Corporations Flashcards

Question

Board Meeting Requirements

Answer 1

--Quorum: Majority of all directors (otherwise the board cannot act). --If a quorum is present at a meeting, passing a resolution (which is how the board takes action at a meeting) requires only a majority vote of those directors present. Remember: Any action required to be taken by the directors at a formal meeting may be taken by unanimous consent, in writing, w/o a meeting.

Answer 2

A quorum of the board can be lost ("broken") if people leave. Once a quorum is no longer present, the board cannot take an act at that meeting. --Note that this rule is different for shareholder voting.

Answer 3

A director does not have the power to bind a corp into a contract unless there is actual authority to act. Actual authority generally can arise only if: (1) Proper notice was given for a directors' meeting, a quorum was present, and a majority of the directors present approved the action; or (2) There was unanimous written consent of the directors.

Answer 4

While the board can delegate actions to a committee, a committee may not take the following actions: (1) Declare a distribution; (2) Fill a board vacancy (3) Recommend a fundamental change to shareholders. Note, however, that a committee can recommend such actions to the full board for its action.

Answer 5

The board manages the corp, meaning it sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental corp changes to shareholders, etc. Unless the articles or bylaws state otherwise, the board may create one or more committees, w/ one or more members, and appoint members of the board to serve on them. The committees may act for the board, but the board remains responsible for the supervision of the committees. The board may also delegate authority to officers.

Answer 6

A director must discharge her duties in good faith and w/ the reasonable belief that her actions are in the best interest of the corp. (duty of loyalty) She must also use the care that a person in like position would reasonably believe appropriate under the circumstances. (duty of care) --Every time you see a director arguably in breach of either duty, state the entire standard. The directors also have a duty to disclose material corporate info to other members of the board.

Answer 7

A director must use the care that a person in a like position would reasonably believe appropriate under the circumstances. The person challenging the director's action has the burden of proof. The duty of care typically comes up in two ways: (1) Nonfeasance - Director does nothing. - -Liable only if breach causes a loss to the corp (in many nonfeasance cases, it's difficult to show causation - b/c the company would have lost money anyway, even if this person had been paying attention) (2) Misfeasance - Board makes a decision that hurts business. - -Here, the directors' action caused a loss to the corp, so causation is clear. - -But remember, a director is not liable if she meets the business judgment rule. (This means that directors who meet this standard will not be liable for corp decisions that in hindsight turn out to be poor or erroneous. We expect a person in like position to do the appropriate homework. If she did, she is not liable for bad results.)

Answer 8

Court will not second-guess a business decision if made in good faith, informed, and had a rational basis. (a director is NOT a guarantor of success) --Applies only in duty of care cases

Answer 9

In discharging her duties, a director is entitled to rely on info, opinions, reports, or statements (including financial statements), if prepared or presented by: (1) Corporate officers or employees whom the director reasonably believes to be reliable and competent; (2) Legal counsel, accountants, or other persons as to matters the director reasonably believes are within such person's professional competence; or (3) A committee of the board of which the director is not a member, if the director reasonably believes the committee merits confidence.

Answer 10

A director must discharge her duties in good faith and w/ the reasonable belief that her actions are in the best interest of the corp. The burden is on Defendant b/c the fiduciary has a conflict of interest. Most common scenarios include: --Self-dealing / interested director transactions --Competing Ventures --Corporate Opportunity

Answer 11

This is any transaction between the Corp vs. either: (1) one of its directors; or (2) that the director's close relative; or (3) another business of the director's.

Answer 12

Interested director transactions will be set aside (or the director liable in damages) unless the director shows either: (1) The deal was fair to the corporation when entered; or (2) Her interest and the relevant facts were disclosed or known, and the deal was approved by either: (i) a majority (at least two) of the disinterested directors, or (ii) a majority of the disinterested shares. Note: Despite the statute's absolute terms, a transaction approved by the board or shareholders might still be set aside if the party challenging the transaction can prove that it constitutes a waste of corporate assets. So, even if the deal is approved by an appropriate group, remember to say this on the exam: "Some courts also require a showing of fairness." --Notice of the shareholders' meeting must describe the transaction --The presence of the interested director(s) at the meeting at which the directors or shareholders voted to approve the conflicting interest transaction is irrelevant

Answer 13

In determining whether a transaction is fair, courts look to factors such as adequacy of the consideration, the corporate need to enter into the transaction, the financial position of the corp, and available alternatives

Answer 14

Despite the apparent conflict of interest, unless the articles or bylaws provide otherwise, the board can set director compensation. However, it must be reasonable and in good faith. If it's excessive, the board is wasting corporate assets and breaching the duty of loyalty.

Answer 15

Directors may engage in unrelated businesses, but engaging in a directly competing business raises serious duty of loyalty problems. --In such a case, the corp may be awarded a constructive trust on profits the director made from the competing venture.

Answer 16

The directors' fiduciary duties prohibit them from diverting a business opportunity from their corp to themselves w/o first giving their corp an opportunity to act. This is known as the "usurpation of a corporate opportunity." --On the exam, start by stating the standard in full, then focus on the duty of loyalty portion. A director cannot usurp a corporate opportunity. That means the director can't take it until he (1) tells the board about it and (2) waits for the board to reject the opportunity. --Remember, a usurpation problem arises only if the director takes advantage of a business opportunity in which the corp would have an interest or expectancy. -A corp's interest does not extend to every conceivable business opportunity, but neither are opportunities limited to those necessary to the corp's current business. The closer the opportunity is to the corp's line of business, the more likely the court will find it to be a corporate opportunity. --The corp's lack of financial ability to take advantage of the opportunity is not a defense. --It is the board that must decide whether to accept an opportunity or to reject it. --If a director usurps a corp opportunity, the corp can sue to recover under a constructive trust theory. If she still owns the property, she can be compelled to transfer it to the corp at the price she paid. If she has sold the property at a profit, the corp may recover the profit.

Answer 17

A director has no common law duty to disclose all facts relevant to a securities transaction between the director and the other party to the transaction. However, courts have found a duty to disclose where a director knows of special circumstances (e.g., an upcoming extraordinary dividend or a planned merger)

Answer 18

A corp can make a loan to a director if it is reasonably expected to benefit the corp.

Answer 19

The articles may limit or eliminate directors' (and, in some states, officers') personal liability for money damages to the corp or shareholders for actions taken or for failure to take action. However, the articles may NOT limit or eliminate liability for financial benefits received by the director to which she is not entitled, an intentionally inflicted harm on the corp or its shareholders, unlawful corp distributions, or an intentional violation of criminal law. Thus, these provisions can eliminate liability only for DUTY OF CARE cases. --Note: A corp may advance expenses to a director defending an action as long as the director furnishes the corp a statement that the director believes he met the appropriate standard of conduct and that he will repay the advance if he is later found to have not met the appropriate standard. --A corp may purchase liability insurance to indemnify D/Os for actions against them even if the D/Os would not have been entitled to indemnification under the above standards.

Answer 20

A director is presumed to concur w/ board action unless her dissent or abstention is noted in writing in the corp records. --In writing means: (1) in the minutes, (2) delivered in writing to the presiding officer at the meeting, or (3) written dissent to the corp immediately after the meeting. --An oral dissent, by itself, is NOT effective. --A director cannot dissent if she voted for the resolution at the meeting. Exception: A director is not liable under the rule above is she was absent from the board meeting (e.g., due to illness). --Another defense is good faith reliance on info presented by an officer, employee, or a committee of which the director relying upon was not a member or her reliance on a professional reasonably believed to be competent.

Answer 21

Officers are agents of the corp. The corp is the principal and the officer is the agent. Whether the officer can bind the corp is determined by whether she has agency authority to do so (actual or apparent). Unauthorized actions may become binding on the corp b/c of ratification, adoption, or estoppel. The corp is liable for actions by its officers within the scope of their authority, even if the particularized act in question was not specifically authorized. --Officers owe the same duties of care and loyalty as directors --The corp need not have any particular officers, it may have those specified in or permitted by the bylaws, and one person may simultaneously serve in more than one office.

Answer 22

Officers are selected and removed by the Board, which also sets officer compensation. Despite any contract term to the contrary, an officer has the power to resign at any time by delivering notice to the corp, and the corp has the power to remove an officer at any time, w/ or w/o cause. If the resignation or removal is a breach of contract, the non-breaching party may have a right to damages, but note that mere appointment to office itself doe snot create any contractual right to remain in office. **Remember that directors hire and fire officers (whereas shareholder hire/fire directors)

Answer 23

There are three categories of indemnification: - Category 1: No Indemnification: A corporation cannot indemnify a director who is (1) held liable to the corp, or (2) held to have received an improper benefit. - Category 2: Mandatory Indemnification: Unless limited by the articles, a corp must indemnify a director or officer who was successful in defending a proceeding on the merits or otherwise against the officer or director for reasonable expenses, including attorneys' fees, incurred in connection w/ the proceeding. (in some states, the D/O must win the entire case, others they're entitled to indemnification "to the extent" that they win the case) - Category 3: Permissive Indemnification: A corp may indemnify a director for reasonable litigation expenses incurred in unsuccessfully defending a suit brought against the director on account of the director's position if the director: (1) acted in good faith; and (2) believed that her conduct was in the best interests of the corp (when the conduct at issue was within the director's official capacity) [this is used as a catch-all, for e.g., if a director settles] Note: Generally, the determination whether to indemnify is to be made by a disinterested majority of the board, or if there is not a disinterested quorum, by a majority of a disinterested committee or by independent legal counsel. The shareholders may also make the determination (the shares of the director seeking indemnification are not counted). --Notwithstanding the above rules, a court in which a D/O was sued may order indemnification if it is justified in view of all circumstances. If the D/O was held liable to the corp, reimbursement is limited to costs and attorneys' fees (it cannot included judgement).

Answer 24

The power to manage the corp is generally vested in the board. Generally, shareholders have no direct control in the management of the corp's business. The shareholders have the power to elect the board. They may act in their own personal interests and generally have no fiduciary duty to the corp or their fellow shareholders. Exception: Unless the corp's articles or a shareholder agreement provides otherwise (e.g., close corps)

Answer 25

--Small number of shareholders --Stock NOT publicly traded --Shareholders can manage directly (or can set up management w/ board like a reg. corp)

Answer 26

These set up alternative management for a close corp. The MBCA allows shareholders to enter into agreements to dispense w/ the board and vest management power in the shareholders. If the articles do not include such a provision, shareholders exercise only indirect control of the corp through their voting power, by which they elect and remove directors, adopt and modify bylaws, and approve fundamental changes in the corp structure. There are two ways to set up a shareholder management agreement: --(1) In the articles and approved by all shareholders; OR --(2) By unanimous written shareholder agreement. Either way, the agreement should be conspicuously noted on the front and back of the stock certificates. (Failure to do so, though, does not affect validity.) Whoever manages the corporation owes the duties of care and loyalty. Thus, in such a case, the managing shareholders will have the liabilities that a director ordinarily would have w/ respect to that power.

Answer 27

In close corps, whoever manages the corp owes the duties of care and loyalty. However, in many states, courts also impose a fiduciary duty on shareholders owed to other shareholders. This is b/c a close corp looks like a partnership (w/ few owners, who usually are employed by the business). B/c partners owe each other a fiduciary duty of utmost good faith, these courts apply the same duty in the close corp. --This means that controlling shareholders cannot use their power to benefit at the expense of minority shareholders. (note the controlling shareholder could be a corp -- it can't use its domination of a subsidiary corp to receive something to the detriment of the subsidiary's minority shareholders). There is also a duty to disclose material info to the minority shareholders. --If there is oppression of minority shareholders, they can sue the controlling shareholders who oppress them for breach of this fiduciary duty. This is b/c oppression thwarts their legitimate goals for investing and they have no way out (minority shareholders can't simply sell their stock in a close corp)

Answer 28

Licensed professionals, including lawyers, medical professionals, and CPAs, may incorporate as a "professional corporation" or association. The name must include the designation. The articles must also state that the purpose is to practice in a particular profession. Generally, the rules governing regular corps apply here. Directors, officers, and shareholders usually must be licensed professionals. But non-professionals may be employed (but not to practice the profession). --The professionals are personally liable for their malpractice (since we are all liable for our own torts). However, shareholders are generally not liable for corp obligations or for other professionals' malpractice.

Answer 29

Shareholders generally cannot be held liable for corporate debts. B/c the corp is liable for what it does. BUT a shareholder might be personally liable for what the corp did if the court pierces the corporate veil. This can happen in close corporations only.

Answer 30

To pierce the corporate veil and hold shareholders personally liable: --(1) The shareholders must have abused the privilege of incorporating; and --(2) Fairness must require holding them liable. Thus, courts may pierce the corporate veil to avoid fraud or unfairness by shareholders in a close corp. But something like sloppy administration is not enough. There are three situations in which the corporate veil is often pierced: (i) Alter Ego; (ii) Undercapitalization; (iii) Fraud, Avoidance of Existing Obligations, or Evasion of Statutory Provisions.

Answer 31

If the shareholders ignore corporate formalities such that the corp may be considered an "alter ego" or a "mere instrumentality" of the shareholders or another corporation, AND some basic injustice results, a court might pierce the corporate veil. --These situations may arise where shareholders treat corporate assets as their own, commingle their money w/ corporate money, etc. --For these questions ask: (1) Did a shareholder abuse the corporation? + (2) Would it be unfair for that shareholder to have limited liability?

Answer 32

The corporate veil may be pierced where the corp is inadequately capitalized, so that AT THE TIME OF FORMATION there is not enough encumbered capital to reasonably cover prospective liabilities. --Note: If you get a hypo like this on the exam, you should also add that courts may be more willing to pierce the corporate veil for a tort victim than for a contract claimant (since parties who contracted w/ the corp had an opportunity to investigate its stability). --Where the corp is insolvent, claims of shareholder-creditors may be subordinated to outside creditors' claims if equity so require (e.g., b/c of fraud)

Answer 33

The corporate veil may be pierced where necessary to prevent fraud or to prevent an individual shareholder from using the entity to avoid his existing personal obligations. --But the mere fact that an individual chooses to adopt the corporate form of business to avoid future personal liability is not itself a reason to pierce the corporate veil.

Answer 34

Normally, only shareholders who are active in the operation of the business will be personally liable. Liability is joint and several. --Remember, piercing the corporate veil allows imposition of liability on a shareholder. That shareholder might be another corporation. (e.g., a parent corp forms a subsidiary to avoids its own obligations)

Answer 35

Generally, creditors may be allowed to pierce the corporate veil. (Courts almost never pierce the veil at the request of a shareholder)

Answer 36

In a derivative suit, a shareholder is suing to enforce the corporation's claim, not her own personal claim. Ask: Could the corporation have brought this suit? If so, it's a derivative suit. --Here, the shareholder is essentially asserting the corp's rights instead of her own rights. Thus, if the shareholder-plaintiff wins, it's the corp that gets the money judgment. (P recovers costs + fees only) --If P-shareholder loses, she cannot recover costs and attorneys' fees + may be liable for D's fees if sued w/o reasonable cause. Note: If a shareholder brings a derivative suit and loses, other shareholders cannot later sue the same D on the same transaction. The claim is barred.

Answer 37

To commence and maintain a derivative proceeding, a shareholder must: (1) Have stock ownership when the claim arose, or must have become a shareholder through transfer by operation of law (e.g., getting stock through inheritance or divorce); (2) Fairly and adequately represent the corporation's interest; and (3) The shareholder must make a written demand on the corp (usually the board) to take suitable action. --Note: In some states, this written demand must always be made, and the shareholder cannot sue until 90 days after making this demand, unless: (i) the shareholder has earlier been notified that the corp has rejected the demand; or (2) irreparable injury to the corp would result by waiting for the 90 days to pass. --In other states, shareholders are not required to make this demand if the demand would be futile. (e.g., when the directors would be the D) -Remember: The corp must be joined to the suit as a defendant. (even though the suit assets the corp's claim, since the corp did not do so, it is joined as a D)

Answer 38

The parties can settle or dismiss a derivative suit only with court approval. The court may give notice to other shareholders to get their input on whether to settle or dismiss. After the derivative suit is filed, the corp may move to dismiss. --Dismissal must be based upon an independent investigation that concluded that the suit is not in the best interest of the corporation. (e.g., it has a low chance of success or the expense of the case would exceed the recovery) --The investigation must be made by independent directors or a court-appointed panel of one or more independent persons. (usually it's a "special litigation committee" of independent directors)

Answer 39

In ruling on the motion to dismiss, if the court finds that (1) those recommending dismissal were truly independent and (2) they made a reasonable investigation, in most states, the court will dismiss.

Answer 40

Shareholder-Plaintiff: Must prove that the decision was not made in good faith after reasonable inquiry. Corporation: IF a majority of the directors had a personal interest in the controversy, must show that the decision was made in good faith after reasonable inquiry.

Answer 41

Number of shares the corp has actually sold

Answer 42

Shares issued and not reacquired by the corp

Answer 43

Shareholders of record on the record date may vote at the meeting. The record date is fixed by the board but may not be more than 70 days before the meeting. Unless the articles provide otherwise, each outstanding share = 1 vote. --Record Shareholder: person shown as stock owner in corp records --Record Date: voter eligibility cutoff date

Answer 44

There are a few exceptions to the general rule that the record owner on the record date is who votes: (1) If the corp reacquires stock before the record date = no one votes the stock, b/c it was outstanding on the record date (2) Shareholder dies after the record date = shareholder's executor may vote the shares Ask: Who owned the stock on the record date? That is the person eligible to vote on the shares.

Answer 45

S b/c she owned the stock on June 8th (the record date)

Answer 46

A shareholder may vote her shares in person or by proxy executed in writing. A proxy is: (1) a writing [fax and email are fine]; (2) signed by the record shareholder [email is fine if the sender can be identified]; (3) directed to the secretary of the corporation; (4) authorizing another to vote the shares.

Answer 47

A proxy is generally revocable by the shareholder and may be revoked by: (1) The shareholder attending the meeting to vote themselves; (2) In writing to the corporate secretary; or (3) By subsequent appointment of another proxy.

Answer 48

A proxy will be irrevocable only if it states that it is irrevocable and is coupled w/ an interest or given as security. This requires: (1) the proxy says it's irrevocable, and (2) the proxy holder has some interest in the shares other than voting (e.g., an option to buy the shares). --An interest can be ANY interest beyond the simple interest in voting the shares.

Answer 49

The rules governing proxy solicitation provide that: (1) There must be full and fair disclosure of all material facts w/ regard to any management-submitted proposal upon which the shareholders are to vote; (2) Material misstatements, omissions, and fraud in connection w/ the solicitation of proxies are prohibited; and (3) Management must include certain shareholder proposals on issues other than the election of directors, and allow proponents to explain their position.

Answer 50

A voting trust is a written agreement of shareholders under which all of the shares owned by the parties to the agreement are transferred to a trustee, who votes the shares and distributes the dividends in accordance w/ the provisions of the voting trust agreement. --In some states, the trust is not valid for more than 10 years unless it is extended by the agreement of the parties. The requirements are: (1) A written agreement, controlling how the shares will be voted; (2) A copy of the agreement (including names and addresses of the beneficial owners of the trust) is given to the corporation; (3) Legal title to the shares is transferred to the voting trustee; and (4) The original shareholders receive trust certificates and retain all shareholder rights except for voting.

Answer 51

Shareholders can enter into voting (or "pooling") agreements providing for how they'll vote their shares. The requirements are that the agreement be in writing and signed. --Note: These need not be filed w/ the corp and are not subject to a time limit. --These agreements are increasingly becoming more enforceable among states.

Answer 52

Shareholders usually take action at a meeting, or by unanimous written consent (email is fine) signed by the holders of all voting shares. The meeting need not be held in the state of incorporation. There are two kinds of shareholder meetings: (1) annual meetings; and (2) special meetings.

Answer 53

Corps must hold annual shareholders' meetings. If the annual meeting is not held within the earlier of 6 months after the end of the corp's fiscal year or 15 months after its last annual meeting, a shareholder can petition the court to order one to be held. At annual meetings, shareholders primarily elect directors.

Answer 54

Special meetings may be called by: (1) The board of directors; (2) The President; (3) The holders of at least 10% of the outstanding shares; or (4) Anyone else authorized to do so in the articles or bylaws. Remember: To call a special meeting, the meeting must be for a proper shareholder purpose. (e.g., shareholders can't call a special meeting to remove an officer b/c shareholders do not have the power to remove officers)

Answer 55

Shareholders must be notified in writing (fax or email is fine) and notice must be delivered within 10-60 days before the meeting. --Notice may be waived in writing or by attendance. --The notice must state the date, time, and place of the meeting. For special meetings, the notice must also state the purpose of the meeting. (the shareholders cannot take any other action at the special meeting beside its stated purpose)

Answer 56

If proper notice is not given to all shareholders, whatever action was taken at the meeting is voidable (maybe void), UNLESS those who were not sent notice waive the notice defect. Waiver can occur in two ways: (1) Express waiver (in writing + signed any time) [fax or email is fine]; OR (2) Implied waiver (meaning the shareholder(s) attend the meeting w/o objecting at the outset).

Answer 57

Shareholders generally get to vote on the following: (1) To elect directors; (2) To remove directors; (3) On fundamental corporate changes. They may also vote on other things if the board asks for a shareholder vote on those things.

Answer 58

Every time the shareholders vote, we must have quorum represented at the meeting. Determination of a quorum focuses on the number of shares represented, NOT the number of shareholders. --The general rule is that a quorum = a majority of outstanding shares entitled to vote, unless the articles or bylaws require a greater number. --Note: A shareholder quorum will not be lost if people leave the meeting. --Shareholder quorum = a majority of voting shares present

Answer 59

If the quorum requirement is met, the shareholders vote. Absent a contrary provision in the articles, each share is entitled to 1 vote. (although the articles may provide for weighted voting or contingent voting) If a quorum is present, generally shareholders will be deemed to have approved a matter if the votes cast in favor of the matter exceed the votes cast against the matter, unless the articles or bylaws require a greater proportion.

Answer 60

Need a plurality of shares voted (i.e., the person who gets more votes for the seat on the board than anyone else is elected).

Answer 61

Traditionally, we needed a majority of the shares entitled to vote. (increasingly, today, however, a majority of the shares that actually vote on the issue is ok)

Answer 62

Traditionally, we need a majority of the shares entitled to vote. (increasingly, today, however, a majority of the shares that actually vote on the issue is ok)

Answer 63

This is a method that gives small shareholders a better chance of electing someone to the board. --Note that this is only available when shareholders elect directors (if the articles are silent about cumulative voting, it does not exist) --Generally used for close corps

Answer 64

Each shareholder gets as many votes per share held as there are directors being elected. A shareholder may divide the votes among candidates in any manner or may cast all votes for any one candidate; the candidates getting the most votes win. --Your Voting Power = [Number of Shares Owned] x [Number of Directors Being Elected] --Example: Shareholder has 50 shares, 3 directors are being elected. Shareholder gets 150 cumulative votes to cast. --Shareholder may vote all 150 votes for one candidate for one position.

Answer 65

Each shareholder gets one vote per share held to vote for each available position. A shareholder may not cast more than one vote per share held for any one position. - -Example: Shareholder has 50 shares, and 3 directors are being elected. - -Shareholder gets 50 shares to cast for position 1; 50 votes to cast for position 2; and 50 votes for position 3. - -Shareholder can vote a max of 50 votes for any one candidate for one position.

Answer 66

Whenever an amendment to the articles of incorporation will affect only 1 particular class of stock, that class has a right to vote on the action even if the class otherwise does not have voting rights.

Answer 67

As a general matter, shareholders are permitted to submit resolutions or proposals for action at shareholder meetings. (e.g., shareholders may express views on corporate matters through non-binding resolutions) Generally, shareholder resolutions that seek to bind the corp or the board should involve a proper subject for shareholder action, such as seeking an amendment to the bylaws.

Answer 68

These are valid if they are not an undue restraint on alienation. (e.g., the right of first refusal is valid; it doesn't restrict the ability to transfer, but only requires the shareholder to offer the stock first to the corp)

Answer 69

Yes. If the restriction is valid, it can be enforced against the transferee (a third-party purchaser) if: (1) The restriction is conspicuously noted on the stock certificate (or is contained in the info statement required for uncertificated shares); or (2) The transferee had actual knowledge of the restriction at the time of the purchase.

Answer 70

Any shareholder has the right, personally or by an agent, to inspect (and copy) the books and records of the corporation upon written demand to do so. Under the MBCA, the procedure followed depends on the material sought. Generally, for non-controversial things, shareholders have an unqualified right of access; for more controversial things, their right of access is qualified. --Unqualified Right [regardless of purpose]: (1) corp articles and bylaws; (2) board resolutions regarding classifications of shares; (3) minutes of shareholders' meetings from past 3 years; (4) communications sent by corp to shareholders over past 3 years; (5) a list of names and business addresses of current corp directors and officers; (6) a copy of corp's most recent annual report. --Qualified Right: (1) excerpts of the minutes of board meetings; (2) corp's books, papers, and accounting records; and (3) shareholder records. [Note: The shareholder must state a proper purpose for the demand. (i.e., one reasonably related to the person's interest as a shareholder)] Failure to allow inspection = shareholder can seek a court order (if shareholder wins, can recover costs/attorneys fees)

Answer 71

Distributions are payments by the corp to shareholders. Includes: Dividends (but NOT "share / stock dividends"), repurchases of shares, and redemptions (a forced sale to corp at a price set in articles) of shares. At least one class of stock must have a right to receive the corp's net assets on dissolution. Beyond that, distributions are generally discretionary. --Declaration generally solely within board's discretion, subject to solvency limitations and provisions to the contrary in a shareholders' agreement or the articles (which may restrict the board's right to declare dividends) --Shareholders have no general right to compel a distribution (only when the board declares it; then shareholders generally are treated as creditors of the corp and their claim for distribution is equal in priority to claims of other unsecured creditors) --Very difficult to win a case to force the declaration of distribution (to win, P must show an abuse of discretion) (e.g., corp consistently makes profits + board refuses to declare a dividend while paying themselves bonuses) --Preferred stock must be paid before common stock is paid (if they are "participating")

Answer 72

Preferred stock must be paid before common stock is paid (if they are "participating") --The right to the preferred dividend may or may not accumulate if unpaid in a particular year (that is, "cumulative" vs. "noncumulative" preferred shares) -Or preferred shares may accumulate only if there are sufficient current earnings (that is, "cumulative if earned" preferred shares) To calculate what the preferred shares are owed: [Number of Preferred Shares] x [$ Preference]

Answer 73

Distributions of corp's own shares (that is, "share dividends" or "stock dividends") to its shareholders are excluded from the definition of distribution. Therefore, the distribution restrictions are inapplicable. However, shares of one class or series of stock may not be issued as a share dividend in respect of shares of another class or series unless one of the following occurs: (1) The articles so authorize; (2) A majority of the voters entitled to be cast by the class or series to be issued approves the issue; or (3) There are no outstanding shares of the class or series to be issued.

Answer 74

The modern view doesn't look at funds that can be used for distributions. Under the modern view, a corp cannot make a distribution if it's insolvent or if the distribution would render it insolvent. This means that a distribution is not permitted if, after giving effect, either: (1) The corp would not be able to pay its debts as they become due in the usual course of business; or (2) The corp's total assets would be less than the sum of its total liabilities (unless the articles permit otherwise) + the amount that would be needed to satisfy preferential liquidation rights

Answer 75

Directors are jointly and severally liable for improper distributions. A director who votes for or assents to a distribution that violates the rules is personally liable to the corp for the amount that exceeds what could have been properly distributed. - -But remember, directors have a good faith reliance defense: A director is not liable for distributions approved in good faith if: (1) Based on financial statements prepared according to reasonable accounting practices, or on a fair valuation or other method that is reasonable under the circumstances; or (2) By relying on info from officers, employees, legal counsel, accountants, etc, or a committee of the board of which the director is not a member. - -A director who is held liable for an unlawful distribution is entitled to contribution from: (1) Every other director who could be held liable for the distribution (e.g., other directors who voted in favor); and (2) Each shareholder, for the amount she accepted while knowing that the distribution was improper.

Answer 76

Shareholders are personally liable only if they knew the distribution was improper when they received it.

Answer 77

The record shareholder of the stock as of the record date will receive the dividend.

Answer 78

Fundamental corp changes are so extraordinary that the board generally cannot do them alone. These include: (1) Amending the articles; (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

Answer 79

(1) Board Action [adopting a resolution of fundamental change]; (2) Written Notice [to the shareholders along w/ the board proposal; (3) Shareholder Approval [a majority of the shares entitled to vote]; (4) Deliver a document to the secretary of state.

Answer 80

If a corp approves certain fundamental corp changes, the shareholders who did not vote in favor of the change may have appraisal rights. The dissenting shareholder's right of appraisal is the right of a shareholder to force the corp to buy their stock for fair value. Only certain fundamental corp changes will trigger the right of appraisal: - -(1) Merging or consolidating - -(2) Transferring substantially all assets - -(3) Stock being acquired in a share exchange - -(4) Converting to another form of business Note: The right of appraisal only exists in close corporations [this is due to the "market-out exception" - no appraisal rights for (i) shareholders of publicly traded corps, or (ii) companies w/ 2,000 or more shareholders]. --This makes sense b/c a shareholder of a public corp can just sell their stock if they don't like the change.

Answer 81

For a shareholder to perfect a right of appraisal: (1) The notice of the shareholders' meeting for which the vote will be taken must state that the shareholders will be able to exercise their dissenting rights; (2) Before the shareholders' vote, the shareholder must file w/ the corp a written objection and intent to demand payment; (3) At the shareholder vote, the shareholder must abstain or vote against the proposed change; (4) If the action is approved, the corp must notify, within 10 days of approval, all shareholders who filed an intent to demand payment; (5) Within the time set by the corp, the shareholder must make written demand to be bought out and deposit her stock w/ the corp; and (6) The corp must pay the dissenters the amount the cop estimates as the FMV of the shares, plus accrued interest. Note: If shareholder is dissatisfied w/ the corp's determination of value, the shareholder has 30 days to send corp her own estimate of value and demand payment of that amount (or the difference between that estimate and what she was actually paid). --If the shareholder and corp can't agree, the corp must file an action in court within 60 days of receiving the shareholder's demand asking the court to determine the fair value of the shares (if the corp doesn't file, then it must pay what the shareholder demanded).

Answer 82

The corp can amend the articles if it receives shareholder approval (requires a majority of shares entitled to vote). If approved, the amended articles must be delivered to the secretary of state. --Certain "housekeeping" amendments (e.g., deleting the names of initial directors named in the articles or changing the number of authorized shares after a stock split) can be made w/o shareholder approval, but most require approval by the shareholders --Shareholders generally DO NOT have dissenting rights of appraisal for amendments of the articles

Answer 83

Merger: One corp is absorbed into another, latter corp survives while merging corps cease to exist Consolidation: Two corps become one --Both require board of director action (by both corps), as well as notice to shareholders and shareholder approval (generally by both corps), and if approved, the surviving corp must deliver articles of merger or consolidation to the secretary of state --There IS a right of appraisal, generally, for shareholders entitled to vote on the merger or consolidation and also for shareholders of the subsidiary in a short-form merger. --Effect of Merger or Consolidation: The surviving cor[p succeeds to all rights and liabilities of the constituents (so a creditor of that corp can sue the survivor [known as "successor liability]")

Answer 84

Approval of a plan of merger by shareholders of the surviving corp is NOT required if all of the following conditions exist: (1) The articles of the surviving corp will not change from before the merger; (2) Each shareholder of the survivor w/ outstanding maintains the same number of shares, w/ identical preferences, limitations, and rights; and (3) The voting power of the shares issued as a result of the merger will comprise no more than 20% of the voting power of the shares of the surviving corp that were outstanding immediately PRIOR to the merger.

Answer 85

No shareholder approval is required for a short form merger. W/ short form mergers, a parent corp owning at least 90% of the outstanding shares of each class of a subsidiary corp may merge the subsidiary into itself w/o the approval of the shareholders or directors of the subsidiary. The parent must mail a copy of the plan of merger to each shareholder of the subsidiary.

Answer 86

(1) The transfer of all or substantially all of the assets of a corp not in the ordinary course of business, and (2) the share exchange (which is when one company acquires all of the stock of another), are two fundamental corp changes treated functionally the same b/c they're the same idea: one company is gobbling up another. --Both are fundamental corp changes for the SELLING CORP ONLY - not for the buyer. (so the corp disposing of the property must follow the fundamental change procedure) --Procedure: (1) Board action required by both corps as well as notice to selling corp's shareholders; (2) approval by selling company's shareholders only. --There are dissenting shareholder rights of appraisal for shareholders of the selling corp (but not the buying corp) --For a share exchange, articles of exchange must be delivered to the secretary of state --Usually, there is no filing in a transfer of assets --Company that buys another's assets is NOT liable for selling company's debts (b/c the selling corp still exists, so creditors can still sue it) (unless the buyer is a "mere continuation" of the seller [e.g., has the same management, shareholders. etc.], or if a court concludes that the deal was really a disguised (de facto) merger)

Answer 87

Involves one business entity changing its form to another business form. Procedure: need board approval and notice to shareholders, as well as shareholder approval. Also need to deliver a document to the secretary of state. --Shareholders have a dissenting right of appeal

Answer 88

--If shares have not yet been issued or business has not yet been commenced, a majority of the incorporators or initial directors may dissolve the corp by delivering articles of dissolution to the state (all corp debts must be paid before, and if shares have been issued, any assets remaining after winding up must be distributed to the shareholders) --The corp may dissolve by a corporate act approved under the fundamental change procedure (requires board action, shareholder approval, and notice of intent to dissolve filed w/ secretary of state) A corp that has been dissolved continues its corp existence but is not allowed to carry on any business except as appropriate to wind up and liquidate its affairs. Must also notify creditors so that they can make claims. --The corp may revoke a voluntary dissolution by using the same procedure that was used to approve dissolution

Answer 89

A claim can be asserted against a dissolved corp, even if the claim does not arise until after dissolution, to the extent of the corp's undistributed assets. If the assets have been distributed to the shareholders, a claim can be asserted against each shareholder for his pro rata share of the claim, to the extent of the assets distributed to him. --However, a corp can cut short the time for bringing known claims by notifying claimants in writing of the dissolution and giving them a deadline of not less than 120 days in which to file their claim. --The time for filing unknown claims can be limited to 3 years by publishing notice of the dissolution in a newspaper in the county where the corp's known place of business is located

Answer 90

This is known as "judicial dissolution" because it happens by court order. Different players can ask for this: (1) Action by Attorney General - on the grounds that the corp fraudulently obtained its articles or that the corp is exceeding or abusing its authority. (2) Action by Shareholders - on the following grounds: (i) Director abuse, waste of assets, or misconduct; (ii) Directors are deadlocked in the management of corp affairs, shareholders can't break the deadlock, and irreparable injury to corp is threatened, or corp affairs cannot be conducted to advantage of shareholders b/c of deadlock; (iii) Shareholders are deadlocked in voting power and have failed to elect 1 or more directors for a period that includes at least 2 consecutive years; or (iv) The corp has abandoned its business and failed to dissolve within a reasonable time. --Note: As an alternative to ordering involuntary dissolution, a court might order a buy-out of the objecting shareholder. (esp likely in a close corp) This alternative involves the corp (one or more shareholders) electing to purchase the shares owned by the petitioning shareholder at their fair value. (3) Action by Creditors - if (1) the creditor's claim has been reduced to a judgment, execution of the judgment has been returned unsatisfied, and the corp is insolvent; or (2) the corp has admitted in writing that the creditor's claim is due and owing and the corp is insolvent.

Answer 91

The state may bring an action to administratively dissolve a corp for reasons such as the failure to pay fees or penalties, failure to file an annual report, and failure to maintain a registered agent in the state. The state must serve the corp w/ written notice of the failure. Corp has 60 days to correct grounds for dissolution or show that the grounds do not exist after service of notice. The state effectuates the dissolution by signing a certificate of dissolution. A corp that is admin dissolved may apply for reinstatement with 2 years after the effective date of dissolution. The application must state that the grounds for dissolution either did not exist or have been eliminated.

Answer 92

Dissolution is not the end of the corp. It is the beginning of a process that will end the corporate existence. The corp continues to exist, so it can still be sue and be sued. It cannot start new business but must wind up (liquidate). The following steps must be taken to wind up the corp: (1) Give written notice to known creditors and publish notice of dissolution in a newspaper in the county of its principal place of business; (2) Gather all assets; (3) Convert assets to cash; (4) Pay creditors; and (5) Distribute any remaining sums to shareholders, pro rata by share, unless there is a liquidation preference --Note: Liquidation (dividend) preferences mean "pay first" as set out in the articles