Corporations Flashcards
General partnership (UPA)
- Association of two or more people to carry on as co-owners of a business for profit forms a partnership
- Silent on intent
General partnership (RUPA)
- Association of two or more persons to carry on as co-owners of a business for profit forms a partnership
- Whether or not the person intends to form a partnership
Partnership property (general partnership)
Partnership can own, buy, and sell property
Formation (general partnership)
- Profit sharing is prima facie evidence of partnership
- Unless profit was received in payment of debt, wages, rent, interest on a loan, or consideration for the sale of the business or its assets
Personal liability (general partnership)
- Unlimited personal liability
Joint and several liability (general partnership; UPA)
- Joint liability for contracts
- Joint and several liability for torts
Joint and several liability (general partnership; RUPA)
Joint and several liability for all obligations
Indemnification (general partnership)
Partnership must indemnify a partner for expenses incurred by the partner in the ordinary course of partnership business
Contribution (general partnership)
Partners must contribute to the partnership if the partnership is unable to satisfy its obligations including any indemnification obligations
Duties (general partnership)
Partners must:
* Repay all contributions
* Share equally in profits and losses
* Unless parties decide otherwise
Ordinary business decisions (general partnership)
Decided by majority of all partners
Major business decisions (general partnership)
Requires consent of all partners
Order of repayment (general partnership)
- Non-partner creditors
- Partner creditors who are owed money for things other than return of capital or profits
- Return of capital
- Return of profits
Dissolution (at-will partnership)
- No definite term
- Power to leave anytime
Dissolution (term partnership)
- Parties agreed to definite term
- Power to leave but results in breach of contract
Narrow shield (LLP)
Protects against malpractice and tort claims
Full shield (LLP)
Protects against all claims
Formation (LLP)
- Documentation including “[name], LLP”
- Liability insurance
Liability (LLP)
Limited liability from the firm’s debt obligations
Restrictions (LLP)
Only lawyers, doctors, accountants, and architects can form LLPs
Structure (LP)
General partner
* At least one
Limited partner
* At least one
Control rule (LP)
If limited partner influence control of business in any way, they lose shield of liability
Formation (LP)
- Documentation including “[name], LP”
- Certification of limited partnership filed with secretary of state
Liability (LP)
General partner
* Unlimited liability
Limited partner
* No liability unless participating in control of business
Structure (LLLP)
Limited partnership where all partners have limited liability
Formation (LLLP)
Same as LP
Liability (LLLP)
- LLP is like general partner of LP
- LLP liable for debt of limited partnership
- Until funds of LLP exhausted
Operating agreement (LLC)
Includes management and control, buyout arrangements, voting, and compensation
Formation (LLC)
- Articles of organization filed with secretary of state
- Operating agreement
Piercing the veil (LLC, corporation)
No personal liability unless factors justify piercing the veil:
* Alter ego
o Commingling of funds and assets
o Failure to observe corporate formalities
o Undercapitalization
* Deception, misrepresentation, fraud
Manager-managed (LLC)
- Selected managers run business
- Only managers have authority to bind business
- Members do not have agency authority
Member-managed (LLC)
- Every member has management authority
- Members have authority to bind business
- Members are agents
Naming (corporation)
- Distinguishable
- Not likely to mislead
- Contains words or abbreviation indicating corporate status
De jure (corporation)
Legal corporation
De facto (corporation)
Corporation arises from good faith attempt to incorporate if there is a valid law under which corporation could be organized, the corporation attempted to organize, and the corporate franchise is actually used
Corporation by estoppel (corporation)
Third party who contracts with corporation is estopped from denying its existence
Powers (corporation)
What corporation has ability to do under the law
Purpose (corporation)
Why corporation is being created in the first place
Ultra vires (corporation)
- When corporation goes “beyond its [purpose]”
- Actions that go beyond purpose are void
Formation (corporation)
- Articles of incorporation filed with secretary of state
- Bylaws
Promoter liability (corporation)
Promoter has fiduciary duty to general creditors, co-promoters, corporations, shareholders, and future shareholders
Promoter (corporation)
Person who takes the initiative in founding/organizing a business
Pre-incorporation contracts (corporation)
- Promoter is generally liable unless they show contrary intent
- Types of pre-incorporation contracts
o Contract in name of promoter (promoter liable)
o Contract in name of corporation (promoter liable)
o Contract in name of corporation not yet formed (liability of promoter depends on what court finds to be parties’ intent) - Corporation is not liable unless contract adopted after incorporation
Express adoption (corporation)
Signed in writing
Implied adoption (corporation)
Adoption through action
Novation
Promoter only released from liability if corporation, promoter, and third party agree to remove name from contract
Defective incorporation (corporation)
Persons acting on behalf of corporation knowing there was no incorporation are jointly and severally liable
Watered stock liability (corporation)
- Stock issue for less than par value
- Shareholders who purchase watered stock are liable for difference between amount paid and what should have been paid
Board of directors (corporation)
- Managers
- Agents
Officers (corporation)
- CEO, COO
- Carry out decisions of managers
- Agents
Shareholders (agency relationships)
Not agents
Common shares (corporation)
- Right to vote for directors
- Right to distributions
Preferred shares (corporation)
- Preferred right to distributions
- No right to vote
Participating preferred (corporation)
Participate in both preferred and common payouts
Cumulative shares (corporation)
Any dividend not paid the year before accumulates
Non-cumulative shares (corporation)
Dividend disappears if not paid
Consideration for shares (MBCA 1969; corporation)
Labor or services to be performed and promissory notes not allowed
Consideration for shares (MBCA 2002; corporation)
Labor or services to be performed and promissory notes allowed
Conversion (corporation)
- Preferred shareholder can covert to common stock
- Common shareholders cannot cover to preferred
Liquidation preferences (corporation)
Preferred shareholders get paid first if corporation liquidates
Redemption rights (corporation)
Corporation can buy back (or “call”) redeemable share at predetermined price
Preemptive rights (corporation)
Shareholders have right to purchase new issuance of stock by the corporation before it is offered to the public in proportion to their existing stock
Dilution (corporation)
- Value of existing shares will decline when new stock issued
- Issuing stock below fair maker value is perfectly legal
- Issuing stock below fair market value to injure minority shareholder is violation of fiduciary duty
Principal-agent (agency relationship)
Principal controls or has right to control result and detail and means by which result is achieved
Principal-independent contractor (agency relationship)
Principal has right to control result
Actual authority (agency relationship)
Manifestation by principal to an agent
Apparent authority (agency relationship)
Manifestation by principal to a third party
Implied authority (agency relationship)
Inferred from a prior course of conduct
Incidental authority (agency relationship)
Actions related to a task that is already authorized
Formation (agency relationship)
- Principal gives consent to another person to act on principal’s behalf and
- Subject to principal’s control
- Agent consents to act on principals behalf and subject to their control
Disclosed principle (agency relationship)
- Identity of the principal known
- Agent not liable
Partially disclosed principal (agency relationship)
- Agent acting on behalf of principal
- Other party knows this
- However, identity of principal unknown
- Agent liable
Undisclosed principal (agency relationship)
- Agent acting on behalf of principal
- However, other party does not know this
- Agent liable
Fiduciary duties (agency relationship)
Agent must:
* Be accountable for profits
* Not benefit anyone other than principal
* Must not compete with principal
* Preserve and protect property of principal
* Compensate principal for loss
Tort liability (agency relationship)
- Principal liable for torts committed by agent within scope of employment
- Principal not liable for torts committed by independent contractor
Termination (agency relationship)
- Either party can terminate
- Death or incompetence also terminates
Transferring interest (general partnership)
- Partner cannot transfer ownership interest in partnership
- Partner can transfer financial interest in partnership (share of profits and right to receive distributions)
Equity insolvency test (corporation)
No distributions if corporation would not be able to pay its debts as they become due in the usual course of business
Balance sheet test (corporation)
No distribution if assets < liabilities plus sum needed to pay preferred shareholders
Assets (corporation)
Assets equal liability plus equity
Equity (corporations)
Property minus debt equals equity
GAAP (corporation)
Base decision on:
* Financial statements prepared on the basis of accounting practices and principles that are reasonable in the circumstances or
* Fair valuation or other method that is reasonable in the circumstances
* Exception: GAAP required for large publicly traded corporation
Liability of directors for unlawful distribution (corporation)
Director liable for difference between amount of distribution given and amount that could have been distributed validly under the state
Closely held corporations (corporation)
In California, closely held corporation is limited to corporations with less than 35 shareholders
Authority of closely held corporations (corporation)
- Authority normally placed in the board of directors can be vested in other persons or organizations by including an appropriate provision in the articles of incorporation
- Must include “this corporation is a close corporation”
Shareholder voting (corporation)
Shareholders vote for:
* Directors
* Big corporate changes (mergers, change in state of incorporation, amendment to articles of incorporation)
Notice requirement for voting (corporation)
48 hours
Quorum (corporation)
- Shares generally must be present to vote
- Certain number of shares must be present for it to be a valid meeting
- Usually a majority of shares
Proxy (corporation)
- Person authorized to vote someone else’s shares
- Agency relationship
- 11-month term
Record owner (corporation)
- Person whose name is on the corporate books
- Appointed as proxy by beneficial owner
- By contract
Beneficial owner (corporation)
Actual owner of the shares
Straight voting (corporation)
- One share, one vote
- Requires 51% to win
- Majority shareholder always wins
Cumulative voting (corporation)
- Gather all votes together and distribute accordingly
- Beneficial for minority shareholders
Straight and cumulative voting (corporation)
- Strategic
- 48-hour notice if voting cumulatively
Staggered boards (corporation)
- Reduce number of positions elected every year by staggering elections
- Fewer the number of directors standing for election, the higher the percentage of stock required to elect director using cumulative voting
- Therefore, staggered boards make cumulative voting more difficult
Voting trust (corporation)
- Shareholder formally transfers “legal title” to their shares and therefore voting power to a voting trustee in exchange for voting trust certificate
- Shareholder retains economic attributes of ownership
- Only transfers voting power
Vote pooling (corporation)
- Less formal than voting trust
- No disruption of ownership interests
Revocable proxies (corporation)
- Proxies are usually revocable
- Must be in writing
- Writing must include date of appointment
Irrevocable proxy (corporation)
- Valid if it states that proxy is irrevocable and
- Coupled with interest in the corporation
Persons with interest in corporation (corporation)
- Pledgee
- Person who purchased or agreed to purchase shares
- Creditor of the corporation who issued credit under terms requiring the appointment
- Employee of the corporation whose employment requires the appointment
- Party to voting agreement (current shareholders), and
- Any other condition that applies
Securities Exchange Act of 1934 (corporation)
Unlawful to solicit or permit use of name to solicit any proxy or consent or authorization in respect to any security registered pursuant to sec. 12
SEC umbrella (corporation)
Under umbrella if:
* Corporation who securities are traded on a national securities exchange or
* Corporation with >$10M in assets (within 120 days of last day of fiscal year) and shares of a class held by more than 2,000 shareholders or 500 or more persons who are not accredited investors
Accredited investor (corporation)
- Record owner who does not need protection of SEC
- Usually $1M in liquid assets or person with special knowledge
Proxy statement (corporation)
Proxy statement must include annual report and MD&A
MD&A (corporation)
Disclosure of forward-looking information
Safe harbor provisions (corporation)
Covers false statements in MD&A made with no knowledge it was false
Termination of SEC registration (corporation)
Class of stock must be reduced to meet following:
* Registration terminated 90 days after issuer files a certification with commission that number of holders of record is reduced to less than 300 or
* Less than 500 persons if assets have not exceeded $10M on last day of each of last three years
Proxy solicitation requirements (corporation)
- Substance
- Form
- Out of order matters
- Fraud or deceit
Exemptions to proxy regulations (corporation)
- Speeches, press releases, or published statements stating how shareholder intends to vote
- Solicitation that does not seek the power to act as a proxy and does not furnish physical proxy
- Solicitation where the number of persons solicited is less than 10 (Thanksgiving dinner rule)
Deadlock (corporation)
Corporation unable to act because it is at “dead center” on an issue
Oppression (corporation)
Examples
* Ousting minority shareholder
* Refusal to pay dividends
Grounds for dissolution (corporation)
Court may dissolve if:
* In proceeding by attorney general
* In proceeding by shareholders if (1) deadlock; (2) shareholder unable to break deadlock; and (3) irreparable injury to corporation because of the deadlock
Duty of care (corporation)
(1) Business judgment rule (MBCA sec. 8.30, 8.31)
* Evidentiary presumption that directors in making a decision have acted
* On an informed basis
* In good faith
* In a manner they believe to be in the best interest of shareholders
(2) Common law
* Decisions must be informed
* Otherwise, violation of duty of care
* Known as the “Van Gorkom” duty of care
Direct shareholder lawsuit (corporation)
Corporation directly caused the shareholder harm through a breach of fiduciary duty
Derivative shareholder lawsuit (corporation)
Shareholders bring suit on behalf of corporation for a breach of fiduciary duty
Duty of loyalty (corporation)
- Requires directors to exercise their powers in the interests of the corporation, and not in the directors’ own interest or in the interest of another person (including a family member) or organization
- Directors should not use their corporation position to make a personal profit or gain or for other personal advantage
Self dealing (corporation)
(1) Statutory definition
* No contract or transaction between a corporation and one or more officers and directors shall be void or voidable solely because the director or officer is present or participates at the meeting of the board that authorizes the transaction, even if their votes are counted in:
* Disclosure and board or board committee subordination by majority vote of disinterested directors or
* Disclosure and shareholder authorization or
* Contract or transaction is fair at the time it is authorized by board (does not need to be disinterested), board committee, or shareholders
(2) Common law
* Intrinsic fairness test
Corporate opportunity (corporation)
Corporate opportunity is one in which:
* Director or senior executive becomes aware of in their corporate capacity or that they should know the other party is offering to the corporation or
* Director or senior executive, who became aware of through the use of corporate information, should know the corporation would be interest in or
* Senior executive knows is closely related to the corporation’s current or expected business
Restrictions on corporate opportunities (corporation)
ALI test
* Directors/senior officers may not take advantage of a corporate opportunity unless:
* Opportunity is offered to corporation and
* Disclosure concerning the conflict of interest is made and
* Opportunity is rejected by corporation and
* Rejection is fair or
* Opportunity is rejected in advance by disinterested directors/superiors following disclosure
* Rejection is authorized or ratified by shareholders (and not a waste of corporate assets)
Burden of proof for corporate opportunity (corporation)
Plaintiff has burden of proof as long as the defendant meets the requirements
Tip (corporation)
Information not available to the general public passed by one person to another as a basis for a decision to buy or sell a security
Tipper (corporation)
Insiders and outsiders with a confidentiality duty who knowingly make improper tips
Tippees (corporation)
Those without a confidentiality duty who knowingly trade on improper tips
Rule 10b-5 (corporation)
Key terms (elements)
* By the use of any means or instrumentality
* In connection with purchase or sale of any security
* Any manipulative or deceptive device
* In the public interest or for the protection of investors
* Scienter (intent to deceive or reckless disregard for truth)
Statute of limitations for Rule 10b-5 for closely held corporations (corporation)
- One year after discovery or
- Three years after the transaction in question
Statute of limitations for Rule 10b-5 for publicly traded corporations (corporation)
- Two years after discovery or
- Five years after the transaction in question
Duty of trust and confidence (corporation)
Rule 10b-5-2
* Three non-exclusive situations in which person has duty of trust or confidence:
* Person agrees to maintain confidence
* Two people have history, pattern, practice of sharing confidences; recipient knows or should have confidentiality is expected
* Bright line rule of confidentiality if info came from spouse, parent, children, or siblings
“on the basis of” (corporation)
Rule 10b-5-1
* If individual knew about the information the court assumes that they were trading “on the basis of” that information
Classic insider trading (corporation)
Corporate insider trades (i.e., buys or sells) shares in their corporation using material, nonpublic information obtained through the insider’s corporate position
Classic outsider trading (corporation)
Corporate outside trades (i.e., buys or sells) share of their corporation using material, nonpublic information obtained through the insider’s corporate position
Mere possession theory (corporation)
- Mere possession of nonpublic market information is not enough to trigger liability under Rule 10b-5
- Duty to disclose nonpublic information before trading only arises when one has a fiduciary relationship or duty of trust and confidence to the corporation in whose stock the insider was trading
Misappropriation theory (corporation)
Person violations the rule when they misappropriate confidential information for securities trading purposes in breach of a duty owed to the source of the information
Tipper-tippee theory
Dirks liability
* Is the tip an illegal tip?
(1) Tipper
* Fiduciary duty
* Only where a tipper earns personal benefit
* Cash, reputation, any perceived benefit, including information given to friends and family
(2) Tippee
* Knew or should have known of breach
* Intent to deceive the public
* Intent to make money off material nonpublic information
Tipper’s liability (corporation)
Liable for passing along information; tippee does not have to trade on it
Tippee’s liability (corporation)
Liable if they trade on the tip
Cash tender offers (corporation)
Rule 14e-3
* Imposes duty to disclose upon any person possessing material nonpublic information who trades in securities related to tender offers
* Knowing tender offer is coming is equivalent to knowing the price of stock is going to go up
* Requires scienter
Contemporaneous traders (corporation)
Sec. 20A
* Everyone trading at same time as inside trader has private right to sue inside trader
* Because manipulation of markets harms everyone trading “at the same time”
Short-swing trading (corporation)
Sec. 16(a)
* Requires specified insiders to report their trading (officers, directors, 10% shareholders)
Sec. 16(b)
* Authorizes the corporation to recover from specified insiders any profits made on stock transactions in a narrow six-month period
Offsetting transactions (corporation)
Sec. 16 only applies to offsetting transactions (purchase-sale; sale-purchase)
Elements of short-swing trading (corporation)
(1) Jurisdiction
* Companies registered under sec. 12, as follows:
* Corporation whose securities are traded on a national securities exchange as well as
* Corporations with 10 million dollars in assets and shares of a class held by more than 2,000 shareholders
(2) Specified insider
* Officers
* Directors
* 10% shareholders
(3) Short-swing profit
* Profit is determined by matching the highest sales price against the lowest purchase price during any six-month period
* Does not matter if lowest purchase happened after higher purchase or if highest sale happened before lower sale
Indemnification (corporation)
Corporation’s promise to reimburse the director or officer for:
* Litigation expenses to defend a suit and
* Amounts paid to settle a suit or satisfy a judgment if the director or officer is sued because she is or was a director
Mandatory indemnification (corporation)
Required by statute
Permissive indemnification (corporation)
At discretion of company
Advancement (corporation)
Immediate payment of director/officer’s ongoing expenses during investigation/litigation
Insurance (corporation)
Provides meaningful protection to directors in the form of:
* Payments for indemnification even if corporation is not financially able to pay and
* Claims not covered by corporation’s indemnification provision
Takeovers (corporation)
An attempt by an outside corporation or group to wrestle control away from incumbent management
Aggressor (corporation)
Potential acquirer
Target (corporation)
Sought-after corporation
Proxy fight (corporation)
- Traditional takeover method
- Political campaign with shareholders to give outside challenger their proxy
- Corporation pays for incumbent managers to defend themselves
- If outside challenger wins, corporation likely to pay for their bid
Cash tender offer (corporation)
- Invitation to sell shares for cash
- Most cash tender offers are higher than market value
- Cash does not fall under security regulations
- Does not need to be filed with SEC
- Can make cash tender offer contingent on obtaining majority control
- If excess of available shares, can choose to buy 51% only or 55%
Mop-up transactions (corporation)
- Takeover bid falls short and only captures 70% of shareholders
- Company enters into cash-out merger; separate transaction
- Majority shareholders sells company; minority shareholders forced to accept the cash for stock offer at a lower price
- Offers outstanding shares less than tender offer (i.e., “mopped up” at lower rate)
- Minority shareholders can fight about the price but cannot fight about the merger actually happening
Williams Act (corporation)
(1) Disclosure requirements for bidders
(2) Procedures for bidding
* Minimum period
* Right to withdraw
* Highest price paid (to every shareholder)
* Shares purchased proportionally
Defending against takeovers (corporations)
- State statutes
- Poison pills
- Staggered terms for board of directors
- Due class capitalization plans
Scienter (corporation)
Intent to deceive or reckless disregard for truth
Applicability of 10b-5 (corporation)
Rule 10b-5 applies to any corporation, not just publicly traded companies
