Corporations Flashcards
1
Q
A corporation is owned by its
A
shareholders
2
Q
The group in charge of the management of the corporation is
A
the Board of Directors
3
Q
Members of the Board of Directors are elected by the
A
shareholders
4
Q
The Board appoints people to carry out its policy. Who are they?
A
Officers
5
Q
To form a corporation, we need…
A
a person, a paper, and an act
6
Q
Person
A
Incorporator. Must have one or more who executes the articles and delivers them to the secretary of state.
A person or entity may serve as incorporator.
Incorporator need not be a citizen of the state of incorporation.
7
Q
Paper
A
Articles of Incorporation
8
Q
Articles of Incorporation: Required Contents
A
(1) Name of corporation
(2) Name and address of each incorporator
(3) Registered agent and street address of the registered office (in this state)
(4) Information regarding stock
9
Q
Articles of Incorporation: Required Contents
Name of corporation
A
Must include “magic words” or abbreviation
Corp., company, inc., or limited
10
Q
Articles of Incorporation: Required Contents
Registered agent and street address of the registered office (in this state)
A
Registered agent is the company’s legal representative, so she can receive service of process for the corporation.
11
Q
Articles of Incorporation: Required Contents
Information regarding stock
A
Authorized stock: max number of shares the corporation can issue (sell)
If the company will have different classes of stock, many states require the articles state the number of shares per class, the voting rights and preferences of each class of stock.
12
Q
Not required in articles
A
Initial directors and addresses
13
Q
Act
A
Incorporators have notarized forms delivered to the Secretary of State and pay the required filing fees.
Once the Secretary of State’s office accepts the articles for filing, the corporation is formed de jure
14
Q
Organizational Meeting
A
If initial directors were named in the articles, directors hold the “organizational meeting”
If initial directors NOT named in the articles, incorporators hold the organizational meeting, where they elect the initial directors
At the meeting, the board of directors (or incorporators) must “complete organization of the corporation– appoint officers and adopt bylaws
15
Q
Bylaws
A
Internal document. Comprise operating manual with things like setting record dates, methods of giving notice, etc.
Not filed with state; internal
If in conflict with articles, articles govern
Can be amended/repealed/new ones adopted by SHHs or BoD
16
Q
Internal Affairs Rule
A
Law of the state of incorporation governs internal affairs– even if they only do business in another state
17
Q
Entity Status
A
Corporation is a legal person.
Can sue and be sued, hold property, be a partner in a partnership, invest in other companies or commodities, make contributions to charity
18
Q
B-Corp
A
Benefit corporation is one formed for profit AND ALSO to pursue some benefit to a broader social-policy cause. Things work as with a regular corporation, but articles must say it’s a benefit corporation.
Files an annual benefit report assessing how it pursued its stated social mission.
Decision-makers consider not just impact of decision on shareholders, but on the broader community or environment.
19
Q
S-Corp
A
Have no more than 100 shareholders, all of whom are human US citizens or residents; one class of stock and it is not publicly traded
20
Q
Corporate Taxation
A
Corporation pays income tax on its profits. In addition, SHHs are taxed on distributions to them, so there’s double taxation.
21
Q
Limited Liability
A
If the corporation incurs a debt, commits a tort, or breaches a contract, shareholders are not personally liable for that debt.
Shareholders generally liable only to pay for their stock, not for corporate debts.
Directors and officers are not vicariously liable for corporate debts
Corporation itself is liable.
22
Q
Defective Corporation
A
Proprietors thought they formed a corporation, but failed to do so– they are personally liable for business debts because they have formed a partnership and partners are liable for business debts
23
Q
De Facto Corporation (DFC): 3 Requirements
A
(1) There is a relevant incorporation statute (there is!)
(2) The parties made a good faith, colorable attempt to comply with it, and
(3) there has been some exercise of corporate privileges (they are acting as though they thought it was a corporation
24
Q
De Facto Corporation (DFC): Effects
A
If this applies, business is treated as corporation for all purpose except in an action by the state (such an action would be quo warranto)
Abolished in many states
25
Incorporation Documents Lost in the Mail
Shareholders personally liable on the contract, unless court applies DFC
26
Corporation by Estoppel
Someone who treats a business as a corporation may be estopped from denying that it is a corporation
Can also prevent the improperly-formed corporation from avoiding liability by saying it was not properly formed
Only applies in CONTRACT, NOT TORT cases
Abolished in many states
27
Pre-Incorporation Contracts
Corporation is liable on a pre-incorporation contract ONLY if it adopts the contract.
28
Promoter
Person acting on behalf of a corporation not yet formed. She might enter a contract on behalf of a corporation not yet formed
29
Adoption of a Pre-Incorporation Contract
Can be express or implied
Express: board takes an action adopting the contract.
Implied: corp accepts a benefit of the contract.
Makes the corporation liable too, but does not relieve the promoter.
30
Promoter's Liability
Unless the contract clearly says otherwise, promoter IS LIABLE on pre-incorporation contracts until there is a NOVATION
31
Novation
Agreement of the promoter, the corporation, and other contracting party that the corporation replaces the promoter under the contract
32
Foreign Corporations
Foreign corporations transacting business in this state must qualify and pay prescribed fees.
Anything outside State: foreign
33
Transacting business
the regular course of intrastate (not interstate) business activity.
doesn't include occasional or sporadic activity in this state, and not simply owning property
34
Foreign Corporation: Qualification
qualifies by getting a certificate of authority from the Secretary of State.
Gives information from its articles and proves good standing in its home state.
Foreign corporation must also appoint a registered agent and maintain a registered office in this state
35
What happens if a foreign corporation transacts business without qualifying?
(1) civil fine
(2) corp cannot assert a claim in state
But corporation can sue and defend in this state.
36
Once corporation qualifies and pays back fees and fines, can it assert a claim here?
Yes
37
Issuance of Stock: Background
To start and operate a corporation, need capital. Corporation can either borrow the money or raise it by selling stock (or both).
Corporation will "issue" a "security" to the person.
38
Debt securities
Corporation borrows money from X and agrees to repay her with interest.
Usually called bonds
39
Person holding a bond is
A creditor, NOT an owner of a corporation
40
Equity securities
Corporation sells an ownership interest to X.
Equity securities are called stock.
41
Person holding stock (shareholder, stockholder)
Owner, not a creditor
42
What is an Issuance of Stock
When corporation sells its own stock.
43
Subscriptions
Written offers to buy stock from corporation
44
Pre-incorporation subscriptions
Irrevocable for 6 months unless it says otherwise or all subscribers agree to let you revoke
45
Is post-incorporation subscription revocable?
yes until accepted by corporation
46
When are the corporation and the subscriber obligated under a subscription agreement?
When the board of directors accepts the offer
47
What must the corporation receive when it issues stock?
Consideration
48
Form of consideration
stock (or an option to buy stock) may be issued for "any tangible or intangible property or benefit to the corporation"
Includes money (cash or check), property, services already performed for the corporation, and discharge of a debt.
Includes promissory notes to the corporation, future services to the corporation.
49
Can corporation give employees options to buy stock as payment for services?
Yes
50
Par
Minimum issuance price (can get more)
51
No par
no minimum issuance price, board can have stock issued for any price that it sets
52
Treasury Stock
Stock the company issued and then reacquired.
Considered authorized, and the corporation can then resell it. If it does, the board sets any issuance price it wants.
53
If corporation issues stock in exchange for property or past services, who determines the value of the property or services?
the Board of Directors.
This valuation is conclusive if made in good faith.
54
Watered stock
If stock is issued (issuance by the corporation!!!!) for less than par, the deficit is called "water"
The directors are liable if they knowingly authorized the issuance
The purchaser of the stock is also liable. There is no defense, he is charged with notice of the par value.
If purchaser transfers the stock to a third party, third party is not liable if she acted in good faith (she did not know about the water)
55
Preemptive Right
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 its equivalent, like a check)
If articles are silent, no preemptive rights.
56
Statutory Requirements: Number of Directors
1 or more
57
Statutory Requirements: Election of Directors
Initial directors may be named in the articles.
If not, they are elected by the incorporators at the organizational meeting.
After that, elected by shareholders.
58
Statutory Requirements: Election of Board
Entire board is elected each year unless there is a "staggered" ("classified") board.
59
Staggered board
Divided into half or thirds, with one half or one third elected each year/
Usually set in the articles
60
Removal of Directors Before Terms Expire
Shareholders can remove a director with or without cause
In some states, if there is a staggered board, shareholders can remove a director only for cause
61
Vacancies on Board of Directors
Generally filled by board of shareholders.
But if shareholders created the vacancy by removing a director, the shareholders generally must select the replacement
62
Is an individual director an agent of a corporation?
No.
Board of directors must act as a group.
Individual directors have no authority to speak for or bind the corporation.
Directors must act as a group, even if there is only one director.
63
Board of Directors must act as a group: Requirements
(1) unanimous agreement in writing (email is ok, separate documents are ok)
(2) at a meeting (which must satisfy quorum and voting requirements)
- Conference call counts (simultaneous oral communication so each can hear all others)
- Individual conversations without a meeting or unanimous written agreement void unless ratified by a valid act
(3) if board meeting, method for giving notice is set in the bylaws
64
Board meetings: Notice
Regular Meetings
No notice required
65
Board meetings: Notice
Special Meetings
Unless bylaws say otherwise, the corporation must give at least 2 days notice of date, time, and place (but not purpose)
66
Board meetings: Notice
Failure to Give Required Notice
Means that whatever happened at the meeting is voidable (maybe void) unless directors not notified waive the notice defect.
67
Board meetings: Notice
Failure to Give Required Notice-- Waiver
(1) in writing anytime
| (2) by attending the meeting without objecting at the outset of the meeting
68
Board of Directors: Proxies and Voting Agreements
Directors cannot give proxies or enter voting agreements for how they will vote as directors; BoD owe corporation nondelegable fiduciary duties.
69
Quorum for Meetings of the Board
For any meeting of the board, need quorum.
Unless bylaws say otherwise, quorum is a majority of all directors.
Without quorum, board cannot act.
Of quorum present, passing a resolution requires only a majority vote of those present.
70
Quorum Broken
Quorum can be lost ("broken" if people leave; once quorum is no longe present, Board cannot take an act at that meeting
71
Role of the Board of Directors
(1) board manages corporation: sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental corporate changes to SHHs, etc.
(2) Board can delegate to a committee of one or more directors, which can recommend things to the full board for action
72
Committee of the Board CANNOT
(1) declare declarations
(2) fill a board vacancy
(3) recommend a fundamental change to shareholders
73
Fiduciary Duties Owed to the Corporation: Directors
Director must discharge her duties in good faith and with the reasonable believe that her actions are in the best interest of the corporation (duty of loyalty). Must use the care that a prudent person in like position would reasonably believe appropriate under the circumstances (duty of care)
74
Duty of loyalty
Director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation
75
Duty of care
Director must use the care that a prudent person in like position would reasonably believe appropriate under the circumstances
76
Duty of care Violations
Burden is on the plaintiff
77
Nonfeasance
director does nothing-- he's lazy
A person in like position would do some work. this guy did nothing, so he breached the standard of care.
only liable if this breach has caused a loss to the corporation
78
Misfeasance
board makes a decision that hurts the business.
director's action caused a loss to the corporation, so causation is clear. But, a director is not liable if she meetings the business judgment rule
79
Business Judgment Rule
presumption that when the board took the act, it did appropriate homework. Burden is on the plaintiff to show that the board either did not do appropriate homework and did something galactically stupid.
Court will not second-guess a business decision if it was made in good faith, was informed, and had a rational basis.
80
Business Judgment Rule: Duty of Loyalty
BJR does not apply in duty of loyalty cases; it can never apply when the fiduciary has a conflict of interest
81
Duty of Loyalty: Burden
Burden is on the defendant
82
Duty of Loyalty: Self-dealing
Interested director transactions.
Any deal between the corporation and one of its directors (or a close relative of a director) or another business of the directors.
Interested director transaction will be set aside (or director liable in damages) UNLESS director shows either
(1) the deal was fair to the corporation when entered OR
(2) her interest and the relevant facts were disclosed or known and the deal was approved by either
- the majority (at least 2) disinterested directors OR
- majority of disinterested shares
Some courts may also require a showing of fairness
83
Special Quorum Rule: Duty of Loyalty
quorum is a majority (at least two) of disinterested directors.
84
Can directors set their own compensation as directors or officers?
Yes, but it must be reasonable and in good faith.
If it is excessive, they are wasting corporate assets and breaching the duty of loyalty.
85
Duty of Loyalty: Competing Ventures
Director cannot compete directly with her corporation.
Remedy: corporation gets a constructive trust on profits from competing venture
86
Duty of Loyalty: Corporate Opportunity (Expectancy)
A duty cannot USURP a corporate opportunity.
That means a director cannot take it until he
(1) tells the board about it and
(2) waits for the board to reject the opportunity.
87
Corporate Opportunity
- Something in the corporation's business line
- Something company had interest/expectancy in
- Something director found on company time with company resources
88
Is company's financial inability to pay for corporate opportunity a defense?
Probably not.
89
Corporate Opportunity: Remedy
Director must sell it to the corporation at his cost if it's still in his possession.
If sold at a profit. the corporation gets the profit (constructive trust)
90
Can corporation make a loan to a director?
yes, if reasonably expected to benefit corporation
91
Directors Liabiliities
Directors may be liable to the corporation for improper distributions, improper loans, ultra vires acts (making the company do things that it has no power to do) and for breaches of fiduciary duties
92
Which Directors May be Liable?
A director is presumed to concur with board action unless her dissent or abstention is noted in writing in corporate records.
In writing: (1) in the minutes or (2) delivered in writing to the presiding officers at the meeting or (3) written dissent to the corporation immediately after the meeting. Oral dissent is not effective by itself.
93
Directors Liability: Dissent
In writing:
(1) in the minutes or
(2) delivered in writing to the presiding officers at the meeting or
(3) written dissent to the corporation immediately after the meeting.
Oral dissent is not effective by itself.
Director cannot dissent if she voted for the resolution at the meeting
94
Directors Liability: Dissent
Exceptions
Not liable if you were absent from the meeting
Good faith reliance on information (including financial information) presented by an officer, employee, or committee (of which the director relying was not a member) or professional reasonably believed competent. Reliance must be in good faith (no good if you knew the person giving information was a bozo)
95
Officers: status
agents of the corporation.
Corporation is the principal and the officer is the agent.
Whether officer can bind the corporation is determined by whether she has agency authority to do so (like actual or apparent authority)
Some positions may have inherent authority
96
Officers: Positions
Corporations were traditionally required to have a president, a secretary and a treasurer. Can have others.
One person can hold multiple offices simultaneously
97
Selection and removal of officers
Officers are selected by and removed by the board, which also sets officer compensation
Removal of officers before end of term may open corporation to liability for breach of contract damages
Shareholders do NOT hire and fire officers
98
Corporation CANNOT indemnify
a director or officer who was held liable to the corporation or to have received an improper benefit.
Must be a holding, not just an accusation
99
Corporation MUST indemnify
a director or officer who prevailed in the case on the merits or otherwise.
in some states she must win the entire case, in others she is entitled to indemnification to the extent she wins the case
100
Corporation MAY indemnify ("permissive indemnification")
a director or officer's litigation expenses if she showed that she acted in good faith with reasonable belief that she acted in the company's best interest. This is the duty of loyalty standard.
101
Eligibility for permissive indemnification determined by
disinterested directors, disinterested shares, or independent legal counsel
102
Court may order reimbursement when director or officer sued if
it is justified in view of all circumstances.
If she was held liable to the corporation, this is limited to costs and attorneys' fees (cannot include judgment)
103
Articles and Liability
Articles can eliminate director (and in some states, officer) liability to the corporation for damages, but not for intentional misconduct, usurping corporate opportunities, unlawful distributions, or improper personal benefit (ONLY DUTY OF CARE CASES)
104
Close Corporation: Shareholders Role
In a close corporation, shareholders can run the corporation directly
105
Close Corporation: Characteristics
Few shareholders
stock not publicly traded
can set up management with board of directors and run it like a regular corporation, or can eliminate the board and have shareholders run the business or appoint a manager, etc.
106
Shareholder Management Agreement
Sets up alternative management for the close corporation.
(1) in the articles AND approved by ALL shareholders OR
(2) by unanimous written shareholder agreement
Either way, should be conspicuously noted on the front and back of the stock certificates. Failure to do so does not affect validity.
Duties of care and loyalty owed by whoever manages
107
Special Fiduciary Duty in Close Corporations
In many courts, courts impose a fiduciary duty on shareholders owed to other shareholders (a duty of utmost good faith)
108
Close Corporation: Oppression of minority Shareholders
Can sue controlling shareholders who oppress them for breach of this fiduciary duty.
Ex: deny minority any voice in corporate affairs, fire them from employment, refuse to declare dividends, refuse to buy the minority's stock.
109
Why do courts let minority shareholders sue for oppression in a close corporation?
(1) this oppression thwarts her legitimate goals for investing
(2) she has no way out
110
Professional Corporation
licensed professionals may incorporate as a professional corporation or a professional association.
Name must have one of those phrases or (P.C. or P.A.)
Articles must state that the purpose is to practice in a particular profession
May employ non-professionals , but not to practice profession
111
Professional Corporation: Liability
Generally liable for their malpractice.
Shareholders are generally not liable for corporate obligations or for other professionals malpractice
112
Can Shareholders be Held Liable for Corporate Debts?
No, because the corporation is liable for what it does.
113
Piercing the Corporate Veil
Only happens in close corporations, to hold shareholders personally liable.
1. they must have abused the privilege of incorporating and
2. fairness must require holding them liable
Avoid fraud or unfairness by shareholders in a close corporation. Sloppy administration is not enough for PCV.
Allows for imposition of liability on a shareholder, which might be another corporation.
114
PCV: Alter Ego
Identity of interests.
Did shareholder abuse corporation: X treats corporate assets as its own.
Why would it be unfair to have limited liability?
Only specific shareholder is liable
115
PCV: Undercapitalization
shareholders failed to invest enough to cover prospective liabilities.
courts may be willing to PCV for a tort victim than for a contract claimant
116
Derivative Suit
Shareholder is suing to enforce the corporation's claim, not her own personal claim.
A case in which the corporation is not pursuing its own claim, so a shareholder steps in to prosecutor it for the corporation.
Could the corporation have brought this suit? If yes, derivative
Suits for breaching the duty of loyalty or care is always derivative because these are duties owed to the corporation
117
Is shareholder plaintiff wins the derivative suit, who gets the money from the judgment?
Corporation.
Shareholder plaintiff recovers costs and attorney's fees, usually from judgement won for the corporation.
118
If shareholder plaintiff loses the derivative suit, does she recover?
No, not even costs and attorney's fees
Will be liable to defendant he sued for defendant's attorney's fees if he sued without reasonable cause.
Other shareholders cannot later sue the defendants on the same transaction
119
Requirements for bringing shareholder derivative suit
(1) stock ownership when claim arose and throughout suit, at time when claim arose or have gotten it by operation of law (inheritance, divorce decree) from someone who did own it then
(2) must provide adequate representation of corporation's interest
(3) must make written demand on corporation (usually that means the board) that the corporation bring suit.
- in some states you must always make this demand, and cannot sue until 90 days after making the demand. In other states, not required to make this demand if demand would be futile (ex: present directors will be defendants in the case)
(4) corporation is joined as defendant.
(5) parties can only settle or dismiss with court approval. court may give notice to shareholders and get their input on whether to settle or dismiss
120
Derivative Suit: Corporation moves to dismiss
Corporation may move dismiss based upon independent investigation that concluded that suit is not in the corporation's best interest (e.g. low chance of success or expense of the case would exceed recovery the corporation would win).
Investigation must be made by independent directors or a court appointed panel of one or more independent persons (usually "special litigation committee" of independent directors)
121
Derivative Suit: Corporation moves to dismiss
Court finds...
(1) those recommending dismissal were truly independent and
| (2) they made a reasonable investigation, court will dismiss in most states.
122
Oustanding Stock
Shares the company issued and has not reacquired
123
Voting: Outstanding Shares
Each outstanding share gets one vote, BUT you must be the "record shareholder" of the outstanding stock as of the "record date" to vote
124
Record Shareholder
person shown as the owner in corporate records.
Record date is the voter eligibility cut-off
125
Exceptions to general rule that record owner on record date votes
(1) corporation reacquires stock before record date, so it is the owner of this "treasury stock" as of record date. Nobody votes, it is not outstanding on record date
(2) Death of shareholder: executor can vote the shares even though not the record holder on the record date
(3) voting by proxy
126
Proxy
A writing (fax and email ok) signed by the record shareholder (email ok if can identify the sender) directed to the secretary of the corporation authorizing another member to vote the shares.
Good for 11 months unless it says otherwise.
127
How to revoke a proxy
(1) in writing to corporate secretary
(2) by attending meeting and voting
Can revoke a proxy even though it states that is is irrevocable.
128
Irrevocable Proxy
must be a "proxy coupled with an interest"
Requires
(1) proxy says its irrevocable and
(2) proxy-holder has some interest in the shares other than voting
129
Voting Trust Requirements
(1) written trust agreement, controlling how shares will be voted
(2) copy to the corporation
(3) transfer legal title to the voting trustee
(4) original shareholder receive trust certificates and retain all shareholder rights except for voting
10 year maximum.
130
Requirements for Voting AGreement
in writing and signed.
Increasingly, these are specifically enforceable. In states where specific enforcement granted, there is no need to use the voting trust.
131
Where do shareholders vote?
Usually at meeting, but can act by unanimous written consent signed by holders of all voting shares (email OK)
If they have a meeting, it need not be held in the state of incorporation
132
Annual Shareholder Meeting
If no annual meeting held within 15 months, shareholder can petition the court to order one.
Required.
Elect directors.
133
Special Meeting can be called by
(1) the board
(2) the president
(3) the holders of at least 10% of the outstanding shares or
(4) anyone else authorized in the bylaws
Must be for something shareholders can do (i.e. cannot call a special shareholder meeting to remove an officer, because shareholders do not remove officers)
134
Shareholder Meetings: Notice Requirement
Must give written notice (fax or email ok) to every shareholder entitled to vote.
Must be delivered between 10-60 days before the meeting.
Notice must state date, time, and place of meeting.
For special meetings, must state purpose-- can only do the special purpose at the meeting.
135
Consequence of Failure to Give Proper Notice to Shareholders Before Shareholder Meeting
Whatever action was taken at meeting is voidable (maybe void) unless those not sent notice waive the notice defect.
136
Consequence of Failure to Give Proper Notice to Shareholders Before Shareholder Meeting
Waiver
(1) Express-- in writing and signed anytime (fax and email ok)
(2) implied-- attend the meeting without objecting at the outset.
137
What do shareholders generally vote on?
(1) to elect directors
(2) to remove directors
(3) on fundamental corporate changes
May vote on other things if the board asks
138
Shareholders: Quorum
every time the shareholders vote, must have a quorum represented at the meeting.
determination of a quorum focuses on the number of SHARES represented, not on the number of shareholders.
general rule: quorum requires a majority of outstanding shares (NOT SHAREHOLDERS!)
Quorum not lost if people leave the meeting
139
Shareholder Vote: To Elect a Director
Plurality
The person who gets more votes for the seat on the board than anyone else
140
Shareholder Vote: To Remove a Director
Traditionally needed majority of shares entitled to vote
Increasingly, treat this the same as "other matters"-- majority of shares that ACTUALLY VOTE on the issue
141
Shareholder Vote: Other matters
majority of the shares that ACTUALLY VOTE on the issue
142
Cumulative Voting
Usually only in close corporations, gives smaller shareholders a better chance of electing someone to the board
Available ONLY when shareholders elect directors
Don't vote for each seat individually-- have one at-large election. Top two finishers are elected to the board.
Must be in articles
143
Cumulative Voting: determining voting power
Multiply the number of shares times number of directors to be elected
144
Straight Voting
separate election for each seat on the board being elected.
145
Stock transfer restrictions
OK if they are reasonable: not an undue restraint on alienation
If valid, can be enforced against transferee if
(1) restriction is conspicuously noted on the stock certificate OR
(2) transferee had actual notice of the restriction
146
Right of Shareholder (Personally or by Agent) to inspect (and copy) the books or records of the corporation
Any shareholder can demand access
147
Right of Shareholder (Personally or by Agent) to inspect (and copy) the books or records of the corporation
Procedure for non-controversial things
shareholder makes a written demand at least 5 business days in advance.
Need not state a proper purpose
Include: articles, bylaws, minutes of shareholder's meetings for the past 3 years, names and addresses of current directors and officers, most recent annual report of corporation
148
Right of Shareholder (Personally or by Agent) to inspect (and copy) the books or records of the corporation
Procedure for more controversial things
Same as procedure for non-controversial things, but must state a proper purpose related to the demand (related to your interest as a SHH)
Ex: excerpts of minutes of BOARD MEETINGS, accounting records, record of shareholders
149
Right of Shareholder (Personally or by Agent) to inspect (and copy) the books or records of the corporation
Corporation Fails to Allow Proper Inspection
Shareholder can seek a corder order.
If she wins-- can recover costs and attorney's fees incurred in making the motion
150
Distributions
Payments by the corporation to the shareholders.
At board's discretion.
151
3 Different Types of Distributions
(1) dividends
(2) to repurchase shareholder's stock
(3) redemption (a forced sale to corporation at price set in articles)
152
When Does Shareholder Have Right to Dividend or Other Distribution?
When the board declares it.
Very difficult to win a case to force declaration of distribution. Plaintiff must make a VERY strong showing of abuse of discretion. (Ex: corporation consistently makes profits and the board refuses to declare a dividend while paying themselves a bonus).
This is a direct suit.
153
Which shareholders get dividends?
Pay preferred stock first, then pay common stock
154
Cumulative dividend
Accrues year to year. Means the corporation owes the number of years times the dividend
155
For any distribution, which funds can be used?
Traditional view:
Earned surplus
Stated capital
Capital surplus
Modern view: doesn't look at funds; says corporation cannot make a distribution if it is insolvent or if the distribution would render it insolvent.
156
Earned surplus
Generated by business activity.
Consists of all earnings minus all losses minus distributions previously paid. Proper fund for paying distributions
157
Stated Capital
Generated by issuing stock (so is capital surplus). When corporation issues stock, it allocates the proceeds between stated capital and capital surplus.
Can NEVER be used for distribution.
On par issuance, par value goes to stated capital. Any excess over par goes to capital surplus.
On no-par issuance, board allocates consideration between stated capital and capital surplus.
158
Capital Surplus
generated by issuing stock
payments in excess of par plus amounts allocated in no-par issuance
can be used for distributions if we inform the shareholders
159
Insolvent
corporation is unable to pay its debts as they come due OR
total assets are less than total liabilities. liabilities include preferential liquidation rights
160
Liability for improper distributions
Directors are jointly and severally liable for improper distributions.
Remember the directors' good faith reliance defense. .
Shareholders are personally liable ONLY if they knew the distribution was improper when they received it.
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Characteristics of Fundamental Corporate Change
Extraordinary, so board generally cannot do them alone.
1. Amendment of articles
2. Merge or consolidate into another company
3. Transfer substantially all assets (or having stock acquired in "share exchange")
4. Convert to another form of business
5. Dissolve
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To do a Fundamental Corporate Change, need
(1) board action adopting a resolution of fundamental change
(2) board submits proposal to shareholders with written notice
(3) shareholder approval: majority of shares ENTITLED to vote
this is changing. increasing number of states require only a majority of the shares that actually vote on the proposed fundamental change. but to be safe, apply traditional rule.
(4) most of the time, must deliver a document to the Secretary of State
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Dissenting Shareholder Right of Appraisal
Right to force corporation to buy your stock for fair value.
Shareholder's exclusive remedy if she does not like a fundamental change absent fraud
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Changes triggering the right of appraisal
(1) merging or consolidating
(2) transferring substantially all assets
(3) stock being acquired in a share exchange, or
(4) conversion to another form of business
Exists in the close corporation
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Changes triggering the right of appraisal
EXCEPTION
No appraisal if the company's stock is listed on a national exchange or if the company has 2,000 or more shareholders (not shares, shareholders)
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To perfect right of appraisal
a. before shareholders vote, file with corporation a written notice of objection and intent to demand payment
b. at the shareholder vote, abstain or vote against the proposed change and
c. after the vote, within time set by corporation, make written a demand to be brought out and deposit stock with the corporation
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Appraisal: Shareholder and Corporation Cannot Agree on Fair Value of Shares
Corporation sues and the court may appoint an appraiser
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Amendment of the Articles
(1) board of director action and notice to shareholders
(2) shareholder approval (majority of shares entitled to vote-- although this is changing, in many states just need a majority of shares that actually voted)
(3) if approved, deliver amended articles to the Secretary of State
(4) no dissenting shareholder rights of appraisal
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Mergers or Consolidation Requirements
(1) board of director action (both corporations) AND notice to shareholders
(2) shareholder approval (generally both corporations)
(3) no shareholder approval required if a 90% or more owned subsidiary is merged into a parent corporation (short form merger)
(4) if approved, surviving corporation delivers articles of merger or consolidation to Secretary of State
(5) right of appraise for shareholders entitled to vote on the merger or consolidation and also for shareholders of subsidiary in short-form merger
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Effect of Merger or Consolidation
Surviving corporation succeeds to all rights and liabilities of the constituents. This makes sense because the constituent corporation disappeared.
A creditor of that corporation can sue the survivor (successor liability)
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Transfer of all or Substantially all of the assets not in the ordinary course of business or a "share exchange"
one company acquires all the stock of another
what constitutes "substantially all of the assets" varies from state to state-- rule of thumb is at least 75% of assets
these are fundamental corporate changes for SELLING corporation only, not buyer
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Conversion
Business converts to another form (e.g. corporation converts to LLC).
Board approval, notice to shareholders, shareholder approval, deliver document to Secretary of State, dissenting shareholder's right of appraisal
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Transfer of all or Substantially all of the assets not in the ordinary course of business or a "share exchange"
Requirements
(1) board action (both corporation) AND notice to selling corporation's shareholders
(2) approval by the SELLING corporation's shareholders (same number as amending articles)
(3) Dissenting shareholders of SELLING corporation have rights of appraisal
(4) deliver to Secretary of State articles of exchange in share exchange. Usually no filing
(5) usually no successor liability-- exception if buyer is "mere continuation" of the seller (same management, shareholders, etc., or de facto merger)
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Voluntary Dissolution
Board of directors action and shareholder approval. File notice of intent to dissolve with Secretary of State. Corporation stays in existence to wind up. Notify creditors so they can make claims.
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Involuntary Dissolution
By court order.
Shareholder can petition because of:
(1) director abuse, waste of assets, misconduct
(2) director deadlock that harms the corporation,
(3) shareholders fail at consecutive annual meetings to fill a board vacancy
Court might, as an alternative, order a buyout of the objective shareholder (esp. in a close corp)
Creditor can petition because corp is insolvent and
(1) he has an unsatisfied judgment or
(2) corporation admits the debt in writing
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Dissolution is...
not the end of the corporation. Beginning of the process that will end the corporate existence. Corporation continues to exist, so it can sue and be sued. Cannot start new business, but must wind up
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Steps Taken in Winding Up
(1) Give written notice to known creditors and public notice of dissolution in a newspaper in the county of its principal place of business
(2) gather all assets
(3) convert assets to cash
(4) pay creditors
(5) distribute any remaining sums to shareholders, pro-rata by share unless liquidation preference
