Corporations

Front 1

What does a forming a corporation do

Back 1

1. creates a public record of incorporatio;

2. binds the parties to the corporate law of the incorporating stte

3. documents by optional terms the parties may have chosen

Front 2

what are the three significant questions:

Back 2

1. what provisions must be included in the articles of incorporation?

2. what optional provisions can be included in the articles?

3. In what state should corporation be incorporated?

Front 3

3 steps of forming a corporation

Back 3

1. preparing articles of incorporation(corporate charter) according to the requriements of state law

2. Signing of the articles by one or more incorporators,

3. submitting signed articles to teh state's secretary of state for filing

Front 4

What must be included in the articles of incorporation

Back 4

1.Name of the corporation- must state complete name and reference to its corporate status.

2. REgistered Office and Agent - must state the corporations registered office for service of process and for senfing offical notices, must name an agent as well

3. Capital structure - specify the securites the corporation can issue to raise capital. (the various classes of authorized shares; the number of shares of each class; and the privileges, rights, limitations, and preferences of each class)

4. Purpose and Powers of the Corporation may needd to state teh corporateions purposes and pwoers, purposes clause is far less important than it once was. modern presumption is that the corporation can engage in any lawful business.

5.Size and composition of board - many statutes no longer require that the articles name the intial directors. like

6. optional provisions - the articles can contain a broad range of other provisions to "customize" the corp. opt i(voting provisions, membership requirements,, managment provisions)n and opt out clauses

7.

Front 5

what do the bylaws do?

Back 5

describe such matters as the functions of each corporate office, how shareholders' and directors' meetings are called and conducted, teh formalities of shareholder voting, the qualifications of directions, the functions of board committees, and procedures for and limits on issuing and transferring shares

Front 6

internal affaris doctrine

Back 6

permtis the parties to fix the law that applies to the corporate relationship, wherever litigation is brought.

under this dotrine state courts are boudnt to accept the rules of the incorporating state.

Front 7

psuedo foreign corporations

Back 7

when corporationdoes a significant amount of its ubsiness in a certain state but is incorporated else where (E.g. Cali has a 50% rule

Front 8

Why Delaware for National Businesses

Back 8

Delaware's Statute is designed to give management flexibility in structuring and running the business

the delaware courts and corporate bar are highly experienced and sophisitcateed in corpporate law maters

a large body of case law interperts the delaware statute, thus providing certainty

the delaware legislature is aleader in corporate law reform and regularly amends the delaware corporations statute as new needs and problems arise.

Front 9

ultra vires doctrine

Back 9

invalidates corporate transactions beyond the powers stated in the corporation's charter.

only applies when

1. teh articels specifically restrict corporate activites

2. the corporation engages ina ctivities not directly related to profit seeking, such as excessive charitable giving

3. the board of directors take actions that undermine shareholder power.

Front 10

What are the 3 exclusive means of enforcement of the limitations of articles

Back 10

1. Shareholder suit: can sue to enjoin the corporation from entering into or continuing in an unauthorized transaction.(3rd party must be present in court, and knew about the corporate incpacity)

2.Corporate suit against directors and officers-

3.Suit by state attorney genereal- can seek involuntary judicial dissolution of the corporation has engaged in unauthorized transactions.

Front 11

What are the 3 sources of corporate financincg

Back 11

1. Equity financing- can issue shares of stock.

2. debt financing

3. corporate financing.

Front 12

When are equity shares authorized???

issued??

Back 12

authorized when the articles permit the board to issue them

issued- when sold to shareholders

Front 13

treasury stock

Back 13

shares that are issued but no longer outstanding because they have been repurchased by the corporation.

Front 14

what must one or more classes of shares have

Back 14

voting power and final liquidation rights,

Front 15

Equity ingredients

Back 15

1. Dividends

2. Liquidation rights on dissolution

3. voting rights- empower shareholders to vote on governance matters, including the election of directors and the approval of signigcant corporate transactions proposed by the board, such as the amendment of the articles, the creation of new classes of shares, mergers and sales of all teh corporations assets

4. conversion rights- right to convert their share shares into anotehr security of the corporation.

5.redemption rights- force corporation to reproduce their shares

6. preemptive rights- allows shareholders to acquire shares when the corporation issues new shares. this protects existing shareholders proportional ownership

Front 16

a class of stock

Back 16

the different recipes of the equity ingredients( common stock to nonvoting, nonparticipating cumulative convertible redeemable preferred stock"

Front 17

series

Back 17

the subclasses that sepreate the rights of shares that share the same class.

Front 18

what are the aspects of common shares

Back 18

represent the corporation's residual ownership interests- whats left of the income stream after all other "senior" financial claims have been satisfied .

stand last in line.

dividends not guaranteed

they make up for this with the right to vote, sell, or sue

Front 19

ESOP

Back 19

Employee stock ownership plans- gives employees a stake in the company, the employers contributions to the esop are tax deductable and the higher level of employee ownership may protect incumbent management

Front 20

stock options

Back 20

a contractual right to purchase shares at a specified date in the future at a specifid price.

Front 21

Preferred Shares ASPECTS

Back 21

1. hybrid between debt and common shares

2. earn fixed dividends and are entitled to fixed liqudidation rights

3. seniro to common shares , but junior to debtholders and creditors.

4. the decision to pay dividends on preferred shares is within the boards discretion, and nonpayment is not an act of default.

5/have carrying forward rights to carry the obligation and acculmate the payments

6. participation rights- the right to participate w/ common shares in any dividends declared on the common

7. do not have voting rights, but can beobtained through statute or articles (many states grant right to vote on fundamental transactions--- such as mergers or amendments to teh articles that elimnate or dilute preferred shares' seniority.

8. may have conversion and redemption rights.

Front 22

what is the important question in issuing equity securities

Back 22

whether the stock is fully paid and nonassessable?

Front 23

par value

Back 23

1. artificial dollar amount in the articles of incorporation; it has no relationship to the market value of the shares

2. it represents the amount that must be paid so the shares can be issued as "fully paid and nonassessable"

3. acts as a price floor

Front 24

no par stock

Back 24

when stock is issued without par, shareholders are liable to the corporatio or its creditors omly to tje extemt tjey jave mpt [aod "the consideration fo rwhich the shares were authorized to be issued . . . or specified in tehir subscription agreement"?

Front 25

"Fully paid and non assessable"

Back 25

must also be issued for the proper kind of consideration, (mainly if the board considers it adequate)

if the shares are issued for future services or promissory notes, all that is required is that the shareholders be advised before the next shareholder's meetings

Front 26

an advantage of debt financing

Back 26

clarity

Front 27

Aspects of debt securities

Back 27

short term debt- to be paid within a year

long term debt- more permanent part of the capital structure.

dont have rights of voting, conversion, or redemption but these things can be incorporated

fiduciary duties not owed to debtholders

Front 28

bonds

Back 28

long term debt security- usually secured by a specific corporate assets, such as a new hospital wing

Front 29

debentures

Back 29

unsecured long term debt

Front 30

leverage

Back 30

debt financing is providing some of the corporations capital.

the greater the ratio of debt to equity, the greater the leverage.

higher financing increases chances for potential large returns and losses

Front 31

difference between interest payments and dividends

Back 31

IPs are tax deductable

Front 32

Signs of Real debt vs. De facto equity

Back 32

Financial returns:

RD- fixed

DF- Variable

Payment from earnings

RD- Must be paid regardless of earnings

DF- dividends are paid from earnings

Corporate managemen

RD- Debt holders not engaged in management

DF- Debt holders manage the business

Capitalization

RD- llow debt-equity ratio suggests "real debt"

DF- higher debt-equity ratio makes more likely debt characterized as equity

Front 33

Securities ACt of 1933

Back 33

requrires issuers of securities to rpovide investors with detailed information about the company, its management, its plans and finacnes, and the securities offered.

Front 34

firm commitment offerings

Back 34

how securities are typically sold from issuer (Creaeter of security) to underwriters (wholesalers) to dealers(retailers) who sell them to investors (consumers)

Front 35

Exemptions to section 5 of the securities acts

Back 35

transactions in tradinig markets
nonpunlic offerings
intrastate offerings by local issuers to local investors
small offerings,as defined by SEC rules
crowdfunding offerings, as defined by SEC Rules

Front 36

Intrastate Offerings

Back 36

to permit local offerings tha tare subject to state jurisdiction

any offering made and sold only to residents within a single state .

Front 37

Nonpublic offering

Back 37

Most important exemption

exists in 2 gorms (1) the 4(a)(2) statutory exemption

and the regulation exemption(506 of Regulation D)

Front 38

statutory Exemption

Back 38

4(a)(2)

Qualified investors- each investor must meet a sldiing scale rtest that factors both her ability toe valuate the investment (given her business and investment sophisticaiton) and the availability of informatio (based on both hr access to it and its actual disclosure)- fend for themselves

restricted securiittes-if qualified investors sell to unqualifeid investors who cannot fend for themselves. for this reason restrictions sold in a private placement are known as restricted securities, and issuers will often seek to preserve their exemption by placing contractiual restrictions on the transfer of securities

Strict compliance- private offerings can be made under the statute only to investors and offerees with the requisite sophistication and access to info. a sale to just one unqualified investor causes the exemption to be lost

Front 39

Regultion D- SEC regulatory exemption.

Back 39

exemptions turn on

1. dollar amount of offering

2 the number and kind of investors who participate in offering

3. whether regulation D offering is part of larger offering

4. the kind of advertisments usued

5. kind of info provided investors.

Front 40

underwriter

Back 40

any person who purchases shares from an issuer "with a view to their further distribution or who offers or sells shares for an isssuer in connection witha distribution.. in short an agent

Front 41

rule 144

Back 41

SEC permits the resale of restricted shares and resales by control persons into public markets without registration under an important sage harbor rule.

Front 42

rule 504

Back 42

small offerings subejct to state blue sky law

nonpublci companies can seel up to $1mil in securiites in any 12-month year. there is no limit on the number or kinds of inverstors or any disclosure requiement.

but general advertising and solicitation are not permitted.

securities are rewstricted.

to avoid these marketing restrictions they can register the offering with a state blue sky law that reuires public filinig and delivery to investors of a disclosure document or limit offering to accredited investors

Front 43

rule 505

Back 43

medium sizedofferings subject to sec conditions. companies can sell up to $5mil in securities in any 12 month period. no general advertisisnig or solicitations are permitted

unlimited accredited investors, but there ca be no more than 35 nonaccredited investors. and they all must receive speciified written disclosure and an opportunity to ask questions

Front 44

Civil Liability under securities act

Back 44

Statutory rescission for violations of ss5

antigraud liability for false registration statement

antifraud liability for false hoods in oublic offering

Front 45

ss5.3.1 Section 12(a)(1)- Rescission for Violations of ss5

Back 45

anny securities offered or sold in voolation of sss5 may be rescinded te get money back with interest

12(a)(1) makes it strict liability as well.

Front 46

5.3.2 Section 11- Damages for Deceptive Registration Statements

Back 46

allows recover damages from issuer if the registration statement contains any falsehoods, or half truths,

may be limited if purchased knowing of falsehood.

Front 47

Shareholders' Role in Corporate Governance

Back 47

little republic

The shareholders (corporations electorate) elect directors annually and vote on fundamental corporate transactions. nominal owners of the corporation, do not participate in managing the corporations business or affairs.

The board of Directors (the corporations legislative organ)- is the locus of corporate authority. "All corporate powers shall be exercised by or under the authority of , and the business and affairs of the corporation managed under the direction of, its board of directors"

The officers (the corporations bureacuracy) are delegated the day to day management of tehcorporationand are answerable to the board. all authority to act for (and to bind) the corporation originates in the board of directors

Front 48

corporate law protects shareholders through what

Back 48

3 principal mechanisms

voting rights

litigation rights to enforcement accountability

liquidity rights to sell their shares

Front 49

what's needed to call a special meeting?

Back 49

10 percent shareholderm

Front 50

what does the MBCA require of consent

Back 50

that it be unanimous

Front 51

what can shareholdres remove under the MBCA

Back 51

directors but not officers(board's decision)

Front 52

who can adopt amendments to the articles?

Back 52

the board adopts amendments for approval by teh shareholders

Front 53

under the MBCA who can amend the bylaws

Back 53

the shareholders have an inherent power to, but if the bylaws give power to the board it;s just coterminous.

Front 54

what does the MCBA say about excerpts for records from corporate -meetings

Back 54

permittable if specific enough and for proper cause.

Front 55

how is the board selected under the MBCA

Back 55

straight voting each year

Front 56

how does the cumulative voting formula work

Back 56

E=(N x S)/(D+1)+1

e=# of shares needed to elect desired number of directors

N= # number of directors that shareholder desires too elect

s= # of shares authorized to vte

D= # of directors

Front 57

where must staggered board be provided for?

Back 57

in the articles not the bylaws

Front 58

What are the Rule 14a-8 procedures

Back 58

any shareholder who owns 1% or $2k worth of a public company's shares for at least 1 year may submit a proposal

it must be in the form of a resolution that the shaerholder intends to introduce at the sharesholders' meetiing

must be submitted generally atleast 120 calendar days before the date proxy materials were sent for the last year;s meeting.

management has 14 days to provide a reason for rejection and a chance to correct if rejecting.

Front 59

what are the purposes of the SEC created exclusions for proposals

Back 59

Proposals inconsistent with centralized management- interfere with the traditional struction of corporate governance:

proposals that intefere with management proxy solicitation

proposals that are illegal, deceptive, or fraudulent.

Front 60

Propos inconsistent w/ centralized management-

Back 60

not "proper subject" for shareholder voting under state law

not significantly related -must relate to operations that account for atleast 5% of total assets or otherwise significantly related

ordinary business operations- can exclude that relate to the ordinary business operations

Front 61

proposals that interfere with managements proxy solicitations

Back 61

related to nomination or election to office of a specific nominee

conflicts with managements proposals

duplicative

recidivist

Front 62

10.2.2 elememnts of action of proxy fraud

Back 62

Misrepresentation or Omission

Statement of Opinion, Motives, or reasons
- 2 part test(misstates true beliefs and misleads about the subject matter of the statement

Materiality

Front 63

What is necessary if you bring a state suit for proxy fraud?

Back 63

show intenitonally misrepresented,

shareholders collectively relied on the representation,

they wouldve voted differently,

the representation caused shareholder loss.

may have to make a demand or have an excuse for why 1 wasn't made.

Front 64

What are the fiduciary duties?

Back 64

Duty of care

Duty of Loyalty

Duty of Good Faith

Front 65

duty of care

Back 65

addresses the attentiveness and prudence of managers in performing their decision-mkaing and oersight funcitons.

Front 66

the business judgment rule

Back 66

presumes directors carry out theri rfuncitons sing odod faith , after sufficient investigation, and for acceptable reasons.

unless the presumption is overcome, courts abstain from second gussing wellmeaning business decisions even when they are flops.

Front 67

what does corporate law do to protect well meaning directors,

Back 67

exculpation provisions in the corporations articles, statutory and contractual indemnificaiton, and directors' and officers' insurance

Front 68

DUTY of loyalty.

Back 68

adresses fiduciaries' conflicts of interest and requires fiduciaries to put the corporation's interests ahead of their own--- that is. fiduciaries cannot serve two masters. corporate fiduciaries breach tehir duty of loyalty when they divert corporate assets, business opportunities or proprietary information for personal gain

Front 69

flagrant diversion

Back 69

can be as simple as a corporate official stealing tangible corporate assets

breach of loyalty - unauthorized and the corporation recieved no benefit in the transaction.

Front 70

self dealing

Back 70

dwhen a fiduciary enters into a transaction with the corporation on unfair terms, the effect is the same fi heb had appropriated the difference between the transaction's fair value and the transaction's price.

a parent corporation that controls a partiall owned subsidiary can breach its duty to the minority shareholders of the subsidiary if the parent prefers itself at the expense of the minority

Front 71

executive compensation

Back 71

when a director or officer sells his executive services tot he corporation diversion can occur if the executives comp, exceeds the fair value of his services.

Front 72

Using corporate opportunity

Back 72

when a corporate fiduciary seizes for herself a desirable busines sopportunity that the corporation may have taken and prfoite d from,

Front 73

disclosure to shareholder

Back 73

who provide false or deceptive info to shareholders and they rely to their detriment, not only undermine corporate credibility and transparency, but frustrate shareholders' expectations of fiduciary honesty and accountability. duties of disclosure arise when directors seek a shareholder vote, and when corporate officials communicate to stock trading markets.

Front 74

trading on inside information

Back 74

when a fiduciary is aware of confidential corporate information--such as the impending takeover of another company- and he buys the target's stock, diversion can occur if the traing interferes with teh corporations takeover plans.

also happens if he trades with the company's shareholders using inside info

Front 75

selling out

Back 75

a corporate official who accepts a bribe to sell her office beraches a duty to the corporation.

a controllign shareholder who sells his contorlling interest to a new owner who then diverts corporate assets to herself exposes the remaing shareholder to the new owner's looting.

Front 76

Entrenchment

Back 76

USES THE CORPORATE governance machinery to protect his incumbency effectively diverts control from the shareholders to himself.

undermines the disciplining effect on mangement of a robust market in corporate control.

Front 77

judicial enforcement of duties

Back 77

generally brought through derivative suits by shareholders

Front 78

3 duties of management in publci corporations or 3 principal functions

Back 78

Enterprise decisions concerning operational and business matters

second, directors act on ownership issues, -mergers or takeover defenses

third-directors are respoosnibfe for oversight of the corporation such as reviewing senior exectuvies performacne and ensure the coproations compliance with legal norms.

Front 79

independnet directors

Back 79

do not have an emplyoment relationship with the corporation. supposed to monitor and oversee corporate management.

Front 80

Sarbanes -Oxley

Back 80

specifies the responsibilities of independnet directors on the audit committees of public corporations.

audit committtees must be composed entirely of independent directors, as defined by the SEC.

all reporting companies must dislcose whether at least one member of the audit committee is af inacnial expert.