Corporations Flashcards
What must be included in Articles of Incorporation
- name of corp.;
- address; nature of biz (can be “conduct or promote any lawful business”);
- total # of auth’d shares of stock, classes of stock, par value, rights;
- name + address of each incorporater;
- name + address of each of first directors if dif from incorporators
What else may be included in Articles of Incorporation?
- Any provision for mgmt. and governance of corp.
- Personal liability of stockholders
- Any provision eliminating or limiting directors’ liabilities for $ damages
What is required to change the Articles of Incorporation?
Shareholder vote
Bylaws Basics
- Initial bylaws adopted by directors or incorporators (b4 stockholders exist).
- Once stockholders exist (corp. rec’d pmt for stock), then bylaw power is to stockholders…but
- AoI can delegate power to adopt, amend, or repeal bylaws to Directors.
Promoters
Sets up corp. (solicits investors) & acts as agent prior to formation
o Promoters are personally liable for anything in pre-inc. phase
o Post-inc., corp. must adopt the contract (expressly by novation or implicitly by ratification via accepting benefits) and then corp. is liable rather than promoter.
Boilermakers Local 151 Retirement Fund v. Chevron Corp.
Chevron adopted a forum selection clause in its bylaws requiring suits to be in Delaware. Shareholders fought for vested rights. Court held that Delaware courts apply internal affairs doctrine: corp. has right to limit internal suits to only one jurisdiction to avoid conflicting demands.
What relationship does corporate law focus on
- Stockholders
- Directors
- Managers
Burwell v. Hobby Lobby
MAJORITY (ALITO) takes position that corps are nothing more than an org. form used by humans to achieve their desired ends. Here, controlling family of closely held corp. structures corp. for specific religious beliefs which can be passed through in operations.
DISSENT (GINSBURG): Corp. are legal persons designed to max corp. profit. “No consciences, no beliefs, no feelings, no thoughts, no desires.”
Limited Liability
Unless otherwise stated in AoI, shareholders are not liable for corp. debts (except by liability for their conduct or acts e.g., breach of fiduciary duty).
Affirmative Asset Partitioning
Owners’ personal creditors cannot satisfy claims with the corporation’s assets.
Defensive Asset Partitioning
Corp creditors cannot satisfy claims w/ shareholders’ personal assets.
Basic Theory of Piercing the Corporate Veil
Imposing liability on shareholders for their conduct
Vertical or Alter Ego Piercing the Corporate Veil Factors
(Unity of interests between shareholders and corporation such that they are not separate)
1. Whether corp was adequately capitalized?
2. Whether it was solvent?
3. Whether it observed corp. formalities (very important)? Incl: failure to hold shareholder/BoD meetings, keep minutes of meetings, keep separate accounts or books, or adopt bylaws/charters.
4. Whether dominant shareholder siphoned funds (e.g. comingling)?
5. Whether corporation functioned as façade for dominant shareholder?
6. Overall factor that corporate form promotes injustice or fraud. Required.
Sea-Land Services, Inc. v. Pepper Source,
Pepper Source stiffed Sea-Land on shipping contract. Pepper Source had been dissolved; owner Marchese owned 5 dif corps. Sea-Land tried to pierce into Marchese (vertical), then reverse pierce into other corps. HELD: Remanded for hearing on whether injustice existed. Though there was evidence of a unity of interest here “injustice” requires more proof.
Enterprise Liability or Horizontal Piercing Theory
Corps are operated collectively as a unique enterprise.
Walkovszky v. Carlton
Tort claim where Carlton operates 10 cab corps w/ 2 cabs each to carry min insurance. Plaintiff tries to have Ct recognize all companies as a single enterprise which can be held liable for the tort. HELD: Insufficient for Walkovszky to plead that corporation lacked separate identity, was part of a single enterprise, and was deliberately undercapitalized. This would open all corps to liability any time debts exceeded assets. Also, no commingling of assets (Failed to show unity of interest and purpose and scope).
Reverse Piercing The Corporate Veil Factors
- commingling of assets and resources
- undercapitalization
- failure to respect corporate formalities and records
- sanction fraud or promote injustice
Sarissa Capital Domestic Fund LP v. Innoviva, Inc.
Sarissa tried to sue the board of Innoviva arguing that the directors were grossly overpaid, failed to oversee risk, and contributed to poor stock performance. There was a settlement agreement that allowed 2 Sarissa directors on the board. But then Innoviva’s larger voters came along, and Innoviva rejected the settlement. Court sided with Sarissa that there was already a settlement based on the actions of an agent (VP) who manifested this to Sarissa. There was actual and apparent authority.
Business Judgment Rule
Directors enjoy a presumption of managing the corporation in good faith. Court will not interfere in questions of policy or biz management except in face of fraud, illegality, or conflict of interest.
AP Smith Mfg. v Barlow
Shareholders challenge corp.’s $1500 donation to Princeton as breach of fiduciary duty. BoD claims charitable contribution was to advance goodwill. HELD: Gift w/in BoD’s authority as long as charitable $ are not unusually large & not given to pet charity (i.e. serve personal interest of directors).
Shareholder Primacy
Did the corporate directors act to maximize shareholder value? Delaware adopts this today w/ modifications by recognizing that a corp. may act in short run to depress value, but long-term to max value.
Dodge v. Ford Motor Co.
Ford shareholders demanded special dividend after they ceased in 1916 as Mr. Ford and BoD planned to reinvest profits to create smelting plant and assist public by cutting cost of cars. Goal: Every American family should have a Ford (makes Co. less profitable). HELD: Ford must pay special dividend b/c profits too excessive not to distribute. TODAY, this would not work. This would be a business decision if no conflict of interest.
Who has the power to determine dividends?
Directors alone have power to declare/determine dividends. Cts will only interfere if fraud, misappropriation of assets, or breach of good faith.
Shlensky v. Wrigley
Shelensky sued that Wrigley mismanaged Cubs by not installing lights for night games, depressing team revenue. Wrigley arg’d baseball was a daytime sport & key for neighborhood. HELD: Shlensky claim failed b/c act was pure biz decision w/o fraud, illegality or conflict of interest.
Authorized Shares
Max limit in Articles of Incorporation. Only s-holders can amend AoI to add auth’d shares if all outstanding shares sold.
Outstanding shares
Shares currently sold to investors & not repurchased
Common Shares
Shares with no special privileges
Preferred Shares
Shares w/ some privileges (e.g. pmt of dividends or asset distribution for liquidation)
Shareholders Rights
- Participate in profits via dividends at BoD decision
- Residual claimants in liquidation
- Elect/remove directors
- Vote on fundamental matters (e.g. mergers, amend AoI)
- Put forth/include proposal for voting (“Shareholders proposal”)
- Right to inspect books and records (so long as purpose is proper)
- Right to file derivative suit
- NOT agents of corp.
Blasius Industries v. Atlas Corp.
Blasius is active investor in Atlas and req’d to disclose intent to control. Atlas BoD was not interested in being acq’d. Blasius sought to expand BoD to 15-member max per AoI; Atlas responded by amending bylaws to expand from 7 to 9 and appointed the vacancies to keep control 2 weeks prior to shareholder vote on Blasius proposal. HELD: BoD violated duty of loyalty.
Blasius Standard of Review
When directors make decision that limits shareholders’ ability to exercise core rights, BoD action is subject to strict scrutiny. Must show decision was justified by a compelling interest to protect corp. from outside shareholder’s constituent threat to the business.
Coster v. UIP Companies
UIP held by 2 shareholders without system to resolve deadlock. Shareholder’s widow wanted bought out, but c/n agree on price and widow refused to allow BoD to operate. Other s/h and employee (mgmt.) decided to issue new shares to break deadlock and est. new majority. Coster claimed issuance of shares was violation of Blasius to limit her voting rights. HELD: Even though BoD’s acts passed “entire fairness review,” Court of Chancery should have investigated whether BoD acted for primary purpose of interfering w/ Coster’s voting rights.
What to consider with voting schemes and rules?
- Who gets to vote?
- On what matter?
- How do they vote?
Plurality Voting
(DE Default) One share, one vote per vacancy. Each director elected one at a time.
Majority Voting
Requires each BoD nominee to receive a majority of votes (50%+1) to be elected to the BoD.
Cumulative Voting
Shareholders given a pocket of votes = # of shares owned * # seats voted for. Then all votes are cast at once. (In theory, s-holder can place all votes for one candidate)
Ringling Bros. v. Ringling
Corp had split shares among 3 family members (315, 315, 370). Sisters’ pooling agreement w/ 315 each where arbitrator would be appointed to break ties. Invoked arbitrator. Lower Ct accepts arbitrator’s vote, which App Ct. rejects as not binding based on pooling agreement (contract) language. As breach of contract remedy, Ct holds that defaulting sister’s votes are nullified and all other directors elected.
Voting Agreement in Advance
Shareholders can agree in advance how they will vote. Directors cannot agree how to vote in advance b/c it is against public policy (could bind them to act counter to the fiduciary duty in a situation).
Pooling Agreement
Contract to vote together
Irrevocable Proxy
Shareholders assign a vote to a person
