Corporations

Question 1

Organization of Corporation: Requirements

Answer 1

(1) People: one or more incorporators
(2) Paper: articles of Incorporation
(3) Act: deliver notarized articles to Secretary of Sttae

Question 2

Organization of Corporation: Requirements - People

Answer 2

Incorporators:

(a) Must be one or more incorporators
(b) Incorporator may be an individual person or an entity
(c) Incorporators execute the articles of incorporation and deliver them to the secretary of state

Question 3

Organization of Corporation: Requirements - Articles of Incorporation (Paper)

Answer 3

Articles of incorporation are (a) a contract between corporation and shareholders and (b) a contract between corporation and state

Information in articles:

(1) NAMES and ADDRESSES:
(a) Corporate name, which must include: Corporation (Corp.), Company (Co.), Incorporated (Inc.), or Limited (Ltd.)
(b) Name and address of each incorporator
(c) Name and address of each initial director
(d) Name of registered agent and address of registered office (legal representative)

(2) DURATION: if the articles of incorporation do not mention duration, corporation has perpetual existence

(3) Generally must have a statement of PURPOSE:
(a) General purpose: can be as broad as “engage in all lawful activity, after first obtaining necessary state agency approval”; some states presume general purpose without anything in the articles
(b) Specific statement of purpose: can state a more specific purpose – if corp acts beyond that stated purpose, then ultra vires: (i) ultra vires contracts are valid, but (ii) shareholders can seek injunction and (iii) responsible managers are liable to corporation for ultra vires losses

(4) CAPITAL STRUCTURE (stock): articles must include (a) authorized stock, (b) number of shares per class, and (c) information on voting rights and preferences of each class
- Authorized stock: max number of shares corp can sell
- Issued stock: number of shares corp actually sells
- Outstanding stock: shares that have been issued and not reacquired

Question 4

Organization of Corporation: Requirements - Act

Answer 4

Incorporators have notarized articles delivered to the Secretary of State and pay required fees. If Secretary accepts the articles for filing, conclusive proof of valid formation –> De Jure Corporation

Then, board of directors holds organizational meeting where it selects officers and adopts bylaws and conducts other appropriate business

Question 5

Internal Affairs Rule

Answer 5

Internal affairs (e.g. roles and duties of directors, officers, and shareholders) are governed by the law of the state of incorporation

Question 6

Entity Status

Answer 6

A corporation is a separate legal entity/person. It can sue, be sued, hold property, be a partner in a partnership, make charitable contributions etc.

Question 7

Corporations and Taxes

Answer 7

Double taxation: corporation pays income taxes on its profits and shareholders are taxed on distributions

S Corporation: no more than 100 shareholders, all of whom are humans and US citizens or residents; one class of stocks; not publicly traded – corporation does not need to pay income tax

C Corporation: must pay income tax on profits

Question 8

Corporation’s Liability

Answer 8

Limited liability: Directors, officers, and shareholders are not liable for what the corporation does – the corporation is liable for what it does (even if there is only one shareholder)

Question 9

De Facto Corporation

Answer 9

De Facto Corporation requirements:

(1) Relevant incorporation statute (there always is)
(2) The parties made a good faith, colorable attempt to comply with the statute, and
(3) Some exercise of corporate privileges (acting like have a corporation)

If the doctrine applies, business is treated as a corporation for all purposes, except in action by the state (quo warranto)

Doctrine has been abolished in many states

Question 10

Corporation by Estoppel

Answer 10

One who treats a business as a corporation may be estopped from denying that it is a corporation

Can also prevent an improperly-formed “corporation” from avoiding liability by saying it was not properly formed

Examples: you do business with people who hold their business out as a corporation, you think it’s a corporation, they think it’s a corporation, you write checks to the corporation – cannot successfully sue proprietors individually

Doctrine has been abolished in many states

Question 11

Bylaws

Answer 11

Bylaws are not a condition precedent to forming a corporation and they are not filed with the state, but corporations usually have them for internal governance

Adoption: The board adopts the initial bylaws at the organizational meeting

Amendment or repeal: Shareholders can do this, and the board can in many states

The articles control if the articles and bylaws conflict

Question 12

Pre-Incorporation Contracts

Answer 12

A promoter is a person acting on behalf of a corporation not yet formed. She may enter into a contract on behalf of a corporation not yet formed.

The contract is considered an offer to the proposed corporation

(1) Liability of the corporation: not liable on pre-incorporation contract until it adopts the contract, which it can do
(a) Expressly: express official action to adopt with knowledge of material facts; or
(b) Impliedly: someone in authority to accept the benefits of the contract with knowledge of material facts (e.g., accept benefits or conduct constituting estoppel)

(2) Liability of promoter: unless contract clearly says otherwise, promoter is liable on the pre-incorporation contracts until there is novation (promoter, corp, and other party agree that corporation replaces promoter under contract)
(a) Signing “as agent” does not release liability.

Question 13

Foreign Corporations

Answer 13

Rule: Foreign corporations transacting business in this state must qualify and pay prescribed fees, and have a registered agent in the state

Definitions:

(a) Foreign corp: Anything outside a state is considered foreign
(b) Transacting business: regular course of intrastate (not interstate) business activity; does not include occasional or sporadic activity in the state or simply owning property in the state
(c) Qualification: by getting a certificate of authority from the Secretary of State; corp gives information from its articles and proves good standing in its home state

What happens if a foreign corporation transacts business without qualifying?

(1) Civil fine and
(2) Cannot sue in this state (but can be sued and defend)

Question 14

Issuance of Stock

Answer 14

An issuance of stock is when the corporation sells its own stock

This is a way for the corporation to raise capital

Question 15

Subscriptions

Answer 15

Definition: written offers to buy stock from corporation

Revocation:

(1) PRE-INCORPORATION subscriptions: subscriptions are irrevocable for 6 months, unless it says otherwise or all subscribers agree to let you revoke
(2) POST-INCORPORATION subscriptions: revocable until accepted by the corporation (i.e., when the board accepts the offer)

Question 16

Stock Issuance: Consideration

Answer 16

What must a corporation receive when it issues stock?

(1) Form of consideration:
(a) Every state agrees the following are permitted: (i) money (cash or check), (ii) tangible or intangible property, (iii) services already performed for the corporation
(b) Split of authority regarding: (i) promissory notes, (ii) future services – where prohibited, use results in “unpaid stock”

(2) Amount of consideration:
(a) Par: minimum issuance price, but can sell for more. (i) If par is sold for less than minimum, gap amount is water; director is liable if knowingly allowed as is purchaser (no defense); third party purchaser liable is know about water
(b) No par: no minimum issuance price, board of directors sets the price
(c) Treasure stock: stock company issued and then reacquired, corp can resell and board sets whatever price it wants

Question 17

Pre-emptive Rights

Answer 17

Pre-emptive right is the right of an existing shareholder of common stock to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock FOR MONEY (cash or equivalent)

Split authority wrt whether treasury stock is considered a new issuance

If articles are silent, split authority wrt whether there are pre-emptive rights

Question 18

Board of Directors: Statutory Requirements

Answer 18

(1) Must be an adult, natural person
(2) One or more persons
(3) Election: initial directors named in the articles; then shareholders elect directors at annual meeting (whole board elected each year, unless staggered board)
(4) Removal: shareholders can remove directors before their terms expire, usually requires majority; (i) unstaggered board, can remove with or without cause; (ii) staggered board, can remove only with cause
(5) Board vacancy: Board or shareholders select replacement for remainder of term

Question 19

Board of Directors: Taking Action

Answer 19

Directors are not agents of the corporation, so they must act as a group.

Two ways to take action:

(1) Unanimous agreement in writing, or

(2) At a meeting, which satisfies quorum and voting requirements
(a) Notice: (i) method usually set in bylaws; (ii) regular meetings: no notice required; (iii) special meetings: notice of time and place required; (iv) failure to give notice voids action at meeting, unless un-notified directors waive defect in writing anytime or attending meeting w/o objection
(b) No proxies allowed - non-delegable fiduciary duty to corporation
(c) Quorum is required; (i) unless bylaws say otherwise, a quorum is a majority of all directors; (ii) if the quorum is satisfied, need a majority of those present to pass a resolution; (iii) quorum of the board can be lost (broken) if people leave, and no action can happen

Question 20

Role of Directors

Answer 20

Generally, the board of directors manages the business of the corporation – sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental corporate changes to shareholders

Question 21

Role of Directors: Committees

Answer 21

Board can delegate to a committee of one or more directors

BUT a committee CANNOT:

(1) Declare dividends
(2) Set director compensation
(3) Fill a board vacancy

Committee CAN recommend such things to the full board for its action

Question 22

Director Liability: Duty of Care

Answer 22

Burden is on the plaintiff

Duty of care standard: A director owes the corporation a duty of care. She must act in good faith and do what a prudent person would do with regard to her own business (i.e., business judgment rule)

(1) Nonfeasance: director can violate duty of care by doing nothing when a prudent person would do something and when the breach causes a loss to the corporation
(2) Misfeasance: the board does something that hurts the corporation and the directors’ actions don’t satisfy the business judgment rule

Question 23

Director Liability: Duty of Loyalty

Answer 23

Standard: A director owes the corporation of duty of loyalty. She must act in good faith and with a reasonable belief that what she does is in the corporation’s best interest.

BJR does not apply because there is a conflict of interest

(1) Interested director transaction: this is any deal between the corporation and one of its directors (or close relative of a director) or another business of the director’s.
(a) Interested director transaction will be set aside or the director will be liable in damages unless the director shows either (i) the deal was fair to the corporation when entered or (ii) her interest and the relevant facts were disclosed or known and the deal was approved by either a majority of disinterested directors or majority of disinterested shares
- In many states, interested directors count toward quorum
- Some courts require showing of fairness, even if appropriate group approves the deal

(2) Setting salaries: directors can set their own salaries as directors or officers, but it must be reasonable and in good faith; if excessive, it’s a waste of corporate assets and a breach of the duty of loyalty

(3) Corporate Opportunity (Expectancy): Director cannot usurp a corporate opportunity; he cannot rake until he (a) tells the board about the opportunity and (b) waits for the board to reject the opportunity
- Corporate opportunity is defined as: something in the business line, something the company has an interest or expectancy in, or found on company time or with company money
- Company’s financial inability to pay is not a defense
- Remedy: (a) If breaching director still has it, he must sell to corporation at his cost; (b) If he sold it at a profit, corporation gets the profit (constructive trust)

Question 24

Director Liability: Ultra Vires Acts

Answer 24

Responsible officers and directors are liable for ultra vires losses

Question 25

Director Liability: Improper Distributions

Answer 25

A director who votes for or assents to distributions that violate contractual rights to distributions is personally liable to the corporation for the amount of distribution that exceeds what could have been properly distributed UNLESS distribution approved in good faith

Director is entitled to contribution from every other director who could be held liable and each shareholder for amount she accepted knowing distribution was improper

Question 26

Director Liability: Improper Loans

Answer 26

Board of directors can loan money to a director if it is reasonably expected to benefit the corporation

Question 27

Sarbanes-Oxley Act

Answer 27

Generally forbids loans to executives in large, publicly-traded (registered) corporations. It requires the board of such a corporation to establish an audit committee and oversee work of registered public accounting firm. Chief executive and financial officers must certify accuracy and completeness of financial reports.

Question 28

Director Liability for Board Actions

Answer 28

(1) General rule: A director is presumed to concur with board action UNELSS her dissent or abstention is noted in writing in corporate records
(a) In writing means: (i) in the minutes, (ii) delivered in writing to the presiding officer at the meeting, or (iii) written dissent to the corporation immediately after the meeting
(b) Oral dissent alone is not sufficient
(c) Cannot dissent if not at meeting

(2) Exceptions:
(a) An absent director is not liable for stuff done at the meeting she missed
(b) Good faith reliance on information (including financial information) present by an officer, employee, or committee (of which director relying was not a member), or professional reasonably believed to be competent.

Question 29

Officers: Duties Owed

Answer 29

Officers owe the same duties of care and loyalty as directors

Question 30

Officers: Status

Answer 30

Officers are agents of the corporation (principal), so agency law applies. Whether the officer can bind the corporation is determined by whether she has agency authority to do so (e.g. actual or apparent)

Question 31

Required Officers

Answer 31

Generally, must have (1) president, (2) secretary, and (3) treasurer – one person can hold multiple offices simultaneously

Question 32

Officers: Selection and Removal

Answer 32

Officers are selected by and removed by the board which also sets officer compensation

Question 33

Indemnification of Directors and Officers

Answer 33

(1) No indemnification if officer or director (a) was held liable to the corporation or (b) held to have received an improper personal benefit
(2) Mandatory indemnification if director or officer was successful in defending on the merits or otherwise (e.g., wins a judgment)
(3) Permissive indemnification: anything not satisfying 1 or 2, e.g. case against director or officer settled. (a) Eligibility standards: must show acted in good faith with reasonable belief her actions were in the company’s best interests (i.e. duty of loyalty). (b) Disinterested directors, disinterested shares, or independent legal counsel determine eligibility.
(4) Court where director or officer was sued can order reimbursement if it is justified in view of all circumstances. If she was held liable to corporation, limited to costs and attorneys’ fees.
(5) Articles of incorporation can eliminate director (and, in some states, officer) liability to the corporation for damages, but NOT for duty of loyalty violations (i.e., intentional misconduct, usurping corporate opportunities, unlawful distributions, or improper personal benefit)

Question 34

Shareholders: Management

Answer 34

(1) Shareholders do not manage the corporation (directors do)

(2) In a close corporation, shareholders can manage the corporation by eliminating the board of directors by either
(a) In articles and approved by all shareholders, or
(b) By unanimous written shareholder agreement
- -> Managing shareholders assume duties of care and loyalty to corporation

Question 35

Shareholder Management: Close Corporation - Definition and Duties

Answer 35

Definition: Few shareholders and stock is not publicly traded

Duties:

(a) Shareholders owe each other fiduciary duties – must treat each other with utmost good faith
(b) If minority shareholders are oppressed (e.g., deny voice in corporate affairs, firing from employment, refuse to declare dividends, refuse to buy minority stock), they can sue controlling/oppressing shareholders for breach of fiduciary duties

Question 36

Shareholder Management: Licensed professionals

Answer 36

Licensed professionals, including lawyers, medical professionals, and CPSa may incorporate as a “professional corporation” or “professional association” (name must have PC or PA) and articles must state purpose is to practice particular profession

Directors, officers, and shareholders must be licensed professionals, but may employ non-professionals

Liability for malpractice:

(a) Professional personally liable for their own malpractice
(b) Shareholders generally not liable for corporate obligations or for other professionals’ malpractice

Generally, rules governing regular corporations apply

Question 37

Shareholder Liability for Corporate Debts or Acts

Answer 37

Shareholders (including other corporations) are generally NOT liable for corporation’s debts or acts

BUT court can PIERCE CORPORATE VEIL if CLOSE CORPORATIONS to hold shareholders liable IF:

(1) Shareholder(s) has abused the privilege of incorporation and
(2) Fairness must require holding them liable (can pierce to avoid fraud or unfairness, but sloppy admin is insufficient)

Examples:

(1) Alter ego (identity of interests): Court can pierce veil if shareholder treated corporate assets as his own
(2) Undercapitalization: Court can pierce veil if corporation was undercapitalized when formed (failed to invest enough to cover prospective liabilities).

Court may be more willing to PCV for tort victim than contract victim

Question 38

Derivative Suits: Definition

Answer 38

In a derivative suit, a shareholder is suing to enforce the corporation’s claim, not her own claim. Corporation is not pursuing its own claim, so shareholder steps in.

Examples: (a) Suit against directors for breach of duty of care or loyalty is always derivative.

Question 39

Derivative Suits: Remedies

Answer 39

(a) If shareholder wins, corporation gets money from judgment; shareholder gets costs and attorneys’ fees
(b) If shareholder loses, cannot recover costs and attorneys’ fees; liable to defendant for costs and attorneys’ fees if sued without reasonable cause (and other shareholders cannot later sue same D on same transaction)

Question 40

Derivative Suits: Requirements

Answer 40

(1) Stock ownership when the claim arose and throughout the suit (includes through operation of law, e.g. inheritance and divorce decree)
(2) Adequate representation of corporation’s interest
(3) Must make written demand on corporation (usually the board) that the corporation bring the suit. In many states, must do this and can’t sue until 90 days after it is made.
(4) Corporation must be joined as a defendant

(5) Parties can settle or dismiss only with court approval
(a) Court may give notice to shareholders to get their input
(b) Corporation can move to dismiss upon showing independent investigation (independent directors or court appointed) showed suit as not in corporation’s best interest (e.g. low chance of success, expense would exceed recovery)

Question 41

Shareholder Voting: Who Votes - General Rule

Answer 41

General rule: the “record shareholder” as of the “record date” has the right to vote

(a) Record shareholder: person shown as the owner in the corporate records
(b) Record date: voter eligibility cut-off

Question 42

Shareholder Voting: Who Votes - Exceptions to the General Rule

Answer 42

(1) Corporation re-acquires stock before the record date, making corporation owner of this treasury stock – corporation cannot vote
(2) Death of shareholder: if record shareholder dies after record date, executor can vote

(3) Proxies: a proxy is a writing (fax, email ok) signed by record shareholder (email ok if can ID sender), directed to secretary of corporation, authorizing another to vote shares
(a) Proxy good for 11 months, unless says otherwise
(b) Revocation of proxy: can revoke in writing or by attending the meeting and voting
(c) Can revoke an irrevocable proxy, unless the proxy says it is irrevocable and the proxy-holder has some interest in the shares other than voting

Question 43

Shareholder Voting: Who Votes - Voting Trusts

Answer 43

Requirements:

(1) Written trust agreement, controlling how the shares will be voted
(2) Copy to the corporation
(3) Transfer legal title to the voting trustee
(4) Original shareholders receive trust certificates and retain all shareholder rights except voting
(5) Maximum 10 years

Question 44

Shareholder Voting: Who Votes - Voting (“Pooling”) Agreements

Answer 44

Requirements:

(1) In writing
(2) Signed

Split authority as to whether voting agreements are specifically enforceable (in states where the answer is no, voting trust is preferable)

Question 45

Shareholder Voting: Where

Answer 45

(1) Usually takes place at a meeting

(2) Shareholders can also act by unanimous written consent signed by holders of all voting shares

Question 46

Shareholder Voting: Where - Types of Meetings

Answer 46

Two types of shareholder meetings

(1) Annual meeting: required to happen; elect directors at this meeting
(a) If no annual meeting is held within 15 months, a shareholder can petition the court to order one

(2) Special meeting: can be called by (a) the board, (b) the president, (c) the holders of at least 10% of the voting shares, or (d) anyone else authorized in the bylaws

Question 47

Notice for Shareholder Meetings

Answer 47

Notice requirement:

(a) Must given written notice (fax or email ok) to every shareholder entitled to vote
(b) Must be delivered between 10-60 days before the meeting

Contents:

(a) Must state time and place
(b) For special meetings, must state purpose – shareholders cannot do anything else at the meeting

Consequence of failure to give proper notice: action taken at the meeting is void, unless those not sent notice waive the notice defect
-Waiver: (a) Express: in writing and signed any time (fax, email ok); (b) Implied: attend meeting without objection

Question 48

Shareholder Voting: Topics

Answer 48

Shareholders generally get to vote:

(1) To elect directors
(2) To remove directors
(3) On fundamental corporate changes
(4) May vote on other things if board asks for shareholder vote

Question 49

Shareholder Voting: How

Answer 49

In order to vote, there needs to be a quorum, which focuses on the number shares represented, not the number of shareholders

General rule: quorum requires a majority of outstanding shares; quorum cannot be lost if people leave the meeting

If quorum satisfied, need:

(1) To elect director: plurality (person who gets more votes for seat than anyone else)
(2) To remove director: traditionally, majority of shares entitled to vote
(3) To approve fundamental corporate change: majority of shares entitled to vote (but increasing number of states only require majority of shares that actually voted)
(4) Other matters: majority of shares that actually vote on the issue

Question 50

Shareholder Voting: Cumulative Voting

Answer 50

Only applies to shareholder election of directors (gives small shareholders better chance of electing someone) – one, at-large election with top three finishers being elected

Determination of voting power: [number of shares] x [number of directors to be elected] = [number of votes]

Generally no cumulative voting if articles are silent on the topic

Question 51

Stock Transfer Restrictions

Answer 51

Stock transfer restrictions are allowed if they are reasonable (e.g., right of first refusal is valid)

If a restriction is valid, it can be enforced against a transferee (recipient) if (a) restriction is conspicuously noted on the stock or (b) transferee had actual knowledge of the restriction

Question 52

Right of Shareholder to Inspect and Copy Books and Records

Answer 52

Standing: Any shareholder can demand access on 5 days written demand

Procedure: Shareholder must make a written demand stating the documents desired and a proper purpose (i.e., related to interest as shareholder) for inspection

Consequences of corporate non-compliance: if corporation fails to allow proper inspection, shareholder can seek a court order. If she wins, she can recover costs and attorney’s fees incurred in making the motion

Question 53

Distributions: Definition and Types

Answer 53

Definition: Payments by corporation to shareholder; at board of director’s discretion, so right to distribution kicks in when board declares distribution

Types:

(1) Dividends
(2) Repurchase shareholder’s stock
(3) Redemption (forced sale to corporation at price set in articles)

Question 54

Distributions: Who gets distributions

Answer 54

Difficult to compel a board to give distributions

(a) Common stock: same amount per share
(b) Preferred stock: means pay first, then divide remaining amount among common stock shareholders
(c) Cumulative dividend: accrues year-to-year, so corporation owes cumulative holders for prior years and current year

Question 55

Distributions: Which funds can be used - Traditional View

Answer 55

(1) Earned surplus: can be used for distributions
(a) Earned surplus is money generated by business activity; consists of [all earnings] - [all losses] - [distributions previously paid]

(2) Stated capital: can never be used for distributions
(a) Stated capital is money generated by issuing stock; when a corporation issues stock, it allocates proceeds between stated capital and capital surplus; *par value goes to stated capital

(3) Capital sock: can be used for distributions if inform shareholders
(a) Capital stock is [payments in excess of par] + [amounts allocated in a no-par issuance]

Question 56

Distributions: Which funds can be used - Modern View

Answer 56

Modern view does not look at the funds. It says a corporation cannot make a distribution if it is insolvent or if the distribution would render it insolvent

Insolvent means:

(a) Corporation is unable to pay its debts as they come due; or
(b) Total assets are less than total liabilities, which include preferential liquidation rights

Question 57

Fundamental Corporate Change: Characteristics

Answer 57

These are extraordinary, so board cannot do them alone, e.g. amending the articles, selling off all assets, merging

Need four things:

(1) Board action adopting a resolution of fundamental change
(2) Board submits proposal to shareholders with written notice
(3) Must get shareholder approval: majority of shares entitled to vote (but increasing number of states only require majority of shares that actually voted)
(4) For most of the changes, need to deliver document to Secretary of State

Question 58

Fundamental Corporate Change: Dissenting Shareholder Right of Appraisal

Answer 58

Definition: Right to force the corporation to buy your stock at a fair price (only applies to close corporation); shareholder’s exclusive remedy if she doesn’t like the change (absent fraud)

Shareholder has this right if corporation is:
(a) Merging or consolidating
(b) Transferring substantially all assets not in the ordinary course of business, or
(c) Transferring its stock in a share exchange
UNLESS: no appraisal if (i) stock is listed on a national exchange, or (ii) company has 2000 or more shareholders

To perfect right of appraisal, shareholder mustL

(1) Before shareholder vote, file with corporation written notice of objection and intent to demand payment,
(2) Abstain or vote against the proposed change, and
(3) After the vote, within time set by the corporation, make a written demand to be bought out and deposit stock with the corporation

If shareholder and corporation cannot agree on fair value of the shares, the corporation sues and the court may appoint an appraiser

Question 59

Fundamental Corporate Change: Amendment of Articles

Answer 59

Steps:

(1) Board of director action and notice to shareholders
(2) Shareholder approval: majority of shares entitled to vote
(3) If approved, deliver amended articles to the Secretary of state

*No dissenting shareholder rights of appraisal

Question 60

Fundamental Corporate Change: Mergers or Consolidations

Answer 60

Steps:

(1) Board of director action (both corporations)
(2) Notice to shareholders
(3) Shareholder approval (usually both corporations): majority of shares entitled to vote
(4) No shareholder approval requires if a 90% or more owned subsidiary is merged into a parent company (short form merger)
(5) If approved, surviving corporation delivers articles of merger or consolidation to Secretary of State

*Right of appraisal: generally available for shareholders entitled to vote on the merger or consolidation and shareholders of subsidiary in short-form merger

Effect of merger or consolidation:
(a) Surviving corporation succeeds to all rights and liabilities of the constituents –> Successor liability: creditor of corporation can sue the survivor

Question 61

Fundamental Corporate Change: Transfer of All or Substantially All Assets Not in the Ordinary Course of Business or Share Exchange

Answer 61

“Substantially all”: varies from state to state, usually at least 75% of assets

Constitutes a fundamental change for the selling company, not the buying company

Steps required:

(1) Board action (both corporations)
(2) Notice to selling company’s shareholders
(3) Approval by the selling corporation’s shareholders: majority of shares entitled to vote
(4) Deliver to Secretary of State articles of exchange in share exchange (usually no filing in a transfer of assets

*Shareholders’ right of appraisal exists for shareholders of the selling corporation

Liability: no successor liability in sale of substantially all assets, unless there buyer is a “mere continuation” of the seller (i.e. has same management, shareholders etc)

Question 62

Fundamental Corporate Change: Dissolution

Answer 62

(1) Voluntary: Board of directors action and approval by a majority of shareholders entitled to vote. File notice of intent to dissolve with Secretary of State. Corporation stays in existence to wind up. Notify creditors so they can make claims.

(2) Involuntary: by court order.
(a) A shareholder can petition because of: (i) Director abuse, waste of assets, misconduct; (ii) Director deadlock that harms the corporation; or (iii) Shareholders have failed at consecutive annual meetings to fill a board vacancy
(b) Rather than involuntary dissolution, court might order buy-out of objecting shareholder (most likely in close corporation)
(c) Creditor can petition because corporation is insolvent and (i) he has an unsatisfied judgment or (ii) Corporation admits the debt in writing

Question 63

Fundamental Corporate Change: Dissolution - Wind-Up (Liquidation)

Answer 63

Dissolution does not end the corporation, it begins the process that will end it.

Winding up consists of: (1) gathering all assets, (2) converting to cash, (3) paying creditors, and (4) distributing remainder to shareholders, unless there is a liquidation preference

*Liquidation preference: means pay first, so it works like a dividend preference

Question 64

Federal Securities Law: Securities

Answer 64

(1) Debt securities: investor lends capital to the corporation, to be repaid (usually with interest) as specified in the agreement. Debt holder is a creditor to the corporation, not an owner.
(a) Secured by corporate assets: bond
(b) Unsecured: debenture

(2) Equity securities: investor buys stock from the corporation, which generates capital for the business. Equity holder is an owner, not a creditor.

Question 65

Federal Securities Law: Rule 10b-5 - Elements

Answer 65

This federal law prohibits fraud or misrepresentation (or nondisclosure) in connection with the purchase or sale of any security (debt or equity)

Elements:
(1) Deal must use an “instrumentality of interstate commerce” (mail, telephone, or trade on a national exchange)

(2) Type of transaction:
(a) Misrepresentation of material information
(b) Insider trading: trading securities on basis of material, inside information (insider: one with relationship of trust and confidence with shareholders)
(c) Tipping: insider passes along material inside information for a wrongful purpose; (for tipper liability, tipper acts on tip and knew or should have known information was improperly shared)

(3) Materiality: misrepresentation/omission must concern a “material” fact, i.e. one a reasonable investor would consider important in making an investment decision
(4) Scienter: Defendant must intent to deceive, manipulate, or fraud; recklessness may suffice
(5) Reliance: said to be a separate element, as in fraud cases, but presumed in public misrepresentation and nondisclosure cases

Question 66

Federal Securities Law: Rule 10b-5 - Possible Parites

Answer 66

Possible plaintiffs:

(1) Securities and Exchange Commission
(2) Private action for damages by buyer or seller of securities who was defrauded

Possible defendants:

(1) Company that issues a misleading press release
(2) Buyer or seller of securities who misrepresent material information
(3) Buyer or seller of securities who trades on material inside information (when there is a duty to disclose)
(4) Tipper or tippee

Question 67

Federal Securities Law: Section 16(b)

Answer 67

This federal law provides for recovery by the corporation of “profits” gained by certain insiders from buying and selling the company’s stock.

Applies only to “reporting” corporations, which means (1) listed on a national exchange or (2) at least 500 shareholders and $10,000,000 in assets

Applies to buying and selling of stock within a single 6-month period (short-swing trading). No fraud or inside info needed.

Question 68

Federal Securities Law: Parties and Remedies

Answer 68

Plaintiff: Corporation’s claim to make

Possible Defendants: (a) Director, when she bought or sold, (b) Officer, when she bought or sold, or (c) Shareholder owning over 10%, both when she bought and sold

Remedies: When Section 16(b) applies, ALL profits from such trading are recoverable by the corporation. If, within six months before or after any sale, there was a purchase at a lower price, there is a profit. The order of buy and sell is irrelevant.