Rb - Corporations

Front 1

Indemnity of Directors

Back 1

A director is entitled to indemnity from the corporation for expenditures for corporate purposes.
1) If the directors is SUCCESSFUL in the lawsuit, indemnification for lawsuit expenses is MANDATORY.
2) If the director LOSES the action, right to indemnification DEPENDS on the nature of the lawsuit.
* Where D loses a Derivative Suit brought by a SH for wrongdoing, indemnification is generally not allowed.

Front 2

Derivative Suit Recovery

Back 2

In a Derivative Suit, the recovery of any losses will go to the corporation, although P (SH) may recover expenses of litigation.

Front 3

Director's Duty of Care

Back 3

A director must act in good faith and in a manner that director believes to be in the best interest of the corporation and to exercise due care in making business decisions.
("Prudence" unless limited in Articles) - Director has a Fiduciary Duty

Front 4

Controlling SH's liabilities

Back 4

Generally, SHs may act in their own personal interest and have no fiduciary duty to the corporation or other SHs.
However, SHs who own a controlling interest must not act in a way which UNFAIRLY PREJUDICES minority SHs.
(ex: when a controlling SH sells to looters who loot the company, he is liable for damages, unless he reasonably investigated before he sold)
(ex: controlling SHs may be held liable for the sale of shares at a premium where the premium was really paid to sell a corporate office for private gain.

Front 5

Declaration of Dividends (SH's right to receive dividends?)

Back 5

A declaration of dividends is within the discretion BOD.
A strong case is required to convince the court of equity to order for the directors to declare a dividend.
(On Essay, look for directors breaching their duty of Loyalty by profiting at corp's expense. Find some purpose beneficial to corporation that directors are trying to do so the Ds will not be held liable)

Front 6

Directors are Managers
Protected by the BJR
But are fiduciaries who owe...

Duty of Care and Loyalty

Back 6

CARE: Dir's must perform in GOOD FAITH and in the best interest of the corporation, exercising the care a PRUDENT person would under the circumstances (as if it was his own business)

LOYALTY: Cannot enter into a transaction in which the directors have a personal interest.

Front 7

Fundamental Changes in Corporate Structure
Sale

Back 7

Sale of the Corp requires that the BOD adopt a resolution setting forth the proposed action and submitting it for vote at a SH's meeting (passes by maj of those entitled to vote).

Front 8

Regulation of Stock Transactions
10b-5

Back 8

Under Rule 10b5, there must be a material misrepresentation through an instrumentality in interstate commerce in connection with the purchase or sale of any security (must buy/sell stock)

Requires SCIENTER + DECEPTION

Front 9

Misrepresentation

Back 9

Common Law Fraud Requires:
1) Misrep by DF
2) Scienter
3) Intent to induce reliance on misrep
4) Causation
5) Justifiable Reliance
6) Damages

Front 10

SH Derivative Suit

Back 10

A SH may sue on behalf of the Corp if:
1) the SH was a SH at the beginning, during, and at the end of the lawsuit,
2) the SH owned shares at the time of the alleged wrong,
3) the SH first DEMANDS that the BOD of directors enforce the Corp's rights & demand is REFUSED, or would be FUTILE, and
4) A demand is made on the SHs to bring suit where SHs can ratify the wrong.

Front 11

Duty of Loyalty

Back 11

A director CANNOT PROFITt at the Corp's expense and must DISCLOSE ALL CONFLICTS of interest to her fellow directors and Corporate SHs, or if the transaction itself is fair, the Corp may seek rescission & damages for the director's breach of duty.

Front 12

Duty of Care

Back 12

The directors must perform in GOOD FAITH and in the BEST INTEREST of the Corp, exercising the care that an ORDINARY PERSON would under similar circumstances.
(ex: a PRUDENT DIR would not pay double the market rate for cleaning services.
ex: a PRUDENT DIR would determine the current market rate for services before approving a contract for services.
ex: A PRUDENT INVESTOR would not deplete retained earnings to repurchase shares to provide a personal favor to a director)

Front 13

Doctrine of Waste

Back 13

Directors have a duty not to waste corporate assets by overpaying for property or employment services.

Front 14

Direct Actions

Back 14

A SH may proceed by direct action for a breach of duty to a SH who faces immediate and direct damage.
("To enforce his rights through Direct Action, SH must show that the directors have BREACHED A FIDUCIARY DUTY owed to him as a SH)

Front 15

Redemption

Back 15

The Articles of Incorp may provide that certain classes of shares may be required by the Corp at the discretion of the BOD.

Front 16

Reacquisition Shares

Back 16

The Corp may repurchase shares from SHs who voluntarily offer to sell their shares to the Corp.
(However, SH MAY NOT FORCE them to purchase his shares)
Repurchase of shares is NOT ALLOWED IF if Corp is INSOLVENT.
Source of repurchase may only come from retained earnings or other sources of surplus income (argue solvency/insolvency)

Front 17

SH Action for Involuntary Dissolution

Back 17

A SH may apply to a court for liquidation of the Corp where the directors are deadlocked, and the Corp is threatened with irreparable injury or where oppression or waste is occurring.

Front 18

Section 16b- Short Swing Profits

Back 18

This act provides that any profit realized by a director, officer, or 10% SH from any purchase and sale, or sale and purchase, of any equity security of his corporation within a period of less than 6 months must be returned to the corporation.
(Look for a person who didn't own 10% before she purchased and then sold)-->this would be permissible bc there is no duty yet.

Front 19

10% SH

Back 19

A person is a 10% SH if she directly or indirectly owns 10% of any class of equity at the time immediately before both the purchase and sale.

Front 20

Rule 10b5

Back 20

Under this rule, it is unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of any facility of any national securities exchange to 1) employ a device scheme or artifice to DEFRAUD, 2) make any UNTRUE STATEMENT of MATERIAL fact, and 3) engage in fraud in connection with the PURCHASE OR SALE of any security.
May Not: Defraud, Misrep, Misapp, when actual purch or sale are induced.

Front 21

Tipper Liability

Back 21

Where an insider gives a tip of inside info, the TIPPER can be liable if the tip was made for ANY IMPROPER PURPOSE. (will be vicariously liable)
Tipper:
= Fiduciary Relationship (corp insider)
= possesses material info (person relying on it could gain substantially)
= Liable even if purpose is for a personal benefit (gift/enhance reputation)

Front 22

Tippee Liability

Back 22

A tippee can be held liable only if the TIPPER BREACHED a duty and the TIPPEE KNEW that the tipper was breaching that duty.

Tippee:
= no need for fiduciary relationship for him to be liable.
= BUT, must know of tipper's fiduciary duty and that he is breaching the duty by divulging inside info.
[ An insider's "personal lawyer" would be a tippee, bc not a fiduciary of the Corp therefore he is not a "tipper" ]

Front 23

Misappropriation Theory

Back 23

Some courts have adopted a rule imposing a duty to disclose on ANYONE who has misappropriated nonpublic information.
Thus, anyone who has breached a fiduciary duty owed to anyone else is liable on this theory when brought by the govt.
Must RETURN PROFIT gained from the misappropriated info and may also suffer PUNITIVE damages.

Front 24

SH's Liabilities

Back 24

Generally, SHs may act in their own personal interest and have no fiduciary duty to the Corp or other SHs, however,
SHs who hold a CONTROLLING INTEREST must NOT act in a way that UNFAIRLY PREJUDICES MINORITY SHs.

Front 25

Shareholder's Sale to Looters

Back 25

Controlling SHs who sell the Corp to person who loot the Co will be liable for damages unless reasonable measures were taken to investigate the buyer.
SH liable for any damages for losses caused by mismanagement of the subsequent owners.

Front 26

Sale at Premium for Corporate Offices

Back 26

Controlling SHs may be held liable for the sale of shares at a premium where the premium was really paid to sell a corporate office for private gain.

SH will be held liable TO CORP for those PREMIUMS received.

Front 27

Director's Duty of Care

Back 27

A director must act in GOOD FAITH and in a manner that the director believes to be in the best interest of the Corp and to exercise DUE CARE in making business decisions.
ex: a PRUDENT DIR would probably not vote to convert a successful motorcycle moped plant so that another co. controlled by a controlling SH could supply moped parts.

Front 28

Director's Duty of Loyalty

Back 28

At common Law, a Director owes a duty of loyalty to his corporation and will not be permitted to profit at the Corp's expense.

Front 29

Controlling SH Liabs

Back 29

Generally, a SH has NO FIDUCIARY DUTY to the Corp or fellow SHs.

However, SHs who hold a controlling interest must refrain from using their control to obtain a special advantage or to cause the Corp to take action that unfairly prejudices the MIN SHs.

Thus, a controlling SH has a duty not to sell his controlling interest in a manner that will detrimentally affect those interests of the Corp and its SHs.

Front 30

Controlling SH Duty to INVESTIGATE BUYER

Back 30

Controlling SHs who sell their controlling interest to individuals who subsequently loot the company to the detriment of the MIN SHs will be LIABLE for damages, UNLESS reasonable measures were taken to INVESTIGATE the character and reputation of the buyer.

Ex: An unidentified, unknown buyer whose intent is unknown and is paying a premium for the stock should put controlling SH on notice he may loot the Corp.

Liable iff Buyer actually loots after sale.

Front 31

Approval of Fundamental Change to Corp Structure
(Sale Corp Assets)

Back 31

SH approval is required in cases of the sale of corporate assets out of the ordinary course of business (substantially all of assets).

Where controlling SH is selling his stock @ the same price the Cor assets are worth, this is tantamount to selling the assets.

If so, the sale of those shares may be rescinded or even prevented by injunction.

Front 32

Controlling SH sells Controlling Interest @ premium
-SH can't sell illegally Corp assets
-D/O can't sell a fiduciary position

Back 32

Controlling SH is NOT LIABLE merely for selling his STOCKS AT A PREMIUM for the sole purpose of a right to control the corp.

However, SHs who illegally sell Corp ASSETS for their own benefit will be forced to DISGORGE THE PROFIT.

Moreover, a D/O cannot sell his POSITION as a fiduciary and office holder for personal gain.

Front 33

Duty of Loyalty

Back 33

A D/O/C-SH owes the Corp a duty of loyalty and cannot profit at the corporation's expense.

Cannot take advantage of an opportunity in which the Corp has an interest or expectancy.

Front 34

Corp Opportunity Doctrine
(Duty of Loyalty)

Back 34

A Director must not usurp a corporate opportunity and is liable for any profits made at the corporation's expense.

This doctrine requires that the director first give the Corp a chance to accept the opportunity (if related to the line of biz of the Corp & Corp would be interested in considering it)
(ex: selling corp assets)

Front 35

Extent of Liability

Back 35

A director who diverts a corp opportunity for his personal gain is liable for any profits he made.

Front 36

SH Derivative Suits

Back 36

Qualifications for a SH suing derivatively:

Must be a SH at the beginning, during, and end of the lawsuit and must have made a demand on the BOD, UNLESS the demand would have been futile.

Minority SH may also sue in an INDIVIDUAL capacity so long as an INJURY IN FACT is established.

Front 37

Effect of Director's refusal to sue

Back 37

BJR defense may bar the derivative suit.

Front 38

Tippee Liability

Back 38

If all elements of a 10b-5 violation are present (interstate, fraud, purchase/sale), Tippee has s duty to disclose inside information.

Tippee's liability derives from Tipper's obligation (not to disclose).

Tippee may not then become a tipper, but may still be liable under a Misappropriation theory.

As he has misappropriated material nonpublic info.

Front 39

10b-5 of Securities Exchange Act

Back 39

Sec 10b prohibits "any manipulative or deceptive device" in connection with the purchase or sale of a security.

Requirements:
1) the transaction must involve INTERSTATE COMMERCE or be traded on the NYSE,
2) FRAUDULENT conduct (Misrep-Intentional or Negl),
3) wrt PURCHASE/SALE of securities

(Tipper/Tippee liable even if didn't purchase or sell)

Front 40

Tipper Liability

Back 40

Fiduciary (O/D)
w/ material nonpublic info
Knowingly acts (speaks loudly)
and Personally Benefits --> directly or indirectly (reputation)
Improper Purpose

A Tippee may not become a tipper unless she is a fiduciary. however, she may be liable under a Misapp theory brought by the govt against one who benefits from insider info.

Front 41

Stock must be Supported by KSN + Good Faith Assessment of Adequacy of KSN

Back 41

Promissory notes (loans) are modernly KSN.
Exchange of PPY is KSN (Invention is ppy. Tangible/intangible)

NOT Future Services.

Must be a good faith assessment of adequacy of KSN. (Duty of Care, Duty of Loyalty)

Front 42

Duty of Care
Duty of Loyalty
BJR

Back 42

Care: Fiduciaries must perform in good faith and act in a manner that he believes is in the best interest of the Corp, exercising the degree of care an ordinary person would exercise under similar circumstances. (prudence, no unsound business decisions)

Under the BJR, directors who meet their duty of care will not be held responsible for Corp decisions that turn out to be poor or erroneous in hindsight.

Loyalty: Cannot profit at Corp's expense even if motivated by good faith (NO UNFAIR BENEFITS UNLESS DISCLOSURE)

Conflict of Interest/Interested Director: Duty to disclose to corp this conflict of interest where an interested director's contract is voidable, the corp's usual remedy is rescission of the transaction.

Front 43

Officer's Powers:
Actual Authority
Apparent authority
+ Ultra Vires Limitation
+ Board's Knowledge

Back 43

Actual: Express authority may be granted by statute, articles of Inc, Bylaws, or board resolution (formal vote)
Implied: Presumed a president of corp can enter ROUTINE BIZ TRANSACTIONS.
Apparent: When corp "holds out" an officer as possessing certain authority, thereby inducing others to believe reasonable the authority exists (ex: informing all directors of your intention to enter a K for the Corp, and they don't object = apparent auth to do so)
Ultra Vires: Exceeding Purpose of Corp stated in articles (ex: buying spu chips for comp mfg corp not UV)
Board's Knowledge: Where BOD is notified of a transaction at a bd mtg & takes no action to ratify or rescind, some cts imply ratification.