Business Associations

Question 1

Corporation Definition

Answer 1

C is a legal entity that exists separate from its owners, thus shielding the owners and managers from personal lia for the actions of the C.

Question 2

De jure Corporation

Answer 2

A de jure C meets all mando stat reqs including that the incorporators sign/file an art of inco w/ the sec of state that includes initial agent’s name for C; address for C’s registered office; C’s name; auth # of shares; name/address of each incorporator.

Question 3

De facto Corporation

Answer 3

De facto C exists where there’s actual use of corp power and GF, but unsuccessful attempt to inco under valid inco stat. Law treats as actual C and SHs not personally lia for corp obligations.

Question 4

Estoppel

Answer 4

Estoppel occurs when a person who deals w/ a bus entity believing it’s a C, or one who incorrectly hold bus out as a C, may be estopped from denying C status.

Question 5

SH Liability for C Obligations

Answer 5

As a general rule, SHs in a properly formed C are not personally lia for the obligations of their C. This is a consequence of the C being an entity separate and apart from the SHs. However, ct will ignore this separateness and pierce the corp veil to hold SHs personally lia for the C’s obligations if the privilege of conducting bus as a C has been abused.

Question 6

Piercing the corporate veil

Answer 6

Veil can be pierced:

(1) alter ego where the SHs fail to treat the C as a separate entity, where corp formalities are ignored and/or personal funds are commingled;
(2) undercap, where SH’s monetary investment at time of formation is insuff to cover foreseeable lias;
(3) fraud, where C formed to commit fraud or as mechanism for SHs to hide behind to avoid obligations; or
(4) estoppel, where SH represents that he will be personally lia for corp debts.

Question 7

Promoters

Answer 7

Promoters are persons acting on behalf of C not yet formed. PRs are personally lia for pre-inco Ks until there’s been a novation replacing the PR’s lia w/ that of the C or there’s agt between the parties that expressly states that the PR not lia. C may become lia for k if it adopts the k, adoption may be explicit or implicit (accepting benefits). PR may have right to reimb based on Q-k for the value of the benefit rec’d by the C, or on implied adoption of k. PR has fid relationship w/ proposed C req’ing GF.

Question 8

Director/Officer Duties - Duty of Care

Answer 8

Directors owe a duty of care to act in in GF as a reas prudent person in a manner he reas believes is in bet interest of C. BJR applies the standard of care imposed for bus judgments and provides presumption that the Ds or Os will manage C in GF and in best interest of the C and its SHs. BJR vio when D’s conduct is unreas. Its not unreas for D to rely on info from OS, legal counsel, committees, etc. the D reas believes tb reliable and competent.

Question 9

Director/Officer Duties - Duty of Loyalty

Answer 9

D owes a duty of loyalty to the C. D must put the interests of the C above his own interests.

Question 10

Self-Dealing - Conflict of Interest:Duty of Loyalty

Answer 10

A D has a conflict of interest when he enters into a k w/ the C or has a beneficial fin interest in a k. Self-dealing Ks are presumed unfair and voidable, however, conflict can be cured if auth by disinterested B members after material disclosure; or approved by maj of disinterests SHs after material discl, and the trans if fair to C.

Question 11

Business Opportunity - Duty of Loyalty

Answer 11

D may not personally act on a bus opp w/o first offering it to the C where the C would expect tb presented the opp. The C must have an interest/expectancy in the interest and the lack of financial ability is not a defense. D may take the opp only after GF rejection of the opp by C if there was full disclosure of all material facts to a disinterested B maj.

Question 12

Duty to Disclose

Answer 12

Ds have duty to disclose material info relevant to the C to B members.

Question 13

Indemnification/Reimbursement of Directors

Answer 13

D is entitled to reimb from the C for expenditures for for purposes. If a D is successful in defending a lawsuit brought against the D in his corp capacity, indemnity for expenses of the suit is mando.

If D loses lawsuit, Ds usually have discretion to grant indemnification if (1) the D acted in GF and (2) the D believed his conduct was in, or at least not opposed to, the C’s best interest.

Indian is prohibited if a D loses a deri suit and is found lia to the C or if the D is found to have rec’d an improper benefit.

Question 14

Valid Indemnification Procedure

Answer 14

GEn, the decision to indemnify mb made by a disinterested maj of the BOD. If theres no disinterested maj, then it can be made by a maj of disinterested committee or by legal counsel. SHs may also make the determination.

Question 15

Fundamental Change

Answer 15

(1) Merger;
(2) Share exchange;
(3) Asset sale;
(4) Conversion;
(5) Amendment;
(6) Dissolution.

Question 16

Fundamental Change Procedure

Answer 16

A fund change may not be made unless:

(1) a maj of Ds adopt a resolution approving the change;
(2) the Ds call a special meeting of the SHs to vote on whe to approve the change;
(3) the change is approved by the SHs; and
(4) the change is formalized in articles that are filed w/ the state.

Question 17

SH’s Rights to Vote

Answer 17

SHs have only indirect corp power through right to vote to elect/remove D and approve fund changes in corp structure.

Question 18

SH Right to Meetings

Answer 18

Regular Meetings must occur annually, no notice is req’d.

Special meetings req at least 10 (no more than 60) days notice and must specify time, place, and bus tb discussed.

Question 19

SH Right to Dividend

Answer 19

Absent a prov in a C’s art of info or bylaws, the declaration of a dividend is left to the discretion of the BOD. A strong case is req’d to convince a ct of equity to order Ds to declare a dividend. If D’s have valid bus reason for not paying dividend, such as retaining profits to obtain a higher price when selling the C, then is doubtful that ct would force dividend.

Question 20

Duty of Loyalty - Shareholders

Answer 20

SH owes not fid duty to C or other SHs, except Controlling SHs.

Question 21

Controlling SHs - Definition & Duty of Loyalty

Answer 21

Controlling SHs owe fid duty to C and min SHs of duty of care and loyalty. Controlling SH is one w/ enough voting strength to have a subst impact on the C. Controlling SHs cannot sell control of C to a looter if they know or have reason to know that the B intends to harm the co. Sale of controlling shares at premium may be allowed where trans is made in GF and is fair.

Question 22

Derivative Suit

Answer 22

If a SH believes that the C has been Hamed, but the C does nothing to vindicate the harm, the SH may try to bring a deri action.

Question 23

Derivative Suit Requirements

Answer 23

(1) the SH bringing the action was a SH at the time of the act or omission complained of;
(2) the SH makes written demand on the B to take action;
(3) the SH remains a SH throughout the pendency of the suit; and
(4) the SH can fairly and adequately rep the interests of the C.

Question 24

Derivative Procedure

Answer 24

A deri proceeding may not be Brough until 90 days after the demand is made unless the SH is notified earlier that the C will not take action or irreparable injury will occur.

If maj of Ds who dont have a personal interest in the trans find in GF after reas inquiry that the suit is not in C’s best interest, a deri action cannot be brought. In some states, demand will be excused if it is futile.

Question 25

Ultra Vires Act

Answer 25

As gen rule, C has power to engage in any lawful bus. However, C may limit the bus in which it may engage by having a narrow purpose prov in its art of info. A C may not carry on bus outside the scope of its stated purpose. Bus outside the scope is said tb ultra vires.

Question 26

Effect of Ultra Vires Contract

Answer 26

UV doctrine may be raised only by:

(1) SH seeking to enjoin a proposed UV action;
(2) the C seeking damages against the O/D who auth the UV act;
(3) the state, seeking to dissolve the C for engaging in an UV act.

Question 27

C’s Remedy for Usurping Corporate Opportunity

Answer 27

If a D doesn’t give the C an app to act but rather usurps the app, the C can recover the profits that the D made from the trans or may force the D to convey the opp to the C, under a constructive trust theory, for whatever consideration the D purchased the opp.

Question 28

Cumulative Voting

Answer 28

Allows SH to multiply the # of shares held by the number of Ds tb elected and then cast all votes for one or more Ds.

Question 29

Straight Voting

Answer 29

Each SH casts one vote per share held. Thus, SH w/ more than 50% of shares controls the vote.

Question 30

D Removal Procedure - Quorum

Answer 30

D may be removed if a quorum of shares is present at the meeting and at the least, the votes cast in favor of removal exceed the votes cast against removal.

Cumulative Voting: If D elected through cumulative voting, he may not be removed if the votes cast against removal would be suff to elect him if cumulatively voted at an election of the B.

Question 31

16(b)

Answer 31

Provides that any profit realized by a D, O, or SH owning more than 10% of the outstanding shares of the C from any purchase and sale, or sale and purchase, of any equity security of his C w/in a period of less than 6 mo mb returned to the C.

Applies to publicly traded Cs whose shares are traded on national exchange or have at least 2k SHs and more than $10mil in assets.

Purpose is to prevent unfair use of inside info and internal manipulation of price.

Question 32

10% Ownership in 16(b)

Answer 32

Tb considered 10% owner for purpose of §16(b), the Sh must have owned 10% of the C’s stock immediately before both the purchase and the sale of the stock. In other words, the purchase that brings a SH over the 10% threshold is not w/in the scope of §16(b).

Question 33

10b-5

Answer 33

Under rule 10b-5, it is unlawful for any person, directly or indirectly, by the use of any means of IC to, in connection w/ the purchase or sale of any security: (1) to employ any device, scheme, or artifice to defraud, (2) make any untrue stmt of material fact or omit to state a material fact, or (3) engage in any act, practice, or course of bus that would operate as fraud.

Question 34

Fraud Prima Facie Case

Answer 34

A PF case for breach of the rule reqs proof of:

(1) fraudulent conduct;
(2) in connection w/ the purchase or sale of a sec;
(3) the use of means of IC; and
(4) in some cases reliance, and
(5) damages in private COAs.

Question 35

Material Fact

Answer 35

A fact would be material under rule 10b-5 if a reas investor would consider it important when making an investment decision. Conduct will be considered fraudulent only on proof of scienter (intent to deceive). One of the most common forms of fraudulent conduct under rule 10b-5 arises from insider trading.

Question 36

Insider Trading

Answer 36

The SC has held that a corp insider who breaches a duty not to use inside info for personal benefit can be held lia under rule 10b-5.

Typical securities insiders such as Ds, Os, controlling SHs, and EEs of the issuer, are deemed to owe a duty of trust and confidence to their C that is breached by trading on inside info. Duty is breached not only when the insider trades on the inside info, but also when the insider gives a tip of inside info to someone else who trades on the basis of the info if the tip was made for an improper purpose.

Question 37

Private Party Suit Under 10b-5

Answer 37

A private person can sue under rule 10b-5 if she purchased or sold a sec and was damaged as a result of the untrue stmt. Further, a suit may be brought against a ∆who neither purchased nor sold the security.

Question 38

Tippers

Answer 38

Where an insider gives a tip of inside info to a friend or relative who trades on the basis of the inside info, the tipper can be lia under 10b-5. By making a gift of confidential info to a trading friend/relative, a benefit to the tipper is inferred by the relationship.

Tipper doesn’t have to trade in sec himself tb lia, so long as the insider info is used by another to trade.

Question 39

Tipper Lia

Answer 39

Tipper may be held lia in civil proceeding for up to 3x the gain made by the tippee. Tipper also subject to crim proceedings in which he may be fined up to $1mil and jailed for up to 10 yrs.

Question 40

Tippee

Answer 40

Are those rec’ing insider info, are lia only if the tipper breached a fid duty, the tippee knew (scienter) the duty had been breached, and the tipper personally benefited.

Question 41

Misappropriators

Answer 41

Are those obtaining corp private info through other means, may be lia in breach of a duty owed to the source of the info, though typically aren’t in a position w/ a duty to disclose. Ex. eavesdropper or L who rec’d info for a proper purpose but then traded.

Question 42

Misrepresentation

Answer 42

πmust prove:

(1) a misrep of fact by the ∆;
(2) scienter (intent to deceive);
(3) an intent to induce the π’s reliance on the misrep;
(4) causation;
(5) justifiable reliance by the π on the misrep; and
(6) damages.

Question 43

Safe Harbor

Answer 43

Under a statutory safe harbor , a trans will not be set aside merely bc a D has a personal interest in the trans if the D can prove that :

(1) the trans is fair to the C; or
(2) the material facts of the trans were disclosed to the B or SHs and the trans was approved by a maj of the B members w/o a personal interest in the trans or maj of the shares held by SHs w/o person al interest in the trans.