1
Q
Formation - statement of purpose - consequences of ultra vires act
A
- Valid as to third parties
- Shareholders can seek injunction to stop
- Corporation can sue responsible managers for losses
2
Q
Formation - forms of corporation if incorporation fails
A
De facto corporation
- Relevant incorp. statute exists (always does)
- Parties made a good faith, colorable attempt to comply with the statute, AND
- Some exercise of corporate privileges (acting like we have a corporation)
Corporation by estoppel
- One who treats a business as a corporation may be estopped from denying that it is a corporation.
- Applies only in contract cases, not tort cases (tort creditors not choosing to deal with corporation)
3
Q
Formation - pre-incorporation contracts - promoters
A
Promoter is person acting on behalf of corp not yet formed; may enter into K on behalf of such corp
Liability of corporation: not liable on pre-incorporation K until it adopts
- Express: board takes action adopting (e.g., resolution)
- Implied: corporation accepts the benefits of the contract. (e.g., can accept lease by moving in)
Liability of promoter: unless K clearly provides otherwise, liable on pre-incorporation Ks until there is a novation
4
Q
Formation - pre-incorporation contracts - promoters - duties
A
Promoters are fiduciaries of each other and corp; cannot make secret profit on dealings w/ corp
- Sale to corp of property acquired by promoter before becoming promoter: profit recoverable by corp only if sold for more than FMV
- Sale to corp of property acquired by promoter after becoming a promoter: any profit recoverable by corp
5
Q
Issuance of stock - subscription
A
Subscription
- Written offer to buy stock from corporation
- Pre-incorporation subscriptions are irrevocable for six months
- Post-incorporation subscriptions are revocable until acceptance by board
6
Q
Issuance of stock - articles
A
Articles must include: authorized stock, number of shares per class, and information on voting rights and preferences of each class.
- Authorized stock: maximum number of shares the corporation can sell.
- Issued stock: number of shares the corporation actually sells.
- Outstanding stock: shares that have been issued and not reacquired.
7
Q
Issuance of stock - par value and consideration
A
- Par value means the minimum issuance price.
- Sale of par value stock
- Any valid consideration may be received if Board values it in good faith to be at least par value.
- E.g., money paid, labor done, property received, tangible or intangible property or benefit
- Some states also allow promissory notes, future services
8
Q
Issuance of stock - treasury stock
A
Treasury stock is stock the company issued and then reacquired; board sets a price for reselling
[CK: liable for below par price?]
9
Q
Issuance of stock - preemptive rights
A
- Right of an existing shareholder to maintain same percentage of ownership by buying stock whenever there is a new issuance of stock for cash
- In most states, no preemptive rights unless expressly in articles.
10
Q
Issuance of stock - watered stock
A
Watered stock is par stock sold below par
- Directors are liable for water (difference between par value and purchase price) if they knowingly authorized the issuance
- Buyer is liable.
- Third-party transferee of buyer is liable only if she knew about water
11
Q
Directors - overview
A
- Board must have at least one member
- Shareholders elect directors every year or staggered every 2/3
- Shareholders can remove with or without cause by majority of shares entitled to vote
- Board vacancy may be filled by other directors or shareholders (only shareholders if they vote to remove)
12
Q
Directors - action
A
Need meeting unless all directors consent in writing to act without a meeting
Each director is presumed to have concurred in board action unless absent or dissent/abstention is recorded in writing
13
Q
Directors - meeting - notice
A
- Regular meetings: no notice required
- Special meetings: notice must state the time and place of the meeting but does not have to state the purpose
Failure to give required notice voids action at meeting, unless directors not notified waive defect, either in writing or by attending the meeting
14
Q
Directors - meeting - quorum and voting
A
Quorum
- Must have a majority of all directors to do (unless different percentage set in bylaws)
- Quorum can be lost (“broken”) if people leave; board loses ability to act
Voting
- If a quorum is present, passing a resolution requires majority vote of those present
- Directors cannot give proxies or enter into voting agreements
15
Q
Directors - duties - care
A
Duty to show breach is on P. Requires:
- Good faith
- Due care of ordinarily prudent person
- Best interest of corporation
- Business Judgment Rule: a court will not second-guess a business decision if it:
(1) was informed,
(2) was made in good faith,
(3) was made without conflicts of interest, and
(4) had a rational basis.
16
Q
Directors - duties - loyalty
A
Burden to show no breach is on D. Requires:
- Act in good faith and with reasonable belief that what she does is in corporation’s best interest
17
Q
Directors - duties - loyalty interested director transaction
A
Deal between the corporation and one of its directors, or a close relative of a director, or another business of the director
Rescission (or damages) UNLESS:
- Deal was fair to corporation when entered OR
- Dir’s interest and relevant facts were disclosed or known and deal was approved by majority of disinterested directors or shares. (Some courts require a showing of fairness even w/ approval.)
18
Q
Directors - duties - loyalty - competing ventures and corporate opportunity
A
Competing ventures
- Director cannot compete with corporation
- Remedy is constructive trust on profits.
Corporate opportunity (expectancy)
- Director cannot usurp a corporate opportunity
- Must (1) tell the board and (2) wait for board to reject; company’s inability to pay for opportunity no defense
- Remedy: if dir still has opportunity, must sell it to corporation at his cost; if dir has sold it at a profit, corp gets constructive trust on profits
19
Q
Directors - duties - loyalty - other bases of liability
A
- Ultra vires acts: responsible officers and directors liable for ultra vires losses
- Improper distributions
- Improper loans: allowed only if reasonably expected to benefit corporation.
- SarbOx also generally forbids loans to executives in large, publicly traded (“registered”) corporations.
- requires board to establish audit committee and oversee accountants
- CEO and CFO must certify accuracy and completeness of financial reports
20
Q
Officers - in general
A
- Owe same duties of care and loyalty as directors.
- Are agents of the corporation and bind the corporation by their authorized activities
- Corporations must have a President, Secretary and Treasurer
21
Q
Directors and officers - indemnification
A
- Prohibited: D/O held liable to corporation or held to have received an improper personal benefit
- Mandatory: D/O was successful in defending, on the merits or otherwise (e.g., wins on SOL)
- Permissive: all other outcomes (e.g., settlement), as long as eligible by meeting duty of loyalty; disinterested directors, shares, or independent legal counsel determine eligibility
22
Q
Shareholders - derivative suits
A
Requirements
- Stock ownership when the claim arose and throughout the suit
- Adequate representation of the corporation’s interest.
- Unless futile, written demand on board that corp bring suit; wait 90 days
- Corporation must be joined as defendant
Settlement and dismissal
- Need court approval
- Court may notify shareholders and get input
- Corp can move to dismiss on basis that independent investigation showed suit not in the corp’s best interest
Outcome
Recovery goes to corporation and individual
is reimbursed for litigation costs
23
Q
Shareholders - voting - who votes
A
General rule: record shareholder as of record date
Exceptions:
- Corporation does not vote treasury stock
- Executors of deceased shareholders do not vote
24
Q
Shareholders - voting - proxies
A
- writing signed by record shareholder (fax/e-mail OK if can identify sender)
- directed to secretary of corporation,
- authorizing another to vote the shares.
Proxy good for 11 months unless states otherwise
Truly irrevocable only if coupled with an interest
25
Shareholders - voting - trusts
1. Written trust controlling how shares will be voted
2. Copy of trust sent to corporation;
3. Transfer legal title to the shares to trustee
4. Original shareholders receive trust certificates and retain all shareholder rights except for voting
Valid for 10-year maximum
26
Shareholders - voting - voting/pooling agreements
- Agreement must be in writing and signed.
| - States are split on whether such agreements are specifically enforceable
27
Shareholders - voting - meetings - overview
Annual meeting
- Required; if none held in 15 months, shareholder can petition court to order one
- Purpose is to elect directors.
Special meeting
- Can be called by (1) the board or (2) the president, or (3) holders of at least 10% of voting shares, or (4) anyone authorized in the bylaws
- Purpose is anything in notice
28
Shareholders - voting - meetings - notice
- Between 10-60 days before the meeting, must give written notice (fax or e-mail OK) to every shareholder entitled to vote.
- Must state time and place
- For special meetings, must also state the purpose; cannot do anything not listed as purpose
- Failure to give notice voids action unless waiver
29
Shareholders - voting - meetings - quorum and voting
Quorum
- Requires a majority of outstanding voting shares
- Quorum is not lost if people leave
Voting
- Votes in favor must exceed the votes against, unless the articles provide for greater requirement
- Cumulative voting only available for director election and must be provided for in articles
30
Shareholders - management rights
Can eliminate corporate formalities in closely-held corp
- Requires unanimous election in articles, bylaws, or filed agreement and reasonable share transfer restriction.
- No piercing even if fail to observe formalities
31
Shareholders - liability
1. General rule: none
2. Can pierce corporate veil if shareholders abused privilege of incorporating and fairness requires holding them accountable
- Alter ego: failure to observe sufficient corporate formalities
- Undercapitalization: failure to maintain sufficient funds to cover foreseeable liabilities
- Fraud: to prevent fraud or an individual from using entity to avoid existing personal obligations
32
Shareholders - duties
1. General rule: none
2. Controlling shareholder must refrain from obtaining a special advantage or causing corp to take action prejudicing minority shareholders, such as selling to looters
3. Controlling shareholders cannot illegally sell corporate assets for their own benefits; will be forced to disgorge
4. Controlling shareholders treated as insiders under Securities Exchange Act
33
Shareholders - distributions
Types:
- dividends
- repurchase (voluntary sale of stock to corp)
- redemption (a forced sale of stock to corp at price set in articles)
Distributions are in board's discretion:
- No right to distribution until declared
- Action to compel distribution is direct, not derivative; must make very strong showing of abuse of discretion
34
Shareholders - distributions - dividends
Under traditional view, payable:
- ALWAYS from earned surplus (earnings minus losses and prev. distributions)
- IF shareholders informed, from capital surplus (payments in excess of par plus amounts allocated in no-par issuance)
- NOT from stated capital (par issuance funds)
Under modern view:
- Corporation cannot make a distribution if it is insolvent or if distribution would render it insolvent - Insolvent means either unable to pay its debts assets less than total liabilities
35
Shareholders - distributions - liability for improper distributions
- Directors jointly and severally liable but have good faith reliance defense
- Shareholders personally liable only if knew distribution was improper when received
36
Fundamental corporate changes - requirements
1. Board adopts resolution of fundamental change.
2. Board submits proposal to shareholders with written notice.
3. Need shareholder approval, from majority of all shares entitled to vote (not just voting shares, as with ordinary decisions).
4. In most cases, also need to deliver a document to Secretary of State.
37
Fundamental corporate changes - right of appraisal
Dissenting s/h forces corp to buy stock at FMV:
- Only if stock not listed on national exchange and fewer than 2,000 shareholders
- Right triggered by merger or consolidation; transfer of substantially all assets not in ordinary course of business; share exchange.
Steps shareholder must take to exercise right:
- Written objection before meeting
- Vote against change or abstain
- File written claim
38
Fundamental corporate changes - merger
1. Board action and notice to s/h of both corps
2. S/h approval (generally both corporations)
- No approval required in short-form merger - 90%+ subsidiary is merged into parent
3. If approved, surviving corp delivers articles of merger or consolidation to the Secretary of State.
- Successor liability
- Right of appraisal for s/h who vote and short-form sub s/h
39
Fundamental corporate changes - transfer of substantially all assets or share exchange
1. Board action by both corps and notice to s/h of selling corp
2. S/h approval by selling corp
3. If approved, deliver to Secretary of State articles of exchange in share exchange; usually no filing in transfer of assets
- If de facto merger, successor liability
- Right of appraisal for s/h in selling corp
40
Fundamental corporate changes - amendment of articles
1. Board action and notice to shareholders
2. Shareholder approval
3. If approved, deliver amended articles to SoS
- Board can make housekeeping changes on own
- No right of appraisal
41
Fundamental corporate changes - dissolution
Voluntary
- Board action and s/h holder approval
- File notice of intent to dissolve w/ SoS
- Notify creditors so they can make claims
Involuntary
- Shareholder initiated: dir abuse, waste, deadlock
- Creditor initiated: unpaid judgment or debt acknowledged in writing and corp is insolvent
In either case, must then wind up:
- Sell assets, pay creditors, distribute remainder to s/h, pro-rata by share liquidation preference
42
Securities regulation - Rule 10b-5 - elements
1. Fraudulent conduct
- E.g., material misstatement or material omission
A. Material: a substantial likelihood that a reasonable investor would consider it important
B. Scienter: intent to deceive, manipulate, or defraud; or recklessness as to truth
2. In connection with purchase or sale of a security by plaintiff
3. In interstate commerce
4. Reliance (presumed for material omissions; misrepresentation is fraud on the market)
5. Damages: difference between price paid/received and 90-day avg share price after misstatement/nondisclosure corrected
43
Securities regulation - Rule 10b-5 - parties liable
- Insider: anyone who breaches duty not to use inside info for personal benefit (D/O, controlling s/h, EEs, CPAs, attys, bankers)
- Tipper: gives tip of inside information to someone for improper purpose (money, gift, reputation, family member's benefit); recipient trades on it
- Tippee: if tipper breached duty and tippee knew
- Misappropriator: gov can prosecute someone who trades on info breaching duty of trust/confidence owed to source of info rather than issuer or its s/h; duty may be based on agreement, history, or receipt of info from family
44
Securities regulation - Rule 16(b)
Applies to large corporation:
- Traded on national exchange, or
- 500+ shareholders and $10 million in assets
Elements:
1. Purchase & sale or sale & purchase of stock w/in 6 mos (highest sales matched with lowest purchases to maximize recovery)
2. Equity security (anything other than pure debt)
3. Covered person: D/O (at time of purchase and w/in 6 mos of sale), or 10% shareholder (before purchase and sale), as well as anyone who has deputized any of these persons to act for him
Remedy:
Short-swing profit returned to corp
45
Securities regulation - Sarbanes-Oxley - corporate responsibilities
- 34 Act companies must have audit committee, which oversees accountants' work
- No loans to D/O
- CEO or CFO must certify financial reports, confirming: he reviewed, report is accurate w/o material omissions, signing officer is responsible for internal controls and has reviewed w/in 90 days
46
Securities regulation - Sarbanes-Oxley - officer liability
- If corp restates financial reports due to misconduct, CEO and CFO reimburse corp for bonus and incentive pay w/in yr of reports, and pay corp for profits from sale of corp stock w/in yr
- No purchase or sale of stock during pension blackout; company can force turnover of profit or s/h can bring derivative suit if company does not act w/in 60 days of req
