Corporations

Question 1

Legal personality of corporation

Answer 1

• Corporation is a legal person (entity) distinct from its owners

Question 2

Limited liability of corporation

Answer 2

• Affirmative asset partitioning: The assets of the corporation cannot be liquidated (are shielded) to satisfy the claims of the personal creditors of the firm’s owners.
• Defensive asset partitioning: The corporations’ creditors cannot satisfy their claims over the firm’s owners personal assets: personal assets of the firm’s owners are shielded from business liabilities and the corporation’s creditors.

DGCL § 102(b)(6): The certificate [articles] of incorporation may (6) […] impos[e] personal liability for the debts of the corporation on its stockholders to a specified extent and upon specified conditions; otherwise, the stockholders of a corporation shall not be personally liable for the payment of the corporation’s debts

Question 3

Management for corporation

Answer 3

• The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors.
• Every corporation is governed by the board of directors that is elected by the shareholders. The board of director hires officers for the running of the business.
• Individual directors are not agents of corporation, only the board itself can act as a “super-agent” and bind the corporation.

Question 4

Issuance of stock

Answer 4

• Board of directors prerogative.
• Shareholders involved only if:
  
  • Board wants to sell more shares than are presently authorized in its AoI
  • Board wants to issue a new class of shares not authorized in the AoI

Question 5

Rules for Bylaws

Answer 5

• Initial bylaws adopted by incorporators or directors (before the corporation has received any payment for its stocks); then (once the corporation has received payment for its stock) the power goes to the stakeholders.
• However, the certificate of incorporation can confer the power to adopt, amend or repeal the bylaws, nevertheless stockholders retain the power to adopt, emend or repeal the bylaws.
• Under Delaware law, forum selection bylaws adopted pursuant to articles of incorporation without a vote by stockholders are not facially invalid. Boilermakers.

Question 6

Who is in charge of corporation?

Answer 6

Shareholders own the company

Board elected by shareholders

Officers appointed by the board

Question 7

Duties of Care for Directors

Answer 7

• Both officers and directors are fiduciaries of the corporation (duty of care and duty of loyalty)
  
  • Duty of Care: Directors/officers are expected to act in good faith and the best interests of the corporation. Failure to exercise due care may subject individual directors or officers personally liable.
  • Duty of Loyalty: subordination of personal interests to the welfare of the corporation.
    
    • No competition with Corporation
    • No “corporate opportunity”
    • No conflict of interests
    • No insider trading
    • No transaction that is detrimental to minority shareholders

Question 8

Theories of piercing corporate vail

Answer 8

• Enterprise liability
  
  • If the corporation that owned the cab that hit him was a fragment of a larger “single entity, unit and enterprise” which actually conducted the business, then the larger corporate entity would be liable.
  • The principal are the entities that are part of the enterprise – all corporations are operated as single entity.
• Alter ego:
  
  • If the corporation is a mere fiction (dummy) for its individual stockholders to carry on the business in their personal capacity and for purely personal rather than corporate purpose, the stockholders would be personally liable.
  • The principal is the stockholder who would be personally liable – shareholders (the ones who were actively involved in the management are personally liable): legal fiction to defraud the public
• Not enough to show undercapitalization and asset intermingling

Question 9

Test for Alter-Ego Liability

Answer 9

• Alter ego liability (Sea-Land):
  
  • Shareholder is personally liable
  • Elements
    
    • (1) unity of interest between corporation and controlling shareholder. In other words, there is a failure to respect corporate formalities and records. Other relevant factors include undercapitalization and commingling of assets and resources.
    • (2) Intentionally or Recklessly deprives the corporation of sufficient funds to repay creditors;
• How to Avoid:
  
  • respect corporate formalities
  • do not use corporate assets
• Enterprise liability

Question 10

Test for Enterprise Liability

Answer 10

• Enterprise liability
  
  • All corporations in enterprise are liable (NOT the shareholders)
  • Elements
    
    • (1) high degree of unity of interest between the two entities that their separate existence had de facto ceased
      
      • Relevant factors include failure to keep corporate formalities, undercapitalization, commingling of assets and resources; use of artificial division of the business.
    • (2) treating the two entities as separate would sanction fraud or promote injustice
      
      • Unjust enrichment or fraud to creditors
• How to Avoid
  
  • Keep separate books, accounts, commingling of resources

Question 11

What is the corporate purpose and power?

Answer 11

• A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end.
• Corporations are allowed to make gifts to charity. However charitable contributions must bring some benefits the corporation. A.P. Smith.
• A typical protected by the business judgment rule is whether to declare a dividend.

Question 12

What are rights of shareholders?

Answer 12

• Own the company, participate in profits, limited involvement in company’s affairs
• Economic rights:
  
  • receive dividends (distribution of dividends) when and as declared by the board of directors
  • residual claim on assets in liquidation
• Voting rights:
  
  • elect directors;
  • vote on fundamental matters (amendment of articles of incorporation, mergers, sales of substantial assets, dissolution)
• Right to inspects books and records: § 220(b) and (c):
  
  • proper purpose (reason for seeking the request is conceivably within the long-term interest of the firm)
  • [request for book and records generally situation of tender offer or filing a suit]
• Right to file derivative suit

Question 13

Shareholder meetings

Answer 13

• Shareholder Meetings
  
  • Requires a written notice to stockholders.
  • Action without meeting (i.e. written consent)
    
    • Action by consent is ok if voted by the same amount of shares as would be needed at a meeting.
    • Consent of Stockholders In Lieu of Meeting
      
      • Unless otherwise provided in the certificate of incorporation, an action may be taken without a shareholder meeting, without prior notice and without a vote, if a consent or consents in writing is executed.
  • A controlling stockholder(s) of a Delaware corporation cannot ratify an interested board’s decision without adhering to the corporate formalities for taking stockholder action.

Question 14

What is quorum for shareholder meeting?

Answer 14

Quorum

Default rule: quorum for validity of meeting: “A majority of the shares entitled to vote, present in person or represented by proxy”

Certificate of incorporation or bylaws can set a different quorum, but no less than 1/3 of the shares entitled to vote at the meeting

Question 15

What are shareholder voting rights?

Answer 15

• Shareholder Voting Rights (overview)
  
  • Default rule: one share one vote
  • Voting stockholder may appoint proxies (delegate voting)
  • Quorum and voting mechanism (plurality; majority; cumulative)
  • Proxy contests and fights: SEA Sec. 14(a) and Rules: Soliciting of proxies:
    
    • Proxy statement (disclosure of information that may be relevant to the decision the shareholder must make)
    • Filing obligations with SEC
    • No materially false or misleading statements or omission in the proxy statement
    • Implied right of action (direct and derivative) under Borak

Question 16

What are methods for shareholder voting?

Answer 16

• Voting
  
  • Decision must be approved by the majority of shares present in person or represented by proxy
  • Mergers and amendments to the charter require approval by the majority of outstanding shares.
  • Election of directors:
    
    • Plurality vote or straight-line voting: one share one vote; each director is elected one at a time, you can vote once per vacancy. Who gets the most votes win, regardless of whether these votes constitute a majority (broadly used in contested elections; default in uncontested elections)
    • Plurality vote plus: if a director nominee is elected but fails to secure a majority vote, the director must offer his or her resignation, and the board has varying degrees of discretion on whether it may decline to accept such resignation.
    • Majority Voting: requires each nominee for election to the board to receive a majority of the votes cast in order to be elected to the board (uncontested elections, on the rise in Delaware)
    • Cumulative vote: total number of available votes = number of shares * number of directors to elect (seats); all directors stand for election at the same time (more friendly to minorities); the directors with the highest number of votes win

Question 17

reimbursement of proxy solicitations costs:

Answer 17

• Basic rules for reimbursement of proxy solicitations costs:
  
  • Reimbursement only allowed if dispute concerns questions of policy
  • The corporate treasury can be used only to reimburse reasonable and proper expenses
  • Incumbents can be reimbursed if they win or loose (do not need shareholder approval).
  • Insurgents can be reimbursed if (i) they win and (ii) shareholders ratify the payment
• In a proxy contest over policy, as compared to a purely personal power contest, corporate directors [i.e. incumbents] have the right to:
  
  • (1) make reasonable and proper expenditures from the corporate treasury
  • (2) for the purpose of persuading the stockholders of the correctness of their position and soliciting their support for policies
  • (3) which the directors believe, in all good faith, are in the best interests of the corporation.
• The stockholders may reimburse successful contestants (i.e. insurgent candidates) for the reasonable and bona fide [proxy solicitation] expenses incurred by them, subject to like court scrutiny [i.e. the shareholders, not the incumbent board, approve].

Question 18

Elements for proxy litigation (no false or misleading statements)

Answer 18

• Elements of Action (burden of proof on the plaintiff) (Mills)
  
  • Materiality
    
    • A fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.
  • Causation
    
    • Defect has a significant propensity to affect the voting process. The proxy solicitation itself, rather than the particular defect in the solicitation materials, is an essential link in the accomplishment of the transaction.
    • Under all of the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Seinfeld.

Question 19

Exclusions of Shareholder Proposal (procedural)

Answer 19

• Exclusions of Shareholder Proposal
  
  • Procedural Issues
    
    • ownership requirements (1% or $2,000 shares for at least 1 year);
    • format guidelines (max 500 words);
    • timely (120 days before date previous year proxy material circulated);
    • company/issuer must offer the opportunity to the proponent shareholder to correct the errors within 14 days after submission

Question 20

Exclusions for Shareholder Proposal (Substantive)

Answer 20

• improper under state (of incorporation) law
• personal grievance; special interest;
• relevance
• management functions (ordinary business functions
• conflicts with company’s proposal;
• substantially implemented;
• relates to an election for membership on the company’s board of directors or analogous governing body.

Question 21

What is two-step approach for improper under state law exclusion?

Answer 21

• Two Step Approach
  
  • (1) Who can amend the bylaws?
    
    • The power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote
    • Any corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors. The fact that such power has been so conferred upon the directors or governing shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws.
  • (2) Does the proposal violate Delaware law? That is, does it eliminate discretion in the board for making disbursements.

Question 22

What is the test for relevance exclusion?

Answer 22

• Test: If the proposal relates to operations which
  
  • (1) account for less than 5 percent of the company’s total assets at the end of its most recent fiscal year, and
  • (2) for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and
  • (3) is not otherwise significantly related to the company’s business
    
    • The meaning of “significantly related” in the SEC rule for omissions in proxy statements is not limited to economic significance. Lovenheim.

Question 23

What are the thee-prongs for management exclusion?

Answer 23

• Three-Prongs (Trinity Wall Street)
  
  • (1) What is the subject matter of the proposal? The subject matter of a proposal is the “ultimate consequence” resulting from the proposal.
    
    • Wal-Mart: potential change in what Wal-Mart decides to sell.
  • (2) Does the proposal deal with matter relating to the company’s ordinary business operations?
    
    • Wal-Mart: Yes, the proposal relates to “merchandising approach” of the business to products.
  • (3) Does the proposal:
    
    • (i) raise policy issues so significant that it would be appropriate for a shareholder vote (i.e significant social policy exception); and
      
      • Wal-Mart: Yes, proposal regarding assault rifles touches on the bases of what are significant concerns in our society
    • (ii) transcend the day-to-day business matters of the company?
      
      • Wal-Mart: No, for a policy issue to transcend Wal-Mart’s (D) business operations, it must target something more than choosing among tens of thousands of products it sells.
      • A decision to stop selling a particular product more likely transcend with ordinary business matters when the company is a manufacturers of a narrow line products.

Question 24

What are “relates to election” exclusion?

Answer 24

• (i) Would disqualify a nominee who is standing for election;
• (ii) Would remove a director from office before his or her term expired;
• (iii) Questions the competence, business judgment, or character of one or more nominees or directors;
• (iv) Seeks to include a specific individual in the company’s proxy material for election to the board of directors; or
• (v) Otherwise could affect the outcome of the upcoming election of directors

Some proposals not permitted to be excluded:

• voting procedures (majority or plurality voting, or cumulative voting)
• Nominating procedures (shareholder proxy access)
• Directors qualification or board structure (BUT cannot relate to removal or disqualification of directors)
• .

Question 25

Shareholder inspection rights for the corporation’s stock ledger, a list of its stockholders, and its other books and records…”

Answer 25

• Demands for shareholders lists: the firm must prove that the shareholder does not have a proper purpose
• Demands for other corporate documents: the shareholder must prove that she has a proper purpose.
  
  • Proper purpose:
    
    • investigating the possibility for corporate wrongdoing, mismanagement, i.e. shareholder litigation (keep BoD accountable)
    • reaching out to other fellow shareholders to discuss a corporate matter (i.e. tender offer per Crane) or in connection with a planned proxy contest
    • collecting information relevant to value shares.
    • A proper purpose contemplates concern with investment return (Pillsbury).
  • Improper purpose:
    
    • soliciting personal business
    • attempting to discover proprietary business information
    • A stockholder who purchased stock for the sole purpose of bringing suit to compel production of corporate books and records, who was motivated by his belief that the corporation should not be manufacturing ammunition to be used in the Vietnam War, and who had no concern for the corporation’s economic well-being, cannot compel production of the corporation’s shareholder lists or business records. Pillsbury

Question 26

What is rule for NOBO list?

Answer 26

• Production of an out-of-state corporation’s shareholder and NOBO lists to an in-state resident is permitted when the corporation is doing business in the shareholder’s state, even when the shareholder was not able to obtain the lists under the law of the state of incorporation. Sadler.

Question 27

Shareholder Voting Control

Answer 27

• A limitation on a class of stock that prevents the stock from receiving dividends does not invalidate the stock. Stroh.

Question 28

When is a claim direct or derivative?

Answer 28

• When is a claim direct or derivative?
  
  • Direct:
    
    • The shareholder/s suffered the injury
    • The shareholder/s would receive the benefit of the recovery or remedy
    • The injury is not suffered by the corporation, but by the shareholder/s directly
  • Derivative
    
    • Injury to the corporation and only indirectly suffered by shareholders
    • The corporation is entitled to the recovery for the injury
    • Cause of action belongs to the corporation as an entity
    • Demand Requirement
      
      • Demand is required
        
        • Unless it is excused
          
          • It is excused when it is futile
            
            • Delaware: plaintiff allege with particularity that a reasonable doubt exists that:
            • New York: plaintiff allege with particularity

Question 29

W