1
Q
What is a “Certificate of Formation” (TBOC 1.002(6))?
A
The articles of incorporation submitted to the Secretary of State.
2
Q
How many different types of corporations are there (TBOC 1.002(14))?
A
- For-Profit
- Non-Profit
- Professional Organization
3
Q
What is an S-Corp?
A
A For-Profit corporation as defined in Chapter S of the Federal Tax Code.
- Flow through taxation
- Owners/Shareholders limited to less than 100
- Single class of shares
4
Q
What is a C-Corp?
A
A For-Profit corporation as defined in Chapter C of the Federal Tax Code.
- Double Taxation
- No limit on number of owners
- Multiple Share classes
5
Q
What is the difference in taxation for an S and C-Corp?
A
- S-Corp does not tax profits of the corporation, only on the distributions to the owners/shareholders.
- C-Corp taxes the corporate earnings and the distributions to the owners/shareholders
6
Q
Who creates a corporation?
A
An “Incorporator, Agent, Organizer” files the articles of incorporation (TBOC 3.004).
- Does not have to be an owner
- Needs to be able to receive process of service for the corporation
- Must have the capacity to contract to create a corporation
7
Q
What elements must the Certificate of Incorporation include (TBOC 3.005)?
A
- Name of the filing entity to be formed
- Type of entity to be formed
- Purpose of the entity
- Duration (if less than perpetual)
- Street address of registered agent
- Names and addresses of initial board of directors (at least 1 required in Texas)
- Number of authorized shares
- Par Value or No Par value of the shares
- Name and address of organizer
- Effectiveness of filing election (Texas)
8
Q
What are the penalties in Texas for knowingly filing a false Certificate of Incorporation?
A
- Misdemeanor if the person knows that the filing is materially false
- State Felony if the person intends to harm or defraud another.
9
Q
What is a closely held company?
A
A company whose shares are not publically traded.
10
Q
How is the corporation structured?
A
- Ownership (Own the Business)
- Shareholders
- Management (Running the Business)
- Board of Directors
- Officers
- Managers
- Employees
- Managers
- Officers
- Board of Directors
11
Q
Who are Directors?
A
Directors are elected (hired) by the shareholders to provide management oversight for the running of the company. (TBOC 1.001(35)(a))
- Individual directors are powerless to act, all actions must be board actions.
12
Q
Who are Officers?
A
Officers (CEO, COO, etc.) are hired by the board to manage the ongoing operations of the company and carry out the strategic direction of the board (TBOC 1.001(61)).
- Individual Officers can bind the corporation to agreements, etc.
13
Q
Can a person be an Owner, Director, and Officer?
A
Yes
14
Q
What “powers” does a corporation have?
A
Except as limited by the code, a domestic entity has the same powers as an individual to take action necessary or convenient to carry out its business and
affairs (TBOC 2.101(…)).
- Run the business
- Defend the business
- Grow the business
15
Q
Can the “Powers” of the corporation be limited in the “Certificate of Formation”?
A
NO ! (TBOC 20.002)
- A corporations powers are provided by statute, not by the Certificate.
16
Q
Can the “Authority” of the corporation (or officers) be limited by the “Certificate of Incorporation”?
A
YES (TBOC 20.002)
17
Q
Can the Corporation avoid liability by using as a defense that the acts were beyond the “Certificate of Incorporation”?
A
- Stated Purpose - No (TBOC 20.002(b)(1))
- Inconsistent with limitation of authority - No (TBOC 20.002(b)(2))
- Lack of capacity - No (TBOC 20.002(a))
18
Q
Can someone suing the Corporation assert the claim of exceeding the purpose or authority of the “certificate of incorporation”?
A
- Shareholder - Yes (TBOC 20.002(c)(1))
- Corporation against an Officer/Director - Yes (TBOC 20.002(c)(2))
- State against Corporation/Officer/Director - Yes (TBOC 20.002(c)(3)
19
Q
What does “de jure” mean?
A
By right of law
- A corporation founded by legal right
20
Q
When does a corporation exist in Texas?
A
- When an certificate of incorporation has been delivered to the SOS
- The SOS determines that the “Articles” conform to the statutes
- Files the Certificate - the Magic Happens A Corporation is Born
- Provides an Acknowledgement
TBOC 4.001, and 4.002
21
Q
What is a “de Facto” corporation?
A
A corporation that is formed by the actions of the parties, but fails to meet the legal requirements of incorporation.
22
Q
How can a “de Facto” corporation be recognized?
A
- A law of incorporation exists within the state
- An attempt was made to organize the corporation
- Must be a “colourable” attempt (failing to timely file not colourable)
- Operated as corporate entity after attempt
- Hausman and TBOC 3.001(d)
23
Q
Is the acknowledgement from the SOS binding?
A
No, the acknowledge of filing is not a “Certificate of Incorporation”, but it can be submitted as evidence of a “de Facto” corporation. TBOC 3.001(d)
24
Q
What is Estoppel?
A
- A statement made by someone signifying that a corporation had been formed
- Sellling shares is a statement
- Another person reasonably relied on the statement
- To their detriment
The person making the statement is estopped from denying the corporation, only works for contracts not tort actions
25
What is the public policy split on "de Facto" corporations?
* Some jurisdictions believe that the filing requirement is a mere formality
* 1/3 would not require a "colourable" attempt
* Some jurisdictions believe that the filing has significance
* 2/3 would expect a "colourable" attempt
26
How long does a corporation last?
Assumed to be in purpetuity, unless otherwise specified in "Certificate of Incorporation" (TBOC 3.003, 3.005(a))
27
Why is the street address of the Incorporating Agent required?
Form 201 - Article 2 states that the street address is required for the process of service.
28
What is the difference between an organizer and agent?
* Organizer - Any person with the capacity to contract can organize and file a certificate of incorporation, like a corporation.
* Agent - A designated person that has the authority to act on behalf of the newly formed corporation, and can receive process of service.
29
What is "Par" value?
A minimum price per share for the authorized shares listed in the "Certificate of Incorporation". Shares cannot be sold by the **corporation** for a price **below** the par value.
30
What are authorized shares?
These are the initial shares available to the ownership as per the "Certificate of Incorporation". Additional share offerings beyond those authorized require amendment of the "Certificate of Incorporation".
31
Is par value required in the Certificate of Incorporation?
Either a statement of par value or "no par value" is required.
32
Is a statement of purpose required?
Yes, but in Texas it is presumed to be "for the transaction of any and all lawful business". Article 5 - Form 201,
33
What is a Quorum, and when is it required?
A quorum is the majority necessary for the board of directors or shareholders to take action.
* Board of Directors - \>50% of board members must be present to meet and take action.
* Shareholders - \> 50% of the outstanding shares must be present to meet.
34
Who is liable for contracts formed on behalf of the corporation prior to the filing of the articles?
Promotor, not the corporation
35
How does the corporation accept liability for contracts formed before the articles are filed?
The board of directors "adopts" the contract, becoming liable for it.
36
Once a pre-incorporation contract is adopted by the corporation, is the promoter no longer liable?
No, the promoter is still liable as a party to the contract. To remove liability, the contract must be subject to a novation.
37
How does net present value (NPV) work conceptually?
38
How does discounted cash flow work in practice?
1. Decide how many years into the future you wish to use (1, 5, 10, etc.)
2. Estimate the profits for each future year (Revenue - Costs)
3. Apply the discount rate to the profits year by year
4. Sum up the individual years
39
Can the social purposes of a corporation be included in the articles?
Yes (TBOC 3.007(d)-(e))
40
When would directors sign an amendment to the articles?
If shares have not been issued and the amended articles are adopted by the board, a majority of directors may sign. (TBOC 21.053)
41
Who normally signs an amended certificate of formation?
Officers (TBOC 21.053)
42
Who must agree to an amended certificate of incorpration if shares have been issued?
Stockholders
* By a majority of stockholders eligible to vote. (TBOC 21.054)
43
Where do the by-laws come from, and how can they be changed?
* The by-laws are established by the Board of Directors at the first organizational meeting. (TBOC 21.057)
* By-laws can be changed by an action of the Board or Shareholders (TBOC 21.058)
44
Can the certificate limit the **powers** of the board or shareholders?
No, the powers of each are established by statute.
45
Can the certificate limit the **authority** of the board or shareholders?
Yes, the authority granted to each can be defined in the certificate.
46
Must a company keep records of all shareholders?
Yes (TBOC 3.151, 21.373)
47
When the Certificate and By-laws contradict each other who wins?
Certificate (TBOC 21.057(b))
48
Can the Board amend the bylaws?
Yes, unless:
* Unless the certificate forbids it, or
* The shareholders adopt a bylaw prohibiting it.
(TBOC 21.057(c))
49
Must the records of a corporation be kept on paper?
No, but they must be kept in a form that can be converted to paper form within a reasonable time. (TBOC 3.151)
50
Do the shareholders have a right to examine the corporate records?
Yes, upon written demand stating a **reasonable** purpose a shareholder may examine and copy. (TBOC 21.218)
51
What can a shareholder do if denied access to the records?
File suit, and if successful can:
* be awarded attorney's fees, costs and expenses
* any other damages and remedies afforded by law
(TBOC 21.222)
52
Can someone else vote on behalf of a shareholder?
Yes, through
* Proxy
* Voting Trusts
* Voting Agreements
(TBOC 6.251)
53
What is a voting agreement?
An contract between shareholders to vote in a common manner (TBOC 6.252).
* Each shareholder casts their own votes
* If agreement is in writing, can be compelled to vote as agreed (specific performance)
* DAS for breach of contract
* A copy of the agreement must be deposited with the corporation.
54
What is a voting trust?
A shareholder signs over the voting rights to a trust which is directed by a trustee.
* Shareholder no longer votes, Trustee does
* The trust agreement must be filed with the corporation
* Shareholder retains other rights of ownership (dividends, etc.)
55
What are the two required elements to "Pierce the Veil"?
1. There must be unity of interest and ownership that the seperate personalities of the corporation and the individal no longer exist.
2. Adherence to the fiction that the corporation exists seperately would sanction a fraud or promote injustice.
## Footnote
*Van Dorn*
56
What are the four factors to determine if a corporation is essentially controlled by another?
1. Failure to maintain accurate corporate records and comply with corporate formalities (Not Used)
2. Comingling of funds or assets
3. Under-capitalization
4. One freely uses the assets of another corporation as its own.
## Footnote
*Macaluso*
57
What does "Promote Injustice" mean from the *Van Dorn* case?
Something less than an affirmative showing of fraud, or some wrong beyond a creditors inability to collect.
58
What are some examples of "Promoting Injustice"?
* Unjust enrichment
* A parent company causes subsidiary liabilities but subsidiaries lack of ability to pay relieves parent of obligation
* Hiding assets in a liability free corporation,while creating liabilities in an asset free corporation.
## Footnote
*Sea Land*
59
What are the practical elements of "Piercing the Veil"?
* Equitable remedy
* Party seeking relief has the burden of proof
* Totality of circumstances test used to evaluate if veil should be pierced
* Each case decided on its own facts/merits
60
What is a possible third prong of "Piercing the Veil"?
That creditors/business folk are saavy enough to properly vett a potential corporation to assess the risk they are taking before entering into a contract.
## Footnote
*Laya*
61
What is Utilitarianism?
If the benefit is great enough to warrant the harm to others, it is justified.
62
What is the order of payment when a corporation is insolvent, "equitable subordination"?
1. Government
1. Federal
2. State
2. Trustee
3. Secured Creditor
4. Unsecured Creditor
5. Equity holder (shareholder)
63
What are the characteristics of an "Arms Length" loan?
1. Payment terms and schedule
2. Collateral
3. Defined interest
64
What are the rules for determining if claims are allowed in insolvency proceedings?
* When a claim is found to be inequitable, it may be set aside, or subordinated to the claims of other creditors
* Inequitable is whether, within the bounds of reason and fairness, such a plan can be justified.
## Footnote
*Costello*
65
What is the test for inequitable claims for a person with fiduciary relations with a corporation?
Whether or not under all the circumstances the transaction carries the earmarks of an arm's length bargain.
## Footnote
*Pepper*
66
Must a Texas Corp. hold its meetings in Texas?
No (TBOC 6.001(a))
* Provided by or fixed by governing documents (Certificate or By-Laws)
* Agreed to by all person entitled to notice of the meeting.
67
Where must a Texas Corp hold its meeting if it is not entitled to have it outside of Texas or there is no agreement of those concerned about the meetings location?
Must be held at the corporate offices (TBOC 6.001(b))
68
Is a face to face meeting of shareholders/board required?
No TBOC(6.002)
## Footnote
Alternate forms are okay, telephone, skype, etc., as long as those in attendance can hear and be heard.
69
Can you object to a call and notice of the meeting in a skype meeting?
Yes (TBOC 6.003)
70
What if no record date is set for a meeting?
Then the record date becomes the notice date. (TBOC 6.101(1))
71
What other ways can corporate action be taken other than a meeting?
Unamimous Written Consent to Action (TBOC 6.201)
72
Can a corporation block a shareholder proposal on a proxy statement?
Yes,
* if the SEC reviews and provides a "no action" letter.
* proposal violates state or federal law
* is false or misleading
* is ordinary business
* concerns personal claims
* is moot
73
What must a proxy statement include (Rule 14(a))?
* All matters to be voted on:
* Directors
* Proposals
* Identity of all proxy holders
* Compensation paid to all officers and directors
74
What must a proxy statement **not** do (Rule 14a-9)?
Provide false or misleading statements of any material fact, or omit any material fact that would make the statements misleading.
75
What are the elements required to prove a false of misleading proxy statement?
* Materiality
* Causation
* Standing
* Scienter (Intent)
76
How is materiality established?
The substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.
## Footnote
*Northway*
77
How is Scienter/Intent established?
The supreme court has yet to define, but it could be negligence (should have known), extreme recklessness (knew of the possibility but didn't care), intent (knew and purposely did it).
78
How is causation established?
If materiality is established then causation is also assumed. Reliance is not required.
79
Can a shareholder proposal be included in the corporate proxy materials?
Yes
* Must be a shareholder (record owner) of at least 1% or $1000 in market value
* Proposal cannot exceed 500 words
* May only have one proposal per proxy statement
80
Must each share get one vote?
No (TBOC 21.366)
## Footnote
Votes per share can be allocated as per the certficate of formation, otherwise one vote per share.
81
What is considered ordinary business (14a-8 (i)(7)?
Policy considerations
* actions that are fundamental to running the corporation that they are not practical for shareholder oversight
* shareholders cannot micro-manage the company
82
What types of shareholder proposals are not ordinary business?
* Lobbying/Political activities of the corporation
* Environmental/Climate Change
* Sustainability
* Diversity of the Board
* EEO
* Human Rights
83
Must a corporation hold an annual meeting?
Yes (TBOC 21.351)
* Time and place to set in corporations by-laws
84
Can a "special" meeting be called.
Yes (TBOC 21.352)
85
Who can call a special meeting?
* President
* Board of Directors
* Any other person authorized by the certificate or by-laws
* Shareholders of certain percentages not to exceed 50% entitlted to vote, at least 10% all shares entitledto vote.
86
Is notice required for a general meeting?
No (TBOC 21.353)
87
Is notice of a "special" meeting required?
Yes (TBOC 21.353(b))
## Footnote
Notice must be given and include the purpose of the meeting.
88
Can "notice" be provided electronically?
Yes (TBOC 21.353(c))
89
Can an incumbent directors use corporate funds to be re-elected?
Yes
## Footnote
If the directors are engaging in a contest over policy (I am a better manager than you), then expenditures are allowed.
*Rosenberg*
90
When can corporate funds **not** be used for election of directors (proxy fight)?
When the fight is for:
* Personal power
* Individual gain or private advantage
* The best interests of the stockholder
* Fairness and reasonableness of the amounts expended are challenged
*Rosenberg*
91
Is shareholder vote buying illegal?
No
* Voting Trusts - *Oceanic*
* Voting Agreements - *Ringling*
* Contract - *Bean*
As long as the object and purpose of the exchange is not to defaud or disenfranchise stockholders it is okay.
*Schreiber*
92
What is straight voting (plurality)?
More yes votes than no votes, a majority (over 50%) is not required.
93
What is cumulative voting?
The total number of votes that a shareholder can exercise for all candidates are pooled together and can be voted for one or all candidates.
94
Is cumulative voting allowed?
Yes, if specified in the certificate of formation (TBOC 21.361)
95
Must the shareholder making a proxy proposal appear in person?
Either the shareholder or agent must attend to present the proposal to other shareholders.
96
Must the company reveal the shareholders name and contact information when submitting a proposal?
Yes (12(1))
97
Can the company provide a counter argument to a shareholder proposal?
Yes (13(1))
98
What is "watered" stock?
Stock sold below its "PAR" value.
* Minority - true value rule
* Majority - good faith rule, assumes that the price variance was done in good faith.
99
Who can sue for the loss in value from the sale of "watered stock"?
Only creditors can sue if shares are sold when the corporation is insolvent. Only those that extended credit after insolvency. The court views the stock as a trust fund for creditors.
100
What does *ultra vires* mean?
To act beyond one's authority or power.
101
What is voting by "proxy"?
When a shareholder gives their right to vote to another to vote in their stead. Proxy rights only last 11 months, and expire before the next annual meeting unless otherwise stated in the certificate. (TBOC 21.368)
102
What is fair value?
It is a term of art used as the factual basis for evaluation of a corporation, and is included in the proxy statements.
103
What is inequitable purpose?
When someone takes an action intended to create inequality amongst groups, like changing the rules after the proxy fight begins to benefit one side over another.
104
What is a staggered board?
A board of at least 9 members whose terms overlap such that at each annual meeting only a fraction (usually 1/3) of the board is up for re-election.
105
What is the value of a staggered board?
Does not allow for the entire board to be replaced in one election, maintaining continuity of board control.
106
Can directors be removed without cause?
Yes, unless the certificate of formation says otherwise, or in the case of a staggered board (TBOC 21.409).
107
May a companies subsidiary vote its shares to elect directors?
No, a company is forbidden to vote its own shares directly, or indirectly by a subsidiary.
## Footnote
*Spieser,* TBOC 6.152
108
What is a subsidiary?
An entity in which the parent owns at least 50% of the shares and/or the voting power of the shares.
109
What are the different categories of share?
* Authorized
* the total number of shares allowed by the certificate
* Issued
* the total number of shares that have been sold
* Outstanding
* the total number of shares owned by shareholders
* Treasury
* the total number of issued shares retained by the corporation (share buyback, etc.).
110
What is Mandatory Indemnification?
By statute, the corporation must provide reimbursement of reasonable expenses incurred to defend oneself in suits regarding actions taken as a governing person, if the suit is **wholly** successful.
* Settlement (Civil or Criminal)
* Dismissal (Procedural or on the merits)
111
Can corporate funds be used to pay for proxy fights of new directors wishing to get elected?
Yes, but only if they win the vote and get elected.
112
Is a proxy right revocable?
Yes, generally a shareholder can revoke their proxy and vote themselves, unless the proxy is given in exchange for consideration.
113
What is Permissive Indemnification?
The corporation can provide additional idemnification if specified in the certificate of formation, or approved by the shareholders (TBOC 8.101).
114
What is a fundamental corporate change?
Changes to the certificate of formation, merger or sale of the company, changes to the stock classes and number of authorized shares.
115
What is the difference between a corporation expressly or implicitly adopting a contract?
* Express adoption is when an officer signs the contract on behalf of the corporation.
* Implied adoption is when the corporation gains a benefit from the contract whether the contract has been expressly adopted or not.
116
What are residual claimants?
Shareholders are residual claimants and the last to get paid if the corporation unwinds. Motivation for them to ensure they make a good investment choice.
117
Does stock ownership come with rights?
Yes
* Certificated ownership is a substantive right
* Uncertificated ownership is a residual right
118
What if an insider (officer, director, etc.) is an unsecured creditor?
The court treats them as an equity holder and they go last with the other equity holder.
119
What is fiduciary duty?
Those with the power to manage owe a duty
120
What are the three fiduciary duties?
Duty of:
1. Good Faith
2. Care
3. Loyalty
121
What two duties make up the Duty of Care?
* Sound decision making (misfeasance)
* Oversight (nonfeasance)
122
How is the duty of care evaluated?
* Duty
* Breach
* Causation
* Harm
123
Which two groups can be liable when piercing the veil?
* If a larger corporate entity actually conducts the business through a smaller fragment, then the corporation can be reached.
* If corporation is a "dummy" for the stockholders, then the stockholders can be reached.
## Footnote
*Walkovsky*
124
When is inequitable action legal?
Not, according to *Schnell*
"inequitable action does not become permissable simply because it is legally possible..."
125
What is the duty of care?
* The fiduciary parties must act;
* In a manner that he or she reasonably believes to be in the best interest of the corporation, and
* with the care that an ordinary prudent person would use in the same or similar circumstances.
126
When will the court act in regard to actions of fiduciaries?
The court will not interfere unless a clear case is made out for fraud, oppression, arbitrary action, or breach of trust.
## Footnote
*Kamin*
127
How is nonfeasance causation proven?
"...where it is reasonable to conclude that the failure to act would produce a particular result and that result has followed, causation may be inferred."
## Footnote
*Francis*
128
What are the two requirements for Fiduciary oversight?
1. A monitoring/reporting system in place
2. Used the system to stay informed of corporate activity
## Footnote
*Graham*
129
What was the holding in *Caremark*?
The board violated its duty of care by
* utterly failed to implement a monitoring system
* consciously failed to monitor corporate activities
130
What shield do Directors have for a charge of misfeasance?
Business Judgement Rule
* A fiduciary will not be held liable for the outcome of a choice made in the fiduciary's capacity provided that:
* decision was made
* fiduciary was disinterested and independent
* decision was based upon reasonable information
* has a rational business purpose
*Cooke*
131
How can a plaintiff overcome the Business Judgment Rule?
By showing that the **process** of reaching the decision represented gross negligence or recklessness.
132
What is an exculpatory clause in the certificate of formation?
In response to the *Van Gorkom* case, states allow by statute the limitation of personal liability for breaching the duty of care.
133
What are the statutory requirements to satisfy duty of care ?
1. Is disinterested in the subject of the business decision
2. Is informed of the details to an extent reasonably appropriate under the circumstances, and
3. rationally believes that the decision is in the best interest of the company
134
What is the fundamentla difference between "duty of care" and "loyalty"?
* Duty of care does **not** involve **conflict of interest**.
* Loyalty involves **conflict of interest** not **negligence.**
135
When is the loyalty (good faith) violated?
* When the fiduciary places their own interest above that of the corporation.
* Intentional violation of applicable positive laws.
* Intentionally fails to act when faced with a known duty to act.
## Footnote
*Disney*
136
What are the three typical cases of failure of loyalty?
1. Self-dealing
2. Usurpation of a business opportunity
3. Competing ventures
137
What is self-dealing?
When a fiduciary (interested) is on both sides of the transaction.
* is a party
* has a known material financial interest
* or a related person has a material financial interest
138
What is required to be shown by the fiduciary in a "self-dealing" claim?
One of the following:
1. The transaction was fair to the corporation, or
2. was approved by disinterested board members, or
3. was approved by disinterested shareholders.
139
Can the business judgement rule apply to loyalty cases?
No, loyalty cases are conflict of interest and the business judgment does not apply.
140
Is the approval of a self-dealing transaction by disinterested parties an automatic win for the conflicted party?
No, the court will review the transaction (burden on the plaintiff) for fairness to the corporation/shareholders.
## Footnote
*Kahn*
141
What is the fairness standard for loyalty claims?
Intrinsic Fairness
* the process of concluding the deal was fair
* the substantive terms of the deal were fair to the corporation.
*UOP*
142
What is usurpation?
When a fiduciary sees a business opportunity and pursues it themselves instead of the corporation.
143
Do majority shareholders owe a duty to other shareholders?
Yes, to not oppress minority shareholders or the corporation.
144
What are the standards used to evaluate majority shareholder duties of corporations and subsidiaries?
* BJR - breach of duty of care,
* the plaintiff must show
* that parent coporation was guilty of "gross or palpable overreaching"
* the action had no rational business purpose
* Intrinsic Fairness - self-dealing, parent receives a benefit to the harm or exclusion of subsudiary
* the defendant must show
* that the entire transaction was fair, both procedurally and substantively.
## Footnote
*Sinclair*
145
What is the practical outcome of corporate majority cases?
Most corporations add independent board members to partially owned subsidiary boards to permit arms length transactions with the parent.
## Footnote
*UOP*
146
What are the two tests to determine if a suit is derivative or direct?
1. Who is harmed and seeks a remedy, corporation or shareholder?
2. Who will be granted a remedy (injunction, compensation, etc.), corporation or shareholder?
147
Can Attorney's fees be awarded in a shareholder derivative suit?
If the plaintiff shareholder wins an award (settlement) on behalf of the corporation, substantially benefitting the corporation, then the corporation must pay attorney's fees.
## Footnote
*Fletcher*
148
What would "substantially benefit" a corporation in a derivative suit?
If the derivative suit
* maintains the health of the corporation
* raise the standards of fiduciary relationships and other economic behavior
* prevent an abuse that would be detrimental to the corporation or shareholders
149
What are the two basic "fairness" attributes in a merger?
* Fair Dealing - How the deal was intiated, structured, negotiated, disclosed to the directors, and approvals
* Fair Price - economic and financial considerations of the deal, like assets, market value, earnings, future prospects, issues which impact the intrinsic and inherent value of the stock
## Footnote
*UOP*
150
What is self-dealing among parent and subsidiary corporations?
When the parent by virtue of its domination of the subsidiary, causes the subsidiary to act in such a way that the parent recieves something to the exclusion and detriment of the subsidiary shareholders.
## Footnote
*Sinclair*
151
What is the standard for corporate waste?
Waste entails an exchange of corporate assets for an amount so small that it lies outside the amount any reasonable person would expect to get for such an exchange.
## Footnote
*Lewis*
152
Can shareholders approve corporate waste?
Yes, but unamiously
153
Can a corporation give to charitably without shareholder approval?
Yes, if the donation is made for corporate ends and not in furtherance of personal aims. Voluntary giving in the reasonable belief that it would aid the public welfare, and advance the interests of the corporation in the community.
## Footnote
*Smith*
154
What is a demand ?
A shareholder plaintiff wishes to sue on behalf of the company must get approval from the board to do so. The board decides if the suit is in the best interest of the corporation and if not, can file a petition for dismissal with the court.
155
What is demand futility?
If the suit at hand would create a situation where the board would never grant the right, the asking them for permission would be futile.
156
How does a shareholder plaintiff get past the demand barrier?
* Plaintiff must show via well pleaded facts that the presumption of director disinterest/independence is incorrect, and
* there are enough particular facts to support that the transaction in question was not a valid exercise of business judgment (reasonable doubt).
## Footnote
*Levine*
157
How is an agent's apparent authority established?
* The principle manifests intent that the agent has authority
* A **third party** believes that the agent has authority
* the belief is reasonable
158
What is the threshhold for a director to be "interested" in derivative suit?
The mere threat of personal liability for approving a disputed transaction is not enough to call a director interested, however if the threat has a "substantial likelihood" of creating liability for the director, then yes.
159
What is the rule for "interested" in a derivative suit?
A director is considered interested if;
* They will recieve a personal financial benefit from the transactions that is not shared with the shareholders
* Where a corporate decision will have a detrimental impact on a director, but not on the shareholders or corporation.
160
How does the court in *Zapata* choose to resolve the balance in derivative suits?
* Review the actions of the independent review committee established by the board, if disinterested and in good faith, then
* review its own business judgement to the decision taken to determine if the case has merit.
161
What is the "Positive Social Value" statement?
If a company internalizes all of its costs (externalities and taxes proportional to the benfits it receives) and still makes a profit, it proves that it has a positive net social value.
162
How does an agent ensure that liability is passed on to the principle?
The agent must disclose the principle's existence and identity?
163
How does an agent establish actual authority?
* Principle manifests intent that the agent has authority
* The agent believes they have authority
* The belief of the agent is reasonable
164
What is the duty of loyalty for an agent?
Agent **must not**:
* acquire a material benefit form acting on the principle's behalf
* deal adversely with the principle
* compete with the principle
* use the principle's property for personal or other use
* share the principle's confidential information
165
How does one establish inherent agency if the principle is undisclosed?
* the agent is a general agent
* does acts that are usual or necessary to authorized transactions (even if forbidden)
* then liability of the principle exists
166
How oes one establish inherent agency when the principle is **disclosed**?
* the agent is a general agent
* doing acts which usually accompany or are incidental to authorized transactions (even if forbidden)
* other party reasonably belives that the agent is authorized
* then liability of the principle is established
167
What is a general agent?
An agent authorized to conduct a series of transactions involving a continuity of service.
168
What is ratification?
1. An act purportedly done on behalf of another,
2. Knowledge by the other of the material facts of that act, and
3. The voluntary affirmance or acceptance by the other of that act
169
Can the corporation loan money to a director?
Yes (TBOC 2.101(13))
* Either approved by a majority of disinterested shareholders, or
* The board finding that the deal is reasonably expected to benefit the corporation.
170
What must be provided to the SEC in a tender offer?
* The source of funds use in the offer (cash or stock)
* Purpose of the offer
* Plans the purchaser will have after acquiring the shares
* Any contracts or MOU's with the targt company
171
What must be provided to the Public in a tender offer?
* A public announcement (tender offer) free of mistatements and misinformation
* The price to be paid (cash or shares)
* One price paid for all
* The length of time (20 days) left open
* Unless changes are made, tender must be left open for 10 more days
* Number of shares being sought
* Extend the length of time by public announcement notice
* Pro rata purchase of excess shares are tendered
172
What are the 13(d) requirments?
* Filing of a 13(d) disclosure upon obtaining
* _\>_ 5% of shares
* _\>_ 10% of shares
* Each 5% increment
* Filing within 10 days of acquisition
173
What is an Appraisal?
For closely held companies, that is one without an open market for the shares, a shareholder may
* Oppose a merger or fundamental change
* Provide notice of appraisal
* The corporation has 10 days to respond
* Demand the corporation to but them out at fair market value
* Corporation pays and provides details of how the calc was done
* If shareholder not satisfied, the can get the court to determine fair market value
174
What is a short form merger?
A merger that only requires the short form (no shareholder approval) filing with the state
* Parent/Subsidiary merger
* \>90% ownership by parent prior to merger
* Minimal share dilution (minnow/whale)
* If absorbing the target does not change the share dilution by more than 20% (5%), then short form is used.
175
What does a public tender offer normally contain?
1. A widely spread public offer (Wall Street Journal)
2. A substantial percentage of target's stock
3. premiuim offer over market price
4. a real offer, not an offer to negotiate
5. An offer for a fixed number of shares, % of market cap or class
6. Limited offer period (at least 20 days)
7. Push to get shareholders to sell
8. Numerous public annnouncements
176
What was the original theory of insider trading?
False statements made with the intent to deceive (common law) by directors or officers.
177
What is the equal access theory?
1. The possession of any non-public, relevant, material information creates a duty to disclose.
1. Access to information not available to the public
2. Inherent unfairness in taking advantage of information not available to public
178
What are the three theories of the omissions of material information in Insider trading.
1. Equal Access
2. Fiduciary
3. Misappropriation
179
What is the fiduciary duty in Insider trading?
* The possession of non-public information does not create a duty to disclose
* The duty comes from the relationship of trust and confidence between insiders and shareholders
* The defendant "must trade" on the information
## Footnote
*Dirks, Chiarella*
180
What is the tippee's duty when provided with inside information?
* It is the assumed duty of the insider if the information was provided improperly
* tippee assumes duty to shareholders
* tippee knows or should know that there was a breach of the tippers duty
## Footnote
*Newman*
181
What is misappropriation?
* A person commits fraud when they misapporpriate confidential information for securities trading purposes,
* in breach of a duty owed to the source of the information.
O'Hagan
182
What are the four rationales for tender offer rules?
1. Early warning system of change of control
2. Identifying individuals and financing, future plans and ownership
3. Anti-fraud of tender offers
4. Substantive terms of tender offers
183
Can the Business Judgement Rule be used to shield directors from a breach of the law?
No
## Footnote
*Miller*
184
When is Director/Officer self dealing contract be permissable?
* Disclosure of the relationship and contract to all parties
* Shareholders are entitled to vote on the contract
* The contract is fair and reasonable to both parties
*Cookies*
185
What is required to show that the special litigation committee (SLC) formed by the board reached a fair decision in a derivative proceeding?
* The members were disinterested
* The members were independent
* They acted in good faith
* They had reasonable bases for their recommendation
*Oracle*
186
What does it mean for a fiduciary to be independent?
The fiduciary is free to make their own choices and is not under the dominant influence of another fiduciary.
187
Can a majority or controlling shareholder sell their shares for a premium?
Yes, but the transaction will be closely examined for fairness
## Footnote
*Perlman*
188
Can a purchaser buy large blocks of shares without using a tender offer?
Yes, but
* The shares must be purchased on the open market at market pricing
* They are not predicated on a fixed number of shares
* They were purchased immediately without a holding period
* The fact that they were bought in discrete blocks to not run up the market price is not illegal
* The only legal issue would be the 13(d) reporting requirements for ownership interest.
*Brascan*
189
What are the public policy rationales for the Business Judgment Rule?
* Allows Boards/Corporations to take business risks
* Spurs innovation and economic growth
* Encourages individuals to serve as Board members
190
What are the requirements for a shareholder to bring a derivatve suit?
* Was a shareholder at the time of the act or omission
* Became a shareholder by operation of law (will, etc.) afterwards
* Shareholder fairly and adequately represents the interests of the corporation
* Has the means to conduct the suit.
191
How long does a plaintiff wait after filing a demand before bringing suit?
90 days
192
Does a corporation have to respond to a demand?
No, they can wait for the suit to be filed and then file for dismissal.
193
Is the derivative suit rule the same for Public and closely held corporations?
No, in closely held corporations
* if justice demands, the suit can be viewed as direct,
* proceeds go directly to plaintiff
TBOC 21.563(c)
194
What is required in the plan of merger, (TBOC 10.002)?
In writing
* Name of each organization that is a party to the merger
* Name of each organization that will survive the merger
* Name of each new organization created by the merger
195
Must shareholders approve the sale of assets?
No, unless the corporation is
* selling **all** of the assets, and
* not using the proceeds to continue running the business
TBOC 21.455(a), 21.451(A)-(B)
196
How many shareholders must approve a merger?
2/3 of all outstanding shares are required to approve a fundamental corporate change.
## Footnote
TBOC 21.457
197
In Texas can directors being named in a derivative suit review the demand request?
Yes, Yahoo!!!!
198
Under what circumstances would demand futility not apply?
* Where the board made a business decision, but the majority of that board has been replaced
* Where the business decision was not made by the board
* Where the decision was made by the board of a different company
199
What factors should a board or SLC consider when reviewing a demand?
To determine if a lawsuit should continue requires the balancing of factors such as
* ethical
* commercial
* promotional
* public relations
* employee relations
* fiscal and legal concerns
*Maldanado*
200
Are *Homo Sapiens* merely *Homo Economicus*?
No, according to Judge Strine
*Oracle*
201
Are all blocks of shares created equal?
No, control blocks of shares are valued at a premium due to
* private benefits if being in control
* belief of buyers that they have a superior plan and will make back the extra they paid for control
* natural rise in price as buying more and more shares drives up the price
202
What criteria does the court review when considering corporate looting cases?
* An excessive or inflated price paid for the control block
* Seller knows the the buyer intends to finance the deal with the corporations own assets
* Insistence by the buyer that the corporate assets be converted to cash either prior to just after the deal
* Buyers reputation for fraudulent conduct, including looting
* Knowing that the buyer lacks the assets to finance the purchase
203
What is the Minnow - Whale scenario?
A small company purchases the assets of a large company
* with shares (if enough share exist)
* and no shareholder approval required for the small company
* the large company owns the shares of the small company (control)
* the assets are held by the small company (like a subsidiary)
204
What is the purpose of the Uniform Fraudulent Transfer Act?
To avoid transfer of corporate assets which leave the company without sufficient assets to run the company or pay creditors.
205
How is intent established in the UFTA?
* transfer of assets to an insider
* debtor retained possession after the transfer (transferred to another version of themselves)
* the transfer or obligation was concealed
* transfer was made after being or threatened to be sued
* transfer was essentially all of the debtors assets
* the debtor took off
* the debtor removed or hid assets
* the amount of assets transferred conveniently matched the amount borrowed
* insolvency began right after receiving the loan or transferring the asset
* transfer occured contemporaneously with loan
* transfer of essential assets to a third party who transferred to an insider
206
What scenarios would trigger the UFTA?
* transfer to hinder, delay or defraud a creditor
* transfer without receiving a reasonable value in return
207
Can a corpration issue a distribution (dividend) when it is insolvent?
No and no if the distribution would render the corporation insolvent.
208
What are the six prongs to test if a controlling shareholder buyout is fair?
1. Approval of SC and majority of minority shareholders
2. Independent SC
3. SC selects its own advisors and can say no definitively
4. SC meets its duty of care in establishing a fair price
5. Informed minority vote
6. No coercion of the minority
209
What is earned surplus?
The amount of positive cash flow from ongoing operations.
210
What is stated capital?
Cash made from the issuance of stock at par value. Distributions cannot be paid from stated capital.
211
What is surplus capital?
Cash earned from selling shares at a price above par value, the difference in price versus par is surplus.
212
Where can distributions come from (source)?
* Earned Surplus - Yes
* Capital Surplus - Yes
* Stated Capital - No
213
Can directors be personally liable for improper distributions?
Yes
214
Can property be consideration in return for issued corporate shares?
Yes, until the property is conveyed the shares are considered unpaid, a trustee in a bankruptcy can demand the payment owed.
215
What is the standard for Board action in a takeover scenario?
* Board has a fiduciary responsibility to protect the shareholders from harm
* A reasonable threat to corporate policy and effectiveness
* Board can take action, but draconian measures that are preclusive and coercive are not allowed.
216
What are some examples of reasonable threats?
* Inadequecy of offer price
* nature and timing of the offer
* questions of illegality
* impact on shareholders or groups of shareholders
* impact on creditors, customers, employees
217
What does solicitation of a Proxy entail (14a-1)
A communication to security holders under circumstances reasonably calculated to to result in procurement, withholding, or revocatino of a proxy.
218
What is the difference in the Blasius standard versus the Business Judgement Rule?
* BJR has a rebuttable presumption that the substantive judgement of the board is reasonable
* Blasius rejects the per se rule and suggests in certain cases that the board has a burden to show that the action taken has a compelling justification.
* Interfering with shareholder voting doesntmeet the standard.
219
What did the Revlon court suggest regarding the corporate policy and effectiveness?
Directors are not obligated to abandon a deliberately conceived corporate plan for a short term shareholder profit unless there is clearly no basis to sustain the corporate strategy.
*Revlon*
220
How far does indemnification of officers/directors go for defense costs?
* Prosecuted criminally - Yes
* Fine imposed from criminal hearing - Yes
* Stealing corporate property - No
221
What is the Rickian view of surplus?
Surplus = Net Assets - Capital Stock
## Footnote
Where Net Assets = Assets - Liabilities
222
How does a person avoid creating a proxy solicitation 14a-(2-3)?
Publicy announce dissatsifaction with management and corporate direction, and send out a bona fide (press release).
Do not mention how they plan to vote or if they are seeking a proxy fight.
Send it to fewer than 10 people as a personal communication
Corporations - Texas
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