Corporations

Question 1

How to form a corporation

Answer 1

People, Papers, Act
o People – incorporators execute articles and deliver to sec of state
o Paper - articles of incorporations
 Corporate Name (co, inc)
 Names and addresses of each incorporator, director + name of registered agent
 Statement of duration
 Statement of purpose
• Ultra vires rule (beyond scope of articles)
o Ultra vires Ks are valid, sharedholders can sue for injunction, responsible managers liable for losses
 Capital structure – authorized stock, issues, stock outstanding stoc
o Act – articles delivered to Sec of State and pay fees = De Jure Corporation
 Organizational Meeting – Then board Holds organizational meeting to select officers and adopt bylaws

Question 2

De Facto Corporation and Corporation by Estoppel

Answer 2

failed to form de jure corp, but business will be treated like one. Anyone asserting either doctrine must be unaware of failure to form.
o De Facto Corporation Requirements (if doctrine applies, business treated as corp)
 Relevant Incorporation statute
 Parties made good faith, colorable attempt to comply; and
 Some exercise of corporate privileges (acting like they have corp)
o Corporation by Estoppel
 One who treats business as corporation may be estopped from denying that it is a corporation. Only applies in K cases.

Question 3

Pre-incorporation Ks

Answer 3

o Corp not liable on pre-incorporation Ks unless it adopts the K:
 Express – bd adopts K
 Implied – arises if corp accepts a benefit of the K
o Liability of Promoter
 Unless K says otherwise, promote liable on pre-incorp Ks until there is a novation

Question 4

Foreign Corporation

Answer 4

o Any corp transacting business in this state must qualify and pay prescribed fees (certificate from Sec of State + registered agent)
o Foreign is anything outside of the state
o If foreign corp transacts in state without qualifying – 1) civil fine, and 2) cannot sue in the state

Question 5

Subscription

Answer 5

Written offer to buy stock from corporation
o Revocation of pre-incorp subscriptions – Subscriber of stock of crop not yet formed cannot revoke offer to buy for 6 months (unless says otherwise or all subscribers let you)
o Post incorporation subscriptions are revocable – corp and subscriber are obligated when board accepts the offer

Question 6

Consideration

Answer 6

o Forms – money, tangible or intangible property, services already performed
 Other forms (split of authority) – 1)promissory notes, 2) future services
o Amount of Consideration
 Par – minimum issuance price
• Watered stock – issuing stock to s/o below par value. Directors can be liable if knowingly authorize issuance and the guy who buys too. Third party not liable if he didn’t know about the water.
 No par – no minimum issuance price – set by board
 Treasury stock – stock the company issued then reacquired

Question 7

Pre-emptive rights

Answer 7

o Right of existing shareholder of common stock to maintain her percentage of ownership by buying stock whenever there’s an issuance for money
o Doesn’t exist if articles are silent – in most states

Question 8

Statutory Requiements - Directors

Answer 8

o Number – 1 or more (often in bylaws)
o Election – initial directors usually names in articles – shareholders elect at annual meeting
 All one per year or staggered
o Shareholders can remove without cause, but has to be with cause if staggered
o Directors must act as a group – (one of 2 ways)
 Unanimous agreement in writing; or
 At a meeting ( which has to satisfy quorum and voting requirements)
• Act is void unless ratified
• Directos aren’t agents of the corp
• Individual directos can’t speak for or bind the corporation
• Conference call counts
o Bd meeting
 Notice method usually set in bylaws
 No noice for regular meetings
 Special meeting -notice needed – time and a place
 No proxies – non-delegable fiduciary duties
 Quorum for meetings for the board – by laws (majority)

Question 9

Role of Directors

Answer 9

o Sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental corp changes to shareholders
o Committees – can do board stuff, except 1)declare dividends, 2) set director compensation, 3)fill a board vacancy

Question 10

Duty of Care

Answer 10

o Standard – director must act in good faith and do what a prudent person would do ith reard to own business
o Nonfeasance – doing nothing is a breach, but only liable if breach caused loss ot the corp
o Misfeasance
 Business Judgment Rule – prudent person std – did they deliverate or analyze.
• Ct will not second guess a business decision if it was made in good faith, was informed, and had a rational basis. Director is not a guarantor of success

Question 11

Duty of Loyalty

Answer 11

o Burden – on the D
o Director owes corp – must act in good faith and with reasonable belief that what she does is in the corp’s best interest (BJR doesn’t apply)
o Interested director transaction – any deal b/w corp and directors or another business of the director – transaction will be set aside un;ess directo shows: 1) deal was fair to corp when entered, or 2)her interest was disclosed or known when the deal was approved by a majority of disinterested directors, or a majority of disinterested shares (not shareholder)
 Directors can set own compensation, but must be reasonable and in good faith. IF not breach of duty of loyalty.
o Competing ventures – director cannot compete directly with corp – remedy is a constructive trust on profits
o Corporate opportunity – Director cannot USURP a corporate opportunity – canot take until he 1)tells board about it and 2) waits or board to reject the opportunity
 Test for corporate opportunity – 1)something the company has an interest or exprectancy in or that was found on company time or w. company resources,
 Constructive trust remedy

Question 12

Other State Law Bases of Director Liability

Answer 12

o Ultra vires acts – responsible officers and directors liable
o Improper distributions
o Improper lans
o Directors presumed to concur with bd unless her dissent is noted in writing in corp recors (minutes, delivered in writing, written dissent after meeting)
o Exceptions
 Absent director not liab;e for stuff she missed
 Good faith reliance on info

Question 13

Officers

Answer 13

o Owe same duties of care and loyalty as director
o Agents of the corporation (Apply agency law)
o Officers selected by and removed by bd which also sets officer compensation

Question 14

Indemnification of Officers and Directors

Answer 14

o Corporation can’t indemnify when – officer held liable to corp, or held to have received improper personal benefit
o Mandatory indemnification
 Successful in defending on merits or otherwise
o Permissive indemnification
 Case settled
 Must show she acted in good faith and with the reasonable belief actions were in the company’s best interests (duty of loyalty)

Question 15

Do Shareholders get to Manage the Corporation?

Answer 15

o No, bd does this
o BUT shareholders can run corp directly or in close corporation – 1)few shareholders, 2) stock is not publicly traded
o If corp stock not traded on national exchange, shareholders can eliminate board and run corp directly—gotta be done by articles or unanimous written shareholder agreement.
o Close corp operates like partnership – fiduciary duties to each other – have to use utmost good faith.
 If oppression of minority shareholders, can sue for breach of fiduciary duty.

Question 16

Shareholder Derivative Suit (Shareholders as P)

Answer 16

o Shareholder sues to enforce corporation claim, not her own personal claim.
o Ex – suing for breach of duty of loyalty
o If shareholder wins, the corp gets the money—P recovers costs and attys fees
o Requirements for bringing deriv suit:
 Stock ownership
 Adequate representation of corp interest
 Must make written demand on corp (usually means board) that corporation bring the suit – gotta wait for 90 days.
 Corporation must be joined as D.
 Can the partiescan settle or dismiss with ct approval (get input from shareholders)
o Corp can move to dismiss if independent investigation showed suit was not in corp’s best interest.

Question 17

Shareholder Voting

Answer 17

o Who votes – record shareholder as of record date (rt to vote) –
 Exception – corporation re-acquires stock, so owner is treasury stock; death of shareholder (executor can); proxies (writing, signed by record shareholder, directed to secretary of corp; authorixing another to vote)—can revoke in writing or attending mtg and voting.)
• Only way to have irrevocable proxy – proxy coupled with interest.
 Voting trusts and voting agreements –
• Voting trust – 1)written agreement controlling how will be voted; 2) copy to the corporation; 3)transfer of legal title to the voting trustee; 4) original shareholders receive trust certificates and retain all shareholder rights except voting
• Pooling agreement: - 1)voting agreement, 2)in writing and signed. Some states cool, some no.

Question 18

Where do shareholders vote?

Answer 18

 At meeting (email if UC)
 2 kinds of shareholder meetings:
• Annual mtg – if none within 15 months, shareholder can petition ct to order one. At annual mtg, shareholder elect directors
• Special meeting – can be called by 1)bd; 2)the prez; 3)holder of at least 10 percent of voting shares; 4) anyone else authorized in bylaws.
 Notice requirement – must give written notice to every shareholder (time and place, purpose (for special mtgs), Actions void unless those not sent notice waive defect. Waiver – (express—in writing and signed( email cool), implied – attend mtg w/o objection).

Question 19

How do shareholders vote

Answer 19

 Shareholders vote on these things: 1) elect directors, 2) remove directors, 3) on fundamental corporate changes. May also vote on other things if bd asks for shareholder vote on those things.
 Every time shareholders vote – gotta have quorum – # of shares represented (not shareholders) – Quorum required majority of outstanding shares
 Shareholders voting:
• Elect a director – plurality
• Remove a director – majority of shares entitled to vote;
• Approve a fundamental corporate change
• Other matters – majority that actually vote

Question 20

Cumulative Voting

Answer 20

 Only available when shareholders elect directors (helps small shareholders);
 Determine voting power – multiply shares by number of directors to be elected – one at large election

Question 21

Stock Transfer Restrictions

Answer 21

o Ok if reasonable – not an undue restraint on alienation;
o If restriction is valid – can be enforced against transferee if
 The restriction is conspicuously noted on stock certificate; or
 The transferee had actual knowledge of the restriction

Question 22

Distributions

Answer 22

o Types – dividends, repurchase shareholder stock or redemption (forced sale to corp at price set in articles)
o Distributions are board’s discretion (so need clear abuse of discretion to win case)
o Shareholders getting dividends
o For any distribution (dividend, repurchase, redemption) which funds can be used?
 Earned surplus – generated by business activity (all earnings, minus all losses, minus distributions previously paid)
 Stated capital – generated by issuing stock: when corp issues stock, allocates proceeds b/w stated capital and capital surplus (never used for distributions).
 Capital surplus – generated by issuing stock—payments in excess of par plus amount allocated in no-par issuance ( can be used for distributions)
o Nowadays, corporation cannot make a distribution if it’s insolvent or if the distro would render it insolvent
o Directors jointly and severally liable for improper distros

Question 23

Fundamental Corporate Changes

Answer 23

o Extraordinary changes bd can’t do alone (amending articles, selling off assets, merging). Need 4 things:
 Board action adopting a resolution of fundamental change;
 Board submits proposal to shareholders with written notice
 Must get shareholder approval (majority of shares entitled to vote)
 In most of these changes, need to deliver document to secretary of state.
o Dissenting shareholder right of appraisal – rt to force corp to buy back stock at fair value (only close corp)
 When will he have this right: 1)merger or consolidating, 2) transferring substantially all assets not in the ordinary course of business; or 3)transferring stock in a share exchange.
 But even if company is doing one of these, no appraisal if stock is listed on national exchange, or company has 2,000 or more shareholders
 What does shareholder do to perfect her right of appraisal?
• Before a shareholder vote file corp written notice and objection and intent to demand payment; abstain or vote against the proposed change; and after the vote, within time set by corp, make written demand to be bought out and deposit stock with corp.

Question 24

Mergers or Consolidations

Answer 24

o Bd of Director Action and Notice to Shareholders
o Shareholder approval (both corps) – majority of shares entitled to vote
o No shareholder approval required if 90 percent or more owned subsidiary is merged into a parent corp (sht form merger)
o If approved, surviving corp delivers articles of merger or consolidation to Sec of State
o Right to Appraisal – still a thing (sht form merger too)
o Effect of merger or consolidation – surviving corp succeeds to all rights and liabilities of constituents (successor liability).

Question 25

Transfe of all the Assets not in ordinary course of business or share exchange

Answer 25

o Different state to state, but 75 percent is rule fo thumb
o MOST IMPT – its fundamental corp changes for the seller only, not the buyer
o Board action (both corps) – and notice to selling company’s shareholders
o Approval by the selling corp’s shareholders – 1)majority of shares entitled to vote for selling, not for buying
o Deliver to sec of state articles of exchange
o No successor liability in selling all assets bc selling company still exists

Question 26

Dissolution

Answer 26

o Voluntary – bd of directors and approval by majority of shares entitled to vote. File notice of intent to dissolve with Sec of state. Corp stays in existence to wind up.
o Involuntary Dissolution (ct order) – shareholder can petition bc of: 1) director abuse, waste of assets, misconduct; 2)director deadlock that harms corp; 3)shareholders have failed at consecutive annual meetings to fill broad vacancy
 Alternative – buyout of shareholder if close corp
 Creditor can petition if corp is insolvent and (1) he has an unsatisfied judgment, or (2) corp admits the debt is in writing
o Winding up – (a) gathering all assets, (b) converting to cash, (c) paying creditors, and (d) distributing remainder to shareholders, pro-rata by share unless there’s liquidation preference

Question 27

Section 16(b) – aimed at speculation by directors, officers and 10 percent of shareholders

Answer 27

o Provides for recovery by the corp of profits gained by certain insiders from buying and selling company’s stock.
o 16(b) – applies to “reporting” corps. Means 1) listed on natl exchange, 2) at least 500 shareholders and $10,000,000 in assets
o 3 types of Ds- Director, officer, or shareholder owning over 10 percent (both when bought and sold)
o Section 16(b) – applies only to buying and selling stock within single 6-month period (sht swing)
o All profits from short-swing trading recoverable by corp

Question 28

10b-5

Answer 28

 Fraud or misrepresentation in connection with the purchase or sale of any security (debt or equity). Elements:
• Deal must use an “instrumentality of interstate commerce” (mail, telephone, or trade on natl exchange)
• Type transactions:
o Misrepresentation of material info;
o Insider trading – trading on basis of material inside information (but only problem for someone whose job gives access to secrets – duty to either abstain from trading or endure disclosure so everyone on same footing)
o Tipping – insider passes material info along for wrongful purpose
o Materiality – misrep/omission must concern “material” fact – on reasonable investor would consider impt in making investment decisions
• Possible Ps
o SEC
o Private action by buyer or seller of securities (defrauder)
• Possible Ds – company issuing misleading press release, buyer or seller of securities who misrepresents material info; buyer or seller of securities who trades on material insider info; tipper or tippee (knew or should have known material improperly passed)
 Scienter- intent to deceive, manipulate, or defraud. Recklessness may suffice.
 Reliance – Said to be separate element, as in fraud cases, but presumed in public misrep and nondisclosure cases.