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Corporations Flashcards

1
Q

What are the two basic goals of corporate law?

A

1) Reduce agency costs

2) Reduce transaction costs by facilitating contracting

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2
Q

What are the 4 hallmarks of corporate form?

A

1) Legal personality
2) Limited liability
3) Transferrable shares
4) Centralized management

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3
Q

What is the key way that management can screw over the board that the board can’t do anything about?

A

Management controls the flow of information to the board (Gantler v Stephens)

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4
Q

What is the central step in creating a corporation?

A

Filing a charter with the Sec of State

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5
Q

Who has to approve changes to the charter?

A

The board and the shareholders

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6
Q

Who has to approve changes to bylaws?

A

The default is shareholders and directors, but most charters alter to allow the directors alone to change them

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7
Q

What are protective rights?

A

Negotiated rights that might give minority shareholders certain veto powers against a controlling shareholder

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8
Q

What should you do every time before issuing more stock?

A

Check the number of shares authorized in the charter

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9
Q

How to creditors protect themselves from management?

A

Veil piercing, FC law, corporate distributions, equitable subordination of shareholder claims, security interests, personal guarantees, loan covenants,

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10
Q

What are the 2 requirements to pierce the veil?

A

1) Must disregard the legal separateness of the corporation(follow formalities and fund the company)
2) Inequitable conduct; squishy
3) Optional “could the creditor have protected themselves” prong

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11
Q

What are the two sources a firm can dividend from?

A

Can issue dividends from surplus or from net profits of the previous 2 years (even if surplus is negative)

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12
Q

What is the source that share repurchases can be made from?

A

Can only repurchase from surplus (but get credit for any capital tied to the shares being repurchased)

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13
Q

What are the 3 ways to do a share repurchase?

A

1) self-tender offer
2) Open market purchases
3) Purchases from individual shareholders

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14
Q

What is the consequence of violating a corporate distribution rule?

A

Directors are individually liable and forced to reimburse the company unless they rely in good faith on the advice of experts

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15
Q

Does a company ever receive REV for dividends?

A

No

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16
Q

What is the protection of some transferees in FCs?

A

548(c) protects transferee that takes for value in good faith is protected tot he extent they gave value

550 protects subsequent transferees in good faith, without knowledge for value

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17
Q

How are LBOs supposed to create value?

A

Debt is tax deductible
Reduces managerial agency costs
perfect timing
steal value from unsecured creditors

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18
Q

What was central to the FC in Gleneagles?

A

IIT’s Knowledge of the grand scheme and that Raymond would not receive REV

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19
Q

How does an LBOer eliminate FC liability?

A

Makes sure the firm is adequately capitalized before and after the LBO

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20
Q

How can a shareholder prevent equitable subordination?

A

Company can go out and raise the debt from a bank and then pay the shareholder in cash (Fc worry so need adequate capitalization)

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21
Q

What does 102(b)7 NOT do?

A

No protection of officers
No effect on ability to see injunctions
Eliminates financial liability only (not technically the violation)
No impact on DOL or bad faith
No impact on unlawful payment of a dividend
No impact on any transaction where director improperly personally benefitted

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22
Q

What does 145 allow corps to do?

A

Indemnify d/o/anyone else in the corp for good faith actions (inc legal fees + settlement) and buy D/O insurance

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23
Q

What do controlling shareholders think about indemnification?

A

They’re not very protected because they are still bearing most of the cost. Controlling shareholders themselves can’t be indemnified anyway

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24
Q

What are the 3 lines of defense to d/os paying?

A

1) 102(b)7 provisions eliminate liability for most of DOC
2) 145(b) allows corps to indemnify for litigation costs and settlements approved by disinterested board members (unless adjudged liable then need court approval)
3) 145(g) D/o insurance covers costs regardless if the corp can indemnify those costs (covers litigation expenses and liability to the extent corp does not indemnify but excludes crime + civ penalties for fraud and breach of fiduciary duty resulting in personal gain)

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25
Q

Why do plaintiffs always prefer direct over derivative actions?

A

1) Avoid the demand requirement and SLC MTD

2) avoid the issue of mergers terminating standing

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26
Q

What is the Tooley test?

A

Direct + derivative claims are parsed solely on two factors:

1) Who suffered the alleged harm (if corp harmed then derivative)
2) Who would receive the benefit of any recovery or other remedy

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27
Q

What is the Gentile/Rosette Test?

A

Allows a direct + derivative suit if BOTH

1) A controlling shareholder causes the corp to issue excessive shares of stock in exchange for assets of the controlling shareholder of lesser value
2) The exchange increases the % of shares outstanding owned by the controller and consequently dilutes the voting rights of the minority

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28
Q

Who gets the recovery on a derivative suit?

A

The company

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29
Q

What does the demand requirement and the SLC do?

A

Shifts the discretion of which suits should be brought away from the plaintiff’s bar and towards the corporation/court

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30
Q

What is the McKee Rule and exception?

A

McKee Rule: Stockholder cannot sue on the corp’s behalf if the directors refuse
EXCEPTION: The Rule does not apply if the copr’s refusal is itself a breach of fiduciary duty

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31
Q

What is the updated demand futility test?

A

Need EITHER prong:
Prong 1: Plaintiff rebuts the presumption that the directors are disinterested and independent
Prong 2: Complaint pleads facts sufficient to indicate that the challenged transaction was not a valid exercise of business judgment

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32
Q

What is the logic behind a SLC MTD?

A

Even if the demand requirement is waived as futile, the corp still has the right to control its litigation. It is a problem of independence, not power and the independence problem can be solved by delegating the decision to an independent group of directors

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33
Q

What is the 2 step standard for evaluating a SLC MTD?

A

Zapata
1) Inquire into the independence and good faith of the SLC and its reasons for dismissing
2) Evaluate the merits of the cause under the court’s independent business judgment
If both steps are satisfied the court may grant a MTD but can also deny if other equitable factors make the litigation necessary or desirable

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34
Q

What is the standard of care for DoC?

A

Gross Negligence

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35
Q

What are the 3 prongs of the DoC under the ALI conception?

A

1) good faith
2) reasonable belief action is in the best interest of the corporation
3) must act with the care an ordinary prudent person would reasonably be expected to exercise under the circumstances

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36
Q

What are the 4 prongs of the BJR under the ALI conception?

A

1) Decision made in good faith
2) not conflicted
3) Informed to the extent they reasonably believe is appropriate
4) rationally believe the judgement is in the best interest of the corp

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37
Q

What are the 2 routes to violate Doc per Caremark?

A

1) Gross negligence in positive decision making

2) Failure to monitor or act

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38
Q

What is the standard for failure to monitor liability?

A

Caremark: Sustained or systematic failure of oversight that is so bad it’s bad faith
Stone: board has to either fail to implement reporting systems or consciously failed to monitor them

39
Q

What are the 2 types of bad faith?

A

Disney: 1) Intent to do harm

2) Intentional dereliction of duty (conscious disregard for one’s responsibilities)

40
Q

What is a case to cite that market premium is not enough to conclude the board’s diligence?

A

Smith v Van Gorkam (but might not apply with 102(b)7 provisions any more)

41
Q

Why is it a bad reason to pay CEO with preferred stock?

A

It looks like the management is not aligned with the common stockholder

42
Q

Why is self-dealing a hot spot for shareholder litigation?

A

When it is done by a controlling shareholder, the shareholder’s only remedy is litigation

43
Q

What is the benefit-detriment test for? what is it?

A

It determines if self-dealing has occurred and if entire fairness is warranted.
The insider has to have received something to the exclusion and detriment fo the company to trigger entire fairness

44
Q

Why would VCs not want debt?

A

If a startup has debt (and it is borderline insolvent per usual) the likelihood of FC avoidance for any transfer to shareholders is high

45
Q

What is plurality voting?

A

The default rule for uncontested elections where one vote for an 99 withheld wins an uncontested election

46
Q

What is majority voting?

A

An alteration to the default rule for uncontested elections where if a director fails to receive 50% of the votes cast, they must tender a resignation. (board can still refuse the resignation and the director stay on)

47
Q

What is the default rule for removal of a director?

A

At will and without cause

48
Q

What is the rule for removing a director if there is cumulative voting?

A

Can only remove a director if the number of votes against removal would be insufficient to reelect the director

49
Q

What is the rule for removing a director if the board is staggered?

A

Can only be removed for cause

50
Q

Are shareholder resolutions binding?

A

No - just communicate to the board

51
Q

What are the 3 market controls over management even without a strong shareholder voting check?

A

1) The product market
2) the market for managerial services
3) The capital markets

52
Q

What is straight voting?

A

The default for contested elections (one vote per share per seat)

53
Q

What is cumulative voting?

A

Allows minority shareholder representation on the board. one vote per share times the number of board seats but all votes can be cast for one director if the shareholder wants

54
Q

What is a staggered board?

A

It is a staggered re-election cycle (the default is that every director comes up for election every year

55
Q

What is an effective staggered board?

A

A staggered board that cannot be undone by a new controlling shareholder. (put staggered board in the charter and also cap the number of directors)

56
Q

What is the Frossel rule?

A

Incumbent board can spend corporate $ in a proxy fight over policy differences (reasonable in good faith)
Challenger expenses are reimbursed only if the challenger wins

57
Q

If a controlling shareholder is sued for actions they take with their stock, they are not indemnified by the corp or by a 102(b)7 waiver or a BJR presumption

A

Controllers should be careful of sale to corporate looter, sale of office, coercing charter amendment

58
Q

What is the general rule with premiums for sale fo control blocks?

A

They’re fine - Zetlin (Market Rule)

Compare to Mandatory bid rule

59
Q

What is the duty of a selling controlling shareholder tot the other shareholders?

A

Reasonable amount of investigation into the buyer if the circumstances would reasonably arouse suspicion and put a reasonable person on notice
Majority view is gross negligence (minority requires actual knowledge of the planned fraud)

60
Q

Can a small % owner sell their block and their board seat for a huge premium?

A

No invalid as against public policy (Brecher v Gregg)

61
Q

What is a 251(c) merger?

A

the plain vanilla merger

62
Q

What is a 253 merger?

A 
a short form merger where one corp already owns 90% of each class of stock
No entire fairness review of this per Glassman v Unocal
63
Q

When do a surviving corporations shareholders not need to approve a merger?

A

If the shareholders get to keep their shares, the charter is unchanged, and the # of shares being issued by the surviver is <=20% of the total shares outstanding

64
Q

What do triangular mergers eliminate the possibility of?

A

the acquiring entity cannot be cashed out

65
Q

What is a 251(h) merger?

A

A merger that avoids a shareholder vote of the target by agreeing with the board that acquirer will run a tender offer, and if >50% participate the remainder are frozen out at the same compensation

66
Q

When to stock exchanges require shareholder approval?

A

They require the approval of the acquirer if they are issuing more >=20% of the current outstanding shares in the merger

67
Q

What are the pros and cons of an asset sale?

A

Acquirer’s assets are not exposed to the target’s liabilities
Acquirer’s stockholders usually don’t have to approve
Acquirer gets a tax step up

68
Q

Who gets appraisal rights?

A

1) any corp that gives the appropriate right in the charter
2) Any subsidiary that is being frozen out by a parent using a 253 or 267 merger
3) any 251 or 255 merger where any class of stock receives something other than stock
4) all other 251 or 255 mergers subject to the exchange or widely held or surviving corp no-vote exceptions

69
Q

Are asset sales considered de facto mergers?

A

No see Hariton v Arco Electronics where appraisal remedy was denied

70
Q

What are the 3 techniques for a freeze out? what are the associated appraisal rights?

A

Cash-out merger (appraisal), sell all of the assets to the controller (no appraisal), reverse stock split (no appraisal)

71
Q

What are the 3 exceptions to entire fairness for freeze outs?

A

1) No entire fairness review for 253 short form mergers (Glassman v Unocal)
2) Kahn v Lynch burden shift
3) MFW move to BJR

72
Q

What is needed to shift the burden of entire fairness to the plaintiff under Kahn v Lynch?

A

Need either of these prongs:

1) Create an independent committee with real bargaining power and no threat of a hostile tender offer
2) Approval of an informed majority of the minority shareholders

73
Q

What is needed to move from entire fairness to BJR under MFW?

A

If the purchasing controlling shareholder conditions their offer on both of the below:

1) a special committee of independent directors negotiating and approving the deal AND
2) a majority approval by the minority shareholders who were not coerced

74
Q

What are the options for taking control of a company without approval of the existing board

A

1) Proxy fight
2) Sale of control block
3) hostile tender offer

75
Q

What is the difference in a structurally coercive and substantively coercive tender offer

A

Structurally coercive tender offers offer two different levels of compensation which causes everyone to tender regardless if they think it’s a good deal
Substantively coercive tender offers might offer a high price for all shares, but the board still thinks it’s strategy is better

76
Q

What is the intermediate standard of review that applies to hostile takeover defense?

A

Unocal: Boards are entitled to BJR review of their defenses against outside tender offers IF:
1) The board reacts in good faith belief after reasonable investigation that a legally cognizable threat would be posed by the bidder’s stock ownership
2) the measure taken is reasonably proportional to the threat posed
(can consider threats to all stakeholders)

77
Q

When are Unocal and Airgas relevant?

A

When a bidder is seeking an injunction against defensive measures

78
Q

At what stage in the deal are are Revlon and Lyondell relevant?

A

Revlon: When seeking an injunction before the deal has gone through
Lyondell: When seeking damages after a deal has gone through (DoC violation - have to prove Revlon duties were breached in bad faith if there is a 102(b)7 provision)

79
Q

What is the Revlon duty and how can it be discharged?

A

Revlon Duty: a board putting the firm up for sale has a duty to shareholders (not other stakeholders) to get the highest price for the shares
Lyondell: A board can satisfy the Revlon duty by leveling the playing field in an auction, conducting a market check or by demonstrating impeccable knowledge of the market

80
Q

After a deal has gone through, what are the options for challenging a merger?

A

Revlon ship has sailed and if there is a 102(b)7 you’re likely out of luck on DoC

81
Q

What are the 3 prohibitions under Sec 16 of the Sec Exchange Act?

A

1) D/o/>10% owners must file with the SEC within 2 days of trades
2) Short Swing Profits Rule
3) No short sales

82
Q

What is rule 10(b)5?

A

An anti-fraud regulation passed by the SEC which supports the equal access, fiduciary duty, and misappropriation theories (the question is always who is being defrauded and how)

83
Q

What is Reg FD?

A

requires that companies who accidentally or intentionally disclose material nonpublic information to a broker/dealer/investment advisor publicly disclose (but does not apply to disclosures made to those already in a fiduciary duty relationship

84
Q

What is Rule 41e-3?

A

SEC used its power to regulate tender offers to make it fraud for any person to trade w/o disclosing who has material non-public info about a tender offer which:

1) they know/had reason to know is non-public
2) they know/had reason to know it was acquired from the offeror/ee or anyone acting on their behalf

85
Q

What is the equal access theory?

A

Rejected in Chiarella
All traders owe a duty to the market to disclose or abstain - rooted in fairness
Liability is imposed on the basis of the information the trader has not on the basis of who the trader is

86
Q

What is the fiduciary duty theory?

A

Est by Chiarella - augmented to tippees by Dirks
Insider trading violates rule 10b5 when there is a pre-existing relationship of trust and confidence between the trader and the shareholders of the company being traded. Rooted in the common law definition of fraud where no duty to disclose = no fraud

87
Q

Can CEOs trade in the stocks of other companies under the fiduciary duty theory?

A

Yes because the duty is owed to the shareholders of the CEO’s company. No relationship of trust and confidence with the other shareholders. Likely a misappropriation claim though

88
Q

Who has a relationship of trust and confidence per Chiarella?

A

1) d/os of the firm

2) temporary service providers (lawyers/accountants/bankers)

89
Q

What are the facts of Chiarella?

A

Chiarella was the printer who decoded the news and made $30K insider trading

90
Q

What are the facts of Dirks?

A

The investment advisor got a tip from a former employee that at company was inflating assets and advised his clients to trade

91
Q

What are the requirements for a tippee to be liable per Dirks?

A

1) Tipper must be liable (RoT&C+improper personal benefit)
2) tippee must have known or had reason to know that the tipper was breaching a fiduciary duty by sharing the information

92
Q

What is the misappropriation theory?

A

The duty (contractual or implied) is owed to the source of the information (e.g. the lawyer in OHagan owed a duty to the client and the firm). The insider defrauds the company by feigning loyalty. Must be deception. OHagan claims misappropriation theory and fiduciary duty theory are complementary

93
Q

What are the facts of OHagan?

A

OHagan’s firm was representing a client who was planning a merger with Pillsbury, and he goes and buys calls in Pillsbury (no fiduciary duty because to ROT+C with Pillsbury just the client)

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