CORPORATIONS

Question 1

Corporate Formation

Answer 1

Formed by filing Articles with Secretary of State

An incorporator is the person who signs the Articles of Incorporation

A corporation is presumed to be formed for a
lawful purpose and any business outside of the
corporation’s stated purpose is deemed ultra
vires.
- Remedies for Ultra Vires activities:
*Shareholder can sue to enjoin the ultra vires act;
*The corporation can sue officers and directors for
damages arising from the ultra vires act;
*The state may seek dissolution of the corporation
* BUT NOT removal of directors

Formation also requires the issuance of
securities

Question 2

Way Corporations are Formed

Answer 2

De Jure
- In accord with the formation statutes

De Facto
- Requires an available statute for valid incorporation,
a colorable compliance and good faith ( members do
not know that the incorporation was defective), and
the corporation must act like a corporation
(conducting business in the corporate name with
some exercise of corporate privileges)

Corporation by Estoppel
- Persons who treat an entity like a corporation are
estopped from later claiming it was not – this is an
apparent authority principle

Question 3

Piercing the COrporate Evil

Answer 3

This is getting at personal liability of
shareholders for corporate actions

Three main theories:
- The corporation is the alter ego of the individuals –
requires a failure to observe corporate formalities
(keeping adequate minutes, books, and records), and
a basic injustice so that equity would require that
shareholders be liable for the damages caused

• Inadequate capitalization at the time of
  incorporation
• Avoidance of existing obligations at the time of
  incorporation, or fraud on creditors or other 3rd
  parties

Question 4

Deep Rock Doctrine

Answer 4

Equitable Subordination

Requires:

• Corporation insolvent
• Shareholder also owner of debt
• Judge in discretion may subordinate shareholder’s debt to all other debt-holders

Question 5

Promoter

Answer 5

One who acts on behalf of the corporation in
formation

Upon incorporation promoters owe fiduciary
duties to the corporation and to the shareholders
- One of fair disclosure and good faith

If the promoter acts on behalf of a corporation
knowing none has been formed, the promoter is
jointly and severally liable for any liabilities, even after formation, unless the 3rd party enters a novation that expressly relieves the promoter of liability

Corporation is not bound by any pre-incorporation acts of the promoter unless corporation accepts liability, or impliedly does so by using subject of the contract

Question 6

Issuance of Securities

Answer 6

Equity Securities means common stock

Issued for valid consideration, but not
promissory note or future services

Debt securities include a bond, which is
secured by corporate assets, or a debenture,
which is unsecured
- Debt security is not a form of ownership

Preferred Stock

• Annual repayments
• Amounts to repay deposited into “sinking fund”

Question 7

Corporate Governance - Shareholders

Answer 7

Power of Shareholders
- Elect directors, amend articles and bylaws (must vote
on fundamental corporate changes – sale of all the
assets, mergers)
- May vote in person or by proxy, but not by absentee
voting
- Proxy revocable unless coupled with an interest
- Proxy lasts 11 months
- Quorum—majority in interest of issued/outstanding
shares

Cumulative Voting
- Shareholders can take all the votes they have for all
the director positions, and vote them all toward one
position
- Allows minority representation on Board

Shareholder Agreement/Voting Trust
- Can involve any aspect of the exercise of corporate powers or management. Must be either be set out in the articles of incorporation or bylaws, or be in a written agreement signed by all the shareholders
- Does not impose personal liability on
shareholders

Transfer Restriction
- Binds transferee with knowledge OR if restriction
“conspicuously noted” on certificate

Question 8

Distributions to Shareholders

Answer 8

Can be in the form of dividends to
shareholders, redemption or repurchase of
outstanding shares, or liquidating
distributions after dissolution

Within the Board’s discretion—court cannot
compel

Limited by solvency and any restrictions in
the articles of incorporation

Question 9

Shareholders’ Direct Suits

Answer 9

For breach of duty directly owed to the shareholder
by an officer or director, or by a majority of
shareholders (such as failure to declare a dividend)

Majority of shareholders have a fiduciary duty to
minority shareholders to not act oppressively or
illegally or with fraud

Other duties of controlling shareholders
- Duty to not sell to looters
* someone who buys the stock and then sells off all the assets for personal gain, leaving the shell and causing all the employees to lose their jobs
- Duty not to sell corporate offices
* Sale of controlling or majority stock at above-market
price and agreement to replace the Board of Directors

Question 10

Derivative Suits

Answer 10

Normally used for suits against directors/officers
for breach of duties of loyalty and care

Requires
- Standing;
- A written demand and inaction for 90 days unless the
demand would futile (because whole board was in
breach)

Question 11

Directors - Voting

Answer 11

Requires Quorum

Quorum = Majority of Eligible Directors

Valid vote requires majority of disinterested
directors

Question 12

Duty of Care

Answer 12

Requires that the directors act:
- In good faith
- With the care that an ordinarily prudent person
in a like position would exercise under similar circumstances
- In a manner the director reasonably believes to
be in the best interest of the corporation

Business Judgment Rule
- If duty of care complied with, no liability for
erroneous decisions

Question 13

Duty of Loyalty

Answer 13

Conflict of interest: Director/Related
Person—
- Is a party to transaction, OR
- Has a beneficial financial interest in transaction,
OR
- Is employee of entity with whom corporation is transacting business

Defenses

• Approval by disinterested shareholders; OR
• Approval by disinterested directors; OR
• Fair to corporation

Usurpation of corporate opportunities

• Corporate expectancy in business opportunity
• Look for similarity to corporate business

Common Law Insider trading
- Purchase/sale of stock with undisclosed knowledge of special circumstances affecting value

Indemnification of Directors and Officers
- Largely dependent on whether director/officer
prevail

Question 14

Dissolution

Answer 14

3 MAJOR WAYS TO DISSOLVE A CORP.

Voluntary dissolution by corporate act
- Shareholders and directors both vote to dissolve the
corporation

Administrative Dissolution
- Brought by State for failure to pay corporate fees or penalties for 60 days after their due date; etc.

Judicial Dissolution

• By Attorney General – fraud or ultra vires acts
• By Shareholders
• Deadlocked directors/threatened irreparable harm
• Directors acting fraudulently, illegally, oppressively
• Deadlocked shareholders/failure to elect directors for two meetings
• Waste of corporate assets

Question 15

Securities Regulation

Answer 15

Rule 10b-5

• fraud
• insider trading

Section 16(b)

Sarbanes-Oxley Act of 2002

Question 16

10b-5 FRAUD

Answer 16

Basic Fraud – Unlawful, in conjunction with the
purchase or sale of a security, to employ interstate commerce or the mail or a national securities exchange to:
- Employ any device or scheme to defraud;
- Make any untrue statement of material fact or omit
to state a material fact; or
- Engage in any act or business practice that would
operate as a fraud or deceit on any person

Common Law Misrepresentation

Both 10b-5 fraud and common law
misrepresentation require plaintiff to actually
purchase or sell stock in reliance on
false/misleading statement or omission

Question 17

10b-5 INSIDER TRADING

Answer 17

Insider Trading – purchase or sale of stock
with knowledge of nonpublic information and
without disclosing that information and
breaches a duty of trust and confidence
owed to the issuer, the shareholders of the
issuer or another person who is the source of
the nonpublic information
- Insider—liable only if insider buys or sells stock using inside information
- Tipper—liable if tip for an improper purpose
- Tippee—liable if knows tipper violated duty
- Misappropriator—trade on information from confidential relationship

Question 18

Section 16B

Answer 18

Short Swing Sales

Any profit realized by a shareholder or more
than 10% of the stock, or any director or
officer, from any purchase of sale within a
period of less than 6 months, must be
disgorged to the corporation
- 10% means 10% at the time of EACH purchase and
sale, so purchases to initially get over 10% do not
count

Question 19

Sarbanes - Oxley Act of 2002

Answer 19

Tries to eliminate the relationship between
the auditor and the officers

Qualifying corporations have to establish an
audit committee made up of independent
Board members – none can be otherwise
employed by or affiliated with the company

Audit committee is to oversee the
appointment, compensation and work
performed by the registered public
accounting firm it employs to perform its
audits