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36 Cards in this Set
- Front
- Back
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5 permitted forms of consideration for an issuance
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#1 Money (cash or its equivalent)
#2 Tangible/intangible property #3 Services ALREADY performed #4 A binding obligation to pay in the FUTURE in $ or in property (e.g., promissory note) #5 A binding obligation to perform FUTURE services having an agreed value |
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Amount of consideration
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- Par means “MINIMUM issuance price”
- NO PAR means there is no minimum issuance price → can sell for any price - TREASURY STOCK is stock that was previously issued and has been reacquired by Corp; Corp may then sell the treasury stock → ALWAYS treat TREASURY as having NO PAR |
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Pre-emptive rights
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- This is the right of an existing SH to maintain her % of ownership by buying stock whenever there is a NEW ISSUANCE of common stock for MONEY (cash/checks)
- If the certificate is silent regarding preemptive rights; the right does not exist |
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Removal of directors before the expiration of their term
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- SH CAN remove a D for cause
- Board CAN remove a director for cause only if the cert or bylaws allow - ONLY SH can remove a D w/o cause, and ONLY IF the cert or bylaws allow → If cert or bylaws are silent then SH CANNOT remove w/o cause |
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Bylaws (amend/repeal)
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- SHs can amend/repeal the bylaws or adopt new ones
- BoD get to amend/repeal bylaws or adopt new ones ONLY when the certificate or a SH bylaw allows (but even then, SH can amend/repeal any BoD-adopted bylaw) |
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Filling a vacancy on the BoD
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- General ®: BoD selects the person who will serve the remainder of the term
- Specific ®: SH selects the person who will serve the remainder of the term in the rare case when a director is removed by SH w/o cause |
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BoD Action
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Only by
- UNANIMOUS + WRITTEN consent - Meeting |
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Notice req't for BoD meeting
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- REGULAR meeting: NO (time & place usually in the bylaws)
- SPECIAL meeting: YES (it must state when and where, but need not say why) --- If req’d notice for a special meeting is not given to a D, any action taken @ the meeting is void UNLESS the Ds not given notice waives the notice defect by ----- In writing and signed, ANY TIME ----- Attending the meeting w/o objection |
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BoD & Q
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Must have a MAJ of “entire BoD” (duly const’d BoD – that means the number of positions if no vacancies); once we have a Q, passing a resolution (how the BoD takes an act at a meeting) req’s MAJ vote of those PRESENT
- If there are 9 Ds on the BoD, ≥5 Ds must attend to have a Q and ≥3 must vote for a resolution to pass - If one leave the meeting (to get Q-1), the BoD CANNOT continue to do business B/C the Q has been broken - If only 7 serving b/c 2 have resigned (w/ no successors), Q still needs 5 - Corp CAN decrease a Q to less than a MAJ of directors in the cert or bylaws, but it can never be fewer then 1/3 of the entire BoD - Corp CANNOT decrease the req’t that passing a resolution req’s a MAJ of the directors present - Corp CAN increase a Q to >MAJ of directors BUT in the cert only, NOT in the bylaws - Corp CAN a superMAJ vote to pass a resolution BUT in the cert only, NOT in the bylaws |
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Duty of Care (Fiduciary)
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Standard: Director must discharge her duties in GOOD FAITH and w/ that degree of diligence, care and skill that an ordinarily PRUDENT person would exercise under similar circumstances in like position
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Duty of Loyalty
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Director must act in GOOD FAITH and w/ the conscientiousness, fairness, morality and honesty that the law req’s of fiduciaries
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Interested director transactions
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Interested D transaction will be set aside UNLESS the D shows either
- The deal was fair and reasonable to the Corp when approved, OR - The material facts and her interest were disclosed/known AND the deal was approved by any of these: --- SH action --- BoD approval by sufficient vote NOT counting the votes of interested Ds --- Unanimous vote of disinterested Ds if disinterested Ds are insufficient to take an act of the BoD” |
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Individual D's liability for BoD actions
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General ®: D is PRESUMED to have concurred w/ BoD action UNLESS her dissent (& she did not vote for resolution) is noted IN WRITING in Corp records by
--- Getting it in the minutes --- In writing to the Corp secretary @ the meeting --- Registered letter to the secretary promptly after adjurnment EXCEPTIONS - If D misses a meeting, she is not liable of the BoD approved something wrongful that day (e.g., illegal dividend) if she registers written dissent w/in a reasonable time of learning of the action --- She does this by delivering the dissent or sending it by registered mail to the Corp secretary, ensuring that the dissent is filed w/ the minutes for the meeting - GOOD FAITH RELIANCE on info, opinions, reports, or statements by --- Corp officers/employees whom the D/O believes competent and reliable --- Lawyers/public accountants whom the D/O believes are acting w/in their competence --- Committee (of which the relying person is not a member), as to matters w/in its designated authority (usually in improper distribution) |
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Officers (appointment & removal)
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BoD selects & removes UNLESS cert allows SH to elect them
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Indemnification of D/O
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#1 Prohibited: Reimbursement prohibited if she was held liable to the Corp
#2 Of right: Corp MUST REIMBURSE D/O if she won the judgment on the merits or otherwise --- If D/O is successful in defending a suit against her, so she qualifies for reimbursement of right from the Corp but Corp refuses → if she sues the Corp to force reimbursement and wins, she CANNOT recover Att’s fees in her suit against the Corp #3 Permissive: Situation not satisfying 1 or 2, Corp may reimburse the D/O if she shows she acted in GOOD FAITH and for a purpose REASONABLY BELIEVED to be in Corp’s best interest --- Reimbursement in “permissive” category can include settlement amount, expenses, and Att’s fees (not any judgment, though) --- For permissive, who determines eligibility ----- BoD (w/ a Q of D being non-parties); or if there is no such Q ----- SH or a Q of those D who are disinterested ----- BoD pursuant to report from independent legal counsel |
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Eliminating D liability
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The certificate may eliminate director liability to the Corp/SH for damages for breach of duty EXCEPT
- If she acted in bad faith - She acted w/ intentional misconduct - She received an improper financial benefit - She approved an unlawful distribution or a loan |
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SH liability for Corp actions
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Generally NO b/c Corp is liable for what it does – it has entity status – that’s why we incorp, so the SH won’t be liable
- SH might be personally liable for what the Corp did if the Ct “pierces the corporate veil” → can only happen in CLOSE CORP --- SH must have ABUSED the privilege of incorp’ing --- FAIRNESS must require holding them liable |
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PCV theories
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- Alter ego (identity of interests, agency, excessive domination)
- Dummy Corp, where SH carry on business in personal capacity/for purely personal, not Corp, ends - Parent Corp forming a subsidiary to avoid its obligations - Undercapitalization (also need excessive domination/fraud/illegality) - Wages: In a close Corp, the 10 largest SH are personally liable for wages and benefits of the Corp’s employees |
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SH derivative suits
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SH is suing to enforce Corp’s claim, not her own personal claim; it’s a case where Corp is not pursuing its own claim, so SH steps in to prosecute claim
- E.g.: Usurping Corp opportunities; waste of Corp assets |
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SH recovery in derivative suits
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- If win, SH receives costs and Att’s fees, usually from the judgment won for the Corp (b/c she benefited the Corp by suing and winning)
--- Damages generally go to the Corp, but S maybe can recover damages directly when recovery by the Corp would return $ to the bad guys - If SH loses, cannot recover costs (will have to pay other side), and other SH cannot later sue |
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SH derivative suits (pre-req for suit)
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Stock ownership when claim arose, when the claim is brought, and thru entry of judgment
- Must adequately represent the interests of the Corp and the SH - SH can be req’d to post a bond for D’s costs, but does not have to if she owns ≥5% of the stock or if her stock is worth ≥$50K - SH must MAKE A DEMAND on Ds that the Corp sue --- She need not make this demand if it would be futile to do so ----- MAJ of the BoD is interested or under the control of interested Ds ----- BoD did not inform itself of the transaction to the extent reasonable under the circumstances ----- Transaction is so egregious on its face that it could not be the result of sound BJ - Special pleading req’ts: π must plead w/ PARTICULARITY (details, not conclusory) her efforts to get the BoD to sue OR why the demand was excused - Corp must be joined in the litigation as a D (it makes no sense b/c it’s the Corp’s claim, but that’s the rule) |
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SH voting (who votes)
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General ®: RECORD OWNER as of RECORD DATE has the right to vote, EXCEPT
- Treasury stock - Executor can vote decedent - Proxy holders can vote |
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SH voting (proxies)
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Writing + signed by SH + directed to secretary of Crop + authorizing vote
--- Proxy good for 11 mo UNLESS stated otherwise --- Proxies revocable (even if it says irrevocable) UNLESS ----- SH sells B her shares after record date but before annual meeting (proxy coupled w/ an interest) ----- Given subject to a voting agreement |
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SH voting (voting agreements)
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In writing + signed
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SH voting (action)
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Only two ways SH can take a valid act
#1 UNANIMOUS WRITTEN consent SIGNED by holders of ALL VOTING SHARES #2 Meeting |
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SH voting (notice req't)
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#1 Contents of notice: It must state WHEN and WHERE (and PURPOSE if a special meeting)
--- Also must inform if proposed action would entitle SH to appraisal rights and tell why #2 If Corp does not give notice to everyone entitled to vote the action @ the meeting is VOID, UNLESS those not given notice waive the notice defect --- Express waiver: In writing @ signed anytime --- Implied waiver: Attended meeting w/o objection |
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SH voting (Q)
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Determination of Q focuses on the NUMBER of shares represented, not the number of SHs; generally, a Q req’s a MAJ of outstanding shares
- If Q is met, MAJ may act to bind the Corp; MAJ means MAJ of shares ACTUALLY VOTING in favor/against the proposal (abstentions don’t count) --- Cert/bylaws CAN reduce Q to less than a MAJ but it can never be <1/3 of the shares entitled to vote --- Can never reduce the req’t of MAJ approval - Once Q is established at SH’s meeting, it CAN NEVER be lost if people leave the meeting (different from Ds) - CAN req a superMAJ of the shares entitled to vote to be represented to constitute a Q BUT only in the cert and not the bylaws - CAN req a superMAJ of the shares @ the meeting to pass a resolution BUT only in the cert and not the bylaws |
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SH inspection rights
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- Minutes of SH proceedings + record of SH: ANY SH on 5 days written demand can demand access to these records
--- Corp can demand that SH give an affidavit that her purpose is not other than in the Corp’s interest and that he has not w/in 5 years tried to sell any list of SH - List of the current D/O: ANY SH can demand that on 2 days written demand --- No affidavits req'd - Corp financial statements: Any SH can make a written request (can be by mail), and Corp must provide the docs - CL right to inspect: Available for all SH to inspect records at a reasonable time & proper place for a proper purpose (related to her role as SH) |
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Distribution
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Payments by Corp to SH
- Dividend - Payment to repurchase shares - Payment to redeem shares (forced sale to Corp at price set in cert) Can only come from surplus: Assets – Liability – Stated Capital |
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SH right of appraisal
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What actions by Corp trigger the SH’s right of appraisal?
- Amendments to the cert - Consolidation - *** Corp merges into another Corp - *** Corp transfers substantially all of its assets - Corp’s shares are acq’d in a share exchange - BUT even if Corp is doing one of these things, there is no right of appraisal if Corp is listed on a nat’l securities exchange or NASDAQ Actions taken by SH to perfect the right of appraisal (MUST do all 3) - Before the SH vote, file written objection and intent for payment - Abstain or vote AGAINST proposed change - After the vote, make written demand to be bought out |
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Amendment to the cert
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- Minor changes (e.g., office location, registered agent) can be made by BoD alone
- Other amendments must be approved by BoD approval + MAJ of the shares entitled to vote --- If amendment will change/strike a supreMAJ Q/voting req’t for SH voting, amendment must be approved by 2/3 of the shares entitled to vote |
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Dissolution
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- Voluntary: No BoD vote necessary; Req’d SH vote is MAJ entitled to vote
- Involuntary (judicial – someone is asking for a Ct order of dissolution) --- By BoD resolution or resolution of MAJ of shares entitled to vote, stating that Corp has insufficient assets to discharge liabilities or that dissolution would be beneficial to SH --- ≥½ of shares entitled to vote may petition if Ds too divided to manage or SH too divided to elect Ds or magnitude or internal dissention makes dissolution beneficial to SH --- Any SH entitled to vote may petition if SH unable to elect Ds for 2 annual meetings --- *** ≥20% of voting shares in Corp whose shares are not traded on a securities market ----- May petition on EITHER ------- Management’s illegal, oppressive, or fraudulent acts toward the complaining SH ------- Management diverting/wasting assets ----- Cts may deny dissolution if there is some other way the complaining SH can obtain a fair return on her investment (e.g., by ordering buy out) → Ct will consider whether liquidation is necessary to protect the petitioners and is the only way for them to get a fair return on their investment ------- Corporation or non-complaining SH may try to avoid dissolution: W/in 90 days of the petition, buy the petitioner’s stock @ fair value on terms approved by the Ct |
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Sale of controlling SH’s interest
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- Controlling SH generally can sell her shares @ a premium (& keep it)
- BUT Ct may impose liability for looting or otherwise breaching fiduciary duties |
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Freeze-out mergers
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All mergers must have a legitimate CORPORATE purpose, even though approved by the requisite number of shares
- Watch out for transactions aimed solely @ cashing out MIN SH unfairly |
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Market trading on inside information
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The D/O has breached a duty to the Corp by engaging in MARKET trading
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Nondisclosure of “special facts” (or “special circumstances”) in SH trading
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a. CL insider trading: All D/O (and probably controlling SH) owe an affirmative duty not to trade on “special facts” in a securities transaction w/ a non-inside → CANNOT trade on secretes, but must ABSTAIN or DISCLOSE so others are on the same footing
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