Corporations Flashcards
1
Q
What are the characteristics of a CHC?
A
In a CHC-
- There is no market for the shares of the corporation. - Owned by a private group of people.
- Often there is an Agreement that limits a shareholder’s ability to transfer the stock.
- Operates day to day more like a partnership because there is a close group of owners.
There is no separation between ownership and control
2
Q
What should you have in a CHC in the event one person eventually wants out?
A
Want to have a buyback or stock sale agreement among the corporation holders
3
Q
what do the board of directors do in a public corporation?
A
directors
- Set corporate policy
- Make fundamental business decisions
- Hire the officers who run the business on a day to day basis.
4
Q
what is the Nexus of Contracts theory?
A
NoC theory takes the approach that the state shouldn’t be regulating operation, but facilitating the creation of these contracts that correspond to the types of provisions people would like to make. Should enable people to enter into arms length bargains and lower transaction costs by adopting provisions people would otherwise negotiate if left to their own devices- laissez faire
5
Q
What was Brandeis’ dissent in Liggett v. Lee?
A
Says corporations make a modern feudal system where we are all serfs to a few corporate board directors.
Calls states beginning to drop restrictions on purposes for which corporations can be formed a “race for laxity”
6
Q
What are th agency costs associated with having a board of direcotrs?
A
Costs:
Monitoring- ensuring the agent is doing a good job and making sure the agent is not putting his interests above the interests of the principal. Agents are fiduciaries.
Bonding- Costs Initially incurred by the agent if they do not serve the sharehodlers. It’s like posting bond. These costs are designed to provide the principal with peace of mind. E.g. insurance.
7
Q
What is the internal affairs rule?
A
when the Q of law has to deal with purely internal affairs of the corp, then you use the law of the state in which the corporation is incorporated. Not true in CA.
8
Q
should a CHC incorporate at home or in Delaware?
A
- If closely held and locally operated local incorporation is almost always preferred
- DE may be higher cost due to income taxes and you may have to defend a suit there if you are incorporated there.
- DE laws may give more flexibility in management
9
Q
when does a corporation become incorporated?
A
Corporation begins when docs are FILED BY SECRETARY OF STATE
10
Q
How much info must be included in the articles to incorporate under the MBCA?
A
Very little
- A corporate name that is linguistically distinct
- An authorized number of shares (max the corporation can issue, they can do fewer).
- mailing address of initial registered agent and office. - does not have to be PPB
- Name and address of each incorporator.
11
Q
What are some things you MUST opt into for the corporation to have those characteristics?
A
E.g. cumulative voting rights, creating classes of shares, preemptive shareholder rights.
12
Q
Under MBCA, what makes a name valid?
A
Under MBCA, Names are allowed if linguistically distinct to other corps.
Sec of state depending on state has power to determine if name is “deceptively similar,” to another. Texas did this until 2019.
13
Q
What is a reserve name?
A
reserving a name prior to incorporting
14
Q
What does it mean to Register your name?
A
Registered name- you must register your name in every state you are going to “do business” to “qualify” the corporation to do business there.
15
Q
If you are incorporated in DE, where are subject to taxation?
A
You are subject to taxation in states in which you do business.
16
Q
Explain the spectrum that courts use to determine how they will treat a director conflict of interest
A
~good~ if court believes the transaction is fair to the corp, it will be upheld
• Marciano v. Nakash – it was inherently fair, so not voidable
~in between~ court looks & sees if transaction was approved by a majority of disinterested directors or shares (not shareholders) after they knew all material facts
~bad~ if court believes the transaction involves fraud, undue overreaching, or wastes corporate assets, they will void it
17
Q
Where can you look to find the maximum authorized number of shares of a corporation?
must a corporation issue all the shares it has authorized?
A
Must register maximum number (authorized number) of shares in the articles. Can issue fewer but the amount in the articles is a maximum.
18
Q
T/F: Registered office address has to be the PPB of the corp.
A
False! Can make it a lawyer or independent person or company’s address.
19
Q
T/F: When the registered agent resigns or dies, you don’t need to update the secretary of state.
A
TRUE: If the registered agent resigns or dies, you don’t need to update the secretary of state, can substitute with the corp secretary and the corp principal office.
20
Q
Do you face personal risk for serving as the incorporator of another’s corporation?
A
Generally no. This is different than being a promoter.
21
Q
What do you have to state when incorporating in TX?
A
In TX you have to specify corporations purpose or purposes, but that can be the purpose to “engage in any lawful business”. This general right is the default in the MBCA
22
Q
How long do corporations exist by default under the MBCA?
A
Corporations have perpetual existence by default under MBCA.
23
Q
In TX when incorporating, what do you need to specify about directors?
A
you need to specify who the initial directors are, but do not have to update the secretary of state if there is a change.
24
Q
Under MBCA 2.05 after incorporation, there is what is called an “organizational meeting.”
- What do directors do at this meeting? and
- what happens if there are no direcotrs yet?
A
If the initial directors are named in the articles, they meet to appoint officers and adopt bylaws, etc.
If the initial directors are not named in the articles, it is up to the incorporator to appoint the directors who can then hold that organizational meeting.
25
Do corporations have the same powers an individual has?
Yes, but idk exactly what this means.
26
According to Sullivan v. Hammer, if directors or a Special Committee gave due consideration to the transaction, what is the presumption?
The court must review the claims of Plaintiffs against the presumption that the acts of the directors are valid
27
What are promoters?
people who enter contracts on corporations behalf before the corp is founded.
28
What is a common reason for promoter liability?
if you send articles of incorporation via snail mail and assume the articles have been filed when they have not. Very similar to agency principles.
29
does Texas have a piercing the corporate veil statute?
Yah
30
If a promoter and 3rd party enter contracts prior to incorporation, is the promoter personally liable?
Yes. corp does not exist to be liable. It cannot be liable since it does not have actual or apparent authority, doesn’t yet exist.
31
After it incorporates, can a corporation become liable for a promoter contract through ratification or adoption?
It cannot be ratified because the corp did not exist at time of contract formation. Ratification is not retroactive when the corp did not exist. Adoption of the contract would make the corp liable because adoption is retroactive.
32
If the corporation is liable, is the promoter released from liability on the contract?
No. Agency question. The promoter remains liable even if incorporation occurs and the corp adopts the contracts
33
Why are Courts hard on promoters?
Courts are hard on promoters because they could have easily incorporated first and in theory the corp may or may not form after promotion.
Promoters could have also contracted out their personally liability for the contract.
34
What are the 2 ways for a promoter to get released from liability?
The ONLY way a promoter gets released is if there is a novation. The promoter, corp, and 3rd party must agree that only the corporation will be liable. This is very rare because the 3rd party has little incentive to do this.
Promoters can weasel out if liability of 3rd party pushed the promoter to make a deal before incorporation.
35
when are foreign corporations considered to be "doing business" within another state?
Foreign corporations are only doing business when regularly carrying on intrastate transactions within another state.
36
What is a defective corporation?
defective corp is one that is de facto but not de jure
37
When does a de facto corporation exist?
A de facto corporation exists if there is:
1. A valid law under which a corp can be organized
2. An act on corp’s behalf
3. Good faith attempt to form a corporation
38
What was the district courts solution to solving the de facto vs de jure problem in Robertson v. Levy?
only the date the corporation was filed mattered. The corp was filed after the agreements were entered so the individual, not the corp was liable.
39
can shareholders be liable in a defective incorporation?
Yes, depending on state law and only until the defective corporation incorporates.
40
What is the test for if a De Facto corporation exists?
1. Is the equitable doctrine available in the state at all? If so,
2. check for a good faith attempt to form a de jure corporation under the relevant state law .
41
How does corporation by estoppel apply in the context of defective incorporation? (opposite of partnership by estoppel)
when someone deals with a business as if it were a corporation, they are later estopped from arguing that it wasn't a corporation at all and the owners should be personally liable. Not based on reasonable reliance because if you rely on the fact that a business is a corporation, you are barred from later arguing it wasn’t.
42
If there has NOT been a good faith attempt to follow a statute and form a corp, are 3rd parties estopped from arguing it wasn't a corp?
possibly yes, depending on the state.
43
It is possible that the promoter could persuade the court that there was an implied agreement that the 3rd party would solely look to the corporation for performance?
This is very unlikely because the promoter has burden of proving an implied agreement exists. Vast majority of cases hold promoters accountable.
44
What promoters do the MBCA rules favor?
MBCA is more sympathetic to promoters who don’t KNOW the business is not incorporated
or when promoters are pushed to enter contracts by 3rd parties to prevent the failure of the deal.
45
What happens in the vast majority of peircing the corporate veil cases.
shareholders immune to personal liability.
46
what states law do courts choose in piercing the corporate veil?
Court may apply the law of the state where the tort occurred or where the majority of business occurred. these often conflict.
47
How do academics feel about most state approaches to piercing the corporate veil?
heavily criticized by academics. Called "Rare, unprincipled, and arbitrary”
48
When do economists thing PCV should occur?
Say it should only apply where
1. 3rd party creditor was misled to believe they were dealing with a shareholder, not the corp. OR
2. where the shareholder commingled or siphoned funds.
other tests create uncertainty, which is bad for business
49
What are the 2 most significant PCV considerations?
1. Was the corproation being used to perpetuate fraud?
a. constructive fraud may be enough
b. in TX, you need actual fraud to PCV on a contract claim.
2. Commingling/syphining funds (courts ALWAYS PCV)
50
what are the lesser, but not insiginficant factors considered for PCV?
3. Were corporate formalities observed?
a. not suffucuent to PCV in TX
4. Does the suit involve a contract or a tort claim?
5. was the corporation grossly undercapitalized for it business purpose?
6. will an individual or corporation be liable?
7. What public policies are implicated?
51
What is unique about TX and PCV?
TEXAS IS THE ONLY STATE WITH A STATUTE GOVERNING PIERCING THE CORPORATE VEIL.
52
What types of corporations does PCV almost exclusively apply to?
PCV is almost exclusively applied to closely held corporations. Corps with low number of shareholders, where those shareholders are a close-knit group of family or friends.
53
T/F: If a court decides to PCV, all shareholders are liable.
False:
If the court decides to pierce it does not hold ALL shareholders liable, examined on a shareholder by shareholder basis, and applies on a creditor by creditor basis.
54
How did Fletcher v. Atex impact how PCV work between parent corporations and subsidiaries?
Court aks if:
Is there overlap of board of director between subsidiaries?
Did parent dominate the subsidiary?
55
If CHCs don’t have to follow many formalities under statute, how important should corp formalities be?
Not very. Just used to support the courts argument after PCV is already decided on.
56
Are courts more likely to pierce the corporate veil on contract or tort claims?
For whatever reason, courts are MORE likely to pierce the corporate veil on contract claims.
Unintuitive because victims can protect themselves in advance in contract claims.
57
What are the current considerations for whether a corporation was grossly undercapitalized for the purposes of its business? (PCV)
Capital must go to the purpose of the corporation (e.g. insurance company can't be without money to pay out claims)
o Courts ask whether grossly undercapitalized
· Ex: significant chance of injury => greater amount of capital required
§ disposing of nuclear waste, hazardous substances
Must be capitalized enough to serve this purpose
58
If legislatures dispensed with minimum capital requirements, then why should Courts look at undercapitalization at all?
Because in some instances corporations might be so grossly undercapitalized that it warrants granting PCV.
59
what counts as captial for thinking about PCV undercapitalization?
Not just capital that SH contribute as part of investment.
- Courts also look at whether Corp had liability insurance (In Radaszewski
§ Court said important factor was that Corp had purchased insurance for this type of event)
- Money infusions even if they are loans (O'Hazza)
- personal guarantees (Baatz)
60
When is undercapitalization considered for PCV?
POINT WHEN THE CORP IS FORMED.
| adequacy of capital is also determined during initial capitalization (Woodrow)
61
According to empirical research, do courts make distinct considerations for undercaptialization in tort vs. contract claims?
Not in practice.
62
What are the exceptional cirecumastances when courts will look at undercaptialization over time vs. at the time of formation?
When SH has been siphoning funds off Corp and treating Corp's assets as their own
63
According to empirical research, do courts PCV at a higher rate when a corp has 1 shareholder or a couple of shareholders?
Courts PCV in more than 50% of cases where Corp has 1 SH.
64
Why are courts more likely to PCV when there is only 1 SH?
where there's only 1 SH, there's going to be tendency to blur distinction between Corp and personal assets
65
what are the 3 circumstances where you would try to PCV?
(1) PCV to get at assets of individual SH of a Corp
o Woodruff
(2) Parent Corp and subsidiary
o Fletcher v. Atex
3) Brother and sister Corps
o π tries to hold brother/sister corp liable for the debts and obligations of its sibling Corp
66
What is DE alter ego liability?
SH is the alter ego of the Corp.
| Goal is to hold the alter ego liable for the debts/obligations of a Corp
67
Can you PCV in other limited liabiity BAs?
Yes. PCV can be relevant for other business forms with limited liability
68
In states where statute is silent, do courts PCV of LLCs?
Even in states where statute is silent on whether PCV applies to LLC, courts have consistently applied PCV principles to LLC context
69
Did TX decide to PCV to get access to limited partners?
In TX LP, court wouldn't PCV to hold limited partners liable when the general partners were already liable
§ Rationale: No reason to PCV because someone is already generally liable
70
Can public policy concerns affect a courts decsion to PCV?
Of course. Ex: Question of whether or not PCV was appropriate in a Corp that was obligated to clean up toxic waste. Implicated lots of public policy concerns
71
In what state is PCV not a judicial phenomenon? Why?
Texas. There is a PCV statute
72
How much do shareholders usually get after bankruptcy
Usually nothing, since their claims are below the claims of creditors
73
What happened in Pepper v. Litton?
court subordinated the Litton's SH claim against the Corp to the claims of the other creditors since he tried to jump ahead of creditors by acting as if he was a secured creditor.
74
What is the purpose of a trustee in bankruptcy?
represents interests of the Corp's creditors. appointed to marshal (maximize) assets of Corp for benefit of creditors (pay more than they would otherwise get)
75
Under MBCA 14, what order to parties get paid back upon dissolution?
1. Creditors with security interests in corporate assets
2. unsecured creditors pro rata
3. shareholders pro rata
76
How are assets distributed to unsecured creditors?
pro rata. (according to their % stake of the corporation's total debt). If X is owed $1 million and Y is owed $100k, and the corp has $100k, X will get $90k and Y will get $10k.
77
If you have a $50k secured claim on the corporation's assets, and the corporation has a foreclosure sale for $30k, what is your interest in the $20k they still owe you?
Corp has a balance of $30k. After you get the $30k of the secured interest they are able to give, you get an unsecured interest on the remaining $20k.
78
If you have a $50k secured interest on the corporation's assets, and the corporation has a foreclosure sale for $55k, what happens to the other $5k after you have gotten your secured $50k back?
Corp has a balance of $55k. Unsecured creditors split the $5k pro rata after you get paid $50k.
79
Why did Litton fail to meet his burden as a director when trying to grab his salary claims during bankruptcy ahead of the unsecured creditors?
As a director he was a fiduciary
Burden was on the director/ shareholder to show the inherent fairness to the corps shareholders and creditors and good faith for their transaction to control the assets.
80
what is a squeeze out or freeze out?
abuse by the controlling shareholder to abuse their power to the detriment of other shareholders.
81
What is an example of a freeze out maneuver?
not declaring dividends in a CHC to the detriment of minority, there is no public market to sell the shares on so will often just sell to the majority holders at a below market price.
82
What is the test for whether equity will apply to a freeze out according to Pepper v. Litton?
“The question is whether the challenge transaction carries all the earmarks of an arms-length bargain. If not, equity will set it aside.“
83
What was another approach the court could have taken to avoid Litton's claim that would have resulted in a bad policy?
Could likely have just “pierced the corporate veil” since he was the sole SH and avoided Litton’s claim on the grounds he as the sole corporate shareholder cannot owe himself a debt. In that case he may have become personally liable for the corporation's debt, so subordination of his debts here was the preferable method.
84
What are the 3 principle differences of debt capital vs. equity?
1. Debt must be repaid at some point 2. Interest on the principal borrowed must be paid periodically 3. The repayment of principal and interest is not contingent on the success of the business
85
What is equity capital?
Equity is an ownership interest after the firm’s debts are paid Assets = liabilities + equity
Equity capital is a combination of: contribution by the original entrepreneurs of the firm, capital by subsequent investors, and retained earnings of the business.
Equity claims are residual
86
T/F: Rights and characteristics of different classes of shares must be similar among their class.
True. Ex: preferred stock vs common stock share same attributes within their class.
87
Under MBCA 6.01 (e), what are the fundamental rights of holders of common shares?
1. they are entitled to vote for the election of directors and other matters coming before shareholders and 2. they are entitled to the net assets of the corporation upon dissolution (residually, after debts paid).
These characteristics can be placed in different classes of shares but each must be present somewhere in the total pool of shares, and must always be outstanding aka issued to a person or persons.
88
what are some additional rights of common shareholders? (aside from voting and residual interest).
common shareholders also have the right to inspect books and Records the right to sue on behalf of the corporation and the right to financial information Etc.
89
according to SCOTUS, what are the characteristics of common stock?
1. the right to receive dividends contingent upon in a portion of profits 2. negotiability and transferability 3. the ability to be pledged 4. the conferring of voting rights and proportion to shares owned and the the capacity to increase in value. 5. The residual ownership interest
90
What is typical of prefferred shares?
```
typically classes of shares with rights preferential to those assigned to common shares but limited in some way. (typically a cap on earnings).
For example, a class of preferred stock might have the right to distribution of $5 per share before the common shares become entitled to any distributions.
Usually non-voting however voting power is assigned to Preferred shares if the company misses scheduled dividend payments on the preferred stock or if it fails to meet other Financial tests
```
91
T/F: preferred shares have caps on their earning.
False. Not always. Depends on the preferred shareholder contract in the articles.
92
If the corporation retains earnings for a year, what happens to the value of common and preferred stock?
the common stock value will go up, but capped preferred shares will not.
93
What is a "Preferred shareholder contract” and how is it amended?
outlined in the Articles of Incorporation and cannot be amended without consent of holders of some statutorily designated fraction of the preferred shareholders
94
Who decides whether to make a distribution to common shareholders?
directors usually.
95
What is a Cumulative dividend right for a preferred share?
when the dividend is not paid in a given year it accumulates and must be paid before any common shares in a later year. For example if a preferred cumulative dividend is not paid any given year then no common shares may be paid in that year. Then the following year no common shares may be paid until the preferred cumulative dividend holder receives the accumulated amount of their preferred shares. $5 preference becomes a $10 preference the next year.
96
What happens to a noncumulative dividend right for a preferred share if it is not distributed in a given year?
A non-cumulative dividend that is not paid during the year simply disappears and does not carry over to the next year.
97
What is a partially cumulative dividend right for a preferred share?
A partially cumulative dividend is typically cumulative in any particular year only if there are sufficient earnings to cover that Year's dividend. If the earnings are insufficient a preferred dividend for that year disappears just as if the dividend were non-cumulative.
98
what happens if you have a cumulative dividend right for $5 on your preferred share in year 1, the corporation does not pay a dividend, and then in year 2 the corporation goes bankrupt? What does the coroporation owe you?
Probably nothing. Unpaid Dividends are not debts of the corporation but are a right of priority on future distributions.
99
why do publically traded preferred shares usually have cumulative dividend rights?
publicly traded preferred dividend shares have cumulative dividend rights because they are allowed in many states to be paid out from various capital accounts.
100
when do preferred shares get voting rights?
if preferred dividends have been omitted for a specified period of time or if their rights are being changed- known as contingent voting rights.
101
T/F: preferred shareholders usually do not share in any general depreciation in the value of the corporation's assets upon dissolution.
True. preferred shares usually have a liquidation preference as well as a dividend preference. The liquidation preference is often fixed at a specified price per share payable upon dissolution before anything may be paid to the common shares.
102
what are redeemable shares?
Redeemable shares just means that the corporation has the power to buy back the redeemable shares at any time at a fixed price and the shareholder has no choice but to accept that price.
103
during a stock redemption, where would the price of the preferred shares usually be set out?
In the articles.
104
what is a stock conversion right?
preferred shares may be made convertible at the option of the holder into Common shares at a fixed ratio specified in the Articles of Incorporation.
105
How can you avoid the corporation redeeming your preferred stock if you want to stay invested?
Convert to common shares within the paeriod after redemption has been called. The conversion ratio is in the articles.
106
What are participating preferred shares?
participating preferred shares can get the specified dividend and after the common shares receive a certain amount they can share with the common in additional distributions on some predetermined basis. This is a combo of common and preferred attributes. They are sometimes called class A common.
107
What are blank shares?
Shares created with financial terms that are not filled out until directors issue them.
108
T/F: MBCA 6.01 focuses on the difference between preferred and common shares
False.
MBCA 6.01 does not Directly use the terms preferred or common shares and instead establishes a scheme of generality to accommodate any creation of new classes or types of shares that may come in the future.
109
Are classes of common shares set out in the articles or bylaws?
In the articles.
110
How is a buyback different from a redemption?
buybacks are the corp going to the market and buying the shares back. redemptions are calling in shares from SHs as set out in the articles.
111
```
what is the interrelationship between:
Authorized shares
Issued Shares
Outstanding shares
Treasury shares
```
In descending order by quantity (generally):
Authorized shares- total amount authorized in the articles
Issued Shares- shares actually sold out of the authorized shares
Outstanding shares- Issued shares actually in the hands of shareholdes (voting shares)
Treasury shares- shares the firm has issued then bought back/ reacquired (par value concept)
112
T/F: “upstream conversion” (common → preferred) is not possible under the MBCA, but in most states it is allowed.
False.
remember that MBCA is an enabling statute.
Upstream conversion is allowed under MBCA even though most states only allow downstream.
113
In theory, can 3rd parties call in shares?
Yes
114
What is a sinking fund?
A fund that is set aside in case the corporation wants to buy back shares.
115
What is a forced stock conversion?
corp calls in a shareholder’s convertible debt security, but the shareholder has the ability to convert the shares into stock or a different class instead of cash out.
116
What is par value?
the value of a single common share as set by a corporation’s charter. It is not typically related to the actual value of the shares. In fact it is often lower. Any stock certificate issued for shares purchased shows the par value.
117
How is par value generally used today?
Usually is just a nominal value
118
What is stated capital?
represents the capital that was raised that corresponded to the shares' par value. anything more is the capital surplus
119
What is capital surplus?
surplus generated with the sale of shares that had a par value, showing the amount earned from the sale above the par value.
120
What is earned surplus?
Earned surplus is surplus generated from the earnings of the corporation by operation of its business
121
what are treasury shares?
previously outstanding stock that is bought back from stockholders. Reaquired stock that the corporation no longer pays dividends for but keeps as its own
122
T/F: In general it is better to assign a high par value.
FALSE:
a low par value gives the corporation more flexibility because:
- A corp distributes dividends from their capital surplus AND their earned surplus. High par value ties up stock value in stated captial, which was previously not allowed to be distributed
- Also allows a corporation to avoid “watered stock liability” (when shareholders buy stock below the par value of the shares- this throws off the balance sheet)
- Gives the opportunity to compete with the secondary market for shares (if the corporation’s shares are for sale on the secondary market. ) e.g. if you issue at $100 because that was par value and the amrket price in $80, no one will buy.
123
T/F: par value does not affect corporate buybacks because par value does not apply to the secondary market, it only applies to issuance.
True.
124
What does it mean when you bought "watered stock"?
What you paid for the stock is not as valuable as the fair stock value.
125
What is the modern approach to par value as far as shareholder liability is concerned?
Paying the par value for shares is a prerequisite for your limited personal liability.
MBCA pg. 688. Shareholders have an obligation to buy corp shares for full consideration or which the shares were authorized to be issued or specified in agreement
126
If a transferee knowingly aquires watered stock, are they liable for that watered stock?
Yes
127
Under the old MBCA, were promissory notes and promises for future services adequate consideration for buying stock?
promissory notes were no good to pay for shares, nor was a promise to render future services, because these payments might never come to being.
128
Under the current MBCA, are promissory notes and promises for future services adequate consideration for buying stock?
under the current MBCA, promissory notes and promise of future services are BOTH acceptable consideration. Accepts any tangible or intangible property. Another enabling statute, virtually anything is eligible consideration for shares. However, it is recognized that promises of future payment may not become realized.
129
How do you hedge against someone exchanging stock for future services since they may never perform?
MBCA 6.21e- corp can put shares into an ESCROW account and hold onto them until a promissor makes good on the promise or makes an installment payment for a certain amount of those shares.
130
If Paying for shares with property- how do you know the value of the property?
Under OLD MBCA, the directors of the corp had to fix a dollar value to the property. In the absence of fraud this amount was conclusive.
Under CURRENT MBCA- Directors do not have to set a dollar value, all they have to do is decide that the consideration is “adequate.”
131
In TX where there is a par value, can corporations issue "no par value" shares?
Yes.
132
In TX, can you distribute "no par value" shares
Yes, but in TX, "no par value shares" are considered stated captial, which would not be distributed UNLESS the directors allocate Some but not all of that consideration to capital surplus.
133
What is the difference between a corporate bond and a debenture?
A bond is a secured debt with a lien or mortgage on corporate property and a debenture is an unsecured corporate obligation.
134
How do bonds work?
Bonds are sold at a discount from their face value and the difference between face value and purchase value represents interest accrued over the time period. Bond acquires its face value once enough interest accrues.
135
What is a zero bond?
A bond that does not accrue interest but pays face value after a maturity (time) period
136
What is a junk bond?
Issued by corps in poor financial shape. Often in merger or acquisition. The interest rates are extremely high. but high risk they will not pay out.
137
What is the relationship between bonds and interest rates?
inverse relationship between the value of a bond and interest rates in the marketplace.
[Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price.]
138
Why issue debt as a way of financing?
Interest on debts are non-taxable. Helps the corporation ZERO OUT and reduce their fed income tax. As long as the interest rates are reasonable, they are tax deductible. Raising money through shares is not tax deductible,
139
What is leverage? give an example.
Leveraging someone else's money for a larger return for the corporation than it has to pay in interest.
Ex: You buy a house for $200k, 20k down, and 180k in a loan with 5% interest ($9k/yr). What happens if the real estate market goes up by 10%? Your house is now worth $220k and you sell for that much. You would make $20k in personal profit. You have LEVERAGED the bank’s money. You earned 10% on your money AND the bank’s money.
140
How does leverage favor borrowers or creditors depending on whther there are high profits or high losses?
high profits: favors borrower because they are surccessfull levraging their debts to turn a profit for them and the creditor.
High losses: If corporation cannot pay back their debts, the company is bankrupt because hey have overleveraged. the more nonds a company issues, the more it giving leverage to borrowers, because they owe them more money back. this is the danger of giving away too much leverage.
141
what does a high debt to equity ratio mean?
Hihg chance the company will go bankrupt or insolvent
142
If a company re-orgs under chapter 11, who has to approve the re-org plan?
the company's creditors
143
What is deleveraging?
getting borrowers to trade out issued debts for stocks to help the company do better long term.
144
What are the dangers of leverage as shown in the supplement?
Might not be able to repay. Illustrated by 2007 real estate crisis.
Lateral hire compensation example in supplement was example of overspending on outside partners which made their leverage too great.
145
Whay would a shareholder want to loan to the corporation instead of invest?
Puts them on par with creditors.
146
What are the benefits of issuing debt over seeking capital infusion?
- Faster to secure debt than successfully court a capital firm.
- Founders of the business can be sure they can maintain control. You do not have to give out your shares to VC firm at the point when you go public.
- Founders interest in the corporation is not going to be diluted by issuing shares.
147
How does Obre v. Alban Tractor Co. show the relation between internal and 3rd party creditors?
When a corp issues debt as an investment for a SH, that deby is on par with 3rd party creditors.
Differnt from Pepper v. Litton because Litton tried to treat his foregone salary as debt, here debt was issued in exchange for a cash infusion. other creditors could not subordinate this debt.
148
Why does SH lending to the corp solve the double taxation problem?
SH gets back interest on their loan, which is deductible by SH, and repayment of principle is not taxable, only paying interest to the borrow is taxable to the corp. a dividend payment would be taxable on both.
149
T/F: If a SH loans money to a corporation, it is treated as a loan by the IRS.
FALSE.
If the SH doesn't treat it as a loan (E.g. no interest on it, does not try to collect) the IRS or a Court can say it is more like a capital contribution based on the corporations finances and treat is as such for tax purposes. (Slappy Drive)
150
What does the IRS look at to determine if a corportion is too thinly captialized?
(could be statutory ramifications)
Debt to Equity Ratio
151
Why would you take a promissory note from a startup over stock?
first in line for repayment
152
How are securities analogous to partnership agreements?
Securities are how corporations are split in capital investment, in control, contributions, etc.
153
T/F: as long as you are in compliance with federal securities law, you are in compliance with state blue sky laws
FALSE:
If you are going to sell securities nationwide, you have to comply with federal law and the securities law of EACH AND EVERY STATE you sell within.
154
What are the two 1933 securities law goals:
1. Prevent fraud
| 2. Full and fair disclosure of all material fact
155
T/F: The SEC regulates whether or not a security is worthy of going to the market.
FALSE
| SEC does not judge the worthiness of a security, just that all the info is out there.
156
What Is the 2 part test for whether you fall under the 1933 Securities Act?
1. Is a security involved / are you selling a security?
- extremely broad definition under statute and been broadly defined by the courts. SALE OF AN INTEREST IN A LIMITED PARTNERSHIP COUNTS AS THE SALE OF A SECURITY- Investment contract is a kind of security.
2. Is registration of that security required, or are there exemptions?
157
Which of the following are likely securites that trigger the 1933 securities Act?
- Limited Partnership Interest as a limited partner (Howie Case)
- Limited Partnership Interest as a general partner
- LLC Interest
- Joint Ventue / GP interest
- Limited Partnership Interest as a limited partner (Howie Case)
- Yes
- Limited Partnership Interest as a general partner
- Likely not
- LLC Interest
- If manager managed and you have a member interest, likely yes
- If a member managed interest, likely no
- Joint Ventue / GP interest
- Likely no unless someone else has all the managinf power
Investment contract includes when a person invests in a common enterprise expecting profits to come mainly from the work of others. If you have right to participate in management, it is likely not a security, If the interest is purely financial without control, then 1933 securities act triggers. Must look at the economic reality of each interest.
158
What are the benefits of IPOs?
Corp generates a ton of cash
-
going public often helps reduce a corporation's need to rely on Bank debt. Money raised in IPOs can often be used to pay off existing debts as well.
-
Selling securities through an IPO also gives existing shareholders liquidity; they can sell their shares after an IPO in order to diversify their investment portfolios. Sometimes funds generated in an IPO are used to acquire other companies.
159
What are the downsides of IPOs?
- Substantial amount of disclosure required. (After a company goes public it must file quarterly or annual Financial reports under the Securities Exchange act and comply with strict internal accounting control measures and record-keeping requirements. Also a public company must constantly deal with analysts and outside shareholders.)
- substantial legal risks. strict liability for disclosure mistakes. (opens up civil liability too)
160
Are companies liable for mistakes on the IPO registration statements?
The company is strictly liable under Section 11 of the Securities Act of 1933 for material misstatements and omissions in the registration statement.
161
What do you need to file with the SEC when going public? What does this filing contain?
REGISTRATION STATEMENT containing:
1. a “prospectus” a document that is to be distributed to potential and actual investors;and
2. additional information that must be submitted to the SEC and is publicly available
162
Is it relatively affordable to go Public?
No. Often costs upward of $500k
163
What's in a prospectus?
Thing like exhaustive explanations of the risk and the track record of the business runner.
164
How did Smith v. Gross (Worm Farm) trigger the 1933 Securities Act?
People who bough into the worm farm were entering a joint venture and made in anvestment contract with the expectation that the work would be dont by a controlling venturer whilte they were passively invested. This lack of control meant they had a security that was traded under the 1933 Act.
165
Would a TX company doing a private offering to 100 TX investors be exempt under SEC regulation?
Yes, SEC has no jurisdiction of exclusively intrastate offerings.
166
T/F Falling Under an SEC exemption can exempt you from registration and SEC anti-fraud provisions
FALSE:
| There are no exemptions to anti-fraud provisions. You are just exempt from registration.
167
T/F:
| SEC is given authority to exempt other securities it thinks should be free from the registration requirement.
True
168
What is a private placement?
NPO, nonpublic offering of securities
169
Why was Ralston Purina considered a public offering under 4(a)2 (private offering exemption)?
Thousands of the employees were offered stock , and they needed the protection of the SEC statute. (this is what determines whether you can get an non-public offering exemption or not)
This was considered a public offering of securites even though only offered internally to employees.
170
What is a Preemptive right?
Preemptive rights give a shareholder the opportunity to buy additional shares in any future issue of a company's common stock before the shares are made available to the general public. ... A preemptive right is sometimes called an anti-dilution provision or subscription rights.
171
In TX, Are the pre-emptive rights by default or must you opt-in?
Texas is currently an Opt-in jusriditction, EXCEPT that corps incorporated in Texas before 9/1/2003 go by the old Opt-out rule.
172
T/F: In TX, any corporation can opt-in to have preemptive shareholder rights in the corporation's bylaws.
False:
| Must opt in in the Articles.
173
Can you give pre-emptive rights when issuing stock in exchange for a promissory note?
No. Pre-emptive rights ONLY exist when they’re issued for cash, not for other consideration.
174
Do non-voting preferred shared have preemptive rights?
Only the common types of stock have pre-emptive rights since they have voting power and that is the property right we are trying to preserve/ look at MBCA for more.
175
T/F: preemptive right are more important in large, publicly held corporations because they issue stock more often.
False:
Preemptive rights are more important in a CHC because there is no market for the shares, so the deprivation of property of dilution is magnified.
176
What is the remedy in a squeeze out for the squeezed out party? (Stokes)
ONLY financial damages for the difference between the sale price and the market price at the time of the transaction. Matches K expectation price. NOTE: These damages do not preserve his voting percentage in the corp. Only specific performance would do that. ALSO, deprives of potential appreciation after the transaction was forced.
177
What was the decision in Stokes about whether Mr Stokes waived his pre-emptive rights?
He was being squeezed out so him refusing to buy more ot the stock was not a waiver of his pre-emptive rights. If the other 2 would have actually sold him the stock at the sales price, it could be a waiver.
178
What are the 3 steps for determining if pre-emptive rights apply?
1. Did Shareholder have preemptive rights?
2. Did shareholder waive preemptive rights
3. Does Katzowitz-type cause of action apply even though preemptive rights were waived?
179
What is the Katzowitz test in regards to a remedy for a claim about pre-emptive rights?
When the issuing price is shown to be markedly below book value in a close corporation and when the remaining shareholders-directors benefit from the issuance, a case for judicial relief has been established. In that instance the corporation’s directors must show that the issuing price falls within some range that can be justified on the basis of valid business reasons. Prove they are not grabbing power by diluting stock.
180
Can a sharholder sell their pre-emptive rights?
Yes, can sell to another party who gets the option to buy stock on new issuance, but who would buy if theres tyranny by majority holders?
181
What was the applicable lesson in Dodge v. Ford?
Corporations serve the shareholders, and if there is an adequate corporate surplus, corporations cannot withhold from declaring dividends in bad faith.
182
What is the test for wether dividens were witheld in bad faith?
Main test of bad faith is whether the policy of the directors is dictated by personal interests rather than the interests of the corporation. (Gottfried v Gottfried)
183
where can you find the definition of a distribution in the MBCA?
1.40 definitions duh.
184
What is the benefit of corporate buybacks?
- Bolsters the price of the remaining shares in the marketplace.
- Signals confidence that the corp believes in its future success/ value of its own shares
- If the crop leaves fewer shares in the market place, that will drive up the corporation’s earnings per share-- LOWERS THE DENOMINATOR.
- Corp will be buying back at a premium, so shareholders will like cashing in now
185
What are the downsides of corporate buybacks?
- Is done at the expense of investing in employees
- Less money available for RnD or rainy days
- Manipulated by executives
- Companies who took part in buybacks asked for bailouts during covid because they lacked funds to weather the storm.
- Dems want to tax buybacks because they only benefit shareholders.
186
What triggered the flood of corporate buybacks in 2017?
Tax Act of 2017- corps now pay a flat tax of 21%. Many public corps are using the funds to just buy back shares.
187
are salaries distributions under the MBCA?
Salary is not a distribution within MBCA, they are not payments “in respect of any of its shares”
188
Is a corp giving a share of another corp like IBM as a stock dividend a distribution?
Yes, because you are getting property in respect of your corporations shares.
189
what hapens with distributions dividends in practice? How often are the distributed?
Expectation is dividends every quarter, and if not, then the fair market value of the shares will drop.
190
Can corporations pay for their bought back stock with debt like a promissory note?
Yes. Share repurchase agreements involving paying for shares over a period of time are of special importance in CHCs.
191
When a corporation repurchases their shares with debt, is the legality of the distribution tested at the time of the issuance or when the debt is actually paid?
The date of distribution except as provided with the section 6.40.
- If > 120 days pass, could be based on date the payment is made.
192
What is the insolvency test?
after the distribution, will X. Corp be able to pay its debts as they become due in the ordinary course of business?
193
Who has personal liability for improper distributions?
directors
194
T/F: If a corporation does not have the money on hand to pay its debts as they come due, then it fails the insolvency test.
False. Can expect debts to be paid out of future earnings. They don’t have to have the money on hand. Only if there is a red flag that the corp is having financial difficulties will this ever be a problem.
195
How can directors shiled their liability if they got caught doing an improper distribution?
They can rely on info from officers and accountants and blame them.
196
What is the Balance sheet test?
after the distribution, will total assets > or = total liabilities + (unless otherwise provided in Article of Incorporation) dissolution preferences payable on senior securities?
197
Why can dissolution preferences be treated by liabilities in the balance sheet test when during dissolution, there is no obligation to pay anything to priority shares?
when the business is a going concern, need to show that the priority class/ senior shareholders can actually be paid before a distribution is made to everyone.
198
When directors are deciding on distribution, ANY reasonable method of valuation under the circumstances is okay as long as GAAP is applied.
False. Don't even need to use GAAP.
199
T/F: directors are judged based on the quality of their decisions when making distributions.
False:
| Don't judge the decision, but the PROCESS by which the decision was made
200
Can shareholders control a director's actions by agreement?
No.Shareholders should not be able to usurp the decision-making normally left to the directors, and directors should be beholden to the corporation and not the shareholders. (McQuade). But they can agree to vote that director out.
201
What is the takeaway from McQuade? (old-ish rule)
SH can’t agree ahead of time what directors will do as directors, directors need to come in with an open mind and use their best business discretion.
We want to avoid SHs impinging on the power of directors.
202
What is the takeaway from Clark v. Dodge?
Where shareholders still agreed and agreeing to keep Clark in place as a director, this was not iminging on Dodge's power as director. Was like a voting agreement.
203
What did Long Park go too far in its SH agreement?
agreement was that ONE shareholder would have the ability to manage all corporate affairs and could only be removed from that position by arbitration. Court said this agreement “completely sterilized the board of directors”
204
What did Galler v. Galler
| decide about SH agreements in CHCs?
because the case involved a close corporation, public policy and statute preventing agreements granting non-board member management powers was inapplicable where enforcement harmed no one. Without a shareholder agreement giving a modicum of control, a large minority shareholder can find themself at the mercy of an oppressive or knowledgeable majority without the ability to sell shares on the open market, so he must have the right provided in a lengthy shareholder agreement to protect his interests.
205
the court says seemingly voidable shareholder agreements can be upheld if there is:
- No public injury
- Absence of a complaining minority interest
- No apparent prejudice against creditors.
206
If a SH agreement grants the power of a director to a non-director, what is that party's duty/ liability?
Usually that same as would apply to directors. But hard to know what the fiduciary duties are.
207
What are some powers granted to SH agreements under the TX CHC opt-in statute.
If you opt in in the article you can:
- dispense the board of directors and provide for direct management by shareholders.
- can treat corp like a partnership
- can appoint a custodian if corp is deadlocked and threated with irreparable injury,
- can adopt a provision do dissolve the corp at will or uppon certain occurrence.
208
Why was the court conflicted in Zion v. Kurtz?
when all of the stockholders of a corporation agree that no business or activities of the corporation shall be conducted without the consent of a minority stockholder, the agreement is, as between the original parties to it, enforceable even though corp did not opt in to state CHC statute. (court treated them as though they opted in)
dissent said this sterilized the board and shifted authority to a SH who did not have the same fiduciary duties to a D or SH that a director would have.
209
What was the relationship between Nixon V Blackwell and Zion? How does this apply to TX?
SCODE said Zion was wrong. refused to apply the Delaware close corporation statute to a corporation that did not elect to become a CHC.
TX agrees with this. MUST OPT IN IN THE ARTICLES TO GET CHC STATUTORY PROTECTION.
210
Do you need a quorum of shares or a quorum of shareholders to vote on something?
a quorum of shares
211
If shares are issued to A, and A transfers the shares to B, does A or B get to vote?
Whoever is the shareholder of record on the cutoff date. different from benefiial owner of a share. these are 2 separate property rights.
212
How can a beneficial owner get to vote if they are not the record owner of a share?
can compel record owner to give them a proxy to vote if they miss transferring by the record date.
213
What is a consent resolution?
A Shareholders' Consent to Action Without Meeting, or a consent resolution, is a written statement that describes and validates a course of action taken by the shareholders of a particular corporation without a meeting having to take place between directors and/or shareholders.
214
What are the quorum requirements under MBCA if there are multiple classes in the articles?
Quorum requires a majority of shares OF EACH CLASS present unless articles state otherwise.
215
What is the quorum floor in TX that a corp's articles cannot go below?
TEXAS SETS A 33% QUORUM FLOOR FOR ANY AMENDED ARTICLES OF INCORPORATION.
216
What if you have a quorum but then a shareholder leaves? Is the quorum broken?
SHs do not break the quorum. MBCA 7.25 b. Once a quorum is met, it cannot be broken by a shareholder for the remainder of the meeting.
217
What if you have a quorum but then a director leaves? Is the quorum broken?
a DIRECTOR can break a quorum, because you need a quorum of directors each and every time a vote is taken.
218
Under MBCA, if there is a SH quorum at 100, and 2 vote in favor, 1 votes against, 97 abstain, does the resolution pass?
Yes, Under 7.25c you DO NOT NEED A MAJORITY, you only need “more votes in favor than votes against”
219
In TX, if there is a SH quorum at 100, and 2 vote in favor, 1 votes against, 97 abstain, does the resolution pass?
No. In TX, abstentions count as NEGATIVE votes.
220
What did Salgo v. Matthews show about corporate voting? (election inspector)
Eligibility to vote at a corporate election is determined by the corporate records not the ultimate judicial decision of beneficial title of disputed shares.
Just because the company that held the shares was insolvent, that did not transfer the right to vote to the bankruptcy trustee. Bankruptcy trustee just got the benefit of the shares, not the Voting Rights. Must tranfer on the books to get the voting rights.
221
T/F Under MBCA, a shareholder with 49% of shares can always elect at least 1 director.
False.
Must have opted into cumulative voting in the articles for this to be true. also only 1 director may be up for reelection even with cumulative voting. in this case SH could still lose.
222
Is TX an opt in or opt out state for cumulative voting?
Opt-in, but firms incorporated prior to 9/1/03 were cumulatuve by default.
223
How does cumulative voting work for passing corporate provisions ?
cumulative voting only applies to elevting directors.
224
T/F: Sometimes if the minority voter votes more efficiently, courts allow majority to recast their votes.
True.
225
What is a classified board?
A Board of directors with staggered election terms.
226
what quorum do you need to meet to amend your quorum requirement?
the change must be done under the quorum and voting requirements existing at the time of the change, or if the requirements are changing to be a higher requirement, then the higher requirement must be passed according to the proposed higher quorum/ voting requirements proposed.
227
What is a director freeze out?
when a director cannot be removed according to the Articles of Incorporation shareholders may attempt to freeze out a minority director by denying information and refusing to appoint them to any committees, holding the unofficial meetings,
228
T/F: Under the MBCA, Shareholders can only remove directors with cause
False:
MBCA 8.08 - Shareholders can vote to remove director with or without cause (in contrast with common law which required removal with cause).
229
T/F: Shareholders can remove directors without cause
False. May be an agreement or statute that says otherwise.
230
T/F: If a preferred shareholder acquired a voting right for a director due to dividends not being distribute, and the preferred shares elect a director, the common shareholders can vote remove that director
```
False.
If a director is elected by a certain class of shareholders, the director can only be removed by vote of that class.
```
231
What are the effects of having a staggered board of directors?
- helps prevent takeovers from outside groups as they can only replace one group of directors per year. - Creates continuity and is shown to benefit the business.
- DECREASES THE IMPACT OF CUMULATIVE VOTING. b/c denominator shrinks so more shares are required to vote in any 1 director. S/D+1
- encourages long term planning by board members and promotes having experienced members on the board.
232
What are some common shark repellants (preventing takeovers)?
- STAGGERING the board is shown to make takeovers more difficult/ postpones over a few years. (shark repellant).
- Eliminating minority shareholder rights to call special meetings, and -
- GOLDEN PARACHUTES / setting up big executive payouts if they get fired also disincentivise takeovers.
233
T/F: Shareholders can agee by majority to run the corporation in lieu of a board of directors.
False. Must be approved unanimously.
234
What was the result of the husband not following the voting agreement in Ringling Bros. v. Ringling?
The Court ruled that Mrs. Haley's votes should not be counted because her husband fucked up and didn’t follow the voting agreement like a dumbass. The three people she asked him to vote for were therefore nullified. But the election was still valid so mrs. Ringling's three nominees and Mr North's three nominees became a 6 person board instead of the normal 7 person board of directors. The Court did not decide on who or if someone would fill the vacant seventh spot.
235
Why is Ringling Bros. v. Ringling viewed negatively?
THE COURT MADE NO MECHANISM FOR THE ARBITER’S DECISION TO BE BINDING. SHOULD HAVE REQUIRED SPECIFIC PERFORMANCE TO MAKE MRS HALEY VOTE ACCORDING TO THEIR AGREEMENT AND NOT LEAVE HER BOARD POSITIONS VACANT. Under 7.31b voting agreements are “specifically enforceable” so this is avoided.
236
what someone breaches a voting agreement and a state’s code does not allow for specific performance of voting shares?
Then you need a proxy to vote the shares according to agreement.
237
When is a proxy irrevocable
A proxy is irrevocable when stated as irreovacle and coupled with an interest (when the proxy is being granted for the benefit of the person who receives it.)
238
How are proxies related to vote-buying?
Vote-buying is simply a voting agreement supported by consideration that is personal to the stockholder whereby the stockholder divorces his voting power and votes as directed by the offer. E.g, a Shareholder votes against his own interest in exchange for a loan from another shareholder. This is separate from each parties residual right in their shares.
239
Does a vote buying agreement have to be fair to other shareholders?
Yes. cannot defraud or disenfranchise other shareholders
240
What do trustees do in bankruptcy?
serves the corporation's creditors.
In Ch. 11 (re-organization), would try to minimize Debt to Equity ratio.
241
What is a voting trust?
When shareholders sever their voting right from their stock interest and let a trustee vote or act for them.
242
In Ringling, was the arbitrator telling them how to vote was an improperly formed voting trust?
NO because each woman still had the right to vote her shares… voting right was not improperly severed from the other rights of share ownership.
243
May voting trustees use the voting power they hold in trust to grant voting rights to debenture holders, to the detriment of preferred stockholders?
Not under Brown v. McLanahan, but the modern trend is voting trusts are fine so long as they meet the requirements of the statute.
244
What is the test for improper voting trust under Cohen?
1. a voting trust exists (separation of the voting right from other share rights)
2. Voting rights granted are intended irrevocable and for an indeterminate period of time
3. Principal purpose of the voting trust is to acquire voting control over the corporation (COLLUSION MAKES A VOTING TRUST IMPROPER)
245
Is it valid for it to be written into the articles that a director can break a shareholder deadlock?
YES.
| Prob would need to be approved unanimously though.
246
Why is Abercrombie v. Davies no longer relevant? (Votes held in escrow)
Can just use irrevocable proxies and put them in a voting trust instead of using managed escrow to collude as voters
247
What was the lesson of Ling and Co. v. Trinity Sav. And Loan Ass'n (ROFR) for TX restrictions on tranfers of shares?
Restrictions on transferring stock are valid if they are
1. reasonable, and
2, if the person affected by the restrictions had actual knowledge of them.
The Texas Business Corporation Act requires restrictions on the transfer of stock to be expressly stated in a corporation’s articles of incorporation, and either included or incorporated by reference on the face of the stock certificate, or referred to on the certificate’s face and included or incorporated by reference on the certificate’s reverse side.
248
Do you need just constructive or actual knowledge of restrictions on tranfers of shares for them to be valid? Under MBCA? In TX?
Only need constructive knowledge of the restriction in MBCA. Need actual knowledge in TX
249
If a shareholder leaves and the corporation must buy their shares back according to agreement, is that a distribution under 6.40?
YES. They are giving cash to a SH in respect to the corporation's shares.
250
Is Right of First Refusal a restrictions on tranfers of shares?
yes.
251
What makes a non-compete clause in the buy-sell agreement more likely to be enforced?
If it is limited to:
1. a reasonable amount of time and
2. a reasonable area.
252
T/F: even though deadlock is proven, a court can still use its discretion whther or not to dissolve a coporation.
True. Will almost never dissolve a profitable corp.
253
In a voluntary dissolution in TX, how many votes do you need to dissolve the corp?
an Absolute majority- a majority of all the shares entitled to vote on that issue. >50% of all shares & quorum rules cannot lower this.
254
In a voluntary dissolutionunder MBCA, how many votes do you need to dissolve the corp?
an absolute majority of the statutory DEFAULT quorum of those entitled to vote, even if the voting quorum has been lowered in the articles. But If a quorum requirement has been increased in the articles to, say, 70%, then that greater quorum must be met for a dissolution vote.
255
What does Gearing v. Kelly illustrate about directors quorums.
Ms. Kelly not showing up to meeting to avoid a quorum just allowed them to replace her anyway.
MBCA 10- If a quorum is not possible, vacancies on board can be filled by the remaining of all the directors remaining in office, even if there is technically not a quorum.
256
How does Donahue v. Rodd help create a remedy for shareholder oppression?
Gives the minority shareholder an equal opportunity to sell her shares back to the corporation on the same terms as a majority shareholder did.
257
What are reverse preemptive rights?
Right to SELL an equal PROPORTION of shares, not equal number of shares at the same price as the majority SH did.
258
How does Meinhart v. Salmon apply to CHCs?
Because of the inherent dangers to minority owners, shareholders of a close corporation owe each other substantially the same fiduciary duties that partners owe one another in a partnership. Duty of loyalty to partners, and possible duty of loyalty between CHC shareholders.
259
What is wrong economically with reverse preemptive rights?
minority SH stake should be worth less, so they should not get the opportunity to sell at the same price as the majority SH.
260
T/F: In TX, shareholders in a CHC have the same fiduciary duties as partners do to one another.
FALSE. Not true as a matter of law. TX follows Nixon v. Blackwell (CHCs must elect to be treated differently as CHCs under statute). SHs can agree to a ton of things a head of time and shouldn't be coddled by the courts if they are oppressed.
261
What is the role of each of the following in dissolution?
Custodian-
Receiver-
Provisional Director-
Custodian- maintains the status quo
Receiver- take the power to manage and control corporate affairs away from the board
Provisional Director- take the power to manage and control corporate affairs away from the board
262
Do Courts have equitable power to compel buyout to help minority shareholder?
Usually.
this break deadlock and avoids a dissolution.
263
In TX, Do Courts have equitable power to compel buyout to help minority shareholder?
NOT if you didnt elect CHC statutory protections.
264
Under MBCA, can a SH compel a buyout of their shares?
YES. In the event of a fundamental change to the business.
| Ex: Merger, Sale of all corporate assets outside the usual course of business.
265
What is the "efficient market theory" of corporations?
corporate management’s performance is reflected by the market price of the corporation.
266
Who are the main investors in Public corporations and what are the ramifications of that?
More than 80% of stock in PHCs is owned by institutions like pension funds, banks, mutual funds, etc. If an institutional investor sells a big block of stock it has an enormous impact on share price. If they buy the share will skyrocket. This has INCREASED THE VOLATILITY OF THE STOCK MARKET
267
T/F: Institutional investors care more about the long haul health of the corporation than short run dividends.
False.
| They want money now
268
According to the Chairman of Black Rock, why do institutional investors favor favor takeover instead of long term investment?
they think the new group will do better and that new group will pay over market price for control of shares.
269
What is the Property Concept of Corporations
The purpose of the corporation is to maximize shareholder wealth, it is in effect the property of the shareholders
270
What is the Social Entity concept of Corporation
Corporations are social entities that serve the community they financially touch- takes a long view
271
Whats the most common way a board of directors can actually get caught for liability?
failure of the directors to oversee delegations of authority
272
What are Management vs non management directors
Management directors- work full time for the corporation
Non management directors- Either have some or no affiliation with the corporation outside board work
273
T/F: the BAR recommends havinf outsider directors and committes to ensure independent business judgment
True.
274
What were Enron's 2 major flaws pointed out by professor Macey?
Board capture-
board of Enron had been captured by management
The board gets its info from management, and if the management is dishonest or ill equipped, the board can’t serve its function (informational asymmetry)
Board never discovered the managers were pulling out millions
Collegial board model-
Reluctance to counter bad ideas due to social pressure on the board.
The board could have asked questions and voiced suspicions if not for this
Asking questions is like “belching at the dinner table”
275
Why wasn’t the Enron board personally liable?
Directors shielded by the business judgment rule.
(Creates a presumption that directors acted in good faith and had reasonable basis for making decisions.)
“Reasonable basis” is hard to counter.
MBCA S 8.30-31 sets standards of board conduct
Breach of duty of care by a director does not necessarily impose liability at all.
(Director liability statute is separate)
Directors have high chance of escaping liability if they breach Duty of care
Directors protected if they rely on the opinion of those listed in the statute (like accountants, CFOs)
Corp may indemnify directors who are held personally liable.
Can get insurance to cover the directors personal loss
“raincoat” statutes that protect a director on a rainy day evin if they breach their duty of care MBCA 2.02(b)4
276
What was the Powers committee's conclusion on what went wrong with the board in Enron?
the board of directors of Enron abdicated its responsibility. But this was determined through hindsight
277
What are stock options?
Given option to buy shares at a particular price called the strike price under certain conditions
278
What was majorly exploitable about stock option by Enron and other corporations?
- If you have the right to BUY shares at a price of $50 and the fair market value of the share keeps going up and up, it creates incentive for the executives to keep pumping up the stock value and then buying at the strike price below market value
- When the person exercised the option, the difference between what the person paid and what the person got was all profit, and there was no immediate income tax consequence because the taxes were not owed until the shares were sold on the market.
- As long as you have held the share for at least one year after exercising the strike price option, you are taxed at the capital gains rate instead of the ordinary income tax rate.
- Manager can put off paying the taxes until they need to sell the stock.
- If you hold the stock until passing away, your heirs pay tax on a stepped up basis. They don’t pay tax on any gains, just the fair market value of the stock.
279
What were the purpose of “Special purpose entities” in Enron's accounting?
- Made to get non producing or underproducing assets off of Enron’s books
- Took liabilities off the books, kept stock prices rising.
- Most were formed as LPs
280
What were the purpose of “Capitalizing expenses” in Enron's accounting?
Instead of taking an expense in 1 year, capitalize the expense so it extends over a number of years. (like depreciation). Enron just distributed a ton of expensed over multiple years that shouldnt have been.
281
What does "up the ladder mean" under Sarbanes Oxley, and who does it apply to?
Attorney are required to report up the ladder if they see a material violation of securities law or breach of fiduciary duty
282
What was the immediate result of passing Sarbanes Oxley?
- led to many corporations going private
- Many feared it caused a “creeping federalism” in corporate law
- Imposed many additional costs to public corporations
283
T/F: Corporate governance is by and large a function of federal law
False: Corporate governance is by and large a function of STATE law, but there is a federal law overlay for securities, corporate governance, tax, etc.
284
Under old MBCA with cumulative voting, could you stagger the board of directors?
NO. If you elected 1 Director/ year it would ruin the point of cumulative voting.
285
What was the lesson of Shlensky v. Wrigley? (BJR)
Board will be shielded from liability unless there is: fraud, illegality, or a conflict of interest
Rejects the idea that the board should be liable for negligence
286
What was so shocking about VanGorkom?
directors are liable for now GROSS NEGLIGENCE, reckless conduct, & intentional conduct;
287
why is the TX balance sheet test different?
Need to have net assets > stated capital
you don't distribute out of stated capital.
288
T/F: 8.31 codifies the Business Judgmentt Rule
False. but they are similar safety nets. The BJR is a flexible concept that should be applied at discretion, not in statute.
289
What did the Caremark case establish around Business Judgment?
1st duty of care case dealing w/ monitoring – board must make sure adequate internal controls are established to oversee the corp’s compliance w/ federal & state laws; no clear violation here
290
How did Stone limit the Caremeark case?
in the absence of red flag that something is amiss, it will be very difficult to hold a director liable as long as they established controls that were likely to uncover unethical conduct
o Court isn’t going to consider the efficacy of the business decision; just whether due care was taken in making the decision
291
What did Tri-state vs Zuckerburg illustrate about Director liabilitity in DE?
Even if there was not a valid exercise of business judgment, directors in DE are shielded from personal liability.
Raincoat provisions
292
What happens to insurance rates when the court weakens the BJR rule?
Board and Officer rates skyrocket.
serving becomes less appealing.
293
What is the contemporaneous ownership rule?
To bring a SH derivative suit, you must have been a SH at the time of the act or omission complained about.
294
As a plaintiff, what do you attack after the board approves a director's conflict of interest ransaction.
Say they breached their duty of care. Say they are violating something else like wasting corporate assets.
295
Wht are the goals of the 1933 securities act regarding IPOs
o (1) to prevent fraud/deceit in initial issuance of securities
o (2) full & fair disclosure of all material facts
296
T/F: The SEC does not check a company's IPO disclosure documents for accuracy
True. They only check for completeness.
297
In TX, is constructive fraud enough to PCV?
In a tort claim, yes. but actual fraud is required to PCV on a contract claim.
298
What did Marchand refine about Caremark ?
The court will evaluate:
1. Is a system in place (and is it adeqate enough to say one is in place) system should address key risks.
2. Whether the board has made a good faith effort to actually monitor the system implemented.
If not, D has breached their duty of loyalty
