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Carson’s Bar Review > Corporations > Flashcards

Corporations Flashcards

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1
Q

What are officers of the corporation?

A

They are AGENTS of the corporation appointed to carry out corporate policy

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2
Q

What is the liability exposure of directors and officers of a corporation?

A

Liability limited to their investment

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3
Q

How is a C corp taxed?

How is an S Corp taxed

A

As a corporation - double layer tax

As a partnership - passthrough

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4
Q

What is a B Corp?
How is a B Corp created?
What are the 2 key differences between a B corp and a C Corp?

A

A B corp is a benefit corporation which intends to benefit the public and the environment (or some other social cause) as well as is shareholders

  • A B Corp is created by a statement in its articles of incorporation that it is a B Corp
  • B corps owe fiduciary duties to their shareholders but are also obligated to consider the impact on the environment, employees, and communities. Managers are not liable for failing to pursue profits alone. Must also prepare an annual “benefit report” which is distributed to all shareholders and/or filed with sec of state
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5
Q

S

A

S

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6
Q

What is the body of law governing corporations for bar exam purposes?

A

Model Business Corporation Act

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7
Q

What are the 3 ways that an entity might be recognized as a corporation?

A

1) De jure corp (formed in compliance with law)
2) De facto corp (formed out of compliance with law)
3) Corp by Estoppel (a person is prevented from denying that an entity is a corp)

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8
Q

What is required to form a de jure corporation?

A

Person, Paper, Act
Person (Incorporators)- can be a person or entity and does not have to be a citizen of the state where they are incorporating
Paper (Articles of Inc) - with all required info
Act (Filing) - corp existence begins on filing

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9
Q

What must be included in articles of incorporation?

A

~ CORP NAME which ends includes corporation, company, incorporated, or limited or some abbreviation
~ INCORPORATOR Name + address
~ REGISTERED AGENT name + address in the state
~ STOCK info (classes, auth shares, voting rights)

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10
Q

What can be included in the articles of incorporation?

A

Anything that is not illegal
~ could name directors
~ could require that corporate claims be brought in a court in the state of inc

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11
Q

Is a statement of business purpose required?

What is the effect of omitting a statement of business purpose from the articles of inc?

A

Not required

Default is “any lawful purpose”

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12
Q

Are charitable contributions and loans to employees/officers/directors proper acts for a corp?

A

Yes, absent exclusion in the statement of business purpose. These are considered necessary/convenient for carrying on the business

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13
Q

What is ultra vires?

What is the effect of an ultra vires action?

A

If a corporation narrows its statement of business purpose, actions taken outside of that purpose are considered ultra vires

Common law: ultra vires acts are void and unenforceable
MBCA: ultra vires acts are enforceable and ultra vires can only be raised (1) in a SH suit to enjoin the act (2) corp suing d/o for approving the act (3) state suing to dissolve the corp for committing an ultra vires act

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14
Q

What does the corporation’s first meeting look like?

A

It’s the “Organizational Meeting”
If the directors were named in the articles of inc, the board holds the first meeting. If no directors named in the articles of inc, then incorporators hold the meeting.

Purpose is to 1) elect directors (if none) 2) adopt initial bylaws 3) appoint officers

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15
Q

What are bylaws?

A

Internal document (not publicly filed). Can contain any rule that is not illegal or inconsistent with the articles of inc

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16
Q

Who can amend or adopt new bylaws?

A

The board or shareholders

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17
Q

What is the internal affairs doctrine?

A

The internal affairs of a corporation are governed by the law of the state of incorporation (regardless where its business is conducted

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18
Q

What is a requirement of would-be incorporators looking to invoke a de facto corporation or corporation by estoppel?

A

Anyone asserting either doctrine must be UNAWARE of the failure to form a de jure corporation. Persons who know there is no corp are jointly and severally liable

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19
Q

What are the requirements for a de facto corporation?

A

1) Must be an incorporation statute (every state has one)
2) Parties must have made a good faith, colorable attempt to comply (i.e. tried and came close)
3) Some exercise of corporate privilege (acting as if corp)

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20
Q

If the requirements of a de facto corporation are met, for what purposes is the entity treated as a corp?

A

For all purposes other than a suit by the state (a “quo warranto” action). Can be invoked in a tort or contract action

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21
Q

What is corporation by estoppel?

When can it apply?

A

Persons who have dealt with an entity as if it were a corporation will be estopped from denying its status as a corp.
Can be invoked by the corp (to prevent a 3rd party from backing out) or by the 3rd party (when corp trying to back out)
- Can only apply in CONTRACT cases - not tort cases

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22
Q

De facto corporation and corporation by estoppel have been abolished in many states

A

yep

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23
Q

What is a promoter?

A

A person acting on behalf of a corp that is not yet formed.

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24
Q

What is the default status of promoters with regard to each other before incorporation?

A

They are joint venturers unless they have an agreement to the contrary. This means they owe fiduciary duties to each other and breach fiduciary duty if they pursue personal gain at the expense of the joint venture/future corp

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25
Q

What standard must a promoter meet when selling property to the corporation?

What is an easy way to meet this burden?

What is the promoter’s liability if this standard is not met?

A

Promoters owe a fiduciary duty of fair disclosure and good faith when selling property.

Burden can be met by disclosing the facts and deal to an independent board of directors and is approved OR ratified after full disclosure. If the board not fully independent, promoter still not liable to any subscriber who bought with knowledge of or after the deal

Promoter is liable for any profit he made on the sale

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26
Q

Can a promoter contract on behalf of a not yet formed corporation?

A

Yes

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27
Q

What is the extent of the corporation’s liability on a contract entered into by a promoter before the formation of a corporation?

A

The corporation is not bound by contracts entered into by a promoter in the corporate name before inc.

BUT corp can become liable if it expressly/impliedly adopts the contract

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28
Q

What is the extent of the promoter’s liability on a contract entered into on behalf of the corp before the formation of a corp?

A

Anyone who acts on behalf of a corp knowing that the corp is not yet formed is jointly and severally liable for obligations incurred.

Promoter’s personal liability continues even after the corporation is formed and even if the corporation adopts the contract. Release only by novation

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29
Q

What is the effect of a promoter enters a contract that expressly relieves the promoter of liability?

A

There is no contract at all (might be reinterpreted as an offer to the proposed corp). Promoter has no rights/obligations under it

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30
Q

If a promoter is held responsible for a contract entered into before the formation the corp, can the promoter look to the corp at all?

A

The promoter can seek reimbursement from the corporation to the extent of any benefits received by the corporation.

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31
Q

What are the obligations of foreign (out of state) corporations doing business in a state?

At what level is this obligation triggered?

What is penalty if the corp ignores this duty?

A

They must register with the sec of state of that state and pay fees

Obligation triggered if there is a regular course of INTRAstate business activity - sporadic activity or just owning property in the state doesn’t count

Civil fine and can’t assert a claim in the state (must register and pay back fees, then can assert claim)

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32
Q

What can an unsecured debt security be called?

A

A debenture

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33
Q

If a debt obligation is payable to the holder of the obligation, what is it called?

If the debt obligation is payable to the owner listed on the corporations records, what is it called?

A

A bearer or coupon bond

Registered bond

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34
Q

Are treasury shares considered issued?

A

No

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35
Q

What specifies the classes of stock and their various rights?

A

The articles of incorporation

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36
Q

What is a subscription?

A

Written OFFERS from investors to buy stock from a corporation

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37
Q

What is the important rule about subscriptions made before incorporation?

A

Under the MBCA, preincorporation subscriptions are irrevocable for 6 months unless otherwise provided in the subscription agreement or all other subscribers consent

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38
Q

How can a corporation call for payment under subscription agreements?

What penalty does a subscriber face if they fail to pay?

A

Board accepts the offer and can then demand payment, but can’t demand payment from subscribers in a discriminatory fashion

Subscribers can forfeit their right to buy and any payment already made

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39
Q

Are post incorporation subscription agreements revocable or nonrevocable?

A

They are revocable until accepted by the board. (the 6 month irrevocable offer period does not apply)

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40
Q

What is acceptable consideration for a sale of stock under the MBTA?

A

Any tangible or intangible property or benefit including past and future services or promises.

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41
Q

What is par value? Where is it specified?

What was the traditional use of par value received?

A

Par value is the minimum issuance price specified in the articles of inc

Par value used to be segregated to into a separate account but not required under the MBCA

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42
Q

If par value stock is issued in exchange for services/property, who values the services/property?

A

The board but estimate must be in good faith

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43
Q

What is watered stock?

What is the “water”

A

Watered stock is stock that was issued for less than its par value
Water is the difference between par value and the price received for the watered stock

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44
Q

From whom can the corporation recover the water if watered stock is sold? Directors? Buyer? Buyer of Buyer’s Shares?

A

~ Directors are liable if they knowingly authorized the issuance (breach of fiduciary duty)
~ Buyer is liable regardless if he subjectively knew the stock was watered
~ third parties are NOT liable if they acted in good faith (i.e. did not know about the water)

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45
Q

What are preemptive rights? What is required to create a preemptive right?

What are the presumed limitations on preemptive rights?

A

Right to maintain % ownership by participating in a new issuance whenever there is an issuance for cash. Preemptive right must be specified in the articles of incorporation

Presumed limitations are that no preemptive right for 1) issuances for something other than cash 2) issuances within 6 months of inc or 3) issuances without voting rights that have a distribution preference

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46
Q

What are the statutory requirements for a director?

Can the articles of inc add more requirements? What kind of requirements?

A

Must be a natural adult person. Don’t have to be SHs or residents of state of inc.

Additional requirements can be imposed by the articles of inc but there cannot be a limitation on the director’s ability to resign

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47
Q

What is the minimum number of directors? Where can a higher number be set?

A

Statutory minimum is 1 director.

Bylaws can require a higher number

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48
Q

Who elects directors at the organizational meeting?

Who elects directors after the organizational meeting?

A

Incorporators elect directors at the organizational meeting

Shareholders elect directors at all times after the organizational meeting

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49
Q

What is the default for when directors are up for election?

What is an alternative regime? How is it established?

A

By default, the entire slate of directors is up for election each year

Staggered board (classified board) is established in the articles of incorporation. In a staggered/classified board only a fraction of the board is up for election each year

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50
Q

Can shareholders remove directors before the terms expire? Is cause required?

What is required to remove a director elected by cumulative voting?

A

Shareholders can remove directors during their terms with or without cause

If there is a staggered board, some states require cause to remove a director

If a director is elected by cumulative voting, then that director can NOT be removed if the votes cast against removal would be sufficient to elect her if cumulatively voted at an election

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51
Q

Who fills vacancies that arise on the board in between elections?

A

Can be the shareholders or the board but if the shareholders created the vacancy by removing a director, the shareholders generally must fill the vacancy

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52
Q

Is a director an agent of the corp?

A

NO, because individual directors have no authority to bind the corp
BUT directors as a group can act as agent of the corp

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53
Q

What are the two ways in which the board can act?

What is the effect if the board purports to act but does not meet either of those requirements?

A

Unanimous agreement in writing (email/separate docs ok)
OR
At a meeting that satisfies the quorum and voting requirements
———
The agreement is void unless ratified by a valid act

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54
Q

What counts as a board meeting? Does it have to be in person?

A

A board meeting is simultaneous oral communication so that each person can hear all the others

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55
Q

What are the director notice requirements for regular and special meetings? What is the effect of lack of notice?

A

There is no notice requirement for regular meetings

Two days written notice of date/time/place is required. Notice need not state the purpose of the meeting

If a meeting is held without required notice, the actions taken at the meeting are voidable/void unless the directors who were not notified waive the notice defect by attending the meeting and not objecting or waiving in writing at any time

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56
Q

Can directors give proxies or enter into voting agreements with other directors? Why?

A

No proxies and voting agreements by directors are void - directors owe nondelegable fiduciary duties to the corporation

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57
Q

What is a quorum for a board meeting?

What is a “broken quorum”?

A

Quorum is a majority of the directors unless the bylaws say otherwise.
Statute limits the min quorum bylaws can require to 1/3
———-
A quorum is lost/broken if directors leave. Once the quorum is broken the board can no longer act

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58
Q

How does a board take action at a board meeting?

What % vote is required to take action at a meeting?

A

Board passes a resolution

To pass a resolution, must have a majority vote OF THOSE PRESENT

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59
Q

If a director or the CEO strikes a deal for an extraordinary contract with a third party, is the corp bound?

A

Only if the director/CEO had actual authority to do so, and actual authority is created by either 1) board resolution at a meeting or 2) unanimous written consent

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60
Q

How can the board create a committee?

What power can the board NOT delegate to a committee or officer?

A

Unless the articles of inc or bylaws provide otherwise, the board can appoint 1 or more members of the board to committees

Board cannot delegate the authority to:

  • declare a distribution,
  • fill a board vacancy or
  • recommend a fundamental change to shareholders
  • But a committee can recommend these things to the board
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61
Q

*VERY IMPORTANT
What is the duty of loyalty owed by d/os?

What is the duty of care owed by d/os?

Every time you see a breach of either duty, state BOTH the DoL and DoC standard

A

DoL: Must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corp
DoC: Must act in good faith with the care of a reasonable person in similar circumstances

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62
Q

Who has the burden of proving a DoC violation?

A

The Plaintiff has burden of proving the DoC violation

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63
Q

What are the two common DoC scenarios on the bar?

A

1) Nonfeasance (lazy director) - D liable only if breached the DoC and that breach caused a loss to the corp (causation often difficult to prove)
2) Misfeasance (bad decision) - D not liable if BJR applies. BJR applies when decision was in good faith and well considered/researched even if it turned out badly (causation easy to prove because bad result)

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64
Q

What reports/info can a director rely on in fulfilling their fiduciary duty?

A

Director an rely on info/opinions/reports/statements prepared or presented by:

1) officers or employees
2) Experts (legal/financial/etc.)
3) board committees of which the director is not a member if D reasonably believes the committee deserves to be trusted

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65
Q

Given the BJR, a director’s decisions will not be challenged if…

A

the directors acted (1) in good faith (2) with the care an ordinarily prudent person would exercise in similar circumstances (3) in a manner reasonably believed to be in the best interests of the corp.

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66
Q

To whom do the directors owe fiduciary duties?

A

To the corporation

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67
Q

Who has the burden of proof in a DoL case? Why?

What are DoL cases all about?

A

The defendant has the burden of proof because the business judgment rule does not apply

DoL cases are all about conflicts of interest

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68
Q

What are the common fact patters in DoL cases?

A

1) Self-dealing or Conflict of interest transactions
2) Competing Ventures
3) Taking corporate opportunities
4) Insider trading

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69
Q

What constitutes self-dealing or a conflict of interest transaction for purposes of a DoL violation?

A

Any transaction between the corp and one of its directors (including their relatives/businesses)

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70
Q

When can a conflicted/self-dealing transaction occur and there still be no DoL violation?

A

IF EITHER:

  • Approved by a majority (but at least 2) of independent directors WITH DISCLOSURE/KNOWLEDGE OF ALL MATERIAL FACTS by the conflicted director
  • Approval by a majority of disinterested shareholders after disclosure/knowledge of all material facts
  • Judged by the circumstances at the time of the transaction, the transaction was fair
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71
Q

What is the result of a successful DoL case?

A

The transaction can be set aside or director can be liable for damages

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72
Q

Does a conflicted director’s presence at the meeting approving the conflicted transaction make a difference?

A

No

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73
Q

What is the special quorum requirement for a directors meeting to approve a conflicted transaction?

At a shareholders meeting?

A

A quorum is a majority of disinterested directors

A quorum is a majority of votes entitled to be cast that are not owned or controlled directly/beneficially by the conflicted director

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74
Q

When can a conflicted/self-dealing transaction that was approved by a majority of disinterested directors/shares STILL be set aside as a DoL violation?

A

If the plaintiff can prove that the transaction was a waste of corporate assets - COURTS OFTEN STILL REQUIRE A SHOWING OF FAIRNESS EVEN IF APPROVED

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75
Q

Is it a conflict of interest for directors to set their own compensation?

A

Yes (unless the articles of inc or bylaws say otherwise), but if the compensation is excessive, that’s a DoL violation b/c wasting corporate assets

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76
Q

Can directors engage in other businesses without violating the DoL?

What is the remedy for a DoL violation here?

A

Yes, but a director cannot compete directly with her corporation.
If director operates a competing venture in violation of DoL, the corp gets a constructive trust on the profits

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77
Q

When can a director divert a corporate opportunity away from the corporation?

What is a corporate opportunity?

A

They must first inform the board of the opp and all material facts and then wait for the board to reject the opportunity

Some opportunity that the corp has an interest or expectancy in, is in the corp’s line of business, or that the defendant found on company time or with company resources

78
Q

Is the corporation’s financial inability to take advantage of a corporate opportunity a defense to a director’s usurping a corp opportunity?

A

No - the director still needs to present the opp to the board and wait for the board to reject it

79
Q

What is the corporation’s remedy if it successfully sues a director for DoL violation for usurping a corporate opportunity?

A

Constructive trust for the corporation. If the gains have been realized, the profits are held in constructive trust for the corp. If the defendant still holds the property, the property is held in constructive trust (but the corp must pay D the price that D paid for the property)

80
Q

What is the duty to disclose?

A

Directors have a duty to disclose material corporate information to other members of the board

Controlling shareholders also owe a duty to disclose material information to other shareholders.

81
Q

When can a corporation make a loan to a director?

A

Only if there is a reasonably expected benefit to the corporation

82
Q

To what extent can the personal liability of a director for fiduciary breaches be limited? Can liability to shareholders or the corp be limited

A

The articles of incorporation can limit or eliminate director personal liability to the corp AND OR to shareholders but cannot limit/eliminate liability for:
financial benefits wrongfully taken from the corp,
intentional harm,
unlawful distributions, or
intentional criminal acts

83
Q

WHICH directors are liable for breaches of fiduciary duty or wrongful acts (ultra vires, improper distributions/loans)?
What are the procedural requirements?
What result if the director was absent from the board meeting?

A

All directors are presumed to have concurred with the board’s action unless they abstained or dissented in writing.
In writing means in the minutes, in a writing delivered to the presiding officer at the meeting, or in a written dissent to the corp immediately after the meeting
BUT a director is not deemed to concur if she was absent from the board meeting (or good faith reliance on a report from emp/o/expert/committee you’re not part of)

84
Q

What determines the power of officers?

What is the usual scope of an officer’s authority?

A

Officers are AGENTS of the corporation, so agency law determines their ability to bind the corporation

Officers have apparent authority to enter the corporation into contracts in the ordinary course of business.

85
Q

What fiduciary duties does an officer owe?

A

Owes the same duties of care and loyalty as directors

86
Q

Does a corporation have to have any particular officers?

Can one person serve in more than one office?

A

No

Yes

87
Q

What determines an officer’s duties?

A

The bylaws or the board (if allowed by the bylaws) or an officer authorized to set other officers’ duties (if allowed by the board/bylaws)

88
Q

Are contractual clauses that limit the board’s ability to fire an officer enforceable?

Are contractual clauses that limit an officer’s ability to resign enforceable?

A

No - board can ALWAYS remove an officer WITH OR WITHOUT CAUSE

No - officer can always resign

*Resignation or removal might be a breach of contract giving rise to damages, but it can still be done!

89
Q

Do shareholders hire and fire officers?

A

No - the board hires and fires officers and also sets their pay

90
Q

That are the 3 categories of indemnification that may apply to a d/o of the corporation who has been sued?
When does each apply?

A

Category 1: No indemnification (corp CANNOT indemnify a d/o who is HELD liable to the corp or HELD to have received an improper benefit)

Category 2: Mandatory Indemnification (unless limited by the articles of inc, a corp MUST indemnify a d/o who was successful in defending a proceeding against them. Some states require complete defense victory, others require partial indemnify for partial successful defense)

Category 3: Permissive Indemnification (corp may indemnify for unsuccessful defenses (OR SETTLEMENTS)if the director acted in good faith belief act was in best interest of the corp -i.e. can indemnify if complied with DoL)

91
Q

Who makes the determination of if to indemnify a director if indemnification is permissive?

A

Disinterested majority of the board, or if there is not a disinterested quorum, by a majority of a disinterested committee or an independent legal counsel. Shareholders can also make a determination (shares owned by director seeking indemnity don’t count)

92
Q

What is the trump factor that overrides all categories of indemnification?

A

The court can order indemnification if it determines that indemnification is justified in view of all circumstances. If the d/o was held liable, the reimbursement is limited to the costs and attorneys fees (can’t include the judgment)

93
Q

Can the articles of incorporation eliminate liability of a d/o to a corp?

A

Yes but can only eliminate liability for DoC violations and most states only allow elimination of director (not officer) liability

cannot eliminate liability for DoL violations including:
intentional misconduct, 
improper personal benefit. 
for unlawful distributions, or 
intentional crimes
94
Q

To what extent can the corp buy d/o insurance to indemnify their d/os?

A

Can purchase liability insurance to indemnify d/os for actions against them EVEN IF the corp could not eliminate liability via articles of inc amd

95
Q

When is a corporation allowed to advance litigation expenses to a director defending an action?

A

Corp can advance if D provides the corp with a statement that the director believes he met the appropriate standard of conduct and that he will repay the advance if later found to have not met the appropriate standard

96
Q

To what extent can a corp indemnify, advance expenses to or buy insurance for agents and employees?

A

NO LIMITS under the MBCA.

97
Q

Do shareholders owe a fiduciary duty to the Corp?

A

No

98
Q

What are the 3 main instances where shareholders of a corporation can be liable?

A

1) unpaid stock
2) pierced corporate veil
3) absence of a de facto corp

99
Q

What is a close corporation?

What is special about close corporations for governance purposes?

A

Close corporations are corporations that are only owned by a few shareholders and are not publicly traded

Shareholders can directly manage the business if they don’t want to use the traditional board structure

100
Q 
What document does a close corporation to set up an alternative corporate governance structure?
--------
What can these documents do?
--------
What is necessary to use this structure?
A

Can dispense with the board and vest management power in shareholders
———
Must be a closely held corporation with either:
- a shareholder management agreement in the articles of inc (approved by all SHs) OR
- unanimous written shareholder agreement
The agreement must also be conspicuously noted on the front and back of the stock certificates (but failure to make the notation has no effect)

101
Q

If the shareholders elect to manage a closely held corporation themselves under a shareholder management agreement, who owes fiduciary duties?

A

The shareholders who are managing - whoever is managing owes fiduciary duties

102
Q

What is the special fiduciary duty that applies in the cases of a closely held corporation where the shareholders manage?

A

Many states extend the normal duty of care and loyalty to the CORPORATION to a duty of care and loyalty TO THE SHAREHOLDERS (because a closely held corp starts to look more like a partnership)

103
Q

What duty does a controlling shareholder owe?

A

Controlling shareholders owe a fiduciary duty to minority shareholders to not use their power to the detriment of the minority shareholders

There is also a duty to disclose material information to minority shareholders

104
Q

What is a professional corp or a professional association? What is the extent of their liability?

What are the procedural requirements?

A

An entity for professionals like drs/lawyers/accountants to practice their profession where they are liable for their own malpractice but not the malpractice of their other professionals or corporate debts.

The articles must state that the purpose is to practice the given profession and the name must contain PC or PA

105
Q

VERY IMPORTANT
In what kind of corp can the veil be pierced?
How can the corporate veil be pierced?

A

Only in closely held corporations

1) Shareholder must have abused the privilege of incorporating AND
2) fairness must require holding them liable

*Sloppy administration is not enough

106
Q

What are some common fact patterns that require veil piercing?

A

1) “Alter Ego” or “Mere Instrumentality” (Identity of Interests) - corporate formalities are ignored/usually assets are commingled AND injustice results
2) Undercapitalization (must be undercapitalized WHEN FORMED such there was not enough capital to cover reasonable prospective liabilities)
3) Fraud or evading personal obligations (but using a corp to avoid future personal liability is not enough)

107
Q

Does veil piercing hold all shareholder liable or just the ones that were doing the bad things or ignoring formalities?

A

Only the shareholder that was doing the bad things - never a passive shareholder.

Piercing the corporate veil is not all or nothing

108
Q

When you get a veil piercing question what should you discuss?

A

1) General Rule : Shareholders are not liable for the debts of the corporation
2) Veil Piercing Rule: Court may pierce the veil against a SH if the shareholder abused the corporate form and fairness requires holding them personally liable
3) Specific fact pattern (alter ego or undercapitalization)
4) Courts may be more willing to pierce the corporate veil for a tort victim than for a contract claimant?

109
Q

Who has better odds of piercing the corporate veil - a tort victim or a contract claimant?

A

Tort victim

110
Q

What claim is the shareholder plaintiff in a derivative suit suing on?

A

Plaintiff is using to enforce the claim of the corporation - because the directors aren’t doing anything about it

111
Q

What’s the difference in a derivative and direct shareholder suit?

A

If the corporation could have brought the suit, it’s a derivative claim. If the action is for a breach of fiduciary duty owed to a shareholder by a d/o it’s a direct action.

Q1) Who suffers the most immediate and direct damage
Q2) To whom did the defendant’s duty run (corp or SH)?

112
Q

Who receives the recovery in a derivative shareholder action? In a direct shareholder action?

A

In a derivative shareholder action, the corporation gets the recovery. In a direct shareholder action, the shareholder gets the recovery

113
Q

Any time a shareholder is a plaintiff, you should discuss direct or derivative suit

A

Yep

114
Q

SH sues controlling SH for oppressing minority - direct or derivative?

SH sues director for breach of DoC - direct or derivative?

SH sues directors to compel dividend - direct or derivative?

A

Direct (duty of controlling SH owed to other SHs)

Derivative (duty owed to corp)

Direct (corp not harmed)

115
Q

Why does anyone make a derivative suit if the corporation gets the recovery?

A

The court can order the corporation to pay attys fees and costs to plaintiff out of its “recovery” if the plaintiff wins (but never if P loses)

116
Q

Can the court ever force a plaintiff in a derivative suit to pay the defendant corp’s atty’s fees?

A

Yes, if the plaintiff brings the case for improper purpose or without reasonable cause

117
Q

What are the two standing requirements for a plaintiff to sue in a shareholder derivative suit?

A

1) The plaintiff must have owned stock at the time the claim arose (or have taken the share by operation of law from some SH who did)
2) Plaintiff must fairly and adequately represent the corporation’s interest

118
Q

What are the demand requirements for a shareholder derivative suit?

A

Must make written demand on the board to take suitable action
Approach 1: Must always make demand and wait 90 days unless the SH is notified that the corp rejects the demand or irreparable injury to the corp would result by waiting

Approach 2: Can prove demand futility (e.g. when the directors on whom demand would be made would be the defendants)

119
Q

What is a procedural requirement in derivative suits regarding who must be named as defendants?

A

The corporation itself must the joined as a defendant even though plaintiff is bringing the corporation’s claim

120
Q

What is required for a settlement or dismissal of a derivative suit?

A

Only if the court approves. Court might give notice to the shareholders and seek their input on if they would like the suit dismissed/settled

121
Q

When will a corporation successfully move to dismiss a plaintiff’s derivative action?

A

If corp moves and court conducts and independent investigation (independent directors - usually SLC or court appointed persons) and concludes that the suit is not in the best interest of the corporation (for example, low chance of success at high expense)

Court evaluates if the independent investigation was by people who were truly independent and that reasonable investigation is made - if these are met, court will dismiss

122
Q

Who has the burden of proof in a corp’s motion to dismiss a shareholder derivative suit (after the SLC says to dismiss)

A

If majority of directors have a personal interest in the controversy - corp has the burden of proving the decision was made in good faith after reasonable inquiry

If majority of directors not conflicted - Plaintiff has the burden of proving lack of good faith/reasonable inquiry

123
Q

What is authorized stock?

What is outstanding stock?

A

Authorized stock is the number of shares authorized in the articles of inc

Outstanding stock is the amount of stock that is issued and has not been repurchased

124
Q

What is the record date? When is it fixed?

A

The record date is the date when voting shareholders are determined (record shareholders can vote)

The record date is fixed by the board and must be within 70 days of the meeting

125
Q

Can treasury stock be voted?

A

No

126
Q

Mechanically what are the two ways a record shareholder can vote their shares?

A

1) in person

2) via proxy

127
Q

What are the requirement for a valid proxy?

How long is a proxy good for?

A

1) in a writing
2) signed by the record shareholder (fax/email ok if sender verifiable)
3) directed to the secretary of the corp
4) Authorizing another to vote their shares

A proxy is good for 11 months unless it says otherwise

128
Q

How can a shareholder revoke a proxy?

A

1) by writing to the corporate secretary
2) by attending the meeting in person
3) by subsequent appointment of another proxy

129
Q

When is a proxy irrevocable?

A

If:

(1) it states it is irrevocable AND
(2) is coupled with an interest in the shares or given as security to the proxy holder

130
Q

What do you need to know about federal proxy rules?

A

1) there must be full and fair disclosure of all material facts for any proposal management has submitted for SH vote
2) Material misstatements, omissions and fraud in connection with solicitation of proxies is prohibited
3) management must include certain shareholder proposals on issues other than election of directors and allow proponents to explain their positions

131
Q

What is a voting trust? How long can one last?

What are the requirements?

A

A voting trust is a written agreement of shareholders where they transfer their shares to a trustee who votes the shares and distributes dividends according to the provisions of the voting trust agreement. Generally can last for 10 years
Requirements:
1) written trust agreement controlling how the shares will be voted
2) copy of the agreement including names and addresses of the beneficial owners of the trust is given to the corp
3) Legal title transferred to the trustee
4) Original SHs receive trust certificates and retain all SH rights except voting

132
Q

What is a voting agreement?

A

A contract among shareholders regarding how they will vote their shares. No time limit, no need to convey, no need to notify the corp.
Only requirement is a signed writing

133
Q

What are the benefits of a voting agreement over a voting trust?

What is the main drawback of a voting agreement?

A

No need to convey, no need to have a trustee, no need to alert the corp. There is no reason to use a voting trust if a voting agreement is specifically enforceable in that state

Voting agreements are not specifically enforceable in all states

134
Q

Where are the two places where shareholders can take action?

A

1) at a shareholder meeting
2) by unanimous written consent (signed by holders of all voting shares)

Just like the board

135
Q

What are the two kinds of shareholder meetings? When are they held?

A

Annual meetings (required by the earlier of 6 mo after end of corp’s FY and 15 mo after its last annual meeting)

Special meetings (called by the board, the president, holders of 10% of shares outstanding, OR according to articles/bylaws - must be called for a proper SH purpose)

136
Q

If a corp has not properly scheduled an annual meeting, what can a shareholder do?

A

Shareholder can petition the court to order that one be held

137
Q

Does the annual meeting have to be held in the state of inc? What about special meetings?

A

No, neither has to be held in the state of inc

138
Q

What is the notice requirement to shareholders for shareholder meetings? Can notice be waived?

What is so important about notice for special meetings?

A

Must be written, state time and place between 10 and 60 days in advance.

Notice can be waived in writing or by attendance at the meeting

Special meetings must also indicate the purpose and this is important because SHs can’t go beyond this purpose at the meeting

139
Q

What is the result of failure to give proper notice of a shareholder meeting to all shareholders?

A

Whatever action was taken is voidable unless notice defect is waived either:

  • in a signed writing at any time OR
  • by attending the meeting without objecting at the outset
140
Q

What are the 4 things that shareholders vote on?

A

1) electing directors
2) removing directors
3) fundamental corporate changes
4) anything else the board asks shareholders to vote on

141
Q

What is a quorum for a shareholder meeting?

Is a quorum lost of people leave the meeting?

A

A majority of outstanding shares must be represented unless the articles or bylaws require a greater number

No

142
Q

What % of votes is necessary for SH approval of a matter (other than director election/removal or a fundamental change) at the shareholder meeting?

A

If majority of the shares that actually vote, then the matter is approved (can be changed by articles of inc or bylaws)

143
Q

What is the default method of voting for directors?

A

Plurality voting (the person who gets more votes for the seat than anyone else wins it)

144
Q

What % of votes is required for a fundamental corporate change?

Amending the bylaws is not a fundamental corporate change

A

Traditionally: Need a majority of shares entitled to vote (but increasingly only a majority of the shares that actually vote is needed)

145
Q

What % of votes is required to remove a director under the default plurality voting regime?

A

Traditionally: Need a majority of shares entitled to vote (but increasingly only a majority of the shares that actually vote is needed)

146
Q

When does cumulative voting come up?

A

Usually only in closely held corps and only when directors are being elected

147
Q

How does cumulative voting work?

A

Each shareholder gets one vote for each seat that is up for election. They can then spread their votes however they wish across the seats up for election. One at large election and candidates with the most votes for each seat wins.

Good for providing minority shareholders with some board representation

148
Q

What is the default voting regime (i.e. the voting regime that is not cumulative voting)?

A

Straight voting - separate election for each seat on the board being elected. 51% majority SH would take all seats

149
Q

When are transfer restrictions on shares valid?

A

Valid if they are not an undue restrain on alienation.

E.g. A right of first refusal in a closely held corp is valid

150
Q

If a transfer restriction is violated, can it be enforced against the transferee of the shares?

A

Yes EVEN if 3rd party paid value IF

1) the restriction is conspicuously noted on the stock certificates OR
2) the transferee had actual knowledge of the restriction at the time of purchase

151
Q

What is a right of first refusal?

A

A transfer restriction that requires the shares to be offered to the corp first before offered for sale to a third party

152
Q

What shareholders have standing to inspect the books and records of the corporation?

A

Any shareholder has the right to inspect personally or through an agent

153
Q

When does a shareholder have an unqualified right of access for certain records?

How does a shareholder procedurally request this info?

A

Any shareholder may inspect noncontroversial records for any purpose including:

1) corp’s articles and bylaws
2) board resolutions regarding classification of shares
3) SH meeting minutes for last 3 years
4) communications sent from corp to SHs for last 3 years
5) names and business addresses of current d/os
6) copy of corp’s most recent annual report

Must make written demand with 5 business days notice

154
Q

When does a shareholder have a qualified right of access to records?

How does a shareholder procedurally request this info?

A

A shareholder has a qualified right of access for more controversial records including:

1) Board meeting minutes
2) corp’s books, papers, accounting records
3) SH records

SH must state a proper purpose for the demand. Proper purpose = reasonably related to the person’s interest as a shareholder and 5 business days written notice

155
Q

If a corporation refuses to allow a shareholder access to a given piece of information, what can the shareholder do?

What are the stakes for the corporation?

A

A shareholder can seek a court order

If the shareholder wins, they can recover the costs of making the motion from the corporation

156
Q

What is the difference in a shareholder’s access to information and a director’s access to information?

A

Directors have unfettered access to corporate information

157
Q

What is the only nondiscretionary rule regarding who can receive distributions?

A

At least one class of stock must have the right to receive the corporation’s net assets on dissolution - every other distribution is discretionary

158
Q

What are the 3 main types of distribution?

A

1) Dividend
2) Repurchase
3) Redemption (forced sale to the corp at a price set in the articles of inc)

159
Q

Who makes the decision on when to distribute $/property to shareholders?

A

The sole discretion of the board (subject to solvency requirements and limitations in the articles of inc)

160
Q

Can a shareholder ever sue to force a distribution?

Would this be a direct or derivative action?

A

It is possible but rare - SHs must make a very strong showing that the board is abusing its discretion (maybe the board is hoarding cash and paying themselves bonuses)

Would be a direct action (corp isn’t hurt by not distributing $)

161
Q

What is a cumulative dividend?

What is a cumulative if earned dividend?

What is participating preferred?

A

Cumulative dividend a right of preferred stock to accumulate dividends owed to them if they are not paid

If a dividend is cumulative if earned, the dividend only accumulates if it is earned

Preferred must be participating to share in any dividend paid to the common stock

162
Q

Once a distribution is declared, what are shareholders rights to that distribution?

A

Shareholders have the same rights as general unsecured creditors, but a distribution can be enjoined or revoked if it was issued in violation of solvency, articles of inc, or superior preference right

163
Q

Are stock distributions considered distributions for purposes of the solvency limitation?

A

No

164
Q

What is the key limitation on stock dividends?

A

Shares of one class or series of stock may not be distributed on shares of a different class of stock unless

1) the articles of inc authorize it OR
2) a majority of the votes entitled to be cast by the class to be issued approves OR
3) there are no outstanding shares of the class to be issued

165
Q

Holders as of which date receive dividends?

A

Holders as of the record date

166
Q

What is the solvency restriction on dividends?

A

A distribution is not permitted if it is EITHER:

  • Insolvent (would not be able to pay debts as they came due) OR
  • Total Assets would be less than total liabilities plus equity preferences due that are senior to the class receiving the dividend
167
Q

What is director liability for an unlawful distribution?
What is the director’s main defense?

What is the director’s right to contribution?

A

Directors are jointly and severally liable for the improperly distributed amount if they voted for it or assented to it.
Directors are not liable for distributions approved in good faith that are:
1) based on financial statements reasonably prepared
2) relying on officers/employees/legal counsel/experts

Directors can seek contribution from each other director that approved the distribution and from each shareholder who accepted a distribution knowing it was improper

168
Q

Under what circumstances is a shareholder personally liable for improper distributions?

A

Shareholders are personally liable for the improper distributions they received only of they knew the distribution was improper when they received it

169
Q

What are examples of extraordinary or fundamental corporate changes?

A

1) Amending the articles of inc
2) merging or consolidating into another company
3) transferring substantially all assets or having stock acquired in a share exchange
4) converting to another form of business
5) dissolving

170
Q

What is the procedure that must be followed for a fundamental corporate change?

A

1) board action adopting a resolution of fundamental corporate change
2) board submits a proposal to SHs with written notice
3) shareholder approval
4) deliver document to the secretary of state

171
Q

What are the rules for what % is required for shareholder approval?

A

Traditional View: Majority of shares entitled to vote

Modern Trend: Majority of shares that actually vote

172
Q

What kinds of fundamental changes trigger appraisal rights?

Even if these are met, when is there no appraisal?

A

1) Mergers/consolidations
2) Transferring substantially all assets
3) stock acquired in a share exchange
4) converting to another form of business

BUT no appraisal if the [Marketed Out Exception] company’s stock is:

  • listed on a national exchange or
  • the company has >2000 SHs and a value >$20M excluding the shares of d/o/SHs with>10%
173
Q

What is the procedure for exercising appraisal rights in a state that also has dissenter’s rights?

A

1) If an action will create dissenter’s rights, the notice of the shareholder’s meeting at which the vote will be taken must disclose that dissenter’s rights will be available
2) Before the vote, SH must file written notice of objection and demand for payment with the corp
3) SH must abstain or vote against
4) Corp must notify those who filed objections that the action passed w/i 10 days and include time/place/price to submit shares
5) SH must deposit shares and make demand for payment
6) corp must pay dissenters the corp’s estimated fair value plus accrued interest
7) if SH disagrees with estimate, can submit their own. If Corp disagrees, can file action with court to resolve the disagreement otherwise must pay SH’s estimate

174
Q

Are their any other remedies that a shareholder can seek other than appraisal?

A

Absent fraud, appraisal is the exclusive remedy for dissenting shareholders

175
Q

Does an amendment to the articles of incorporation trigger a shareholder vote? appraisal rights?

A

Yes, shareholder vote is required for all amendments that are not “housekeeping amendments” like deleting initial directors named in the articles

No appraisal rights

176
Q

Can a domestic corp merge with a foreign corp into a new domestic corp?

A

Yes, if allowed by the laws of the foreign country

177
Q

Is there a right of appraisal for a merger?

Is a shareholder vote required to approve a merger?

A

Yes

A shareholder vote is not required of the SURVIVING corp IF (1) no change to the articles of inc of the surviving corp (2) no change to the shares held by existing surviving corp SHs
(3) voting power of new stock issued <=20% of the preexisting voting power

Also no vote of a sub required if “short form merger” where a parent corp owns >=90% of the outstanding shares of each class of a sub and is merging the sub into itself

178
Q

What is successor liability?

A

Successor liability is when a surviving corp inherits all the liabilities of the corp that merged into it

179
Q

What is a share exchange?

A

When one company acquires all of the stock of another

180
Q

At what % of assets is substantially all of the assets considered to be sold?

A

about 75%

181
Q

An asset sale or stock sale (share exchange) is occurring, which shareholders have to vote? Which boards have to approve?

Which shareholders have appraisal rights?

A

Only the selling corp’s shareholders because only the selling corp is undergoing a fundamental corporate change. Both buyer and seller boards have to approve

SHs of the selling corp have appraisal rights (not buyer)

182
Q

Remember to let the Sec of State know about the fundamental corporate change.

A

Need to deliver articles of merger or consolidation OR articles of exchange (for share exchange but not asset sale) OR amended articles of inc

183
Q

Is successor liability expected in an asset sale?

A

Generally no, unless the buyer is a mere continuation of the seller or if the deal was a disguised/de facto merger

184
Q

If a corporation is changing its entity form, do shareholders have a right of appraisal?

A

Yes

185
Q

Who must vote to dissolve the corp if shares have not yet been issued and business has not commenced?

What happens in such a dissolution?

A

Majority of the incorporators or initial directors

All corporate debts must be paid and any assets remaining after winding up must be distributed

186
Q

Who must vote to dissolve a corp?

A

Standard fundamental change procedure: board action, notice to SHs proposing the change, SH approval, notice to Sec of State

187
Q

After a corporate dissolution has been approved, what can the corporation do?

A

Cannot operate a business any longer - can only wind up and liquidate and notify creditors that they should file claims

188
Q

What are a creditors rights against a dissolving corporation?

How does a corporation in dissolution bar creditor claims?

A

A creditor can assert a claim against a dissolving corp to the extent it still has assets. If assets have been distributed to SHs, a claim can be asserted against each SH to the extent they received a distribution until barred (see below)

Corp can cut short the time for bringing claims by notifying the creditors (120 days notice) or publishing notice (3 year notice)

189
Q

How is a corporation involuntarily dissolved?

A

By court order granted upon…

1) Suit by state AG that corp is acting fraudulently or ultra vires
2) Action by shareholders alleging director abuse/waste, director deadlock that threatens irreparable injury to SHs, SHs deadlocked in voting power and haven’t elected a director in 2 consecutive annual meetings, corp has abandoned its business and failed to dissolve
3) Action by creditors of insolvent corps and either have a judgment against the corp or corp admits the debt in writing
4) Administrative action by the state for failure to pay fees (corp can apply for reinstatement within 2 years and reinstatement relates back to date of dissolution)

190
Q

What might a court order instead of an involuntary dissolution?

A

Court might order a buy-out of the objecting shareholders (esp in a closely held corp)

191
Q

Are liquidation preferences relevant to solvency?

A

Yes, if they are senior to the claim getting paid (e.g. a dividend to common when liq prefs are high)

Carson’s Bar Review (16 decks)

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