Zgep - Corporations --- Bar Exam February 2012

Front 1

CORPORATIONS

Level 1 - (6)

Back 1

1. Formation (5)
2. Capitalization (3)
3. Fiduciary & Other Duties of Directors & Officers (7)
4. Shareholders (6)
5. Common Law & Federal Securities Laws (2)
6. Fundamental Changes in Corporate Structure (3)

Front 2

CORPORATIONS

Level 2 - Formation (5)

Back 2

1. Promoter - (3)

2. Pre-Incorporation Contracts - (4)

3. Formation Requirements - (4)

4. Formation Defects - (4)

5. Post-Incorporation Agreements

Hint 2

1. Promoter - (3)
--->(1) Person participating in the formation of a corp.
--->(2) Fiduciary duty of fair dealing, disclosure, and good faith to corp and each other
--->(3) No secret profit

2. Pre-Incorporation Contracts - (4)
--->(1) BLL: Promoter personally liable for pre-incorporation contracts made on behalf of corp. if 3rd party unaware corp. not yet formed. Corp. is not liable on pre-incorp. contracts until adopted.
--->(2) Ways corp. can adopt - (2)
------>(a) Express (Board Resolution)
------>(b) Implied (accept benefits)
--->(3) If K says copr. not formed, issue is intent of the parties
--->(4) Promoter Liability - (3)
------>(a) Unless K says otherwise, promoter liable absent novation)
------>(b) Promoter primarily liable; guarantor
------>(c) May seek indemnification/quasi-k

3. Formation Requirements - (4)
--->(1) Incorporators (person or person who form corp. -- only one needed in majority of states)
--->(2) Articles - (2)
------>(a) Defn: Document filed with Secretary of State - also known as "charter"
------>(b) usually contain - (3)
---------->(i) Name of corporation
---------->(ii) Purpose or Posers (e.g., make money by any lawful means)
---------->(iii) Capital structure - (3)
--------------->(1A) Authorized Stock = # shares corp. can sell
--------------->(2A) Issued stock = # actually sold
--------------->(3A) Outstanding Stock = # issued
--->(3) Act - file (date of incorporation retroactive to filing date)
--->(4) Note: Articles control over inconsistent bylaws.

4. Formation Defects - (4)
--->(1) De Jure - (2)
------>(a) Full or substantial compliance --> GR: Shareholders not personally liable
------>(b) If de jure fails, can use doctrine of De Facto or Estoppel

--->(2) De Facto - (5)
------>(a) Abolished in most states - issue is did D know or have reason to know of invalidity
------>(b) Good faith, colorabble attempt to comply (unaware of invalidity)
------>(c) Some exercise of corporate privileges
------>(d) Effect: Treat as corp. for all purposes except in action by the state.
------>(e) If D knows or has reason to know of invalidity, D personally liable.

--->(3) Estoppel (defense) - (2)
------>(a) One dealing with a business as a corp. may be estopped from denying its corp. status.
------>(b) Usually K's; not torts; abolished in many states. (Judge made doctrine - use as persuasive authority)

--->(4) Piercing - (6)
------>(a) GR: SH not personally liable for corp. debts. But note that SH may be required to return improper divident.
------>(b) Alter Ego Theory (Failure to follow corporate formalities) - (3)
---------->(i) Identity of interest
---------->(ii) Commingle - only the one at fault is liable
---------->(iii) Injunction
------>(c) Inadequate capitalization (to meet prospective business risks)
------>(d) Fraud
------>(e) Note: Piercing more likely where tort (rather than voluntary k) involved.
------>(f) Note: Parent corp. generally not liable for subsidiary unless - active participation and control.

5. Post-Incorporation Agreements
--->Governed by contract law

Front 3

CORPORATIONS

Level 2 - Capitalization (3)

Back 3

1. Subscription Agreement - (2)

2. Consideration for Stock - (4)

3. Pre-Emptive Rights - (3)

Hint 3

1. Subscription Agreement - (2)
--->(1) Defn: Written offer to buy stock from corp. before it's formed.

--->(2) Revocation - (2)
------>(a) Modern Rule - Pre-incopr. offers irrevocable for a designated period (usually 6 mo.), unless otherwise provided
------>(b) Post-Incorp. subscriptions - freely revocable until acceptance (Board accepts)

2. Consideration for Stock - (4)
--->(1) Issue: What qualifies as a valid consideration for shares?

--->(2) Form - (Ways shares can be purchased) - (3)
------>(a) BLL: Under the modern majority rule, shares may be paid for with any tangible or intangible property or benefit to the corporation. (Expands what is acceptable consideration)
------>(b) Value - (5)
---------->(i) Money paid
---------->(ii) Labor done
---------->(iii) Property acquired
---------->(iv) Secured promissory note
---------->(v) Cancellation of corp. debt.
------>(c) Valid, but formerly Not Valid - (3)
---------->(i) contracts for future services
---------->(ii) Unsecured promissory notes
---------->(iii) Promise to convey future property

--->(3) Amount - (2)
------>(a) BLL: Corporation must receive full value for its stock
------>(b) Kinds - (3)
---------->(i) Par - minimum issuance price
---------->(ii) No par - no minimum issuance price (Stated value = value set by Board for no par)
---------->(iii) Treasury stock - previously issued; has been re-acquired (treat as no par)

--->(4) Watered Stock - (2)
------>(a) Par value shares sold for less than par, so corp. did not receive full value
------>(b) e.g., payment of property / service overvalued

3. Pre-Emptive Rights - (3)
--->(1) Defn: Rt. of an existing SH to maintain her % ownership of stock when new stock issued for money
--->(2) CL rule recognizes such rights as matter of law; however, modern majority rule allows corps. to "opt out" if expressly stated in articles
--->(3) Sale of treasury stock not subject to pre-emptive rts: must be new issuance for money.

Front 4

CORPORATIONS

Level 2 - Directors & Officers (7)

Back 4

1. Fiduciary Duties: Due Care - (5)

2. Fiduciary Duties: Loyalty - (2)

3. Liability for Passive Participants - (2)

4. Other Duties - (4)

5. Officers - (4)

6. Indemnification - (4)

7. Lawyer as Corporate Counsel (Sarbanes-Oxley Act of 2002) - (3)

Hint 4

1. Fiduciary Duties: Due Care - (5)
--->(1) BLL: Directors and Officers must act with the reasonable care and skill that a prudent person would with respect to his own business (Goes to business dicisions)

--->(2) Burden: On plaintiff's to show breach (absence of reasonable care & skill)

--->(3) Types - (2)
------>(a) Nonfeasance - Failure to act (e.g., has material knowledge but remains silent or fails to object) Causation: must show causation. Liable only if caused loss.

------>(b) Misfeasance - does something to cause losses

--->(4) Defense - (2)
------>(a) Business Judgment Rule - BLL: A court will not second guess a director if the decision is in good faith and informed and has a rational basis.

------>(b) Must always raise BJR and discuss all 3 elements

--->(5) Breach - If duty breached and BJR won't save, Directors will be jointly and severally liable for harm proximately caused.

2. Fiduciary Duties: Loyalty - (2)
--->(1) BLL: Directors and officers must act in good faith and in the best interests of the corp. without regard to personal gain (You must find and articulate a personal benefit)

--->(2) Common Breaches - (5)
------>(a) Insider Trading

------>(b) Interested Dir. - (3)
---------->(i) Self-Dealing
---------->(ii) Rule: Deal set aside unless D shows either the deal is fair to corp. or that it is both that interest is disclosed or known and approved by majority of disinterested D's or SH.
---------->(iii) Remedy - damages or rescission

------>(c) Competing Ventures - (3)
---------->(i) e.g., interlocking Dir. - Dir. of 2 competing corps.
---------->(ii) BLL: It is a breach of the duty of loyalty for a Director or Officer to compete directly with the corp.
---------->(iii) Remedy: Damages + injuctive relief

------>(d) Corporate Opportunity Doctrine - (3)
---------->(i) Directors and Officers cannot usurp a corp. opportunity, unless -- full disclosure and Board approves

---------->(ii) 4 Tests - (4)
--------------->(1A) Necessary to company
--------------->(2A) Company has interest / expectancy in thing
--------------->(3A) In the business line
--------------->(4A) Overall fairness

---------->(iii) Remedy - (3)
--------------->(1A) Damages
--------------->(2A) Constructive trust
--------------->(3A) Corp. gets opportunity at cost

------>(e) Improper loans (to self, spouse, mother, etc.)

3. Liability for Passive Participants - (2)
--->(1) G.R: A director is presumed to have concurred with a Board action unless he dissents in writing in corp. records.
--->(2) Exceptions - (2)
------>(a) Absent director - not liable, unless nonfeasance
------>(b) Good faith reliance on independent sources (e.g., expert, accountant)

4. Other Duties - (4)
--->(1) Directors have the duty to manage the corp. - e.g., - (3)
------>(a) declare dividends
------>(b) select & supervise officers
------>(c) set policy

--->(2) Personally manage - (4)
------>(a) Can delegate management burdens to 2 person committee
------>(b) Cannot delegate all powers and responsibilities to committee
------>(c) Unlawful delegation = breach of fiduciary duty
------>(d) Board cannot delegate its policy making and discretionary decisions
--->(3) Meetings - (4)
------>(a) Unless all dirs. consent in writing to act w/o mtg., mtg req. (conf. call okay if simultaneous)
------>(b) Notice - reg. mtgs - bylaws; special - need notice
------>(c) Proxy - not allowed; nor are voting agreements
------>(d) Quorum - must have maj. Dirs. (quorum) to do business; maj. present to pass a resolution; If no quorum, action invalid; can lose a quorum.

--->(4) Removal - (2)
------>(a) by shareholders: with or without cause, by majority entitled to vote
------>(b) By court: for fraud or gross abuse of authority

5. Officers - (Pres., VP, Treas., Secretary) - (4)
--->(1) Owe same duty of care and loyalty as directors

--->(2) Status (authority) - (2)
------>(a) As agents - (3)
---------->(i) Actual authority - express authority to act because the board has voted or articles grant
---------->(ii) Apparent authority - conduct which reasonably interpreted, causes 3P to believe he acts for corp.
---------->(iii) Inherent - by virtue of office (implied) - trade usage (eg., power of pres.)

------>(b) Powers - pres. can enter K's and act in ordinary course of business; secretary - records; treasure - funds

--->(3) Required - must have - (3)
------>(a) President
------>(b) Secretary
------>(c) Treasurer

--->(4) Selection Reimbursement) - (4)
------>(a) GR: Directors entitled to reimbursement of expenses if for corporate purpose unless excepted

------>(b) 3 Types - (3)
---------->(i) Corp barred - if liable to corp. or held to have received an improper personal benefit
---------->(ii) Mandatory - if wholly successful on the merits or otherwise defends
---------->(iii) Permissive - anything not in 1 or 2 (settlement). Standard - Duty of Loyalty - must show she acted in good faith with reasonable belief act was in corp's best interest.

------>(c) Who determines eligibility - (3)
---------->(i) Disinterested directors, or
---------->(ii) Disinterested shares, or
---------->(iii) Independent legal counsel

------>(d) Points - (3)
---------->(i) Articles can provide for indemnification, except - Breach of duty of loyalty; Intentional misconduct; or Improper personal benefit.
---------->(ii) Court can order reimbursement
---------->(iii) Corp. can get insurance.

7. Lawyer as Corporate Counsel (Sarbanes-Oxley Act of 2002) - (3)
--->(1) Applies only to L appearing before SEC

--->(2) L shall go up the corporate ladder if L learns of material violation of securites law or breach of fiduciary duty by someone acting for corp. (Note that ABA & CA rules permit this, so no conflict of rules here)

--->(3) L may inform SEC. Conflicting state laws & rules are expressly preempted. (Note that CA rules do not allow this, so L is safest not exercising the option to report to SEC because if Sarbanes-Oxley Act is overturned by court, then L could be disciplined for violating confidentiality.)

Front 5

CORPORATIONS

Level 2 - Shareholders (Owners of Corporation) (6)

Back 5

1. S.H. Liability for Corporate Debt

2. S.H. Distribution

3. S.H. Derivative Suits

4. S.H. Management (Close Corporation)

5. Right to Inspect Books/Records

6. S.H. Issues

Hint 5

1. S.H. Liability for Corporate Debt - (2)
--->(1) GR: SH not liable for corp. debt.
--->(2) Exception - Piercing the Corp. Veil - (3)
------>(a) Alter ego
------>(b) Undercapitalization
------>(c) Fraud

2. S.H. Distribution - (3)
--->(1) Defn.: Payment to SH - any distribution of cash, property, or corp. shares paid to SH on account of stock ownership

--->(2) Right - (2)
------>(a) No right to them. Payment is a matter of Board discretion
------>(b) Exception -- abuse of discretion / breach of fiduciary duties

--->(3) Funding - (2)
------>(a) BLL: Corp. must be solvent to extent that assets exceed liabilities and corp. is able to meet current obligations
------>(b) Liability - (2)
---------->(i) Directors are personally liable for unlawful distributions, as are SH who knew distribution unlawful when received it
---------->(ii) Defense - good faith reliance

3. S.H. Derivative Suits - (3)
--->(1) Defn.: SH sues to enforce corp. rts. - can sue if -- corp. hurt, or, O's or D's violate duty of loyalty; due care.

--->(2) Requirements - (3)
------>(a) Stock ownership

------>(b) Written Demand

------>(c) Bond - in many jurisdictions


--->(3) Litigation - (3)
------>(a) Corp. necessary party
------>(b) No dismissal w/o court approval
------>(c) Consequences - (2)
---------->(i) Is SH successful, recovery goes to corp.; SH -- atty fees / costs from corp;
---------->(ii) If SH unsuccessful, no other SH can sue


4. S.H. Management (Close Corporation) - (3)
--->(1) Defn.: Has few SH; not publicly traded. Owners manage day to day operations. Liability on SHs.

--->(2) BLL: SH agreements that bind directors' discretion are void. Many states allow SH to manage directly if the articles provide it is a close corp. and unanimous SH agreement provides for SH management.

--->(3) Duties - (2)
------>(a) fiduciary to SH and corp.
------>(b) Managing SH owe duty of loyalty and care

5. Right to Inspect Books/Records - (2)
--->(1) Standing - any SH

--->(2) Procedure - written demand stating a proper purpose

6. S.H. Issues - (4)
--->(1) Voting Rights - (3)
------>(a) GR: Right to vote vested with record owner as of record date (voter eligibility cut-off) has rt. of vote. If dies, SH executor can vote.

------>(b) Proxies (OK) - (4)
---------->(i) Writing
---------->(ii) Signed by record SH
---------->(iii) Directed to secretary of corp.
---------->(iv) Authorizing another to vote
------------------->***only good 11 mo. unless other-wise state; revocable unless coupled with an interest other than voting

------>(c) Agreements (OK) - (2)
---------->(i) Voting Trusts - (4)
--------------->(1A) Written trust agreement controlling how shares will be voted.
--------------->(2A) copy to corp.
--------------->(3A) transfer legal title of shares to voting trustee
--------------->(4A) Original SHs retain all SH benefits

---------->(ii) Pooling Agreements - K law applies: trend is to enforce

--->(2) Meetings - (2)
------>(a) Annual meeting required unless unanimous written consent if all voting shares
------>(b) Speical - can be called by - (4)
---------->(i) Board
---------->(ii) 10% voting shares
---------->(iii) As provided in articles
---------->(iv) Notice required - (2)
--------------->(1A) written: when & where, to all voting shares
--------------->(2A) failure to give notice, then action void unless waiver (express or implied)

--->(3) Quorum - (2)
------>(a) Majority of outstanding shares - to pass, majority present
------>(b) You don't lose a quorum

--->(4) Stock transfer restrictions - (4)
------>(a) Must be reasonable - (2)
---------->(i) no undue restraint on alienation
---------->(ii) right to first refusal reasonable if price reasonable

------>(b) Corp. can refuse to transfer shares if SH violates a valid restriction

------>(c) Absolute restraints void

------>(d) Restriction conspicuous - action against buyer only if - (2)
---------->(i) Conspicuously noted on certificate +
---------->(ii) Had actual knowledge

Front 6

CORPORATIONS

Level 2 - Common Law (C.L.) & Federal Securities Laws (2)

Back 6

1. Common Law
2. Federal Securities Law
---(a) 10b-5
---(b) 16(b)
---(c) Underwriting

Front 7

CORPORATIONS

Level 2 - Fundamental Changes in Corporate Structure (3)

Back 7

Defn: Unusual occurrences, so require - (3)
--->(1) resolution by Board
--->(2) notice to all SH entitled to vote +
--->(3) approval by majority of SH entitlted to vote

1. Right of Appraisal

2. Specific Examples

3. Winding Up