Corporations 6 Flashcards
1
Q
States React to Director Shortage
(1) Charter Option
A
- Allows the corporation to add a
provision to the charter eliminating or limiting personal liability of a director to the corporation or its shareholders
for $ damages for breaches of fiduciary duties - Doesn’t work retroactively in the
provision wasn’t in place at the time - Some states (DE) include officers
(DE only limits liability for officers
for claims by shareholders, not
claims by the corporation)
2
Q
States React to Director Shortage
Charter options exceptions
A
- (i) breach of the duty of loyalty
- (ii) acts or omissions not in good faith
- (iii) acts or omissions involving
intentional misconduct - (iv) acts or omissions involving
knowing violation of law - (v) improper distributions (applicable
to directors only) - (vi) improper personal benefit
DGCL
3
Q
States React to Director Shortag
MBCA’s Charter Option and exceptions
A
- Only for directors
- Exceptions
- (i) financial benefits received by the director to which the director is not entitled
- (ii) an intentional infliction of harm on the corporations or shareholders
- (iii) unlawful distributions
- (iv) intentional violation of criminal law
4
Q
States React to Director Shortage (3)
A
- charter options
- self-executing
- cap on money damages
5
Q
States React to Director Shortage
(2) Self-executing
A
- Automatically applies. Not a default rule, it’s the rule
- A director is only liable for breaches of the duty of care that constitute willful misconduct or recklessness.
- Silent regarding duty of loyalty
6
Q
States React to Director Shortage
(3) Cap on money damages
A
- Limit damages from a claim by the corporation or shareholders against the directors or officers to the greater of (i) $100,000 or (ii) cash compensation received in the year preceding the violation
- The charter can specify a lower number than $100,000
7
Q
Effect of Exculpation Statutes
A
Not changing standard, changing outcome of breaching statute
aka if they are liable
8
Q
Categories of indemnification
A
- Mandatory (shall) - no choice
- Discretionary/Permissive
(may) - have a choice - Prohibited unless court
approved
9
Q
Mandatory Indemnification (Green Light)
A
If a director or officer is successful on the merits on a claim or otherwise has a defense (like statute of
limitations), the corporation shall indemnify them for reasonable expenses (including attorneys’ fees) (DGCL § 145(c); MBCA § 8.52 and 8.56(c))
- DGCL allows partial mandatory indemnification if there are multiple counts. MBCA says specifically “wholly successful” so leads to more of an all or nothing approach
10
Q
Discretionary/Permissive Indemnification
(Yellow Light) (MBCA)
- who is indemnified?
A
Directors and officers
11
Q
Discretionary/Permissive Indemnification
(Yellow Light) (MBCA)
- Employees and agents – look to agency law
A
Principal has a duty to indemnify when an authorized
payment is made or when the agent suffers a loss in
connection with their duties and its fair for the principal to bear it
12
Q
Discretionary/Permissive Indemnification (Yellow Light) (DGCL)
Claims from 3rd parties (DGCL § 145(a)
A
A corporation may indemnify a director, officer, employee or
agent for liability incurred defending a claim to which the person is a party or threatened to be made a party by reason of their position if:
* (1) acted in good faith
* (2) reasonably believed their conduct was in or not opposed to the best interests of the corporation
* (3) reasonably believed their conduct was legal (criminal proceeding)
* (4) not found liable on basis of receiving financial benefit
13
Q
Discretionary/Permissive Indemnification
(Yellow Light) (DGCL)
Agents and employees may be indemnified for
expenses without meeting the 3 requirements if they
A
are successful on the merits or otherwise have a defense
14
Q
What it means for a corp to idemnify against liability
A
its when they didnt win
15
Q
Advancement is like
A
venmoing before booking
16
Q
Permissive Advancement of Expenses
A
- Fronted the money in advance
- Must pay it back if ultimately not entitled to indemnification
17
Q
Discretionary indemnification (or advancement) must be DETERMINED by
A
- (1) by a majority of directors who are not parties to the action (regardless of
whether they constitute a quorum); - (2) by a committee of non-party directors appointed by majority vote of the
entire complement of non-party directors on the board (regardless of whether
they constitute a quorum); - (3) if there are no non-party directors, or if the non-party directors so
provide, by independent legal counsel; or - (4) by the stockholders.
just need one of the 4
18
Q
Discretionary indemnification (or advancement)
AUTHORIZATION Approval can be done in advance in
A
in the charter, bylaws or
another contract/written consent
19
Q
Prohibited Unless Court Approved Indemnification
(Red Light) includes anything that
A
doesn’t fit
within Mandatory or
Permissive/Discretionary
20
Q
Prohibited Unless Court Approved
Indemnification (Red Light)
Claims brought by or on behalf of the corporation:
A
A corporation may indemnify a director, officer, employee or agent who is found
liable for expenses incurred defending a claim to which the person is a party or threatened to be made a party by reason of their position if:
* (1) good faith
* (2) reasonably believed their conduct was in or not opposed to the best interests of the corporation
* (3) not found liable on basis of receiving financial benefit
* (4) determination by the Court of Chancery (or the court in which the action was brought) that, despite such adjudication of liability, the individual is “fairly
and reasonably” entitled to indemnity for expenses in view of all the circumstances
21
Q
D&O Insurance
A
The corporation can buy insurance to cover directors, officers, employees and agents even if the corporation wouldn’t have the power to indemnify
22
Q
D&O policies can reimburse the corporation if
A
they pay or directly pay the
indemnified person.
23
Q
D&O Insurance
Policies vary but typically do not cover
A
uninsurable matters, such as actions
involving dishonesty, self-dealing, bad faith, knowing violations of the securities laws, or other willful misconduct
DE says you can’t cover self-dealing deliberate criminal or deliberate fraudulent act of such person, or a knowing violation of law
24
Q
D&O Insurance
Even if couldnt pay back (indemnfiy), insurance bought…
A
can cover (but usually not for certain things)
25
Director’s Wish List
* Exculpation provision to the fullest extent allowed by law in the charter.
* Discretionary indemnification authorized in the charter, bylaws or an employment agreement.
* Discretionary advancement made mandatory.
* Corporation’s obligation to purchase D&O insurance that is broad.
* Disclaiming corporate opportunities in advance in the charter.
26
General Rules for Amending the Charter
* You can’t bring in provisions through an amendment or amendment and restatement you couldn’t otherwise have in an original charter.
* Amended and restated vs. amendment
27
Amended and restated vs. amendment
A&R= whole universe of what it says
Amend= a particular portion
28
Steps for amending/amending and restating the charter
* (1) Board approves the amendment, subject to approval of the shareholders, and submits it to the shareholders for their approval.
* (2) Shareholders get a copy of the proposed amendment
* (3) Shareholders approve the proposed amendment
1. DGCL – majority of all shares entitled to vote
2. MBCA – quorum of a majority of all shares entitled to vote then just
more “yes” than “no”
29
Exculpation Statues
1. charter option
2. self-executing
3. cap on money damafes
30
Discretionary/Permissive Indemnification
* Claims from 3rd parties
(MBCA and DG)
* Expenses for claims brought by or on behalf of the corporation
(MBCA)
* Successful Agents and Employees
(DE)
* Permissive Advancement
31
Rules for Bylaw Amendments in the DGCL
* Initial directors will adopt bylaws to set up the
corporation.
* Shareholders can always adopt, amend or repeal bylaws.
| Dont need both, just either or, charters need both though
32
# Rules for Bylaw Amendments in the DGCL
The charter MAY grant the board the ability to
adopt,
amend or repeal bylaws.
| Practically, every corporation will
33
Rules for Bylaw Amendments in the MBCA
Shareholders may amend or repeal the bylaws
The board may amend or repeals the bylaws, unless:
* Charter reserves the power to the shareholders
* Shareholders expressly provide when amending, repealing or adopting a bylaw the board may not amend or repeal a specific bylaw
* The bylaw increases a quorum or voting requirement for the board AND it was originally adopted by the shareholders (unless the bylaw provides otherwise)
34
General Rules on Approval of Sale of Assets
When a corporation **sells, leases, exchanges or disposes **of **all or substantially all **of its
assets, **outside the ordinary course of business,** it requires the approval of the shareholders
* DGCL– majority approval
* MBCA – quorum of a majority and then more “yes” than “no”
* Texas is a 2/3 vote
35
Approval of Sale of Assets Elements
* (1) Sell, lease, exchange or dispose
* (2) All or substantially all
* (3) Out the ordinary course of business
36
Approval of Sale of Assets Rationale
The shareholders no longer have an investment in the business they invested in.
37
# General Rules on Approval of Sale of Assets
Not just sell
Sell, lease or exchange
38
# General Rules on Approval of Sale of Assets
All or substantially all
* Rudisill – not substantially all if you retain any minimal business
* Gimbel/Katz Test – quantitatively vital portion and it substantially affects the
existence and purpose
MBCA (MBCA § 12.02(a))– substantially all if it would leave the corporation without a significant continuing business activity. A significant continuing business activity is
* 25% of total asset and
* 25% of either (i) pre-tax operating income or (ii) revenues
39
# General Rules on Approval of Sale of Assets
Not in the ordinary course
Not in the business of selling assets (inventory)
| What is in ordinary course for 1 may not be for another
40
# General Rules on Appraisal for Sale of Assets
What is appraisal?
Determination of fair market value of the stock and buying out the stock of the dissenters
41
# General Rules on Appraisal for Sale of Assets
What does appraisal involve?
* Notices
* Agreement or determination of a price
* Holding on and holding out
42
# General Rules on Appraisal for Sale of Assets
Who gets appraisal rights for a sale of assets?
* Shareholders dissenting from a sale of assets don’t get appraisal rights in Delaware.
* Shareholders dissenting from a sale of assets do get appraisal rights under the MBCA.
43
Appraisal Rights as an Exclusive Remedy
Appraisal is generally your exclusive remedy regarding a transaction absent fraud, misrepresentation, or improper procedure
44
# Appraisal Rights as an Exclusive Remedy
Are breach of fiduciary duty claims still allowed?
* MBCA - interested transactions are unless approved by disinterested directors AND shareholders (MBCA § 13.40)
* DE - sometimes (fraud, misrepresentation, self-dealing, deliberate waste of corporate assets or gross and palpable overreaching are involved)
* Other courts say no
45
# Appraisal Rights as an Exclusive Remedy
Special Insolvency Exception in DE
“Safe harbor” for the sale, lease, or exchange of
property or assets that secure a mortgage or
pledge to a secured party without stockholder
consent
| Keeps out bankrupcy
46
What is a Freeze
Out?
Forcing a
minority
shareholder out
of ownership.
47
# Asset Sale vs. Stock Sale vs. Merger
Asset sales
buyer buys the stuff from the target
company
48
# Asset Sale vs. Stock Sale vs. Merger
Stock sales
buyer buys the stock from the
shareholders
* Stockholders are the sellers
* 100% (drag along)
49
# Asset Sale vs. Stock Sale vs. Merger
Merger
buyer and target company are folded into 1 corporation
50
You can buy stoc from comapny because they own the stock
stock owned by shareholders and sellers
51
Drag along
When everyone sells
- if agree among selves can make others sell as well
52
Merger is when
2 companies come together
- can be equal or big fish, little fish
53
Patsy cline (dog) as a stock sale
- can sell own toys
- cant sell self (shareholders need to sell stock)
54
Basic Statutory Mergers
Combination of 2 or more entities into 1 surviving entity
55
# Basic Statutory Mergers
steps
Merger Agreement
* Terms and conditions
* Amendments to the charter needed
* Consideration
Both all/boards approve
Both/all sets of shareholder approve
* DGCL – majority
* MBCA – majority for a quorum then more “yes” than “no”
56
# Short Cuts to Mergers: Small Scale
Small Scale Merger/No Significant Change to Surviving Corporation
- requirements
* Surviving corporation’s charter must not be amended
* Shares of the surviving corporation must be identical before and after the
merger
* Number of voting shares of the surviving corporation must not increase by
more than 20%
57
# Short Cuts to Mergers: Small Scale
Small Scale Merger/No Significant Change to Surviving Corporation
- Approval needed
* Surviving corporation’s board
* Merging corporation’s board and shareholders
58
# Short Cuts to Mergers: Short Form
Short Form Merger
- Requirements
Parent corporation owns at least 90% of the shares of 1 or more subsidiaries
59
# Short Cuts to Mergers: Short Form
SHort Form Merger
- Approvals Needed
Parent’s board
MBCA
* Parent’s shareholders, UNLESS it also qualifies for Small Scale
DGCL
* If parent corporation is the surviving corporation, parent’s
shareholders DON’T need to approve
60
# Appraisal Rights in Mergers
Market exception
(DGCL)
* Shares originally held by shareholder are publicly listed or held by at least 2,000 owners
AND
* Merger consideration is: (i) shares of the surviving corporation, (ii) publicly listed shares
or shares held by at least 2,000 owners or (iii) cash in lieu of fractional shares
61
# Appraisal Rights in Mergers
Market exception
- MBCA
* Shares originally held by shareholder are publicly listed or held by at least 2,000 owners
with a value of at least $20MM AND
* Merger consideration is: (i) cash or (ii) publicly listed shares
* Market exception doesn’t apply to conflict of interest transactions
62
# Appraisal Rights in Mergers
General rule is
shareholders involved in a merger get appraisal rights
63
# Appraisal Rights in Mergers
Exceptions to the general rule
* Shareholders of the surviving corporation in a small scale merger DON’T have appraisal rights
* Shareholders of the parent corporation in a short form merger DON’T have appraisal rights if they didn’t have voting rights
64
Forward Triangular Merger
1. Parent (buyer)
- Stock and cash from Parent
ot Target’s shareholders
2. Merging Entity (target)
- Target merges forward
into Surviving Entity
subsidiary
3. Subsidary (surviving enetity)
65
Reverse Triangular Merger
1. Parent (buyer) and Subsidary (merging entity)
2. Target (surviving entity)
66
Merger structuring choice
1. What do we want
as our End Game?
2. What approvals
would we need in
each scenario?
3. What appraisal
rights would
there be in each
scenario?
4. Are there any
other logistics?
67
# Amending the Charter
Shareholder Approval
Required
May need a separate class vote if re certain shares
68
# Amending the Charter
Board Approval
Required
69
# Amending the Bylaws
Shareholder
Always allowed to amend on their own
70
# Amending the Bylaws
Board Approval
DGCL – Charter may grant ability to amend on their
own
MBCA – Board may amend on their own unless
charter says otherwise + other exceptions
71
# Sale of All or Substantially All of the Assets
Shareholder Approval
Required (selling)
72
# Sale of All or Substantially All Assets
Board Approval
Required (selling and buying)
73
# Statutory Merger
Shareholder Approval
Shareholders of all companies (surviving) and (merging) required
74
# Statutory Merger
Board Approval
All boards (surviving and merging) required
75
# Small Scale Merger
Shareholder Approval
Merging shareholders required
76
# Small Scale Merger
Board Approval
All boards (surviving and merging) required
77
# Short Form Merger
Shareholder Approval
DGCL - If parent corporation is the surviving corporation, parent’s shareholders DON’T need
to approve
MBCA - Parent’s shareholders need to approve UNLESS it also qualifies for Small Scale
78
# Short Form Merger
Board Approval
Parents board
79
# Structuring the Sale of the Business
Asset sales
buyer buys the stuff from the
target company
80
# Structuring the Sale of the Business
Stock sales
buyer buys the stock from the
shareholders
81
# Structuring the Sale of the Business
Merger
buyer and target company are folded
into 1 corporation
82
What is Dissolution?
- Termination of the corporation
Voluntarily
Involuntarily
* Administrative - Not
complying with requirements
(Reinstatement)
* Judicial
(Shareholder requests
dissolution for oppression
or deadlock)
(Attorney General)
83
# Dissolution
If dont have good standing
the state will give notice, have time wont just get dissolved
84
Reinstatement with involunatary dissolution
can get reinstated wirhin 2 years of model act
85
Dissolution Approval
Need the directors and the shareholders
* In Delaware you don’t need the board if you have ALL the shareholders
In Delaware a majority of shareholders need to vote
to dissolve with the board. (DGCL § 275(a)-(b))
Under the Model Act, a majority of shareholders is
needed for a quorum and then more “yes” than “no”
with the board (MBCA § 14.02)
86
# Freeze
TX (Farnsworth)
Fine to use an asset sale freezeout if you follow the statutes for approval of the asset sale.
87
# Freeze
MA (Patriots)
* Dissenting shareholders are not limited to the statutory remedy of judicial appraisal where
violations of fiduciary duties are found.
* Freezeout mergers must be for the advancement of a legitimate corporate purpose and must be fair to minority shareholders.
88
# Freeze
DE (Weinberger)
* Majority may eliminate the minority through a freezeout merger without demonstrating a
legitimate business purpose.
* Minority has an appraisal remedy.
* Minority in some circumstances can bring a breach of fiduciary duty claim.
89
# Freeze
NJ (Grato)
a dissolution that freezes out
minority shareholders is
permissible only where it is
undertaken for a legitimate
business purpose and the
minority shareholders receive
fair value for their shares
90
# approval
Bankruptcy
- Need board approval
* Can have a protective provisions (usually preferred shareholders)
91
# Approval
Loans
* Usually need board approval (unless ordinary for that business)
* Don’t need shareholders’ consent for a loan or to pledge the corporations assets (grant a security interest) unless it says otherwise in the charters (DGCL § 272)
92
# Approval
Ordinary contracts
just an officer
93
# Dissolution
shareholder
required
94
# Stock Sale
board approval
Corporation not a party so don’t need board
95
# Stock Sale
shareholder approval
Shareholder selling (drag along possibility)
96
# Bankrupcy
Board approval
Required
97
# Bankrupcy
shareholder approval
Not required by default, look to org docs and shareholders’ agreement
98
# Loans or Granting Security Interest
Board Approval
Required unless this is in ordinary course for that
business (get it regardless)
99
# Loans or Granting Security Interest
Shareholder approval
Not required by default, look to org docs and shareholders’ agreement
100
Anything that the
charter/bylaws/
Shareholders’ agreement
says needs shareholder
consent or a certain class
of shareholders
- Board approval
Required
101
Anything that the
charter/bylaws/
Shareholders’ agreement
says needs shareholder
consent or a certain class
of shareholders
- Shareholder approval
Do as intructed
102
# Ordinary Course Transactions
shareholfer approval
Not required
103
# Ordinary Course Trasactions
Board Approval
Not required (if unsure if it is in ordinary course,
get consent)
