Corporations

Question 1

Taxation of a C Corporation

Answer 1

double taxation - corporation pays taxes on its profits, and shareholders pay taxes on distributions

Question 2

Requirements for and taxation of an S Corporation

Answer 2

Requirements: (1) stock can be held by no more than 100 persons; (2) shareholders must be individuals; and (3) can only be one class of stock

Taxation: no double taxation; profits and losses flow through the entity to the owners

Question 3

de jure v. de facto corporation

Answer 3

de jure = corp formed in accordance with the law

de facto = when corporate laws have not been followed, but corp is recognized through estoppel

Question 4

requirements for de jure corporation

Answer 4

• person - one or more incorporators, don’t need to be a citizen of state of inc.
• paper - articles of incorporation
• act - notarized articles delivered to secretary of state and filing fees paid

Question 5

What must be in the articles of incorporation?

Answer 5

• name of the corporation - must include one of these words or abbreviation: corporation, company, incorporated, or limited
• name and address of each incorporator
• registered agent and address of registered office
• info regarding corporation’s stock - number of authorized shares, different classes, number per class

optional info: names of initial directors, business purpose (without purpose, presumption is any lawful business)

Question 6

What are the steps to organize a corporation apart from filing articles?

Answer 6

• organizational meeting: board or incorporators (if directors not named) hold meeting where they adopt bylaws and appoint officers
• bylaws: may contain any provision for managing the corp that is not inconsistent with the articles

Question 7

requirements for a de facto corporation

Answer 7

• relevant incorporation statute (there’s one in every state)
• parties made a good faith, colorable attempt to comply with the statute (came close to formation)
• there has been some exercise of corporate privilege (have acted as though there was a corporation)

*must be unaware that there was no valid corporation

If the doctrine applies, business is treated as a corporation for all purposes except in an action by the state

Note: abolished in most states

Question 8

What is corporation by estoppel?

Answer 8

persons who have dealt with the entity as if it were a corporation will be estopped from denying the corporation’s existence

• will prevent “corp” and third parties who dealt with it as a corp to back out of contracts
• will prevent “corp” from avoiding liability

*only applies in contract, not torts

note: abolished in most states

Question 9

What is a promoter?

Answer 9

A promoter is a person acting on behalf of a corporation not yet formed.

• They may procure commitments for capital and other instrumentalities that will be used by the corporation after its formation
• may enter into contracts on behalf of a corp not yet formed

*not an agent of the corporation because you can’t be an agent for a principal that doesn’t exist

Question 10

Promoter’s fiduciary duty arising from sales to the corporation

Answer 10

A promoter who profits by selling property to the corporation may be liable for his profit unless all material facts of the transaction were disclosed to all who are contemplated to be part of the initial financing scheme

*not liable for profits made selling promoter’s stock to outsiders

Question 11

Liability on pre-incorporation contracts

Answer 11

• corporation: not bound unless it expressly or impliedly adopts the contract
• promoter: personally liable, even after the corporation is formed and even if the corporation adopts the contract and benefits from it
  
  • will only be released if there is an express or implied novation (agreement by all three parties to release promoter and substitute corp)
  • can also avoid liability if the agreement expressly relieves promoter of liability (no contract, just revocable offer to the corp)

*a promoter held personally liable may have a right to reimbursement for any benefit received by the corp

Question 12

Rules for registration of foreign corp

Answer 12

• foreign corporations (including other states) transacting business in a state must register and pay fees
• transacting business = regular course of intrastate business activity (doesn’t include occasional or sporadic activity or simply owning property)

Question 13

Debt security v. equity security

Answer 13

• debt security = security issued when corporation borrow money, called a bond (holder is a creditor)
• equity security = when investor buys an ownership interest in the corporation, called stock (holder is an owner, shareholder)

Question 14

types of shares

Answer 14

• authorized shares: shares described in the corporation’s articles of incorporation
• issued and outstanding shares: shares that have been sold
• authorized but unissued (treasury) shares: shares that have been reacquired by the corporation through repurchase or redemption

Question 15

share option

Answer 15

An option is the right to purchase shares in the future under terms predetermined by the board of directors

may be offered in exchange for any type of consideration, including future services

Question 16

issuance

Answer 16

when the corporation sells its own stock

Question 17

subscription

Answer 17

written offer to buy stock from a corporation

Question 18

When may a subscription be revoked?

Answer 18

• preincorporation subscription - irrevocable for six months unless otherwise provided in the terms of the subscription agreement or all subscribers agree
• postincorporation subscription - revocable until accepted by the corporation

Question 19

What is proper consideration for a stock issue?

Answer 19

any tangible or intangible property or benefit to the corporation

e.g., money, property, services already performed, and discharge of a debt

Question 20

Par value

Answer 20

minimum issuance price

Traditionally, stock could not be issued by a corporation for less than the stock’s stated par value, and the consideration received for par value stock had to be held in a certain account containing at least the aggregate par value of the outstanding par value shares.

*no longer the majority view, but if it does apply, watch for watered stock, when par value stock is issued for less than its par value (directors liable if knowingly authorized, and buyer is liable)

Question 21

What is the proper amount of consideration for stock issue?

Answer 21

Concept of par is generally eliminated. Corporations can issue shares for whatever consideration the directors deem appropriate

If issuance is in exchange for consideration other than cash, board determines value of services or property. Board’s valuation is conclusive if made in good faith

Question 22

Preemptive rights

Answer 22

• right of an existing shareholder of common stock to maintain her percentage of ownership in the company by buying stock whenever there is a new issuance of stock for money
• right must be stated in articles
• no preemptive right in shares issued: (1) for consideration other than cash, (2) within six months after incorporation, or (3) without voting rights but having a distribution preference

Question 23

qualifications of directors

Answer 23

• adult natural persons, legal capacity
• need not be shareholders
• qualifications in articles or bylaws must be reasonable and lawful

Question 24

required number of directions

Answer 24

• one or more
• number can be set in articles or bylaws, which may requires as many as desired

Question 25

election of directors

Answer 25

• if initial directors not named in the articles, elected by incorporators at the organizational meeting
• after that, shareholders elect directors and annual shareholders’ meeting, subject to contrary provisions in the articles
• elected annually unless staggered board

Question 26

removal of directors

Answer 26

• shareholders can remove directors before their terms expire
• may remove a director with or without cause
• director elected by cumulative voting can’t be removed if votes cast against removal would be sufficient to elect her if cumulatively voted
• director elected by voting group of shares can be removed only by that class

Question 27

director vacancies

Answer 27

• generally, board or shareholders may select new director
• if shareholders created vacancy by removing director, generally shareholders must select replacement

Question 28

board action

Answer 28

• must always act as a group (individual is not an agent of corp) through:
  (1) unanimous agreement in writing; or
  (2) at a meeting, which must satisfy the quorum and voting requirements

Question 29

ratification of defective corporate actions

Answer 29

Directors, incorporators, and officers may ratify defective corporate actions.

• Board of directors must state the action to be ratified and the nature of the failure of authorization, approve the ratification, and seek shareholder approval if necessary.

Question 30

Board meeting notice requirements

Answer 30

• notice
  
  • not required for regular meetings
  • for special meetings, two days’ written notice of date, time, and place
• failure to give notice
  
  • everything at meeting is voidable unless directors not notified waive: (1) in writing any time, or (2) by attending the meeting without objecting at the outset of the meeting

Question 31

Are proxies allowed at board meetings?

Answer 31

NO. Directors owe the corporation non-delegable fiduciary duties

Question 32

Board meeting quorum and approval requirements

Answer 32

• for any meeting of board, must have quorum, majority of all directors, unless bylaws say otherwise (no less than ⅓)
• if quorum present, board resolution requires majority vote of those present
• broken quorum - if someone leaves and breaks the quorum, board can’t act

Question 33

Role of Board of Directors

Answer 33

The board manages the corporation, meaning it sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental corporation changes to shareholders, and so on.

Unless the articles or bylaws provide otherwise, the board may create one or more committees, with one or more members, and appoint members of the board of directors to serve on them. The committees may act for the board, but the board remains responsible for supervision of the committees.

The board may also delegate authority to officers.

Question 34

What actions may a board committee NOT take?

Answer 34

• declare a distribution
• fill a board vacancy
• recommend a fundamental change to shareholders

*can recommend these actions to the full board

Question 35

Fiduciary duties of directors

Answer 35

• Director must discharge duties in good faith and with the reasonable belief that their actions are in the best interest of the corporation (duty of loyalty)
• Director must use the care that a person in like position would reasonably believe appropriate under the circumstances (duty of care)

Question 36

business judgment rule

Answer 36

The business judgment rule is a presumption that a director’s decision may not be challenged if the director (i) acted in good faith, (ii) with the care that an ordinarily prudent person would exercise in a like position, and (iii) in a manner the director reasonably believed to be in the best interest of the corporation

*does not apply in duty of loyalty cases

Question 37

burden in duty of care case

Answer 37

• duty is on plaintiff/challenger to prove that the director did not meet the standard

Question 38

What is the problem in nonfeasance cases?

Answer 38

It is difficult to prove causation

The director is only liable for breach if the breach causes a loss to the corporation. In. many nonfeasance cases, the company would have lost money anyway

Question 39

What information may director rely on in discharging duties?

Answer 39

entitled to rely on information, 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.

Question 40

burden in duty of loyalty cases

Answer 40

burden is on the defendant

Question 41

common duty of loyalty scenarios

Answer 41

• conflicting transactions (self-dealing) - transaction between corporation and (1) one of its directors, (2) a director’s close relative, or (3) another business of a director’s
• competing ventures
• corporate opportunity doctrine

Question 42

Standards for Upholding Conflicting Interest Transactions

Answer 42

transaction will not be enjoined, set aside, or give rise to an award of damages if:

(1) Approved by a majority (but at least two) of the disinterested directors. Director must have disclosed all material facts to the board or that they were known when the board approved the transaction OR
(2) Approved by a majority of votes entitled to be cast by disinterested shareholders —again, after disclosure or the facts were known. Notice of the shareholders’ meeting must describe the transaction, OR
(3) Judged by the circumstances at the time the corporation entered into the transaction, it was fair to the corporation.

Question 43

Quorum at board or shareholders’ meeting to vote on conflicting interest transaction

Answer 43

• board - majority of disinterested directors
• shareholders - majority of votes entitled to be cast, not including shares owned or controlled directly or beneficially by director with conflicting interest

Question 44

Exception to board approval of conflicting interest transaction

Answer 44

Some courts also require a showing of fairness. The transaction might still be set aside if the challenger can prove that it constitutes corporate waste

factors: adequacy of the consideration, corporate need to enter into the transaction, financial position of the corporation, and available alternatives

Question 45

Corporate opportunity doctrine

Answer 45

• Directors may not divert a business opportunity from their corporation to themselves without first giving their corporation an opportunity to act.
• This is known as “usurpation of a corporate opportunity.”
• lack of financial ability of corp not a defense
• board decides whether to accept opportunity

Question 46

What is a corporate opportunity?

Answer 46

An opportunity in which the corporation would have an interest or expectancy

• not every conceivable business opportunity, but not limited to those necessary to the corporation’s business
• closer the opportunity is to the corp’s line of business, the more likely it is a corporate opportunity

Question 47

Remedies for usurpation of a corporate opportunity

Answer 47

• corp can sue to recover under constructive trust theory
• if director still owns the property, can be compelled to transfer to corp at price paid
• if property sold at a profit, corp may recover profit

Question 48

When can a corporation make a loan to a director?

Answer 48

when it is reasonably expected to benefit the corporation

Question 49

Limiting personal liability of directors

Answer 49

The articles may limit or eliminate directors’ personal liability for money damages to the corporation or shareholders for actions taken or for failure to take action.

However, the articles may not limit or eliminate liability for (1) financial benefits received by the director to which she is not entitled, (2) an intentionally inflicted harm on the corporation or its shareholders, (3) unlawful corporate distributions, or (4) an intentional violation of criminal law.

Question 50

What directors are liable for. breach?

Answer 50

A director is presumed to concur with board action unless her dissent or abstention is noted in writing in the corporate records.

In writing = (1) in the minutes, (2) delivered in writing to the presiding officer at the meeting, or (3) written dissent to the corporation immediately after the meeting.

*Note - director cannot dissent if she voted for the resolution at the meeting, but also can’t be liable if absent from board meeting

Question 51

Status and Power of Officers

Answer 51

Officers are agents of the corporation. Agency law determines the authority and powers of officers.

Question 52

Selection and removal of officers

Answer 52

• Officers are selected and removed by the board, which also sets officer compensation.
• Despite any contractual term to the contrary, an officer has the power to resign at any time by delivering notice to the corporation, and the corporation has the power to remove an officer at any time, with or without cause.
• If the resignation or removal is a breach of contract, the nonbreaching party may have a right to damages, but no contractual right to remain in office.

Question 53

When is a corporation not allowed to indemnify a director or officer?

Answer 53

A corporation cannot indemnify a director who is (1) held liable to the corporation or (2) held to have received an improper benefit

Question 54

When is a corporation required to indemnify a director or officer?

Answer 54

Unless limited by the articles, a corporation 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 with the proceeding.

In some states, the director or officer must win the entire case; in others, they are entitled to indemnification “to the extent” that they win the case.

*court may also order indemnification if justified in view of all the circumstances

Question 55

When may a corporation indemnify a director or officer?

Answer 55

A corporation 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 corporation (when the conduct at issue was within the director’s official capacity).

Question 56

Who makes the determination of whether to indemnify

Answer 56

• disinterested majority of the board or
• majority of disinterested committee or
• independent legal counsel or
• shareholders

Question 57

characteristics of close corporation

Answer 57

• few shareholders
• stock not publicly traded
• shareholders run the corporation directly or set up management with board of directors

Question 58

shareholder management agreements

Answer 58

• sets up alternative management for a close corporation
• may dispense with the board and vest management power in the shareholders
• two ways to set up:
  
  • in articles and approved by all shareholders OR
  • unanimous written shareholder agreement
• should be conspicuously noted on front and back of stock certificates (but doesn’t affect validity)
• whoever manages the corp has fiduciary duties

Question 59

special fiduciary duty in close corporations

Answer 59

In many states, courts impose a fiduciary duty on shareholders owed to other shareholders.

• controlling shareholders can’t use their power to benefit at expense of minority shareholders
• if oppression of minority shareholders, can sue the controlling shareholders who oppress them for breach

Question 60

When can shareholders be personally liable for the corporation’s actions?

Answer 60

If the court pierces the corporate veil (only close corps)

Question 61

What is required for piercing the corporate veil

Answer 61

• shareholders must have abused the privilege of incorporating; and
• fairness must require holding them liable

*sloppy administration is not enough

Question 62

What are the common scenarios in which the corporate veil is often pierced?

Answer 62

• alter ago - shareholders ignore corporate formalities such that the corp is “alter ego” or a “mere instrumentality” of the shareholders or another corporation, and some basic injustice results; arises where shareholders treat corporate assets as their own, commingle their money with corporate money, and so on.
• undercapitalization - corporation is inadequately capitalized, so that at the time of formation there is not enough unencumbered capital to reasonably cover prospective liabilities
• fraud, avoidance of existing obligations, or evasion of statutory provisions - but mere fact that an individual chooses corporate form to avoid future personal liability is not enough

Question 63

Who is liable if corporate veil is pierced?

Answer 63

only shareholders who are active in the operation of the business will be personally liable

Liability is joint and several

Question 64

derivative suit v. direct action

Answer 64

• derivative suit - shareholder may bring a shareholder derivative suit to enforce corporation’s rights
  
  • suing to enforce corporation’s claim
• direct action - brought for breach of duty owed to the shareholder

ask who suffered harm and to whom duty was owed

Question 65

Requirements for derivative suits

Answer 65

• standing
  
  • stock ownership at time of wrong or become shareholder through operation of law (inheritance or divorce)
  • fairly and adequately represent corp’s interest
• demand requirements
  
  • must make written demand to the board
  • some states require waiting 90 days after demand unless shareholder has earlier been notified corp has rejected or irreparable injury would result from waiting
  • other states don’t require demand if it would be futile
• corp joined as defendant

Question 66

dismissal or settlement of derivative suit

Answer 66

• parties can settle or dismiss only with court approval
• corporation may move to dismiss
  
  • must be based on independent investigation concluding that suit is not in corp’s best interest (low chance of success or expense would exceed recovery)
  • investigation by independent directors or court-appointed panel of independent persons
  • court will dismiss if (1) those recommending dismissal were truly independent, and (2) they made a reasonable investigation
  • to avoid dismissal, shareholder has burden of proving that decision was not made in good faith after reasonable inquiry - but if majority of directors had personal interest, corp has burden

Question 67

Who votes at a shareholders’ meeting

Answer 67

outstanding stock and record shareholders

• shareholders of record on the record date may vote (record date fixed by board, but not more than 70 days before meeting)
• treasury stock can’t vote
• executor of record shareholder’s estate may vote
• may vote by proxy

Question 68

Voting by proxy

Answer 68

• proxy = writing signed by record shareholder (email is okay) directed to secretary of the corporation authorizing another to vote their shares
• revocation
  
  • generally revocable and may be revoked (1) by shareholder attending meeting to vote themselves, (2) in writing to corporate secretary, or (3) by subsequent appointment of another proxy
  • irrevocable if (1) it states that it is irrevocable and (2) the proxy holder has some interest in the shares other than voting

Question 69

Voting Trust

Answer 69

written agreement of shareholders under which all shares owned by the parties are transferred to a trustee, who votes the shares and distributes dividends in accordance with provisions of the voting trust agreement

*ten-year maximum but renewable

Question 70

Requirements for a voting trust

Answer 70

• written trust agreement, controlling how shares will be voted;
• copy of the agreement (including names and addresses of owners) given to the corp;
• legal title to the shares transferred to voting trustee; and
• original shareholders receive trust certificates and retain all shareholder rights except for voting

*can be perpetual

Question 71

Requirements for voting agreement

Answer 71

• writing and signed

*increasingly specifically enforceable, and where they will be enforced, no need for voting trust

Question 72

types of shareholder meetings

Answer 72

• annual meetings
  
  • must hold annual shareholders’ meetings
  • if not held within earlier of six moths after the end of corp’s fiscal year or 15 months after last annual meeting, shareholder can petition court to order one
  • elect directors
• special meetings
  
  • may be called by (1) the board, (2) the president, (3) the holders of at least 10% of outstanding shares, or (4) anyone else authorized to do so in the articles or bylaws

Question 73

notice of shareholder meetings

Answer 73

• must be notified of meetings not fewer than 10 or more than 60 days before meeting
• must be in writing
• notice may be waived in writing or by attendance
• contents: date, time, and place (for special meetings, must also state purpose - can’t do anything else at that meeting)

Question 74

quorum for shareholders vote

Answer 74

majority of outstanding shares entitled to vote, unless the articles or bylaws require a greater number

*quorum not lost if people leave

Question 75

general shareholder voting rules

Answer 75

• generally, one share one vote, unless articles provide otherwise
• matter is approved if votes cast in favor exceed votes cast against, unless articles or bylaws provide otherwise
  
  • except to elect director (plurality), to approve fundamental corp change (majority entitled to vote), or to remove director (majority entitled to vote)

Question 76

cumulative voting

Answer 76

• usually only in close corps
• gives smaller shareholders a better chance of electing director
  
  • available only in director vote and only if articles provide
• one at-large election
  
  • top finishers elected to board
  • voting power = number of shares x number of directors to be elected
  • can divide however
• compare straight voting - separate election for each seat

Question 77

Stock transfer restrictions

Answer 77

• valid if not undue restraint on alienation
  
  • right of first refusal is okay
• if valid, can be enforced against third-party purchaser if (1) conspicuously noted on stock certificate or (2) the transferee had actual knowledge of the restriction at the time of the purchase

Question 78

shareholders’ inspection rights

Answer 78

• shareholder has a right to inspect the books and records of the corporation
• unqualified right for certain records regardless of purpose, must make written demand at least five business days in advance: (1) articles and bylaws; (2) board resolutions regarding classification of shares; (3) minutes of shareholder’s meetings from last 3 years; (4) communications sent by corp to shareholders over past 3 years; (5) list of names and business addresses of corp’s current directors and officers; and (6) copy of corp’s most recent annual report
• qualified right, must state proper purpose related to interest as shareholder and 5 days written notice: (1) excerpts of the minutes of board meetings; (2) corp’s books, papers, and accounting records, and (3) shareholder records

*can seek court order to enforce

Question 79

Right to distribution

Answer 79

• at least one class of stock must have a right to receive corp’s net assets on dissolution
• otherwise distributions generally discretionary
  
  • solely within the directors’ discretion, subject to solvency limitations and contrary provisions in articles or bylaws
  • shareholder has right only when declared
  • no general right to compel unless abuse of discretion

Question 80

contractual rights to distribution

Answer 80

• cumulative preferred shares
  
  • will accumulate if unpaid in particular year
• once distribution is lawfully declared, shareholders generally treated as creditors of the corporation
  
  • can be enjoined or revoked if declared in violation of solvency limitations, articles, or superior preference right

Question 81

Which shareholders get dividends?

Answer 81

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

Question 82

Which funds can be used for distributions?

Answer 82

Can’t make a distribution if it’s insolvent or if the distribution would render it insolvent. Distribution not permitted if, after giving it effect, either:

(1) corp would not be able to pay its debts as they become due in the usual course of business; or
(2) corp’s total assets would be less than the sum of its total liabilities + amount needed, if corp were to be dissolved at distribution, to satisfy preferential rights on dissolution of shareholders whose preferential rights are superior to recipients of distribution

Question 83

liability for unlawful distributions

Answer 83

Directors are jointly and severally liable for improper distributions (shareholders personally. liable only if they knew the distribution was improper when received)

A director who votes for or assents to a distribution that violates the above rules is personally liable to the corporation for the amount of the distribution that exceeds what could have been properly distributed.

not liable for distributions approved in good faith: (1) based on financial statements prepared according to reasonable accounting practices, or on fair valuation or other reasonable method; or (2) by relying on information from officers, employees, legal counsel, accountants, etc., or committee of the board of which the director is not a member

Question 84

types of fundamental corporate changes

Answer 84

• amending the articles
• merging or consolidating into another company
• transferring substantially all assets (or having stock acquired in a share exchange)
• converting to another form of business
• dissolving

Question 85

procedure for fundamental corporate changes

Answer 85

(1) board action adopting a resolution of fundamental change;
(2) the board submits the proposal to the shareholders with written notice; and
(3) shareholder approval (majority of shares entitled to vote)
* increasingly requiring only majority of shares that actually vote

*For most of these changes, we also need to deliver a document to the secretary of state.

Question 86

dissenting shareholder right of appraisal

Answer 86

If a corporation approves certain fundamental corporate changes, the shareholders who did not vote in favor of the change may have appraisal rights.

• right of a shareholder to force the corporation to buy their stock for fair value
• applies only to: (1) merging or consolidating; (2) transferring substantially all assets; (3) stock being acquired in share exchange; or (4) converting to another form of business
• no right if the company’s stock listed on national exchange or more than 2,000 shareholders and shares have value of at least $20 million (so only close corps)

Question 87

how to perfect right right of appraisal

Answer 87

• i proposed action will create dissenters’ rights, notice of meeting must state shareholders will be entitled to exercise dissenting rights
• before vote, shareholder must file with corp written notice of object and intent to demand payment
• at vote, shareholder must abstain or vote against
• if approved, corp must notify, within 10 days, all shareholders who filed intent to demand payment. must include time and place to submit shares and other terms of repurchase
• within time set by corp, shareholder must make written demand to be bought out and deposit stock
• corp must pay dissenters amount corp estimates as fair value
• if shareholder dissatisfied, has 30 days to send corp her own estimate and demand payment
• if can’t agree, corp must file action w/in 60 days of shareholder’s demand, requesting court to determine fair value
• if corp does not file, must pay what shareholder demanded

Question 88

merger v. consolidation

Answer 88

merger = blending of one or more corporations into another corporation, and only the latter corporation survives

consolidation = two corporations combine to form a new entity

*action by both boards and generally approval by shareholders of both (exceptions when no change to surviving corp or short form merger)

Question 89

When does the surviving corporation of a merger not need shareholder approval?

Answer 89

Approval of a plan of merger by shareholders of the surviving corporation is not required if all the following conditions exist:

(1) the articles of the surviving corp will not differ from the articles before the merger;
(2) each shareholder of the survivor whose shares were outstanding immediately prior to the effective date of the merger will hold the same number of shares, with 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 corporation that were outstanding immediately prior to the merger.

Question 90

When does the merging corporation of a merger not need shareholder approval?

Answer 90

short form merger

With short form mergers, a parent corporation owning at least 90% of the outstanding shares of each class of a subsidiary corporation may merge the subsidiary into itself without 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.

Question 91

What is considered a transfer of substantially all of the assets?

Answer 91

at least 75% of corp’s assets

Question 92

Who must approve transfer of all or substantially all assets or a share exchange?

Answer 92

shareholders of selling corp only because not a fundamental change for the buying corp

Question 93

Who is liable for debts of a selling corp after sale of substantially all assets

Answer 93

generally no successor liability and selling corp remains liable because it still exists

Exception: if buyer is a “mere continuation” of the seller - has the same management, shareholders, etc. or if a court concludes the deal was a de facto merger

Question 94

types of voluntary dissolution

Answer 94

• dissolution by incorporators or initial directors - if shares have not yet been issued or business not yet commenced, majority of incorporators or directors may dissolve by delivering articles of dissolution to state
• dissolution by corporate act - approved under fundamental change procedure

Question 95

effect of dissolution

Answer 95

corp continues but is not allowed to carry on any business except as appropriate to wind up and liquidate its affairs

• must also notify creditors so they can make claims

Question 96

claims against corp after dissolution

Answer 96

• claim can be asserted against a dissolved corporation, even if the claim does not arise until after dissolution, to the extent of the corporation’s undistributed assets
• If 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
• corporation 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 three years by publishing notice of the dissolution in a newspaper in the county where the corporation’s known place of business is located

Question 97

methods of involuntary dissolution

Answer 97

• action by attorney general - if fraudulently obtained articles or exceeding or abusing authority
• action by shareholders
  
  • director abuse, waste of assets, or misconduct
  • directors deadlocked in management, shareholders unable to break deadlock, and irreparable injury to corp is threatened or corporate affairs can’t be conducted to advantage of shareholders
  • shareholders deadlocked in voting power and have failed to elect one or more directors for at least two consecutive annual meeting dates; or
  • corp has abandoned its business and failed to dissolve w/in reasonable time
• action by creditors
  
  • creditor’s claim reduced to judgment, execution of judgment has been returned unsatisfied, and corp is insolvent; or
  • corp has admitted in writing that creditor’s claim is due and owing and corp is insolvent
• court supervision of voluntary dissolution

Question 98

administrative dissolution

Answer 98

• state may bring an action to administratively dissolve a corp for reasons like failure to pay fees or penalties, failure to file an annual report, and failure to maintain a registered agent in the state
• must service corp written notice of failure
• if doesn’t correct w/in 60 days after service, state signs certificate of dissolution
• corp may apply for reinstatement within two years
  
  • must state that grounds either didn’t exist or were corrected
• reinstatement relates back to date of dissolution, as if it never occurred

Question 99

steps for winding up

Answer 99

• give written notice to known creditors and publish notice of dissolution in a newspaper in the county of its principal place of business;
• gather all assets;
• convert assets to cash;
• pay creditors
• distribute any remaining sums to shareholders, pro rata by share, unless there is a liquidation preference