Corporations

Question 1

Formation of corporation

Answer 1

Incorporators sign articles and deliver to SoS
Articles must contain:
Name of corporation (must contain “limited, corporation”
Name and address of each incorporator
Name of registered agent and address of registered office
Info about stocks
Statement of purpose

Question 2

Defective incorproation

Answer 2

De facto corporation (relevant statute of incorporation exists; good faith attempt comply w the statute; exercise of corporate privileges)

Corporation by estoppel

Question 3

Promoters

Answer 3

Promoter = person who undertakes to procure commitments for a corporation before it is formed.

Fiduciary duties to each other
Good faith and fair dealing to corp

Liable for any pre-incorporation Ks made on behalf of corporation. Corporation wont be liable for these unless it adopts (explicitly or implicitly). Promoter stays on the hook unless 1) agmt expressly relieves promoter of liability in which case the agmt is just a revocable offer, or 2) there is a novation releasing promoter and subbing in the corp

Question 4

Board mtgs

Answer 4

Quorum: majority of directors (but cannot be <1/3)
Majority vote: majority of directors attending
If quorum lost, board can no longer act

Can take action thru 1) board mtgs or 2) unanimous agmt in writing

Notice
Regular mtgs: notice not req’d
Special mtgs: 2 days notice (date, time, place)

Question 5

Election of board members

Answer 5

Incorporators choose at the first mg
After that board members are elected by SHs are annual mtgs

Question 6

Removal of board members

Answer 6

SHs can remove anytime with or without cause so long as votes for removing are more than votes against removing

In some states, if it’s a staggered board, need cause

Director elected w/ cumulative voting cant be removed if the votes opposing her removal would be enough to elect her in a cumulative election

Director elected by a voting group of shares can only be removed by that class

Question 7

Duty of care

BJR

Answer 7

A director must act in good faith and in the best interests of the corporation, with the care that a reasonable person would exercise under similar circumstances.

BJR: Director presumed to have met duty of care if their decision was
1) informed
2) in good faith
3) made w/o conflict of interest
4) had rational basis

Question 8

Duty of loyalty

Answer 8

A director must act in the best interests of the corporation, which means that the director must not put their own interests or the interests of a third party above the corporation’s.

Not allowed:

Self-dealing
Statutory safe harbor - if director can prove either that (a) tx was fair to corp or (b) tx was approved by disinterested majority of board or disinterested shares
Some courts require a showing of fairness regardless and will look at 1) adequacy of consideration, 2) corporate need to enter tx, 3) financial position of corp, 4) available alternatives

Compete w corporation

Taking corporate opportunity
A director must not take a corporate opportunity for themselves without first presenting it to the board, disclosing all the material facts, and allowing the board to either accept or reject it.

A corporate opportunity does not cover every conceivable business opportunity, yet it is not confined to opportunities that are necessary for the corporation’s business. Can be an interest (K or property right) or expectancy of the corporation (tentative claim), in line of business, found on company time

Remedies: corporation can recover profits director made or force the director to convey the opp to the corporation under constructive trust

Question 9

Indemnification (who makes the decision, when can there be indemnification)

Answer 9

Majority of disinterested directors decides whether to indemnify. If there is not a majority of disinterested directors, then a disinterested majority of shares.

Must indemnify: if they successfully defended the suit
Must not indemnify: if director loses derivative suit and is found liable to the corporation, or if director is found to have received improper benefit (basically if director was disloyal)
Can indemnify: if director 1) acted in good faith and 2) thought their action would not harm the corporation

Question 10

Duties of controlling SH

Answer 10

Must not oppress minority SHs
Must refrain from using their control to obtain special advantage or cause corporation to take action that unfairly prejudices minority SHs

Question 11

Piercing the veil

Answer 11

Corporation is a limited liability form, but courts may pierce the LL veil to avoid fraud or unfairness

Alter ego (SHs taking corporate assets and using as their own, commingling)
Undercapitalization
fraud, avoidance of existing obligations

usually only the SHs who were active in the business will be held personally liable

Question 12

SH mtgs

Answer 12

Can be called by board, president, 10% holder, or anyone else given authority to call mtg in articles

Notice 10-60 days in advance of date, time, and place (and purpose if special mtg)

quorum = majority of outstanding shares
vote= majority
once there is quorum, quorum not lost even if some SHs leave

Question 13

What do SHs get to vote on

Answer 13

Electing/removing directors
Fundamental corporate changes

Question 14

Voting trust

Answer 14

Legal ownership transferred to trustee, who will vote the shares and distribute dividends according to instructions in trust agmt
1. Written trust agmt instructing how shares will be oted
2. copy of agmt sent to corporation, including names and addresses of the beneficial owners
3. legal title to shares transferred to voting trustee
4. original SHs receive trust certificate and retain all SH rights except voting

Question 15

Voting agmt

Answer 15

SHs enter into agmt about how they will vote their shares
Agmt mst be in writing and signed
No time limit, no filing reqt
States split on whether these can be enforced by SP

Question 16

Derivative suit

Answer 16

SH suing on behalf of corporation

Standing
Own stock at time COA arose and throughout suit
Fairly and adequately represents corporation’s interest

Demand
Must make demand on corporation first
Some states say demand not necessary if it would be futile
Others require it to be made and Sh cant sue for 90 days unless 1) the demand is rejected earlier or 2) irreparable injury would result by waiting

Corp joined as defendant

Dismissal or settlement requires court approval
If majority of disinterested directors (but atL 2) determines the suit is not in the corporation’s best interest, can dismiss

Question 17

Inspection right

Answer 17

SHs must give 5 business days notice of their request
Can inspect: AIC, bylaws, minutes from SH mtgs, annual reports, communications from board to SHs, names and addresses of D&Os

Qualified: books, papers, accounting records, board minutes –> Need to provide reason for inspection related to their interest as a SH

Question 18

Procedure for fundamental corporate changes

Answer 18

1. Board adopts resolution
2. Proposal + written notice to SH
3. Majority of shares outstanding vote to approve

Question 19

Tender offer

Answer 19

Tender offer is when a buyer proposes to buy enough shares in the corporation to increase their share ownership by >5%
Governed by Williams Act
Bidder must file Schedule D with extensive disclosures

• Offer must be open at least 20 days and must be open to all members of the class of securities sought
• SHs must be permitted to withdraw tendered shares while offer still open
• If offer is oversubscribed, bidder must purchase on pro rata basis from among the shares deposited during the first 10 days of the offer
• If offer price is increased, all tendering SHs get the higher price

Offer must be open at least 20 days
management of target must either give recommendation concerning offer or explain why they cant

• Act also prohibits false or misleading statements or omissions in connection with the offer

Question 20

Appraisal remedy

Answer 20

If SHs oppose a fundamental corporate change, they can ask the corporation to buy them out

Must
1) demand appraisal before vote
2) not vote in favor
3) demand payment after change is approved

Appraisal remedy is available in: share exchange, merger, transfer of substantially all assets, conversion into another form of business

Appraisal remedy not available if
market out exception applies, where corporation has over 2000 shareholders and >20M capitalization

Question 21

Rule 10b-5

Answer 21

Rule 10b-5 prohibits a person, in connection with the sale or purchase of any equity security, using a means or instrumentality of interstate commerce, from
1) employing scheme to defraud
2) making a fraudulent misrepresentation or omission of material fact
3) engage in any practice that operates as a fraud

Elements:
1) fraud (need materiality + intent to deceive)
2) in connection w/ purchase of sale of securities
3) means or instrumentality of interstate commerce was used
4) reliance
5) damages if it was a private COA (damages will be the diff btwn purchase or sale price vs the avg purchase or sale price in the 90 day period after corrective info is sent out)

Covers
Misrepresentation
Misappropriation
Insider trading
Tipper/Tippee

Question 22

Rule 16(b)

Answer 22

Requires a director, officer, or >10% SH to surrender profits made from a purchase and sale or sale and purchase of equity securities within a 6 month window.

This section applies to corporations whose shares are traded on a national exchange or have >2000 SHs with >10M in assets

Court will look at whether this is the type of tx where abuse of insider info is likely

10% SH must be 10% SH before both purchase and sale

D&O can remain on hook 6 months after leaving position

Question 23

SOX

Answer 23

Must have audit committee overseeing work done by registered public accounting firm w/ internal procedures for handling complaints about company’s auditing/accounting

A D&O must certify that they reviewed the report and report is accurate and complete. Officer certifies they have internal controls in place designed to ensure that material info is made known to the officer, and they reviewed the procedures in the last 90 days

If corporation has to restate their financials, D&Os must reimburse corporation for any bonus they received in the 12 month period preceding the filing of the inaccurate reports

Question 24

Who votes the shares

Answer 24

Record shareholder as of the record date

But the record shareholder can vote by proxy - writing signed by record SH, directed to secretary of corp, authorizing another to vote their shares for them
Record SH can revoke proxy by attending themselves, writing to the corporate secretary, or assigning proxy to someone else
Proxy irrevocable only if proxy says it is, or if proxy holder has a special interest other than voting