Biz Orgs Bar Flashcards
1
Q
What are three requirements to form an agency relationship?
A
(1) An agreement between parties;
(2) To benefit the principal; AND
(3) The principal has the right to control the agent.
o The principal is responsible for the acts of his agent.
o Note: No writing required unless Statute of Fraud requires writing. No consideration.
2
Q
What capacity do the principal and agent require?
A
Principal must be an adult and have mental capacity
Agent must have mental capacity but can be any age
3
Q
Formation by estoppel - define
A
An agency relationship may be created where a P holds out someone as an agent and a third party reasonably relies
(e.g., P lets an imposter represent him)
4
Q
5 duties owed by an agent
A
(1) Duty of loyalty
(2) Duty of care
(3) Duty to follow reasonable directions
(4) Duty to communicate relevant information
(5) Any contractual duties
5
Q
6 remedies when agent breaches
A
(1) Discharge agent
(2) Withhold compensation
(3) Compensatory remedies
(4) Disgorge profits
(5) Constructive trusts
(6) Rescission
6
Q
3 duties owed by principal
A
(1) Duty to reasonably compensate and reimburse for expenses
(2) Duty to cooperate
(3) Express contractual duties
7
Q
3 remedies when principal breaches
A
(1) Compensatory damages
(2) Terminate agency
(3) Seek lien for money due
8
Q
When will the agent’s actions bind the principal?
A
The agent’s actions will bind the principal if the agent was acting under actual (express or implied) or apparent authority
9
Q
3 types of agency authority?
A
(1) Actual express
(2) Actual implied
(3) Apparent
10
Q
define actual express authority
A
what is written in the four corners of the agreement or expressly stated
Note: In corporation, exists for director if in board resolution or similar
11
Q
define actual implied authority
A
Where agent reasonably believes principal gave him the authority in order to accomplish the agency’s goals (due to customs, prior dealings, necessary to accomplish goals)
12
Q
When does termination of actual authority occur?
A
occurrence of event, unilaterally by A or P, operation of law, changed circumstances where clear agent’s services no longer needed
13
Q
Define apparent authority
A
Apparent authority exists where the principal has provided the agent with the appearance of authority upon which a third party reasonably relies
14
Q
define lingering apparent authority
A
apparent authority may linger even if where actual authority has ended. the agent can continue to have apparent authority with third parties with which the agent has previously contracted unless the third party had actual or constructive notice of the termination
15
Q
define ratification in agency and 3 requirements
A
Where an agent acts without authority, the principal may approve the act. The agent is no longer liable if this occurs. 3 requirements:
(1) P has capacity;
(2) P has knowledge of all material facts; AND
(3) P accepts transaction.
16
Q
what happens when principal dies?
A
modern rule: authority not terminated
17
Q
what happens when agent acts without actual or apparent authority
A
principal is not liable and agent is liable on contract
on the other hand, if agent had authority, principal is liable to the third party on the contract
18
Q
when is the agent liable to the third party on the contract?
A
- when acted with no authority
- when did partially disclosed principal or did not disclose him at all (Third party elects whether agent or principal is liable.)
19
Q
who enforces the contract - P or A?
A
disclosed principal enforces the contract, not the A
when principal not disclosed, P or A can enforce
20
Q
when is P liable for agent’s torts?
A
Principal liable for agents torts if:
(1) Employer and employee relationship; AND
(2) Tort committed within the scope of the relationship with the exception of frolics
Rule: While the P is liable for a detour (minor deviation off course), the P is not liable for frolics (a major deviation from the scope of employment).
21
Q
how to determine whether employer and employee relationship exists?
A
most important consideration is the amount of control principal has over how A gets the job done
other factors
- expertise required
- who provides tools and facilities
- period of employment
- type of compensation
22
Q
rule for when P and liability for the torts of an IC?
A
P is not liable for the torts of an independent contractor unless
(1) intentional tort authorized by employer
(2) in furtherance of business
(3) abnormally dangerous activities
(4) non delegable duties
- Other notes
o Negligent selection of the IC agent
o Principal holds out IC agent as an employee (relationship by estoppel)
23
Q
define partnership and all the main rules.
A
A partnership is formed where two or more persons carry-on as co-owners a business for profit.
General partners are liable for the partnership debts.
No formalities are required. Writing required if partnership within Statute of Limitations.
Note: A “person” may be a corporation, trust, another partnership, etc.
24
Q
3 ways to determine whether partnership exists and most important factor
A
(1) whether share in profits - raises a rebuttable presumption of partnership
* Exception – profits received as payment of debt, rent, wages, services
(2) whether share in control
(3) whether share in losses
25
define partnership by estoppel
one who holds himself out as partner may later be estopped from denying partnership if one reasonably relies to their detriment
26
3 ways to know something is partnership property
(1) property titled in partnership name
(2) property title in partner name but identifies partnership or partner capacity
(3) property purchased with partnership funds
27
rule on partnership property
Partnership property belongs to the partnership itself and not to the partners. A partner can only use the partnership property for the benefit of the partnership and may not transfer the interest
28
rights of general partner and what voting required
All partners have an equal right to manage and control the business (one partner, one vote), unless agreement provides otherwise. A partner cannot unilaterally transfer his management rights. All ordinary decisions require a majority vote while extraordinary decisions require a unanimous vote.
Extraordinary decision - bringing on a new partner
29
rule on distribution of profits and losses in a general partnership
All profits are split equally unless the agreement says otherwise, and losses are split the same way profits are treated
* Example: Split profits 60/30/10, then split losses by 60/30/10. Losses follow profits, not the other way around.
30
define indemnification in a partnership
a general partner is indemnified by fellow partners for expenses incurred in excess of the partner's share
Note: No right to compensation other than for winding up business.
31
what is the rule on inspection in a partnership?
A partner may inspect and copy the partnership books
o Lawsuit
Rule: A partner may sue another partner (e.g., for breach)
32
5 duties of a general partner - first two are fiduciary
(1) Duty of loyalty
(2) Duty of care
(3) Duty to disclose
(4) Duty to account
(5) Duty of obedience (because a partner is an agent of the business)
o Rule: Partners owe a fiduciary duty to the partnership and to each other.
Duty of Care and Duty of Loyalty cannot be eliminated in partnership agreement
33
Duty of care
Partner must not engage in grossly negligent, reckless, or intentional misconduct
34
4 things to remember with duty of loyalty - what must partner do/not do
(1) Act in good faith and fairly toward the partners
(2) Account for all profits and benefits derived by partnership
(3) Not deal adversely with the partnership
(4) Not compete with partnership
35
rule on general partners as agents
Each general partner is an agent of the partnership. The general partner can bind the partnership under actual or apparent authority
(unless a third party knew the partner lacked authority).
36
rule for general partnership liability for contracts
The partnership is liable for contracts entered into by a general partner acting under authority of the partnership and in the scope of the partnership
37
rule for partnership liability for torts
The partnership is not liable for the torts of general partners unless those were performed in furtherance of the partnership/scope of the partnership
38
rule on joint and several liability in a partnership
A partner is jointly and severally liable for the debts of the partnership. If the partner pays more than their fair share, the partner can seek contribution from the other partners. However, the plaintiff must first exhaust the partnership resources before seeking to recover from the partner's personal assets.
39
Rule for new partner obligations?
New partner is not liable for partnership obligations prior to him joining firm but can lose any investment he put in (e.g., to satisfy partnership debts)
40
rule for existing partner obligations?
liable for any obligations partnership incurred while he was a partner unless there is a release
41
criminal liability - is partnership liable?
No.
Rule: Partners are criminally liable only for their own crimes.
42
listen
o Rule: A GP has the power to dissociate or dissolve at any time by express will, agreed event, expulsion, bankruptcy, death/incapacity, or judicial order.
Duties of loyalty and care (confidentiality) continue
43
Describe dissociation
When a partner dissociates, he leaves the partnership. The partnership either dissolves or continues.
A dissociated partner can bind the partnership for up to two years if other party did not have notice of the dissociation.
44
Define dissolution
Dissolution requires that the partnership be wound up (sell and settle GP affairs) before termination.
Partners may waive dissolution by a unanimous vote of partners who have not wrongfully dissolved.
45
When does voluntary dissolution occur?
(1) Partner in an at will partnership voluntarily dissociates (must dissolve)
(2) In term partnership, after death, bankruptcy or wrongful dissociation, majority of remaining partners wish to dissolve
(3) Partnership objective achieved
(4) Agreement specified an end date
(5) All partners agree
(6) Passage of 90 consecutive days where partnership lacks 2 partners
46
2 times involuntary dissolution occurs?
(1) Partnership engaged in unlawful activity
(2) Court decree following request of partner
47
When does apparent authority end in a partnership?
(1) Directly inform creditors, or
(2) 90 days after the filing of a notice of dissolution with the state
48
define winding up
Winding up is the period between dissolution and termination where the partners sell the assets, settle the debts, and distribute remaining assets to the partners. Partners receive compensation for winding up services.
49
What is the order of distribution of assets?
(1) Outside creditors
(2) Partner creditors
(3) Capital contributions from partners
(4) Profits, if any, distributed equally unless agreement says otherwise
NOTE: If partnership cannot cover debts, partners must contribute in equal share to cover the debt.
50
Define a limited partnership
In a limited partnership, general partners are liable for partnership debts while limited partners are not liable for partnership debts though do not manage the business (they can only lose the investment they put in). The limited partner does not owe fiduciary duties. Limited partners have a full right to inspect the books and receive an accounting
If a purported LP fails to file with the state, they are a GP.
51
How are profits based in a LP?
Profits are based on the degree of capital each partner put in.
E.g., Partner puts in 20% of capital, partner receives 20% of profits (different from partnership)
52
3 requirements for an LP to form
(1) File certificate of limited partnership with the state;
(2) Identify name of partnership, must state "limited partnership"; AND
(3) Name and address of registered agent and of a general partner
53
What is a LLP?
In a limited liability partnership, all of the partners have limited liability.
Formation is the same as LP. File with state.
Dissociation and dissolution: Same as limited partnership
o LLLP – Limited Liability Limited Partnership
Rule: Both general partners and limited partners have limited liability.
54
Main rules for LLC
A LLC - limited liability company is an entity owned by members and run off an operating agreement. The LLC enjoys the taxation of a partnership (pass-through taxation) and the limited liability of a corporation, where the members are not personally liable for the LLC's debts (other than for their own wrongful debts). Profits and losses are same as that for a LP, split based on contributions (not equally). Managers in a LLC owe fiduciary duties of loyalty and care. BJR applies.
Note: This is not a corporation or partnership. No shareholders. Only members.
55
3 requirements to form a LLC
(1) File certificate with secretary of state;
(2) Name must include LLC; AND
(3) Name and address of agent
Dissociation – same as general partnership
Dissolution – same as general partnership
Sample conclusion: To form a LLC, a certificate of formation must be filed with the state. Here, there was no filing with the state, so the firm is not an LLC. Partnership is the only entity that does not create a state filing.
56
What liability is a member subject to in a LLC?
(1) Piercing the veil
(2) Direct or derivative actions
57
What is a de jure corporation?
A regular corporation
58
Define a corporation at a high level
A corporation is a legal owner that shields owners and managers from the obligations of the corporation.
59
4 requirements to be included in filing with secretary of state?
(1) Corporation's name;
(2) Authorized number of shares and associated rights;
(3) Names and addresses of incorporators, initial directors, and registered agents; AND
(4) Any lawful purpose
60
Define ultra vires activity and the rules
An ultra vires is one outside of the corporation's stated purpose in the articles of incorporation. At common law, ultra vires acts were not permitted. Modernly, ultra vires acts are generally permitted but shareholders can seek an injunction to stop the company from performing the act and a manager may be liable for approving such an act.
61
Other than a regular de jure corporation, what are the 2 other ways to form a corporation?
(1) De facto corporation
(2) Corporation by estoppel
62
2 requirements for de facto corporation?
(1) Actual use of corporate power; AND
(2) Good faith but unsuccessful attempt to incorporate
Under a de facto corporation, there is no liability for failing to correctly incorporate
Effect: Treated as an actual corporation where shareholders generally not liable. Otherwise, default is a general partnership.
Note: Cannot claim de facto if you knew you had no corporation.
63
Define corporation by estoppel
A person who deals with the business believing it is a corporation is estopped from later denying it was a corporation. This only applies in contract cases.
The de facto and corporation by estoppel doctrines have been established in many jurisdictions but if they are available, this is how they work
64
Define a professional corporation
Licensed professional incorporate into a professional corporation. An individual is responsible for their own malpractice but not that of others. This is the only type of organization where the shareholders are liable for corporation obligations (other then under piercing)
65
3 requirements for close corporation
(1) 35 or fewer shareholders;
(2) Not publicly traded; AND
(3) Filing with the state.
A close corporation may be managed by shareholders and can forgo many corporate formalities.
66
Define S corporation
(1) Less than 100 shareholders;
(2) U.S. citizens and residents;
(3) Only one class of stock; AND
(4) Cannot be publicly traded.
Similar to close corp
67
Rules for foreign corporation and define it
A foreign corporation is one incorporated in another state. To do business (outside of owning property) in another state, it must register and pay a fee. If it does not, it can be:
(1) civilly fined
(2) cannot sue in the state
(3) can be sued (and can defend)
o Example: A Nevada corporation is foreign in California.
68
define all rules for promoters
Promoters are those that enter into contracts before a corporation is formed. Promoters are personally liable for contracts entered into before and after the corporation is formed unless there is a novation or the corporation adopts the contract (e.g., accepts the benefits). A corporation is NOT liable for pre-incorporation contracts. The promoter has a fiduciary relationship with the corporation (e.g., cannot make secret profits off dealings).
o Notes
Promoter may have a right to reimbursement for the value of the benefit received by the corporation.
Examples: Rent or equipment contract entered into before incorporation
69
One comment to remember on Officers
Officers manage the business on a day to day business and are agents of the incorporation
Apply agency concepts
70
Rule on bylaws
By laws are governing documents for the corporation. They are not required. The articles of incorporation take priority over bylaws because the articles are a contract with the state
71
What are authorized shares?
Shares that are described in articles of incorporation
72
What are issued and outstanding shares?
Shares that have been sold
73
What are treasury shares?
Shares that have been reacquired by the company (through repurchase)
74
2 types of shares
common
preferred
o Notes: Requirements for Preferred Stock
(1) Number of shares in each class;
(2) A distinguishing name/classification for each class; AND
(3) The rights, preferences, limitations, etc., of each class.
75
What is a share option?
A share option is the right to purchase shares in future at a predetermined price set by the Board
76
What is a subscription?
A subscription is a written offer to buy a corporation's stocks. Pre-incorporation subscriptions are not revocable in the first six months. Post-incorporation subscriptions are revocable up to the point the Board accepts the offer. Payment is due upon the Board's demand.
77
What is the common law rule on the forms of consideration a company could accept for its stock?
Under the common law, only money, property, or services already performed could be offered as consideration
78
What is the modern law rule on the forms of consideration a company can accept?
Under the modern law, a company can accept any tangible or intangible property including future services and promissory notes
79
What is the traditional approach on how much consideration is needed?
Under the traditional approach,
stock must not be sold for less than PAR value (the minimum issuance price)
80
define watered stock
where one sells a PAR stock for less than the minimum issuance price, the loss is called lost value is called the 'water.' Both the seller and the purchaser are liable to the corporation for the lost value. Where the purchaser transferred the stock to a third party who took without notice, the third party is not liable if they acted in good faith.
Example: PAR value was $1K/share. Board was low on cash so instead of paying CEO salary of $10K, gave CEO 50 shares. However, 50 shares is worth $50K. The difference - the $40K is the water.
Therefore, Dick could sue on behalf of the corporation to recover the value of the water from either Jane, who took the shares with knowledge of the water
81
what is the modern rule on consideration
Corporations can issue shares for whatever consideration the Board deems is appropriate
82
Are stock transfer restrictions valid? What is the rule?
A shareholder can transfer their stock at any time.
Stock transfer restrictions are reasonable so long as they are valid. For example, a restriction that says the company has the first right of refusal when a shareholder wants to sell their stock is valid. Other restraints on transfer may be void.
The third party is bound when the restriction is noted or the third party has knowledge.
83
Define preemptive rights and the modern treatment
Under preemptive rights, an existing shareholder may protect his shares from becoming diluted by having an opportunity to purchase shares from the company by buying stock when there is a new issuance. Under the modern law, a shareholder does not have preemptive rights unless the articles provide otherwise
84
o Election and Removal
1+ member on board, shareholders elect the directors, the shareholders or directors may fill vacancies.
o Election and Removal
1+ member on board, shareholders elect the directors, the shareholders or directors may fill vacancies.
85
What is the rule on removal of directors and of officers
Directors can be removed with or without cause by a majority shareholder vote, unless the AOI says otherwise
Officers can be removed by the Board with or without cause
86
How can the Board take action and define quorum and any other requirements
Board can only take action by unanimous consent in writing or by a meeting where there is quorum. Quorum exists where a majority of directors are present, and quorum must exist during the entire meeting. Board approval requires a majority of votes. Interested Board members do not count toward the quorum.
87
3 ways dissenting members can state their dissent and what is underlying rule
You are bound unless you are dissented.
(1) Voice dissent at beginning of beginning
(2) Voice dissent or abstention in meeting minutes
(3) Provide written notice to presiding member during or after meeting
Oral dissent not allowed (still liable)
88
rule for absent board members
not liable for actions at meetings they missed
89
rule for proxies and voting agreements for Boards
invalid
90
what two things can committees cannot do
Board can delegate to committees
however, committees cannot declare dividends and cannot elect directors or approve fundamental changes
91
3 rules on officers
run day to day business
owe fiduciary duties of loyalty and duty of care
apply agency rules because officers are agents of the corporation
(watch for cross over question)
92
3 rights for directors and officers
(1) entitled to fair compensation
(2) entitled to indemnification
(3) entitled to inspection
93
two rules on indemnification (2 types)
(1) mandatory indemnification where board member or officer prevails in proceeding brought against him by corporation
(2) permissive indemnification where board member or officer loses in proceeding against him but officer acted in good faith
94
rule on exculpation clauses
do not apply for breach of duty of loyalty or intentional misconduct
only works for breach of duty of care
split jx on whether it applies to officers
95
rule on inspection
right to reasonable inspection of corporate records and books
96
3 fiduciary duties a board member and officer owe corporation
(1) Duty of loyalty
(2) Duty of care
(3) Duty to disclose (non fiduciary duty)
97
Define duty of care and the Business Judgment Rule
Directors owe the company the duty of care, which means they make decisions that are informed, act in good faith, and put the company's interests first.
Under the Business Judgment Rule, if a director meets the standard of care, the director will not be held liable for corporate decisions that in hindsight turn out to be poor or erroneous. Gross negligence is sufficient for a cause of action but not negligence.
98
define duty of loyalty
Directors and officers owe the duty of loyalty to the organization where they act in good faith and put the company's interests above their own
99
3 types of breaches of duty of loyalty for directors
(1) Interested Director Transaction
(2) Usurping Corporate Opportunity
(3) Unfair Competition
100
Define Interested Director Transaction rules
A director has a conflict when he, his spouse, or his own company do business with the corporation. A safe harbor applies for the director if he can show that (1) the transaction is fair to the corporation or (2) that a majority of disinterested directors or of disinterested shares approve the transaction after full disclosure of material facts. Interested director transactions can be set aside. The director must disgorge any profits received back to the company or a constructive trust can be put on the property.
101
Rules for usurping a corporate opportunity
A director must not usurp a corporate opportunity. A corporate opportunity is one in which the corporation has an expectancy or an interest in the opportunity or the director found on the company's time and resource. The transaction is void unless a majority of disinterested directors approve after a full disclosure of the facts.
102
* (3) Unfair Competition
o Rule: A director/officer may not unfairly compete w/ corporation.
* (3) Unfair Competition
o Rule: A director/officer may not unfairly compete w/ corporation.
103
2 defenses available to director for any breaches of duty of loyalty or care
(1) Reasonable reliance on information from another
(2) Ratification by a majority vote of independent directors, a majority vote of a committee with 2+ independent directors on it, or a majority vote of independent shares
104
Duty to Disclose
* Rule: Directors/officers have duty to disclose material information to Board.
o Other Ways to Be Liable
Improper distributions
Improper loans
Duty to Disclose
* Rule: Directors/officers have duty to disclose material information to Board.
o Other Ways to Be Liable
Improper distributions
Improper loans
105
Rule on giving loans to Board members
A loan to a director is only permitted where it is reasonably expected to benefit the corporation
106
3 main shareholder rights
(1) Right to vote (for corporate fundamental changes, to elect or remove directors)
(2) Right to inspect
(3) Right to sue
Note: Shareholders do not manage the corporation unless in closely held corp.
107
Rules on shareholder meetings - actual and special
Shareholders hold annual meetings and also special meetings.
An annual meeting is required to elect directors, the date/time/place must be provided
Special meetings can be called by:
- The Board
- The CEO
- Holders of at least 10% of outstanding shares
- Anyone authorized in bylaws
Special meetings - must have date/time/notice and give notice between 10-60 days before meeting including purpose of meeting and details of proposal.
if purpose is not stated meeting resolutions not valid unless those not present waive
108
2 ways for shareholders to vote and define quorum and voting requirement
Shareholders can vote via unanimous written consent or through a meeting.
Quorum is reached through majority of outstanding shares present. Quorum not broken if someone leaves.
Majority of quorum required to pass resolution (votes cast in favor exceeds votes cast against)
Interested directors do not account toward the forum or vote
109
2 methods for shareholders to vote
Straight: Each shareholder casts one vote per share.
Cumulative: Each shareholder gets multiplies the number of shares by number of directors to be elected.
Example: I own 1K shares. 9 directors. I can cast 9,000 votes for one person.
110
who can vote?
the voting shareholder - person shown as owner in corporate records - as of the record date - the voter eligibility date
111
4 ways for shareholders to vote other than by unanimous written agreement
(1) in person
(2) by proxy
(3) by voting trust
(4) by shareholder agreement
112
Define voting by proxy
A proxy is a writing signed by shareholders directed by the corporation authorizing another to vote their shares. A proxy is valid for 11 months unless otherwise agreed to. A proxy is generally revocable unless the proxy says otherwise and the proxy holder has another interest in the shares other than voting (e.g., he owns his own shares).
A proxy can be voted in person or in writing (or appointing another proxy)
113
Define shareholder voting trust (block voting)
In a shareholder voting trust, to increase influence, the shareholders agree to vote in a block by transferring their shares to a trustee.
114
4 requirements for shareholder voting trust
(1) Written agreement filed with corporation;
(2) Legal shares transferred to trustee;
(3) Shareholder retains other rights; AND
(4) Good for 10 years but renewable.
115
Define voting by a shareholder agreement.
To increase their influence, shareholders agree as to how they will vote their shares. The agreement must be in writing. It is not subject to any time limit and does not need to be filed with the corporation. States split on whether enforceable.
116
Define a shareholders overall right to inspection
A shareholder has the right to inspect and copy records. The right is either unqualified or qualified.
117
Define when a right is unqualified
The shareholder has an unqualified right to inspect where
- shareholder meeting minutes
- shareholder communications from Board
- anything related to articles of incorporation or bylaws
- annual report
- lists of names of board of director and their business address
- Board resolution regarding how shares are classified
118
Define when a right is qualified
A shareholder's right to inspect records is qualified where
- Board meeting minutes
- Any corporate records/books/papers/accounting records/shareholder records
119
what is required when right to inspect is qualified
(1) Proper purpose related to shareholder's role;
(2) 5 days advance notice; AND
(3) Written notice.
120
what is rule on who can declare dividends and exception
The Board has the sole discretion to determine when dividends are distributed. However, the Board may not do so when:
(1) Company would not be able to satisfy its debts, OR
(2) Company's liabilities would exceed assets including amounts needed to satisfy shareholders
121
Define 3 methods shareholders receive dividends
(1) Preferred stock - paid first
(2) Participating stock - pay again
(3) Cumulative stock - add them up
122
Define how preferred stock works
Take the number of preferred shares and multiply it by the dollar value of the preferred stock. Deduct this from the total pot available.
Whatever is left over - divide the common stock by this amount and you get total of what each common share gets
Preferred: paid first
Example: $400K total
100K shares of common stock and 20K of preferred stock with a $2 preference
Preferred means pay first, so $40K that gets paid first. This leaves $360K for 100K shares, which means each common share gets $3.60. Each preferred share gets $2.
Note: Common stock gets paid last and in equal amount.
123
Define participating (pay again)
Do the same as above but when you use the leftover for common stock, put the preferred stock in there too.
Participating: pay again
Example: $400K total
100K shares of common stock and 20K of preferred participating. Each preferred share gets $2.
Preferred is $40K. $360K remains. $360K divided by 120K shares. Preferred gets $3, added to the initial $2 which is $5 per share. Common shares get $3 per share.
124
Define the cumulative (add them up approach)
Only preferred get paid for years when dividends haven't been paid.
Multiply number of preferred shares times value of each share and number of years haven't been paid including this year.
anything left over, use that for common stock
100K shares of common stock and 20K of preferred cumulative. Each preferred share gets $2. No dividends have been paid for 3 years (including for this year)
Corporation owes preferred stock for 4 years times 20K shares times $2/share. Equals $160K. Leaves $240K for common share. Each common share gets $2.4. Each cumulative gets $8.
125
What two funds can be used to fund distributions?
(1) Earned surplus
(2) Capital proceeds
o Earned surplus (all earnings – losses – dividends already paid_
o Capital surplus (Proceeds received from issuing stock in excess of par value)
* Where do the proceeds go?
o Par value proceeds go to stated capital account
o Excess goes to capital surplus
126
What corporate fund can not be used to fund distributions?
Stated capital
127
Six types of fundamental corporate changes
(1) Merger or consolidation
(2) Transfer or sale of substantially all assets
(3) Share exchange
(4) Conversion
(5) Amending Articles of Incorporation
(6) Dissolution
128
4 requirements for a fundamental corporate change to be valid
(1) Board resolution;
(2) Company provides notice to shareholders 10-60 days in advance disclosing information about proposal and purpose of meeting;
(3) Shareholder approval; AND
(4) Documents filed with secretary of state.
129
Define any special rules for merger or consolidations
Both companies must approve (both by directors and shareholders)
Surviving company delivers papers to secretary of state
Short form mergers - where acquire a company you already had 90% ownership in do not count
Creditors from prior company can sue surviving company
130
Define any special rules for the sale or transfer of substantially or all assets or a share exchange
rule of thumb is 75%+ of assets or shares
both boards must approve but only the seller's shareholders have to approve
131
any special rules for amendment of articles
housekeeping changes (e.g., changing directors names do not apply)
132
what is conversion as a fundamental corporate change
where one entity changes its form to another form (e.g., corporation to a LLC)
133
define Dissenting Shareholder Right to Appraisal
Shareholders who dissent from proposed fundamental change may have the right to force the corporation to buy its shares for fair value
134
what are 3 requirements shareholder must follow
(1) Before shareholder vote, file written objection with corporation with intent to demand payment;
(2) At meeting, dissent or abstain; AND
(3) After meeting, file written demand for payment.
135
A dissenting shareholder's right of appraisal applies only to which company and what specs?
Only applies to close companies, because close companies are not public (shares not sold on a national exchange), so there is no where to take your shares
- cannot be public, or
- cannot have more than 2K shareholders and $20M shares
136
What are the only two types of corporate fundamental changes where there are no dissenter rights of appraisal for closed corporations?
(1) Amending the articles of incorporation
(2) Dissolution
137
listen for dissolution - requirements exact same as regular except notify creditors too
Voluntary Requirements
* (1) Board action;
* (2) Shareholder approval;
* (3) File papers with state; And
* (4) Notify creditors.
138
4 ways where a company might involuntarily dissolve?
(1) Action by shareholders
(2) Action by creditors
(3) Action by Attorney General
(4) Action by state - administrative
139
Situation where shareholder can petition for dissolution?
Director abuse
Directors wasting assets
Directors deadlocked
2 or more consecutive annual meetings where a Board seat is not filled
140
2 situations where a creditor can petition for dissolution?
(1) Corporation insolvent
(2) Corporation admits in writing that creditor's claims due
141
1 situation where Attorney General can petition for dissolution?
Fraudulent activity and abuses of authority
142
3 situations where state can petition for administrative dissolution
(1) Failed to pay fees
(2) Failed to pay penalties
(3) Failed to maintain registered agent
Note: After notice, corporation has 60 days to fix
143
4 steps to wind up for corporation
(1) Give written notice to creditors and publish notice in newspaper in the state;
(2) Gather and convert all assets;
(3) Pay creditors; AND
(4) Distribute any remainder among shareholders.
144
Define Deep Rock Doctrine
Under the Deep Rock Doctrine, where a company owes third-party creditors, shareholders claims are subordinate to the third-party creditors claims
145
What do you do an exam if it asks on what theory of liability may the 3rd party creditor sue the shareholders?
Breach of contract
briefly bring up breach of contract theory. Contract performed. Anticipatory repudiation if revoked. Don’t analyze offer/acceptance etc. Can mention 4 damages requirements.
* Note: Creditor will never sue a director/shareholder for breach of fiduciary duties because those duties not owed to third party contract recipient.
146
Define a tender offer and for how long the offer must be open
A tender offer is where a bidder makes a public offer to buy a substantial percentage of the company's shares resulting in the buyer owning more than 5% of a class of securities. The offer is open for 20 days.
147
What 5 things must the buyer file in the tender offer?
(1) Identity and source of funds;
(2) Past dealings with target;
(3) Future plans with target;
(4) Bidder's financial statements; AND
(5) Any arrangements made with significant people at the target company.
148
What is the general rule - 2 to 3 sentences on piercing the corporate veil?
Generally, shareholders are not liable for a corporation's debts. Limited liability is the bedrock principle for corporations. However, a court may pierce the veil where it finds the shareholders have abused the privileges of conducting business as a corporation.
149
3 areas which courts consider as basis for piercing
(1) Treating corporation as an alter ego
(2) Undercapitalizing the business
(3) Fraud
150
Define treating the corporation as an alter ego
(1) Doesn't follow corporate formalities
(2) Commingles corporate and personal property
151
Define undercapitalization
(1) Does not adequately invest in the business at its formation to where the company can reasonably cover anticipated expenses
(2) Does not obtain insurance for the company
152
Define additional rules for piercing - which types of companies
- applies mostly to close corporations
- courts less willing to apply piercing in contract cases
- where the corporation is a shareholder, and the subsidiary has engaged in funny business, the court pierces the veil and gets to the corporate shareholder
o Conclusion: The veil is pierced, and Supplier can recover against A.
153
Define a direct suit and give 3 examples
In a direct lawsuit, a shareholder brings the lawsuit on behalf of herself against the corporation and gains any recovery.
Examples of direct lawsuit includes where the shareholder is demanding a dividend, exercise of her preemptive rights, or claiming that a majority shareholder oppressed her (and she is a minority shareholder) in a closed corporation
o Recall: In closed corp, shareholders owe fiduciary duties to each other
Note: On exam, run both direct and derivative regardless.
154
Define the rules for a shareholder derivative suit
In a shareholder derivative suit, the shareholder brings a suit against the directors on behalf of the corporation for harm done to the corporation. Any recovery goes to the corporation though if the shareholder prevails, he obtains reimbursement for attorney fees.
The shareholder must:
(1) Own shares at the time of filing the action and throughout the litigation;
(2) Adequately represent the corporation; AND
(3) Make a written demand on the corporation to bring the suit unless the demand would be futile (e.g., because the defendants are on the Board).
The corporation has 90 days to respond to the demand. The corporation can move to dismiss if the corporation puts together an independent committee of directors who believes bringing suit would injure the corporation.
155
instances where proper to bring derivative suit
(1) Any breaches of duty of loyalty
(2) Any breaches of duty of care
Exam Tip – Issue Spotting
Direct suit, derivative suit, breach of loyalty, breach of duty of care, 10b5, 16b
- not disclosing material fact during security transactions with shareholders
156
listen - Common Law Liabilities for controlling shareholders
Controlling Shareholders: A controlling shareholder owes fiduciary duties to minority shareholders. He must refrain from using his control to obtain special advantage or take action that unfairly prejudices minority shareholders. Controlling shareholder may not sell stock to looters, sell corporate assets, or sell board seats.
157
common law liability - special facts doctrine - define
The general rule is that directors and officers have no duty to disclose inside information to shareholders. However, where shareholders may be at a disadvantage in a securities transaction, the directors must disclose the facts or be liable.
Special facts are those which a reasonable investor would consider important in making an investment decision. Where the director or officer fails to disclose special facts, the shareholder can recover the difference between the price they paid and the value of the stock with the information.
Example includes where director knows there is a pending lawsuit or regulatory investigations taking place.
158
Define common law liability of misrepresentation
A D/O may be liable for common law misrepresentation where:
(1) Material, false statement of fact;
(2) D knew was false or acted with recklessness;
(3) Intent to induce reliance;
(4) P reasonably relied; AND
(5) Damages.
159
2 types of securities laws - what are they
Federal Rule 10(b)
Federal Rule 16(b)
160
Define overall header statement on Federal Rule 10-b
Federal Rule 10(b) makes it illegal to participate in any fraudulent scheme in connection to the sale or purchase of a security.
161
What are the 5 requirements the plaintiff must show to make a prima facie case under Federal Rule 10-b?
(1) Intent to defraud;
- recklessness is sufficient, negligence not.
(2) Material misrepresentation, omission, or tipping;
(3) Purchase or sale of securities;
(4) Reliance (presumed in public misrepresentation and non disclosure cases; AND
(5) Use of an interstate instrumentality
(e.g., national stock exchange, phone, internet)
162
What is the rule on insider trading?
Those in a fiduciary relationship with the corporation may not trade or disclose on insider information (material, non-public information).
The tipper is liable where the tipper made a tip for an improper purpose.
The tippee is liable where tipper breached the duty and tippee knew of this
163
Where the person is not an insider with the corporation (no fiduciary relationship), what cause of action should be explored?
Misappropriation theory where someone breached the trust and confidence the corporation had in them (e.g., a janitor or employee who did not owe fiduciary duty)
Exam Tip – 10b-5 Fact Triggers
* Officer gives a misleading press conference / statement
* Remark overheard in public, intentionally or not intentionally
* Officer gives inside info to a lawyer who then trades or tips
164
What are the damages in a Federal Rule 10b case?
P receives difference between the price paid and the price a reasonable time after disclosure
Exam Tip – 10b-5 Fact Triggers
* Officer gives a misleading press conference / statement
* Remark overheard in public, intentionally or not intentionally
* Officer gives inside info to a lawyer who then trades or tips
165
Where you see a lawyer in business orgs essays - what things should you issue spot?
- If securities violation - analyze them under violating the law and misappropriation
- Analyze duties of loyalty
- Analyze business transaction in corporate fundamental changes
- Analyze a potential breach of duty of confidentiality
- Analyze duty of diligence
166
Define Federal Rule 16(b)
Under Federal Rule 16(b), any director, officer, or more than ten percent shareholder may not realize a profit on the sale or purchase of a security within a six month period. Any such profits must be returned to the company.
The individual will be held strictly liable.
167
Who does Federal Rule 16(b) apply to?
Federal 16(b) only applies to companies that are listed on a national stock exchange or have at least $10M in shares and 500 shareholders.
168
How do you calculate the ill profit?
Take whatever the ill profit is and multiply it by the number of shares that she both bought and sold within the six months
Exam Tip – Issue Spotting Tip
* Comes up in a shareholder derivative suit
o Who can be a defendant - corporate insiders defined:
Officers, directors, and shareholders that own more than 10% equity stock
Officers must be in their positions at the time of either the purchase or sale
Over 10% of shareholders must be in that position at the time of both the purchase and the sale of the share
169
Define Sarbanes Oxley and its 3 requirements
Under Sarbanes Oxley, publicly traded companies must meet certain reporting requirements. These include:
(1) An audit team overseeing the work performed by a public accounting firm;
(2) CEO and CFO certifying the accuracy of company's financial statements; AND
(3) If a filing is inaccurate and the company must restate their financials, the CEO and CFO must reimburse the company for their incentive-based earnings for the 12 month period after the reports were filed
170
What are the criminal penalties associated with Sox? 2 types
(1) Destroying/altering corporate documents: Up to $5M and up to 20 years in prison
(2) Securities fraud: Punishable up to 25 years in prison
171
What is the statute of limitations on Sox?
2 years after discovery or 5 years after cause of action, whichever is later
* Note: Whistle blowers are afforded protection.
