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276 Cards in this Set

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  • Back
  • 3rd side (hint)
What are the 6 fact patterns common for the MA bar?
Six Fact Patterns -
1. Organization of corporation
2. Issuance of Stock
3. Directors and Officers
4. Shareholders
5. Fundamental Corporate changes
6. Securities and related topics
What are the requirements for forming a corporation in MA?
People, Papers, Act
What four things are required in the Articles of Incorporation?

Hint: No Person in DC
A - NAMES and addresses
1. Corporate Name
2. Name/addresses each incorporator
3. name/address each initial director
4. Name of registered agent and address of registered office
B. PURPOSE - can be all lawful activity
C. DURATION - or perpetual
D. CAPITAL STRUCTURE - Info regarding stock: Number of shares authorized to be issued, voting rights and preferences of each class - series - subclass.
NPDC - No Person in DC
What is the duration of a corporation?
Immortal unless the articles give it some definite duration
What activities do we presume an organization can engage in?
Any legal activities
If there's a statement in the articles that limits the activities a corporation can do, what are activities outside that scope called?
Ultra Vires acts
What do we do with Ultra Vires Acts?
1) Ultra vires contracts are valid
2) Shareholders can seek an injunction
3) Responsible individuals are liable to corp for UV losses
What act is required to form a corporation?
deliver notarized articles to Secretary of State & pay fee
What does the Secretary of State do if all our forms for incorporation are in order?
Files the articles
What is the importance of filing the articles?
Conclusive proof of valid formation = de jure corporation
What happens at the organization meeting?
After the filing of the articles by the Secretary of state, there's an organization meeting.

Then org. meeting where Directors:
1. Adopt bylaws
2. Select Officers
3. Conduct Appropriate business
Do the incorporators have to have their directors hold an organization meeting?
No - they can hold their own organization meeting and do what the directors would have done.
By what laws are MA corps governed?
1. Internal affairs of MA corp are governed by MA law - even if corp doing business in CA
What is the legal status of a corporation?
Corp = separate legal person - can sue/be sued/own prop - can make charitable contributions
Are officers or directors generally liable for what the corporation does? Shareholders?
O/D not liable for what entity does - SH also not liable
Who is generally liable for what a corporation does?
Corp as entity as entity is liable for what Corp. does
What is the legal effect of Incorporation by Estoppel and De Facto Incorporation?
A business failing to achieve de jure corp status still treated as corp.
What is the first thing you must show to get either Incorporation by Estoppel or De Facto incorporation?
To argue for either doctrine - must show unaware of failure to form de jure corp.
What are the requirements for De Facto Corporation?
a. Relevant incorp. Statute
b. Parties made good faith, colorable attempt to comply w/ it
c. Some exercise of corp. priv.

Some are Good Enough (Statute, Good Faith, Exercise)
Some are Good Enough
What is the legal effect of de facto incorporation?
If de facto corp. then corp for all purposes EXCEPT in an action by state (called quo warranto)
What is Corporation by Estoppel?
Corp by Estoppel - one dealing w/ a business as corp estopped from denying corp status -
Who can invoke corporation by estoppel?
i. may be invoked against those who dealt directly w/ business as corp.
ii. May also be used to prevent co from avoiding obligation by asserting lack of valid formation
Is corporation by estoppel more likely in tort or contract?

Status of De Facto Corporation and Corporation by Estoppel doctrines?
It's usually limited to contract, not tort.

Abolished in many states.
Are corporations required to have bylaws?
Adoption of bylaws not requirement - but virtually every corp has them
Who creates bylaws usually, and when?
Directors/Incorporators create bylaws at initial org. meeting
Who can repeal/amend bylaws?
Shareholders can repeal/amend

Directors can repeal/amend only if bylaws allow
What happens if the bylaws conflict with the articles of incorporation?
If bylaws conflict w/ articles - articles control
What is a promoter?
A person acting on behalf of corp not yet formed
When is a corporation liable for the contracts made before its incorporation?
Corp not liable until it adopts K
What are the ways a corporation can adopt a pre-incorporation contract?
1) Express adoption - board action adopting K
2) Implied - when Corp accepts a benefit of the K
Until when does a promoter remain liable for contracts made in the pre-incorporation phase?
Generally - unless K clearly provides otherwise, P remains liable on PI K until novation - an agreement w/ corp to replace P under K
What is the legal effect of adoption on the liability of the corporation and promoter?
Adoption makes the corp liable but does not relieve P until novation
What is the rule about promoters and profit?
Secret Profit Rule - P cannot make secret profit on her dealings w/ corp
How do we determine if there was a profit when a promoter is selling property he owned before becoming a promoter?
Sale to corp of prope of prop obtained before becoming P [Price paid by Corp - FMV]

So, when selling prior-owned property, price paid by P is irrelevant
How do we determine if there is a profit when a promoter is selling property he purchased after becoming a promoter?
Sale to corp of prop acquired after becoming P [Price paid by Corp - price paid by P]
What's the first thing we do when a promoter has made a profit?
See if it's secret - only secret profits are forbidden to promoters
What is a foreign corporation?
Any non-MA corp
What does a foreign corporation need to do to qualify in MA?
Foreign corp. qualifies by getting authority from MA state secretary - Cert giving info from articles + cert of good standing from home state

Plus - Pay fees to MA

1. Appoint/Maintain a registered agent
2. Maintain a registered office in MA
3. File an annual report of condition
In addition to filing its papers and paying its fees, what does a corporation have to do to qualify in MA?
D. Also
1. Appoint/Maintain a registered agent
2. Maintain a registered office in MA
3. File an annual report of condition
What are the consequences of failing to qualify in MA?
1. Civil Fine
2. Liable for late fees, interest, and penalties
3. Can't sue in state - but can be sued.
4. No other consequences
Besides avoiding fines and penalties, what benefit does a corporation get from qualifying in MA?
Corp can sue after it qualifies.
What are securities?
Securities are investments
What are the two general types of securities?
What are the types of debt security?
Secured by corporate assets = bond

Unsecured - debenture
What's a secured debt called?
Secured by corporate assets = bond
What's an unsecured debt called?
Unsecured - debenture
What is a debt security generally?
It's when an investor loans capital to the corporation - a loan.
What is an equity?
An Investor buys stock - has ownership interest in corp. Carries various rights see fact pattern 4
I want to make a debt security convertible or redeemible, where do I do that?
Debt security can be made convertible/redeemable in instrument.
I want to make an equity security convertible or redeemible, where do I do that?
Equity security can be made convertible/redeemable in articles.
What is redemption when we're talking about securities?
Redemption = forced sale to corp.
What is conversion when we're talking about securities
Conversion gives the security holder right to convert - debt to equity, or one class of stock to another
What are "authorized shares"
Authorized -=> maximum number of shares a corp. can sell
What are "issued shares"
Issued -=> total number of shares a corp. don't have to sell all authorized.
What are "outstanding shares"
Outstanding -=> issued but not reacquired by corp.
What is issuance of stock?
Corp sells or trades own stock - way to raise capital for corp.
1. What is a subscription?

2. Are pre-incorporation subscriptions revocable?
1. Subscription is written offer to buy stock from corporation

2. Pre-incorporation subscriptions are irrevocable for six months unless it says otherwise or all subscribers agree
Are post-incorporation subscriptions revocable?
Post-incorporation subscriptions are revocable until acceptance
When do the corporation and subscriber become obligated under their subscription agreement?
Corp and the subscriber become obligated under subscription agreement when the board accepts the offer
1. What form of consideration is acceptable for a a corporation to receive when it issues stock?

2. What might create "water?"
1. Any tangible/intangible benefit to corp. Includes money, tangible/intangible property, services already performed, notes, promise of future services, release of a claim - split some states don't allow anything that would cause "unpaid stock" = water - some states do allow

2. Promissory notes or future services
What is par stock?
Par - minimum issuance price
What is the effect of a board of directors determination about the adequacy of consideration?
MA allows BOD to determine what amount of consideration is adequate, even if below par - conclusive regarding validity of issuance.
What is no par stock?
No Par - No minimum price - Board sets issuance price
What is re-acquired stock?
Re-acquired stock - stock previously issued and been reacquired by corp.
How do we treat re-acquired stock? Par or no par?
Sale of re-acquired stock is treated as no par.
Can C. Corp issue 5k shares for Green Acre?
Form of consideration ok - real property = tangible benefit to corp. Amt of consideration = conclusive presumption adequate
C issues 10k shares of $3 par stock to X for nothing. Corp (or creditors) want to recover 8k of water. Who can be held liable?
If board knowingly issued stock below par, directors and X could be liable.
X has watered stock and transfers it to A - can A be held liable for this transfer?
In X->A tx, A not liable if acts in good faith.
What are pre-emptive rights?
Right of existing SH to maintain % of ownership by buying stock whenever new issuance
How do we treat issuance of re-acquired stock for pre-emptive rights?
Issuance of re-acquired stock -=> issuance
Do pre-emptive rights exist normally in corporations?
Pre-emptive rights only exist if indicated in articles
What is the first requirement for the board of directors?
1 or more natural adult persons.
How is the number of directors normally set?
The number is usually set in articles or bylaws

It can be set by default however
If the number of directors is not in the articles or bylaws, what is the default number?
if not in either of those, then if:

1 SH = 1+ D,

2 SH = 2+ D,

3+ SH = 3+ D
Can the board be staggered?
What are the ways a board of directors can be staggered?
Articles can divide board by halves or thirds w/ 2 or 3 yr terms (halves = 2yr term, thirds = 3 yr term)
How must publicly traded corporations boards be set up?
Publicly traded corps must be staggered w/ 3 classes
Who elects directors?
Shareholders elect directors
Who can remove a director before his term expires?
SH and other directors can remove directors before term expires.
If shareholders move to remove a director, what is required?
Maj of shares entitled to vote must vote for removal - w/ or w/o cause for private corps.
Who fills a vacancy in the board of directors?
Board or Shareholders fills vacancy in board
What are the ways a board can take action?
Two ways - (1) unanimous written consent (email/fax ok) to act w/o a meeting OR (2) a meeting (held anywhere) that satisfies quorum and voting requirements
What happens if an action is taken without unanimous written consent or a meeting?
The action is void unless later ratified by a valid act.
Does a conference call count as a meeting?
Yes, as long as all participating can hear each other simultaneously
Where are notice requirements usually found?
Notice requirements for directors' meeting generally can be set in bylaws
What is the general notice required for regular meetings?
Notice not required for regular meetings
Notice required for special director meetings?
2 days notice giving time/place
If notice is required, what are the requirements?
If notice required - must be in writing, unless oral notice is reasonable under circumstances.
What happens if there is a failure to give notice?
Failure to give notice to each director renders acts taken at meeting void unless directors not notified waive the defect.
How might a director waive a notice defect?
In writing + signed + filed w/ minutes

By attending meeting w/o objection
Are proxies allowed in director voting?
Proxies are not allowed for director voting - void as against public policy
How many of the directors do we need to take action?
Quorum required - majority of all directors to do business - if quorum, passing resolution only requires majority vote of those present.
What happens if we start with a quorum but a director leaves?
If a quorum exists and directors leave, you can lose the quorum!
What does the Board of directors do?
Generally - BOD manages business of corp. sets policy, supervises Os, declares distributions, decides when corp. will issue stock, recommends fundamental corp. changes to SH
Can a board delegate management functions to a committee?

What are the limits to what a committee can do?
Board can delegate substantial mgmt functions to a committee.

But a committee cannot adopt or amend bylaws, declare distributions, change size of board, declare or recommend a fundamental corp. change to SH or fill vacancy in board
What is a committee of a board of directors?
Committee consists of 1 or more D.
What is the standard of care for directors?
A director must (1) act in good faith, (2) with the care that a person in like position would reasonably believe appropriate, and (3) with the reasonable belief that it is in corp. best interest.
What is Nonfeasance?
A failure to act - director does nothing
J, director, fails to attend any board meetings or keep abreast of co business. What do we write on the essay?
State standard - A person in like position would do something regarding the business. J never did anything, so he has breached the duty of care. BUT HE IS ONLY LIABLE IF his breach caused a loss to the corp. Not enough to show breach.
What's one key way a director could commit nonfeasance?
D fails to supervise officers which harms co. Key fact is size of business - if small, D knows more about day-to-day operations.
What is Misfeasance?
Director does something that hurts the company.
Directors vote to start product line that hurts co. How do we write about this on the essay?
[State the standard] Here, the directors' actions caused a loss to the corp. BUT a director is not liable if she meets the business judgment rule. A person in like position would do homework, did they deliberate, analyze, etc.

A court will not second-guess a business decision if it was made in good faith, informed and had rational basis. Directors only in trouble if irrational or grossly negligent
What's the business judgment rule?
A court will not second-guess a business decision if it was made in good faith, informed and had rational basis. Directors only in trouble if irrational or grossly negligent
GIR - Good-faith, Informed, rational
What is the duty of loyalty?
The standard: A director must (1) act in good faith, (2) with the care that a person in like position would reasonably believe appropriate, and (3) with the reasonable belief that it is in corp. best interest.

# 3 is the duty of loyalty

The Standard requires duty of loyalty - in determining "best interest" can look at any relevant group + economic/community concerns - no single group is determinative
Who do we look at when determining "best interest" for the duty of loyalty?
In determining "best interest" can look at any relevant group + economic/community concerns - no single group is determinative
Interested director transaction?
Any deal b/w corp. and one of its directors
What happens when there is an interested director transaction?
Fair OR Known and Approved

State the Standard - Interested director transaction will be set aside UNLESS the director shows (1) the deal was fair to the corp. when entered or (2) her interest and the material facts were disclosed or known and the deal was approved by either:
(A) Majority of all disinterested Directors (at least 2)
(B) Majority of all disinterested SHARES

A quorum is a majority of disinterested directors (at least 2) or a majority of disinterested shares.

Approval by one of these groups does not make the deal OK - just means it's not automatically invalid. Court will look to other factors - still liable if a waste of corporate assets.
What if the Director is involved in a competing venture? What do we write on the essay?
State the standard then say: A Director cannot compete directly with her corporation. She is a director of X and owes them a fiduciary duty of loyalty.
What does the duty of loyalty require with regards to corporate opportunities?
D cannot USURP a corporate opportunity.
What do we write on the essay if a director usurps a corporate opportunity?
If D buys something that would help company, State the Standard then say - Director may not usurp a corporate opportunity. Therefore, she cannot take it until she (1) tells the board and (2) waits for the board to reject the opportunity.
What is a corporate opportunity?
Some courts say anything necessary to corp. Some say it's anything in corp's business line. Ask: "Is it unfair to the corp. that D took it?"
Can a director argue that he didn't usurp the opportunity because the company couldn't pay for it?
Financial inability to pay for opportunity does not excuse usurping.
What combo do we need to look for with respect to the duty of loyalty?
D buys something that he should have let C get then sells it to C for profit - Both a usurpation of corporate opportunity + interested director transaction.
Can you summarize the duties a director owes his corporation?
1. Good faith

2. Care

3. Loyalty
What other ways might a director be found personally liable in MA?
1. Ultra Vires acts

2. Improper loans

3. Improper distributions
When is a loan to a director proper?
A. Approved by majority of disinterested shares OR

B. Board determines loan benefits corp. and specifically approves it (loan to Dir to take business courses)
Any rules we should know about with respect to loans and public companies?
SOX forbids most loans to executives registered corps (traded on stock market)
What's the general rule about which directors will be held liable for the acts of a corporation?
General rule: Director presumed to concur unless dissent/abstention in writing in corp records
What does it mean to register one's dissent/abstention in the corporate records?
1) Minutes
2) Writing to corp. sec. at meeting
3) Writing (email/fax) to corp. sec. immediately after adjournment
Can I dissent to a corporate act orally?
No, it's not effective
Can I dissent to something I voted for?
What exception is there to the rule that any director who didn't dissent/abstain is liable for that act?
1) Absent directors not liable
2) Good faith reliance on info, opinions, reports, statements prepared by:
a) Corp. officers or employees
b) Professionals
c) Committee of which person relying was not a member
Must have reasonable belief in the confidence of those relied upon.
What duty do officers owe the corporation?
Owe same duties of care and loyalty as directors
What is the status of officers?
Status = Agents of corp - so bind corp. by acts for which have authority to bind it.
What must a deed to corporate land have?
must be signed by P or VP PLUS Treasurer
How much inherent power does a corporation's president have in MA?
Pres has limited inherent authority - his sig. alone does not bind corp unless BOD gives it to him
Who elects officers?
elected and removed by directors - directors set compensation
What happens if the Directors fire the president?
If Directors fire Pres - corp could be liable for breach of contract damages, but cannot force rehiring.
What happens if the Shareholders fire the president?
Trick question. SH hire and fire directors - Directors hire/fire officers - SH do NOT hire/fire officers
When MUST a corporation indemnify its officer's legal bills?
if Officer wholly successful on merits or otherwise in defending action - show won a judgment on any basis - corp. must pick up tab
When can there be permissive indemnification?
O must show: acted in good faith + reasonable belief that her act in best interest of corp.
Who determines whether the officer acted in the best interest of the corporation for indemnification purposes?
Determined by disinterested directors/shares or independent legal counsel
Can an officer get indemnification even if O doesn't qualify for compulsory or permissive indemnification?
court can order indemnification if fair and reasonable in view of all circumstances - usually limited to costs/attorneys' fees - not judgment
Can the articles limit or eliminate director liability?
Articles can provide for limitation or elimination of director liability for damages
Can the articles limit or eliminate director liability for ALL liability?
No, not for:
A. Breach of duty of loyalty
B. Intentional misconduct
C. Wrongful personal benefit
Can the articles limit or eliminate officer liability?
No it only applies to directors in MA
Can a corporation insure against liability?
Corp can purchase insurance for director or officer liability
What's the general rule about Shareholder liability?
Generally SH not liable for acts/debts of corp, unless court pierces the corporate veil and holds SH personally liable if (1) they have abused the privilege of incorporating and (2) fairness requires it
What's the standard for piercing the corporate veil?
PCV standard - MA courts may PCV to avoid fraud or unfairness (never automatic)

FU! - Fraud/Unfairness
What are the two major times when a MA court will pierce the corporate veil?
Alter ego

X & Y are SH of C corp. X is also CEO. X commingles personal/corporate funds, uses corp. car as own, and uses corp. credit card to pay for personal purchases. Can creditor of the corp. who has been unable to collect its claim from the corp. collect from either X or Y?
(Start with General Rule) Generally, stockholders are not liable for the acts or debts of the corporation unless the court pierces the corporate veil (PCV) and holds SH personally liable if (1) they have abused the privilege of incorporating and (2) fairness requires it. (Then standard for piercing) MA courts may PCV to avoid fraud or unfairness. Here, a court might PCV if X's failure to respect the separate corporate entity harmed creditors. Sloppy administration generally is not enough for PCV, but here X treated the corporation as his alter-ego by treating the corporation and personal assets as interchangeable. If that resulted in unfairness, the court may PCV. Here, there is unfairness b/c creditors are not being paid.

If the court allows PCV, only X would be liable, since Y has done nothing wrong.
S is shareholder of G, a corp. that hauls nuclear waste. G does not carry insurance. G has an initial capitalization of $1,000. V is injured when one of G's trucks melts down. Can V sue S directly?
General rule; PCV standard - Here a court MIGHT PCV because the corporation was undercapitalized when formed. SH failed to invest enough to cover prospective liabilities. There is no doubt there was an undercapitalization here.

MA courts generally may be more willing to PCV for a tort victim than for a contract claimant, since the contract claimant had an ability to do due diligence of the corporation before choosing to do business with them.
When else should I look for piercing the corporate veil facts?
Related corporations - where a parent forms a subsidiary to avoid obligations.
When might shareholders manage the corporation?
SH can manage corps directly in close corp.
Whare the characteristics of a close corporation?
Characteristics of close corp:
A. Few shareholders
B. Stock is not publicly traded
C. Substantial shareholder involvement in management
How would the shareholders of a close corporation go about getting rid of their board of directors?
SH can eliminate BOD and run corp. Must be made by unanimous SH agreement in writing.
Would the shareholders getting rid of their BOD be a basis for piercing the corporate veil?
No - This agreement alone is not a basis for PCV, would still have to show abuse + fraud/unfairness
What duty does a Shareholder owe others in a close corporation?

Why is that important?
Utmost good faith + loyalty

A breach of that gives rise to a claim other S can make to sue you, can get personal liability!
How does the duty owed in a close corporation compare to that in other corporations?
More stringent than duty of loyalty owed directors
What is the rule for conducting a close corporation?
No damage to minority if less harmful alternative.

Controlling shareholders in close corp cannot pursue conduct when an alternative exists that would be less harmful to the minority shareholders. Reason so protective: Minority S have no way out, no public market for stock
What should I look for in close corporation fact patterns?
Watch for any oppression by controlling stockholders:

One example is selling control w/o reasonable investigation of the buyer to someone who loots the corp. The seller must investigate character/reputation of buyer.
What other examples can you give me to look out for in close corporations?
1) Deny employment when no business reason to do so.

2) Freeze out - where we freeze minority out
O is majority stockholder of XYZ, V is minority shareholder. Ollie causes XYZ to merge into O corp, of which he is sole shareholder. Has O breached duty to V?
Yes - this is a freeze out - he has breached a duty owed to V - can't pursue a course of conduct if a less harmful alternative to minority shareholder exists.
What corporate form might licensed professionals form?
Licensed professionals (Lawyers, Drs, CPAs) may incorporate as a "professional corporation" (must have that or PC in name)
What restrictions on partners does the law have for professional corporations?
Shareholders must all be licnesed and may only practice one profession - unless law allows more than one to be practices.
Can a PC employ non-professionals?
May employ non-professionals, but officers/directors must be licensed professionals.
Who's liable in a PC for malpractice or misconduct?
If malpractice/misconduct - liable = person committed it + PC (the other professionals are not liable)
What's the benefit of a PC over a partnership?
Shareholders are not liable for each other's malpractice or corporate obligations - advantage over a partnership.
What rules govern a PC?
Rules governing regular corporations apply to PC.
What is a derivative suit?
SH enforcing corp's claim, not own. Corp fails to pursue claim, so SH sues on its behalf.
What should I ask to determine if it's a derivative suit?
Always ask: Could the corp have brought this action? If so, derivative b/c SH vindicating the corp's rights.
Derivative or Direct?

S sues X for breaching K with Corp

S sues BOD of Corp for usurping corp opportunities

S sues BOD for oppression of S in close corp
S sues X for breaching K with Corp - Derivative suit

S sues BOD of Corp for usurping corp opportunities - derivative

S sues BOD for oppression of S in close corp - direct suit
Who gets the recovery in a derivative suit?
generally the recovery goes to corp. S receives costs and atty's fees, usually from corp.
What happens if the derivative suit is unsuccessful?
· Only atty fees/costs if the suit brought substantial benefit to corp. unlikely since lost

· S liable to D for their atty's fees if court finds she sued w/o reasonable cause or for improper purpose

· Other S can't sue on same TX later - res judicata
What are the requirements for bringing a derivative suit?
1. Stock ownership
2. Adequately represent the interests of the corp.
3. Written demand on directors to bring suit for corp
4. Wait 90 days, unless (1) BOD rejects demand or (2) irreperable harm from waiting
5. Corp can dismiss if disinterested shares / directors find in good faith that suit is not in best interest of corp.

Oh Really, Darn We Didn't (Own, Represent, Demand, Wait, Dismiss)
What are the requirements for stock ownership for a derivative suit?
Own at time or operation of law, Own throughout, Continuing Wrong

At time claim arose or have gotten it by operation of law (death, divorce) from someone who did own it at that time.

Must own stock throughout litigation

If case concerns a "continuing wrong" must own stock at some point during the wrong.
When do I not have to wait 90 days after writing a demand letter?
(1) corp. rejects demand before that or

(2) waiting 90 days would cause irreparable harm to the corp.
How might a corporation dismiss a derivative suit?
if majority of disinterested shares or majority of disinterested directors find in good faith after reasonable inquiry that suit is not in corp's best interest.
What will the court look at in determining whether a corporation's dismissal of a derivative suit was proper?
Court can scrutinize whether those who make this finding are disinterested and made a reasonable inquiry.
What is the burden of proof when determining if a dismissal of a derivative suit was proper?
If it finds disinterested + reasonable inquiry it will dismiss the case. Usu. S has burden to show standard not met.

If a majority of Board is interested, then burden on Corp. to show standard was met.
We've got a derivative suit going, what do we do with the corporation?
Corp must be joined as a party in the case. Even though suit is on its behalf, corp. joined as D
Can the Shareholder settle the derivative suit on his own?
No dismissal or settlement w/o court approval.

Court can give notice to those who would be affected, and get their input on whether dismissal or settlement should be approved.
Who gets to vote in shareholder elections?
general rule is that record stockholder as of record date has right to vote
What's a record stockholder?
Record stockholder is person shown as owner in corporate records.
What is record date?
Record Date is a voter eligibility cut-off no more than 70 days before meeting.
What happens if a person sells their share after the record date?
The previous owner is entitled to vote
What are the exceptions to the general rule that the record owner votes his shares?
1. Corp does not vote reacquired stock

2. If S dies, executor can exercise vote even though not owner on record day

3. Proxies
What is a proxy?
a proxy is:
a) A writing (fax and email ok)
b) Signed by record shareholder
c) Directed to secretary of corp.
d) Authorizing another to vote the shares
How long is a proxy good for?
· Proxy good for 11 months unless it says otherwise
How can I revoke a proxy?
· Can revoke proxy in writing OR

by showing up at meeting and stating intention to vote share
The proxy says it's irrevocable, can I still revoke?
· Can revoke proxy even though it says irrevocable
Can there be proxy voting by directors?
no proxy voting in Director voting
What if I really want to make the proxy irrevocable, is there a way to do that?
If S gives someone irrevocable share plus interest (by selling share, option or pledge) then it really is irrevocable
◊ Must say conspicuously on instrument irrevocable
◊ Must be accompanied by an interest
What are the requirements for a voting trust?
Requirements for a voting trust (real trust under trust law!)
a) Written trust agreement controlling how shares will be voted
b) File copy w/ corp.
c) TX legal title of shares to voting trustee
d) Original shareholders receive certificates and retain all shareholder rights other than voting

What They All Feel is TaXes Suck Radishes (Written Trust Agreement, File, Transfer Shares, Retain rights)
What They All Feel is TaXes Suck Radishes
What's the time limit on a voting trust?
No time limit on voting trust
What are the requirements ofr a voting ("pooling") agreement?
Requirements for voting ("pooling") agreement
a) Open to shareholders only
b) Must be in writing and signed (That's it!)
Are voting agreements enforceable?
Voting agreements are specifically enforceable under the new MBCA
What are the ways that shareholders can act?
1) Unanimous written consent of holders of all voting shares OR
2) A meeting (held anywhere) that satisfies quorum and voting rules
If neither is met, action is void unless later ratified
My company hasn't had an annual meeting in three years, what can I do?
If not held, SH can petition court to order one
Who can call a special meeting?
(1) board

(2) holders of at least 10% of voting share (40% of public company) or

(3) by someone else as provided by bylaws or articles
What notice must be given for meetings?
must give written notice to every shareholder entitled to vote - for every meeting (annual and special) b/w 7 & 60 days before meeting
What does the notice have to contain?
When, Where, purpose

Can't do anything other than stated purpose - void
What happens if there's not adequate notice?
If no notice - actions taken at meeting void unless those not sent notice waive notice defect
How might I waive a notice defect?
a) Express - in writing and signed anytime and filed w/ the minutes of meeting
b) Implied - attend meeting w/o objection at outset of transaction of business
What percentage of shares must be present to do business?
Must be a quorum represented at meeting - quorum of shares represented, not number of shareholders.
Can I change the requirements for a quorum?
Bylaws can move % required for quorum up, not down
What percentage of those present must vote to do business?
To do business, need a majority of the shares actually voted - abstentions don't count
Who can I cumulatively vote for?

What's the purpose of cumulative voting?
Cumulative voting allowed only for voting for directors

Gives small shareholders a better chance of influencing the vote for director
How do you vote cumulatively?
Multiply number of shares times number of directors - then you can pool those into one director
What do you need to have cumulative voting?
Articles must explicitly give cumulative vote
What percentage do you need to win a seat in cumulative voting?
Need 100/(X+1)+1 to win seat

So, if 3 seats, need 100/(3+1) + 1 = 26%
There's a restriction on transfering shares, a shareholder violated it. If I want to bring an action against the SH what do I look at?
if restriction if valid, then can have action against SH
There's a restriction on transferring shares and a SH violated it. Can I bring an action against the tranferee?
Action only allowed if:
i. Restriction conspicuously noted on front and back of the stock certificate OR
ii. Transferee had actual knowledge of the restriction
Kato is SH - his stock is subject to a stock transfer restriction that requires him to offer it to corp. first. He gives it to Paris Hilton in violation of restriction.

Who can we sue?
Here, right of first refusal okay, assuming corp offers fair price - so we can sue Kato.

No facts that Paris was aware or restriction conspicuous on front/back, so no suit against her.
Who can see the books of a corporation?
Any S can get right to see books/records
What is the right to see routine documents?
unqualified right to inspect.
What notice do I need to give to see routine documents?
Need only give five days written notice.
Do I need to state a purpose to see routine documents?
No need to state purpose.
If I want to see important documents, what do I need to do?
Written demand w/ proper purpose

(Accounting records, minutes of board meetings, record of shareholders) need to make a written demand stating a proper purpose:
A. One related to your role as an S
B. Can be a purpose hostile to board

Why Read Hemingway (Written, Related, Hostile)
Why Read Hemingway
What notice do I need to see important documents?
5 days notice
When must the shareholder list be made available
SH list must be made available for SH meetings
What happens if the corp denies my request to see the important documents?
SH moves for court order - if successful, generally recovers costs and atty's fees incurred in making motion
Does a director need to give notice or make a request to see documents?
What are the options for payments to SH?
Payments to SH - can be (1) dividend, or (2) to repurchase SH stock or (3) to redeem stock - forced sale to corp. at price set in articles
Who decides to issue distributions?
Distributions are at board's discretion
What would I have to show to force the board to do a distribution?
must have strong show of abuse of discretion (Corp. consistently making profits but no distributions + board pays themselves a bonus)
Board of Directors declares dividend of $400k - if outstanding stock is

100k of common stock
each $4/share
Board of Directors declares dividend of $400k - if outstanding stock is

100k of common and 20k of preferred w/ $2 dividend preference
(preferred means pay first) Preferred gets $2/share ($40k) then the $360k divided b/w common shares - $3.60
Board of Directors declares dividend of $400k - if outstanding stock is

100k of common, 20k of $2 preferred that is participating
(Participating means pay again.) So, paying the $2 first, ($40k) leaves $360k, divided by 120k shares = 3.
Board of Directors declares dividend of $400k - if outstanding stock is

100k shares of common, and 20k of $2 preferred that is cumulative (and no dividends have been paid in 3 years.)
Cumulative means add them up. Accrues year to year. So, corp owes them $8 ($160k) leaving $240k for the rest
Can a corporation make distributions even if it lost money last year?
Corp can make distribution even though lost money last years, as long as not insolvent
What does it mean to be insolvent?
1) Unable to pay debts as they come due in usual course of business
2) Assets are less than liabilities and L include dissolution or liquidation preferences (see below)
Who is liable for improper distributions?
Directors + SH who knew improper

Directors are personally liable for unlawful distributions, as are SH who knew the distro was unlawful when they received it
What is the mens rea for Director liability for improper distribution?
Strict liability for all D who assented to the distribution - needs written objection
Is there a defense to improper distribution?
Remember defense of good faith reliance - D's claim reliance in good faith on financial info.
What are the characteristics of a fundamental corporate change?
1. Extraordinary occurrences, so require board of director action AND
2. Notice of all shareholders (regardless of whether entitled to vote) AND
3. Approval by 2/3d of the shares entitled to vote (abstentions count against)
4. Possibility of dissenting shareholder right of appraisal
What is the right of appraisal?
The right of a SH to force corp. to buy her shares at fair value
What actions by a corporation will trigger the right of appraisal?
a) Merger
b) TX of substantially all assets outside ordinary course of business
c) TX of shares in a share exchange
d) Some amendments to the articles
e) Conversion
How do you perfect your right of appraisal?
a) Before SH vote, file w/ corp. written notice of objection and of intent to demand payment AND
b) Abstain or vote against the proposed change AND
c) After vote, make written demand to be bought out.
What happens if the SH and corp cannot agree on a fair value for his shares in right of appraisal?
If SH and corp cannot agree on fair value of shares, corp. sues and court may appoint an appraiser. Must sue w/in 60 days after S's demand, otherwise, must pay what he demanded.
What about public companies, right of appraisal?
No right of appraisal if stock is listed on stock exchange and has 1,000 or more shareholders
How do you amend the articles?
1. BOD action AND notice to all shareholders
2. SH approval 2/3 of those eligible to vote must vote for it - except these types of amendments where only majority of shares eligible to vote:
a. Changing name
b. Changing number of authorized shares
3. If approved - deliver amended articles to secretary of state
4. There is a dissenting SH right of appraisal if:
· Amendment materially and
· Adversely affects your stock
What article amendments don't require 2/3 vote of shareholders?
Name change

Changing the number of authorized shares?
When is there a right of appraisal for changing the articles?
When it materially and adversely affects your stock
What do you do to merge?
1. BOD action AND notice to all SH of the disappearing company
2. SH approval (often only for disappearing corp) 2/3 of those eligible
3. No SH approval required in "short-form" merger - where a 90% or more owned subsidiary is merged into a parent co.
4. If approved, deliver articles of merger to state secretary
5. Dissenting SH right of appraisal even in "short-form" merger for disappearing co.
6. The surviving co. succeeds to all rights and liabilities of the constituent co.
What do I watch out for in mergers?
Freeze out merger
For whom is it a fundamental corporate change to do a share exchange?
The selling company.
What is a share exchange?
one company acquires all the stock of another
What's required for disposition of all or substantially all of the assets not in the ordinary course of business or share exchange (one company acquires all the stock of another)
1. BOD action (both corps.) and notice to all of the selling co's SH
2. Approval by TX'ing co.'s SH 2/3d
3. Dissenting SH right of appraisal only for selling co.
4. Generally, co buying assets not liable for debts of the acquired co. unless deal says otherwise or unless the co purchasing assets is merely a continuation of the selling co.
Is there successor liability for share exchange or buying all assets not in ordinary course of business?
No - original company still exists (though only money, no assets) - so no successor liability
What is conversion wrt fundamental corporate change?
Converting from one form of business to another (corp. to LLC)
What is required for conversion?
Board action and approval by 2/3 of shares entitled to vote - deliver articles of conversion to sec. of state.
What are the types of dissolution?
1. Voluntary
2. Involuntary
3. Administrative
What do you need for voluntary dissolution?
A. BOD action and approval by 2/3 of shares entitled to vote

B. Deliver articles of dissolution and give notice to creditors.
How might SH force a dissolution?
40% of voting share can petition b/c of

1) Director deadlock that threatens irreparable harm to corp. or

2) SH deadlock and failure for at least 2 annual meetings to fill a vacant board position

Dear, I Hate Dating 2 Victims (Deadlock, Irreparable Harm OR Deadlock + 2 missed meetings and Vacancy)
Dear, I Hate Dating 2 Victims
Is there an alternative to dissolution when there are dissatisfied SH?
Alternative to dissolution: court may order buyout of petitioning SH - especially if we're talking about a close corp.
How might a creditor force aninvoluntary dissolution?
Creditor can petition b/c corp is insolvent and either:

1) Has an unsatisfied judgment against corp. OR

2) Corp admits the debt in writing.
What is an administrative dissolution?
Sec of State can effect dissolution for corp failure to file required reports or pay taxes for 2 years or if corp inactive or if dissolution in public interest
Does the Secretary of State go to court for an administrative dissolution?
They don't do it judicially, but administratively - on his own
What does the Secretary of state need to give a corporation before administratively dissolving it?
Must give notice & 90 days to fix problem
What happens after company files articles of voluntary dissolution or court order of involuntary dissolution?
Corp. stays in existence to wind up
What is winding up?
Winding up:
A. Gather all assets
B. Convert to cash
C. Pay creditors
D. Distribute remainder to SH pro-rata by share unless dissolution preference
What's a dissolution preference?
Dissolution preference - pay first in dissolution (this is relevant to one of the definitions of insolvent)
What's the rule about distributions to SH in dissolution?
Cannot distribute to SH w/o making adequate provisions for foreseeable liabilities to creditors
What is 10b-5 aimed at?
Fraud or misrepresentation (or nondisclosure) in connection with the purchase or sale of any security
What are the critical elements of 10b-5?
1. Instrumentality of interstate commerce
2. Improper transaction
3. Materiality
4. Proper plaintiff
5. Proper defendant
6. Scienter
7. Reliance
What does it mean, instrumentality of interstate commerce?
Deal goes through national exchange
What types of transactions are covered by 10b-5?
1. Misrepresentation of material information

2. Trading on material inside information when there is a duty to disclose (comes from a relationship of trust and confidence with the shareholders of the corporation).

3. Tipping - passing along material inside information.
What is trading on inside information?
Insiders cannot trade on secrets. They have a duty to abstain or ensure disclosure so everyone's on an equal footing?
Define tipping?
Passing along material inside information for a wrongful purpose.
Define materiality for 10b-5?
The misrepresentation or omission must concern a "material" fact - one reasonable investor would consider important in making an investment decision.
Who are the proper plaintiffs in a 10b-5 question?
1. SEC
2. Private action for damagers by BUYER or SELLER of securities.
Proper defendants in a 10b-5 question?
Any person - or entity

1. A company that issues a misleading press release

2. Buyer or seller of securities who misrepresents material information

3. Buyer or seller of securities who trades on material inside information (only if there is a duty to disclose - comes from relationship of trust and confidence with shareholders of the corp.)

4. Tipper or tippee
L, a lawyer for X co, learns that X co is planning on merging with Y Corp. She phones son Joe to urge him to buy stock. He buys stock because of this.

Is L a tipper?
Did she benefit?
Yes - L is a tipper because:

1. She passed along material inside information

2. She benefited - How?

Making a gift or enhancing reputation is enough
L, a lawyer for X co, learns that X co is planning on merging with Y Corp. She phones son Joe to urge him to buy stock. He buys stock because of this.

Is Joe a tippee?
Joe's a tippee because he:

1 - traded on this tip
2 - knew or should have known that the information was improperly passed.
D is a director of C corp. While waiting for a concert, D tells her husband about a new, secret processing method that C Corp has just developed. Bobbitt, who is sitting in the next row overhears the conversation and buys stock based in C Corp stock on the national exchange.

Any violations of 10b-5?
No, at worst, D was merely negligent, which is not enough for 10b-5 liability. There was no tipper Without a tipper, there can be no tippee.
What is the scienter requirement for 10b-5?
D must have an intent to deceive, manipulate or defraud.

Recklessness suffices.
What should I know about reliance element in 10b-5?
Reliance is presumed in public misrepresentation and nondisclosure cases.
What is Section 16B aimed at?
Speculation by directors, officers and ten percent shareholders.

Strict liability
What does Section 16B provide for?
Provides for recovery by the corporation of "profits" gained by certain insiders from buying and selling the company's stock.

The theory is that it's bad for market confidence to have insiders buying and selling own company's stock.
Can a Section 16B be brought as a derivative suit?
Who does Section 16B apply to?
Reporting Corporation:

1 - listed on national exchange


2 - at least 500 shareholders and $10M in asssets
Who can be defendants in Section 16B?
1 - Director - who bought or sold
2 - Officer - who bought or sold
3 - Shareholder who owns more than 10% - BOTH when she bought AND sold
What type of transaction is covered by Section 16B?
Buying and selling stock within a single six-month period (short-swing trading)

No fraud or inside information required
What happens when 16b applies?
All "profits" from such "short-swing trading" are recoverable by the corporation.

If, within six months before OR after any sale, there was a purchase at a lower price, there was a profit.
D is a director of Acme, Inc. which is a reporting company. In 2006, D bought 700 shares of Acme stock for $10/share.

In Jan 2010, D sold 700 shares for $6/share. In March 2010, D bought 200 Acme shares for $1/share.

What result?
Doesn't look like a profit in real-world terms, but D owes the corp $1,000. Focus is on sale.

Here, the sale was in Jan. 2010, when D sold at $6. She bought within 6 months AFTER the sale.

Multiply $5 profit by 200, the amount of the "shorted" shares.