Corporations - Must Remember

Front 1

What does it take to form a corporation?

Back 1

People, Paper, Act

Front 2

Ultra Vires Rule

Back 2

Ultra vires activity is beyond the scope of the articles. They are (1) valid, (2) but S/H can seek injunction, and (3) Responsible O's and D's are liable to corp for UV losses

Front 3

De Jure Corp

Back 3

The "Act" -- Delivery of articles to secretary and state and paying fees. Conclusive proof of valid formation

Front 4

De Facto Corporation

Back 4

Failure to form de jure corp. Are they liable? No, if (1) relevant incorporation statute, (2) parties made good faith attempt to comply with it, and (3) there is exercise of corporate privileges (acting like a corporation)

Mention that this is abolished in many states.

Front 5

Corporation by Estoppel

Back 5

Failure to form a de jure corp.

One who treats a business as a corporation may be estopped from denying that its a corporation. More likely in K, not tort cases.

Mention that this is abolished in many states

Front 6

If bylaws conflict with articles, which controls

Back 6

Articles control (b/c they are filed with state).

Front 7

Rule of liability for Promoters / Corps

Back 7

1. Corporation not liable on pre-incorporation K's until it adopts contract (either express or implied)

2. Promoter is liable on K until there is a novation (not just adoption) (unless K expressly indicates promoter is not liable)

Front 8

Foreign Corporations requirements

Back 8

If transacting business in a state, must qualify and pay fees, or else you get a civil fine and can't sue instate. (you can remedy this later)

Front 9

Consideration for issuance of stock (and split authority)

Back 9

(1) Money (cash / check), (2) Tangible or intangible property (3) services already performed.

Split authority: (1) promissory notes, and (2) future services).

Front 10

Watered Stock Rule

Back 10

If MEE gives you par stock, watch for watered stock. Watered = s/h doesn't pay par price.

1. Directors liable if knowingly authorized.
2. S/H always liable
3. S/H sells to third party = 3rd party not liable if good faith and no notice.

Front 11

Pre-Emptive Rights rule

Back 11

No preemptive rights unless article provides for them.

Only applies in issuance of stock for CASH.

S/H gets right to maintain % of ownership by buying more stock first.

Front 12

Rule for Appointment of Directors

Back 12

Shareholders Appoint (directors can too). Can remove at any time with majority vote, with or without cause). Very broad power

Front 13

Rule for how Directors takes an act?

Back 13

(1) unanimous written consent), or a (2) meeting with quorom / voting requirements

If not met, act is void unless ratified by later valid act.

Front 14

Quorom / Voting Requirements Rule for Directors

Back 14

(1) Quorom = majority of all directors shows up (unless different in bylaws)
(2) Quorom can be defeated by people leaving
(3) Majority of those PRESENT must vote

No proxies allowed!

Front 15

Duties owed by Directors

Back 15

Duty of Care
Duty of Loyalty

Front 16

Duty of Care definition

Back 16

Director owes corporation a duty of care: He must act in GOOD FAITH, and do what a PRUDENT PERSON would do with regard to her own business.

(burden on plaintiff)

Front 17

Two types of duty of care

Back 17

Nonfeasance (not doing anything, but only liable if causation)
Misfeasance (does something that hurts corp -subject to BJR)

Front 18

Business Judgment Rule

Back 18

Court will not second guess decision if (1) good faith, (2) informed, (3) rational basis

Front 19

Duty of Loyalty definition

Back 19

Director owes the corporation a duty of loyalty. He must act in (1) GOOD FAITH, and (2) with a REASONABLE BELIEF that its in the corporation's best interests.

BJR does not apply here.

Front 20

Duty of Loyalty Fact Patterns

Back 20

Interested Director
Competing Ventures
Corporate Opportunity

Front 21

Interested Director Rule

Back 21

Loyalty Rule. ID transaction will be set aside (or D liable) UNLESS D showes (1) deal was fair to corporation when entered into, OR (2) her interest was disclosed to and approved by (1) Majority of the disinterested directors, OR (2) majority of the disinterested -shares-.

[Some states require both].

(burden on defendant)

Front 22

Competing Ventures Rule

Back 22

Loyalty Rule. A director cannot compete with her corporation.

Remedy is constructive trust on profits.

Front 23

Corporate Opportunity (Expectancy)

Back 23

Loyalty Rule. D Cannot USURP a corporate opportunity.

D cannot take it unless D (1) tells the board, and (2) waits for board to reject the opportunity.

Company's financial ability to pay is NOT a defense.

Front 24

What constitutes a corporate opportunity / expectancy?

Back 24

(1) Something in corporation's business line

(2) Something the corporation has an interest / expectancy in

(3) Something D found on company time or with company resources.

Front 25

Other state law bases of director liability

Back 25

(1) Ultra vires acts
(2) Improper distributions
(3) Improper loans
(4) Acts of other directors [unless D dissented in WRITING, was absent, or had good faith reliance on info presented by others

Front 26

Duties owed by Officers

Back 26

Same duties as Directors. Duty of Care and Duty of loyalty.

They are AGENTS of the corporation, so they can bind the corp by acts which they have authority for.

Cross-over agency issue. [Authority rules for K and Torts]

Front 27

Selection and Removal of Officers

Back 27

Officers are selected / removed by directors, and they set compensation.

Shareholders do NOT hire and fire officers.

Front 28

Indemnification of Directors / Officers (3 rules)

Back 28

(1) No indemnification when D/O was liable to corporation, or held to have received improper personal benefit

(2) Mandatory indemnifcation when D/O is successful in defending on merits

(3) Permissive indemnification if not (1) or (2), e.g. settlement.
Must show D/O met duty of loyalty standard (good faith, reasonable belief)
Disinterested directors / shares determines eligibility

Court can also order reimbursement if justified

Front 29

When do shareholders manage corporation?

Back 29

Only in a close corporation: (1) few shareholders, (2) stock not publicly traded. Most corps are close.

Must be in articles / bylaws or unanimous written agreement. Conspicously noted on front / back of stock certificates.

Front 30

Duties owed by shareholders in close corporation

Back 30

Fiduciary duties owed to each other like in a partnership. Especially, controlling shareholders should not oppress minority shareholders. (minority can't sell her shares to get out)

Front 31

Liability of shareholders in close corporation

Back 31

Not liable for corporate obligations or other shareholders malpractice. Advantage over a partnership.

UNLESS courts pierces the corporate veil

Front 32

Piercing the Corporate Veil definition

Back 32

Applies to close corporations. S/H must have (2) abused the privilege of incorporating, and (2) fairness requires holding them liable.

Court will PCV to avoid fraud or unfairness

COURTS MORE WILLING TO PCV FOR TORT VICTIM THAN FOR K CLAIMANT.

Front 33

Alter Ego fact pattern

Back 33

General Rule. PCV Rule. Court will PCV if S/H failed to respect the separate corporate entity, and it harmed creditors. Sloppy administration is generally not enough for PCV.

Front 34

Undercapitalization fact pattern

Back 34

General Rule. PCV Rule. Court may PCV if the corporation was undercapitalized when formed, because shareholders failed to invest enough to cover prospective liabilities.

Front 35

Shareholder Derivative Suit requirements

Back 35

Suing to enforce the corporations claim, not personal.

(1) STOCK OWNERSHIP when claim arose

(2) ADEQUATE REPRESENTATION of corporation's interest

(3) WRITTEN DEMAND on corporation, unless futile.

Corporation is joined as a defendant (technicality)

Settle / Dismissal only with Court approval.

Front 36

Dismissal of Shareholder Derivative Suit by Corporation

Back 36

Corp can move to dismiss only be INDEPENDENT INVESTIGATION showing that suit was not in the corporations's best interests (low chance of recovery / expense exceeds recovery). Must be by independent directors or court-appointed panel.

Court may also make its OWN assessment in addition to independent director assessment.

Front 37

Shareholder Voting Rule

Back 37

Record shareholder as of the record date has the right to vote.

EXCEPTION: (1) Corp reacquires stock before record date, makes it treasury stock and corp does not vote on it. (2) Death of shareholder = executor can vote the shares

Front 38

Shareholder Voting Proxies Requirements

Back 38

(1) Writing, (2) Signed by record shareholder (3) Directed to secretary of corp (4) authorizing another to vote the shares

REVOCABLE even if it SAYS IRREVOCABLE, unless proxy is coupled with AN INTEREST AS WELL. (e.g. interest in shares other than voting)

Front 39

Voting Trusts and Voting Agreements

Back 39

TRUST:
(1) Written trust
(2) Copy to corporation
(3) Transfer legal title to voting trustee
(4) Original S/H receive trust certs and retain all S/H rights except for voting

AGREEMENT:
(1) Writing
(2) Signed

Split decision as to whether voting agreements are enforceable.

Front 40

Shareholder Meetings (2 types)`

Back 40

(1) Annual meeting: To elect directors (if none held in 15 months, can petition court to order one

(2) SPECIAL meeting can be called by (1) board, (2) president (3) holders of at least 10% of voting shares (4) anyone else authorized.

BUT if S/H call special meeting, it must be for a PROPER SHAREHOLDER PURPOSE (e.g. can't call meeting to remove an officer).

Front 41

Notice requirements for shareholder meetings

Back 41

(1) Written notice to every S/H
(2) Delivered 10-60 days before meeting
(3) WHERE, WHEN, and WHY (purpose is important - cannot go beyond purpose at meeting)

Failure to give notice makes action taken at meetings VOID, unless WAIVER: (1) express (2) implied [attended meeting w/out objection]

Front 42

Shareholder Voting Requirements

Back 42

(1) Quorom = majority of outstanding SHARES
Quorom can't be lost if shares leave (vs. directors)
(2) Majority of shares who actually vote.

Front 43

Stock Transfer Restrictions Test

Back 43

Will be upheld if they are REASONABLE UNDER THE CIRCUMSTANCES, which means not an undue restraint on alienation.

Even if it meets the test, it CANNOT BE INVOKED against TRANSFEREE, unless EITHEr (a) it is -conspiciously noted- on the stock certificate, or (b) transferee had -actual knowledge- of the restriction.

Front 44

Rights of Shareholder to Inspect Books / Records

Back 44

Must make a written demand stating documents desired, and proper purpose for inspection (e.g. related to his role as a shareholder)

Directors don't need to do this.

Front 45

Types of Distributions

Back 45

(1) Dividend
(2) Repurchase Shareholders stock
(3) redeem stock (forced sale to corporation at price set in article)

Front 46

Rules for Distributions

Back 46

(1) Declared in Board's discretion
(2) No right to distribution until its declared.
(3) Action to compel distro is hard to win, must make very strong showing of abuse of discretion

Directors joint and severally liable for improper distributions. S/H liable if they knew it was improper when they recevied it. Director has good faith reliance defense.

Front 47

Which Shareholders get Dividends?

Back 47

Preferred --> Pay first
Participating --> Pay First, then Pay Again
Cumulative --> Add up the years it wasn't paid
Common --> Regular guys

Front 48

Which Funds can be Used for Distribution?

Back 48

Earned Surplus (business activity) --> OK to use

Stated Capital (issuing stock) --> CANT be used
[on par issuance, par value goes to stated capital. excess goes to capital surplus]
[no-par issuance, board allocates it between the two]

Capital Surplus (issuing stock) -->OK to use if you tell the S/H

Front 49

Modern View for Distributions

Back 49

Modern view: Doesn't look at funds. Corp cannot make distrubution if it is insolvent or distribution would make it insolvent. E.g
(1) Corporation is unable to pay its debts, or (2) Total assets are less than total liabilites (and liabiliites include preferential liquidation rights)

Front 50

Fundamental Corporate Changes

Back 50

(1) Extraordinary occurrence, requires
(2) Board of director action, AND
(3) approval by majority of shares -entitled- to vote

Possibility of dissenting shareholder right of appraisal (force corp to buy her shares at fair value)

Front 51

When will S/H has a dissenting shareholder right of appraisal?

Back 51

ONLY available for close corporations (cuz he could sell them otherwise)

(1) Merger or consolidation

(2) Transfer of substantially all assets not in ordinary course of business

(3) Transfer of shares in a share exchange

Front 52

When must shareholder perfect her right of appraisal?

Back 52

(1) before vote, file w/ corp written notice of objection and intent to get appraisalt, AND
(2) abstain / vote against change, AND
(3) After vote, make written demand

Court may appoint appraiser if they can't decide on far value of shares

Front 53

Amendment of Articles

Back 53

Is a fundamental corporate change.

Need S/H majority.

If approved, file w/ secretary of state.

No dissenting S/H right of appraisal.

Front 54

Merger or Consolidations

Back 54

Fundamental Corporate Change

Need (1) board of director action [both corps] AND (2) notice to shareholders., and (3) majority shareholder approval by both corporations [of entitled to vote]

Front 55

Merger Exception

Back 55

Shareholder approval NOT required if merger would not result in fundamental corporate change:
(1) corporation survives merger
(2) articles of incorporation unchanged
(3) each S/H will have identical rights in shares after merger

Front 56

Short-Form Merger Exception

Back 56

No shareholder approval or subsidiary board of director approval required if 90% or more own subsidiary is merged into parent corporation.

BUT STILL has dissenting shareholder right of appraisal.

Front 57

Transfer of All or Substantialyl All of Assets Not in the Ordinary Course of Business [or Share Exchange - one co gets all stock of another]

Back 57

Fundamental Corporate Change if at least 75% of the assets.

Fundamental Corporate change for the TRANSFERRING corporation ONLY. NOT a change for the buying corporation.

Board of director action (BOTH corps) and notice to TRANSFERRING corp's shareholders needed.

Majority Approval by TRANSFERRING corporation's shareholders needed. Buying S/H's don't vote on it, b/c its not FCC for them.

Dissenting rights of shareholder's appraisal for the transferring corporation only.

No successor liability here (vs. merger there is)

Front 58

Dissolution of Corporation

Back 58

Voluntary = Board of directors action AND approval by majority of shares entitled to vote

Involuntary (by court order) --> Shareholder can petition because of (1) director abuse and waste, misconduct, (2) director deadlock that harms (3) failure to fill vacant board position @ two consecutive meetings.

If close corporation, court might just order buy out of objecting shareholder.

Creditor can petition b/c corporation is insolvent

Front 59

Rule 10b-5

Back 59

Aimed at Deceit. Prohibits misrepresentation (or nondisclosure) in connection with the purchase or sale of any security.

(1) Instrumentality of interstate commerce
(2) Misrepresentation / Trading on inside info / Tipping
(3) concerns a -material- fact.

Front 60

Who can sue under 10b-5

Back 60

(1) SEC
(2) buyer or seller of securities. <-- B/E trick, person who doesn't sell b/c of misrep can't sue.

Front 61

Tipper / Tipee Relationship

Back 61

Tipper: (1) passes material inside information in breach of duty to corp, and (2) benefits [gift or reputation is enough]

Tippee: (1) traded on the tip (2) knew or should of know that information was improperly passed

Can't be a tippee without a tipper (e.g. can overhear it at movie theater = ok)

Front 62

Scienter for 10b-5

Back 62

Must have intent to deceive, manipulate or defraud. Recklessness OK, negligence is NOT OK

Front 63

Reliance in 10b-5

Back 63

Separate element for fraud, but PRESUMED in public misrepresentation and nondisclosure cases

Front 64

16B Rule

Back 64

Aimed at speculation by Directors / Officers / 10% Shareholders.

Strict liability!

Prohibits profits gained by insider trading.

Only applies to Big publicly traded companioes (national exchange, or 500 S/H and $10 mil in assets)

Front 65

16B Application and Rule

Back 65

Prohibits short swing trading. All profits are recoverable by corporation.

Rule: If, within six months BEFORE or AFTER any SALE, there was a purchase at a LOWER PRICE, then that is a PROFIT.

Order doesn't matter. Highest Common Number both bought and sold gets you the remedy.

Front 66

Common law duties of directors to other directors, and majority shareholders to minority shareholders

Back 66

Duty to Disclose material info
Duty of Fair Dealing = refrain from using control to obtain special advantage or detriment the minority.

Front 67

Special Circumstances Rule

Back 67

Common law. Someone with inside knowledge fails to disclose information to person with whom they are dealing = breach of fiduciary duty.

Front 68

Voting Rule for Removal of Director in cumulative voting situation.

Back 68

If director is elected through cumulative voting, the director cannot be removed if the votes cast AGAINST removal would be sufficient to elect the director if cumulatively voted at an election of the director.

Front 69

Short form merger requires

Back 69

Approval by Parent Board of Directors ONLY

NO approval by Subsidiary BOD
NO approval by Subsidiary S/H
NO approval by Parent S/H (if no fundamental corporate change results)