties to the corporation

Front 49

When can the director or officer take the corporate opportunity?

Back 49

1. the opportunity is presented to the director or officer in his or her individual and not his or her corporate capacity
2. the opportunity is not essential to the corporation
3. the corporation holds no interest or expectancy in the opportunity; and
4. the director or officer has not wrongfully employed the resources of the corporation in pursuing or exploiting the opportunity

safe harbor – take to corporation and allow to accept or reject first

Front 50

What is the safe harbor statute?

Back 50

No interested director transaction is void or voidable solely because it is an interested director transaction, provided:
1. it is approved by a majority of fully informed disinterested directors, even though less than a quorum
2. it is approved by a majority of fully informed disinterested stockholders; or
3. contract or transaction is shown to be fair to the corporation

allows review under BJR rather than entire fairness standard

Front 51

How is BJR applied?

Back 51

1. Is there a breach of a fiduciary duty?
- no, BJR satisfied if there is a rational business purpose
2. Yes, burden shifts to director/officer to show entire fairness; unless approved by disinterested directors or majority of minority shareholders, then burden on P
- in price and dealing (timing, initiated, structured, negotiated, disclosed to directors, how approval obtained)

Front 52

What does the duty of good faith require?

Back 52

Two types
1. subjective – fiduciary conduct motivated by an actual intent to do harm; or
2. where directors fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities

Front 53

When is there director liability for failed oversight?

Back 53

1. the directors utterly failed to implement any reporting or information system or controls; or
2. having implemented such a system or controls, such directors failed to monitor or oversee its operations thus disabling themselves from being informed of the risks or problems requiring their attention

Front 54

What does the duty of disclosure require?

Back 54

- Duty to disclose fully and fairly all material information within the board’s control when they communicate publicly or directly with shareholders about corporation’s affairs
- Material facts are those facts for which there is a substantial likelihood that a reasonable person would consider them important in deciding how to vote, or in the case of a tender offer, whether to tender, or in the case of a merger, whether to demand appraisal

Front 55

When is there a breach of duty of disclosure?

Back 55

By making a materially false statement, by omitting a material fact, or by making a partial disclosure that is materially misleading

Front 56

What are the limitations on materiality?

Back 56

1. conclusions to be drawn from information disclosed need not be disclosed
2. indifference and speculation need not be disclosed
3. common knowledge need not be disclosed
4. directors are not required to engage in self-flagellation or speculate about improper motives
5. no duty to disclose merger negotiations until price and structure are agreed on; Chancery rejects brightline rule – balance probability and magnitude of transaction in light of the totality of the company activity
6. depends on reliability of information
7. detailed facts and modes of analysis used by a financial advisor in developing its opinion are rarely material

Front 57

What are the fiduciary duties owed to others besides corporation and common stockholders?

Back 57

1. preferred stockholders – owed fiduciary duties, but rights are contract rights
2. not owed to convertible debt holders, to option holders, or to warrant holders
3. when company in zone of insolvency or is insolvent, directors’ duties expand to include creditors
- creditors can bring derivative actions, but cannot bring direct claims for breaches of fiduciary duties

Front 58

When is there enhanced BJR?

Back 58

1. defensive transaction – response to a perceived threat to corporation policy and effectiveness which touches on issues of control
2. sale of control
3. merger (not involving sale of control)
4. hostile takeovers
5. interference with corporation franchise

Front 59

How is enhanced BJR applied?

Back 59

1. apply enhancement first
2. then apply BJR

Front 60

What enhanced scrutiny is applied before BJR for defensive transactions?

Back 60

Unocal test
1. reasonableness – demonstration that the BOD had reasonable grounds for believing that a danger to corporate policy and effectiveness existed
2. proportionality – demonstration that the actions taken by the directors were reasonable in relation to the threat posed (not most reasonable, just reasonable)

Front 61

What does the reasonableness prong require?

Back 61

After a reasonable investigation, a potential unsolicited acquisition offer presented a threat that warranted a defensive response
- adequacy of price
- nature and timing of offer
- quality of consideration being offered
- impact on parties affected
- risks of non-consummation
- questions of illegality
- past actions of bidder in takeover
- negotiability of the offer

Front 62

What does the proportionality prong require?

Back 62

- Defenses that are coercive or preclusive will be viewed as disproportionate
- Reasonableness, not perfection

Front 63

What enhanced scrutiny is applied before BJR in the sale of control?

Back 63

duty bound to seek the best transaction reasonably available
- all other things equal, cannot accept a lower price when a higher one is available; can consider other things besides price

Revlon (directors have burden of proof):
1. adequacy of the directors’ decision making process, including the information on which it was based; and
2. reasonableness of the director’s actions

Front 64

When does Revlon apply/not apply?

Back 64

Typically applies when the company as a whole or control is sold

Does not apply when a majority stockholder decides to take out minority stockholder because neither control or company is being sold (just maximize value)

Does not apply when control of company is with the public stockholders before the transaction and after transaction (no majority shareholder)

Front 65

What are the scrutiny requirements for a merger not involving sale of control?

Back 65

Governed by BJR, but deal protection devices use Unocal

Deal protection devices:
1. no talk provisions – prohibit BOD of target company form responding to unsolicited offers from third parties
2. no shop/window shop/fiduciary out
- no shop – prevents BOD of target company from shopping for a better deal
- window shop – allows target company to provide information to an unsolicited potential suitor
- fiduciary out – BOD allow to talk and provide information where the unsolicited suitor promises a superior deal
- lock up – giving the acquiror the right to purchase prized assets
- termination fees - of the target company at an attractive price or a block of stock if the deal falls apart for any reason

Front 66

What is a hostile takeover?

Back 66

Acquirer gains control of a target company by going directly to the stockholders without the consent of the target’s BOD

Two steps:
1. tender offer in which the acquirer offers to purchase 51% or more of the target company’s stock from shareholders
2. acquirer can then vote a friendly BOD into office; new BOD causes the target company to do a cash out merger and eliminate any remaining stockholders who did not tender

Front 67

What is a poison pill?

Back 67

Stockholders receive rights exercisable upon the occurrence of a trigger event (usually acquisition by hostile bidder of 10%-20% of stock), to purchase stock or other security at favorable price
- dilute value of company and makes more expensive and difficult to takeover

Front 68

What scrutiny is applied?

Back 68

When pulling the pill (allowing takeover) or keeping in place (preventing takeover), apply Unocal, then BJR

Front 69

What provisions are invalid?

Back 69

1. dead hand – provides that only the BOD who adopted the poison pill have the power to pull the pill
2. no hand – in the event a majority of the company’s directors are replaced by the stockholder, the new BOD cannot pull the pill for six months if the purpose would be to facilitate a transaction with a hostile bidder

Front 70

What does the DE Takeover Statue provide?

Back 70

1. delays for 3 years business combinations with acquirers that are not approved by the target’s BOD UNLESS the acquirers obtain 85% in a first step transaction
2. exemption – obtaining BOD approval and vote of 2/3 shares not owned by interested stockholders (interested - owns 15% or more)
3. may opt out in certificate of incorporation or stockholder amendment to bylaws with 12 month waiting period
4. interested stockholders released from restrictions if there is a competing tender offer, merger or sale of more than ½ target’s assets
5. does not apply to companies whose shares are not (1) traded on a public exchange (2) held of record by more than 2000 stockholders

Front 71

What are the rules for interference with corporate franchise?

Back 71

1. vote buying – involving use of corporate funds for entrenchment purposes involves duty of loyalty, so requires entire fairness
2. third party vote buying – improper only when economic interests and the voting interests of shares are split
3. coercion – nullifies vote; exists where the BOD or some other party takes actions which have the effect of causing the stockholders to vote in favor of the proposed transaction for some reason other than the merits of the transaction
4. Unocal applied when BOD take defensive actions which affect the corporate franchise

Front 72

What should be known about common stock?

Back 72

1. has no claim on specific assets prior to dissolution or the declaration of a non stock dividend
2. last to participate in liquidation
3. dividends only at discretion of BOD
4. typically one share, one vote
5. not redeemable, but may be repurchased
6. shareholder has right to sell and in ordinary course owes no duty in that connection to other shareholders when acting in good faith

Front 73

What should be known about preferred stock?

Back 73

1. not a creditor
2. rights are contract rights as defined in certificate of incorporation or certificate of designation
3. same voting rights as common stock unless restricted by the certificate of incorporation or the certificate of designation

Front 74

What is important to know for capital?

Back 74

Is the minimum amount of value that will be in the corporation

If issues no par stock, capital will be the stated value, but if BOD does not determine stated value, entire consideration is

Capital surplus – amount of value in the corporation in excess of capital = net assets – capital

Net assets = total assets minus total liabilities

Front 75

What is important to know for considerations of stock?

Back 75

BOD determines

Stockholders are liable to creditors for unpaid portion of consideration

Stock issued for no consideration should be canceled

Front 76

What should be known about dividends?

Back 76

Nimble dividend – must be available funds in surplus or net profits from present or prior year

BOD liable for unlawful dividend

Front 77

What should be known about purchase of stock by issuer?

Back 77

BOD has power to purchase stock or redeem preferred

May not do so if purchase or redemption will impair capital

Shares held directly or indirectly by the company may not be voted or counted to create quorum

Front 78

What is important to know about restrictions on transfer of countries?

Back 78

Must be in writing

Enforceable if noted conspicuously on certificate or actual knowledge

Can be imposed by: (1) certificate of incorporation (2) bylaws or (3) agreement among stockholders or with corporations

Front 79

What are equitable limitations?

Back 79

That which is legally possible will not be allowed if inequitable

Front 80

What is independent legal significance?

Back 80

Action taken pursuant to the authority of the various sections of that law constitute acts of independent legal significance and their validity is not dependent on other sections of the Act

Front 81

What are the types of stockholder litigation?

Back 81

1. appraisal
2. class and individual actions
3. derivative actions

Front 82

What are appraisal rights?

Back 82

Judicial determination of the fair value of stock of a DE corporation

Front 83

Who aren't appraisal rights available to?

Back 83

1. stockholders of the surviving corporation, if the merger did not require their approval
2. stockholders of the disappearing corporation if their shares are either:
- listed on a national securities exchange; or
- held of record by more than 2,000 holders
- except – do not have if by the terms of the merger, they are required to accept in exchange for their shares anything other than:
a. shares of stock of the surviving corporation
b. shares of stock of any other corporation that at the effective time of the merger will be either (1) listed on a national securities exchange, (2) held of record by more than 2,000 holders, (3) cash in lieu of fractional shares, or (4) any combination of the foregoing
3. stockholders of the subsidiary always have appraisal rights in a short form merger irrespective of the consideration received

Front 84

What are the procedures for appraisal?

Back 84

1. must not vote in favor of merger
2. must deliver to the corporation prior to vote on merger a written demand for appraisal
3. demand must be by or for record stockholders; beneficial owners may file in own name
4. within 120 days of effective date of merger, stockholder must file petition
5. must retain ownership through effective date of merger
6. if short form, demand appraisal within 20 days after date of mailing of notice

Front 85

What should be known about appraisal?

Back 85

Going concern value – based on all relevant factors as of effective date of merger and will determine who is entitled to appraisal; must exclude any element of value arising from the accomplishment or expectation of the merger

Presumption that interest is to be awarded

Court determination may be less than merger consideration

Corporation must disclose material facts necessary to permit reasonable stockholders to perfect demands

Front 86

What should be known about class and individual actions?

Back 86

Stockholder may sue on its own behalf or on behalf of similarly situated stockholders

Must be injured directly or independently of the corporation

Can be against corporation, its BOD, officers or majority stockholder for breach of fiduciary duty owed

Front 87

What should be known about derivative actions?

Back 87

1. assert claims on behalf of corporation which the BOD would not have pursued
- look to who was harmed and who would receive remedy
2. some claims can be direct and derivative

Front 88

What is required to bring a derivative action?

Back 88

1. must be a stockholder at the time of the transaction complained of or his stock must have devolved upon him by operation of law subsequent to the transaction complained of
2. must remain a shareholder throughout litigation
- exceptions
a. where the company effectuates the merger to eliminate the P’s shareholder status and thus the derivative suit
b. merger is in realty merely a reorganization which does not alter the P’s ownership in the business enterprise
3. may not file unless (1) he or she has made a demand on the corporation to institute litigation and that demand has been wrongfully refused or (2) stockholder has shown that the demand would be futile and is therefore excused

Front 89

What are the futility of demand tests?

Back 89

1. Aronson test
- have reasonable doubt that either:
a. the BOD are disinterested and independent; or
b. the challenged transaction was otherwise the product of a valid exercise of business judgment
2. Rales test – demand will be excused only where particularized factual allegations create a reasonable doubt that as of the time of the complaint was filed, the BOD could have properly exercised its independent, and disinterested BJ in respond to the demand

Front 90

When is Rales applied instead of Aronson?

Back 90

1. majority of the BOD making the decision have been replaced
2. subject of the derivative suit is not a business decision of the BOD; and
3. decision being challenged was made by the BOD of a different corporation

Front 91

What if a demand is refused?

Back 91

Apply BJR

Front 92

What are special litigation committees for derivative actions?

Back 92

Can appoint a committee of independent directors to determine whether the derivative litigation is in the corporation’s best interest

Will stay derivative litigation for up to six months

If decides derivative action should not be pursued, it can seek and gain a dismissal

Gets BJR

Front 93

What should be known about settlement of class actions and derivative suits and attorney's fees?

Back 93

Court must approve settlements of class and derivative actions as well as the award of any attorneys fees to P’s attorneys
- whether or not the proposed settlement terms are fair, reasonable and adequate when weighted against the probability of recovery at trail on the asserted claims

To award attorney’s fees, court must normally satisfy itself that the litigation has conferred some benefit on the corporation or its stockholders

Front 94

When does DE have jurisdiction?

Back 94

1. internal affairs – only state of incorporation has jurisdiction
- pertain to relationships among or between the corporation and its officers, directors and shareholders
2. over BOD and officers
- impliedly consented to jurisdiction and to registered agent for service of process
- only for actions or omissions related to their capacity

Front 95

What is indemnification?

Back 95

Allows indemnification to past and present officers or BOD where they were made party to any kid of action by reason of the fact that they were officers or BOD of the company or a wholly owned subsidiary

May/shall provide if acted in good faith in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful
- cannot if adjudicated liable to corporation unless permitted to do so by court

Front 96

What else is required mandatory indemnification?

Back 96

Success on the merits or otherwise and dismissed with prejudice

Partial success may justify partial indemnification

May be made mandatory by certificate of incorporation, bylaw and contract; requires fees and costs to enforce right (ONLY mandatory, not permissive)

Front 97

What are advancements?

Back 97

Expenses may be advanced provided indemnities give an undertaking to repay all sums advanced if it is ultimately determined that he or she did not satisfy the requisite standard

Must be specifically provided for in the certificate, the bylaws or some other contract or BOD decision

Front 98

What is important to know about the right to inspect the stock list?

Back 98

1. corporation has affirmative duty to maintain stock list
2. stockholder has a right to inspect (record and beneficiary owners)
3. to exercise, must deliver a demand in writing, under oath, stating proper purpose (reasonably related to such person’s interest as a stockholder) and if beneficiary owner, proof of that; must respond within 5 days, then shareholder can file to enforce
- If demand is in proper form, burden on corporation to establish purpose is improper

Front 99

What does the corporation have to allow the stockholder to inspect?

Back 99

All documents available to corporation

Includes:
1. stocklist with addresses
2. daily transfer sheets
3. computer tapes
4. depository nominee breakdown
5. beneficial ownership list

Front 100

What are the rules for stockledgers?

Back 100

Required to prepare at least 10 days prior to stockholders meeting

Includes all stockholders entitled to vote, their addresses and number of shares

Must be available for inspection at the company’s principal place of business or on electronic network accessible to stockholders

Front 101

What are the rules for books and records demands?

Back 101

1. stockholders (on record and beneficial) are entitled to inspect and copy corporate books and records if they have and state a proper purpose
2. enforced in Chancery after 5 days of no response or denial
3. may not be limited by certificate of incorporation or bylaws
4. demand in writing, under oath, evidence if beneficial owner, state proper purpose (reasonably related to person’s interest as a stockholder; must be primary), delivered to principal place of business or registered agent in DE
5. can get subsidiary’s if corporation has possession or the corporation could obtain through control of subsidiary (over 50% owned or actual control)
6. stockholder has burden of proof; some evidence of a credible basis
7. scope is limited to that which is essential and sufficient to the purpose

Front 102

What should be known about appointment of custodian or receiver?

Back 102

1. appointed by Chancery
2. custodian may be appointed for a solvent corporation or a receiver may be appointed for an solvent corporation
3. receiver may be appointed for an insolvent corporation (any stockholder or creditor may request) – collect and resolve all debts
4. when custodian may be granted:
a. stockholders so divided that unable to elect BOD
b. corporation is deadlocked (BOD and stockholders each deadlocked) and corporation’s business is suffering or threatened with irreparable harm
c. corporation abandoned its business and has failed in reasonable time to take steps to dissolve, liquidate or distribute its assets

Front 103

What is the procedure for dissolution?

Back 103

1. resolution by BOD
2. approval by shareholders
3. unanimous shareholder consent obviates BOD approval
4. file and record certificate of dissolution (name, date authorized, how authorized, name and address of BOD and officers)

ceasing business is not dissolution

can be forced to dissolve by Chancery (abuse, misuse or nonuse)

Front 104

When is the corporation dissolved?

Back 104

Dissolved upon certificate of dissolution becoming effective

Usually continues for 3 years or longer for winding down business including litigation and distributions to creditors and stockholders

Front 105

What are the rules for claims after dissolution?

Back 105

1. notice of dissolution with proof of claim procedure
2. if no claim procedure, corporation must make reasonable provision for all claims and obligations
3. failure to provide claims procedure or reasonable provision, BOD will incur personal liability

Front 106

When is the corporation veil pierced?

Back 106

Factual showing that the corporation has no independent reason for existence and that its sole purpose is to provide a means for doing the act and bidding of the individual