Corporations Flashcards
Piercing Corporate Veil: Factors
FLAGS
Fraud
Lack of adherence to formalities
Affiliated entites comingling finaces
Gross undercapitalzation (insufficient to service debts or meet corporate needs)
Shareholders comingling
When is a dividend improper?
- Distribution would leave corporation unable to service debts; OR
- Total assets less than total liabilities + preferred shareholders rights (balance sheet insolvency
3 Rights of Corporate Shareholders
- Dividend rights
- Liquidation rights
- Voting rights
Derivative Suit Requirements
Shareholder sues on behalf of corporation to enforce its rights and “stand in shoes” of corp.
Must show:
- Shareholder at time of disputed transaction (or is successor in interest to such person)
- First made demand on board to enforce shareholder action
If a) owns less than 5% of any class or b) shares’ FMV > $200k, may be required to give security
PA will not require contemporaenous ownership (#1) if strong prima facie case in favor of corporation and seriuos injustice will result if action is dismissed.
Officer & Director defense to derivative suit:
Business Judgment Rule
No officer & director liability for violations of duty of care if the business decision was:
- Reasonably informed (duty of care)
- No conflict of interest (duty of loyalty)
- Acted in good faith (duty of loyalty)
Officer & Director Liability:
Corporate Opportunity Doctrine
O&D should not usurp a business opportunity properly belonging to corporation
Must first present opportunity to board, not just CEO; if passes, then may use.
When does opportunity belong to company?
- expectancy of company
- line of business of company
- how did officer learn of opportunity?
- Did corporation have financial means to pursue?
- Will this result in competition between officer & company?
Federal Securities law:
10b-5 applicability & elements
10b-5: prohibits any of the following:
- the use of any devise, scheme, or artifice to defraud;
- untrue statement of material fact, or omission of material fact;
- Any act that operates as fraud or deceit
- applies to insider trading, actions for false statements; no duty imposed where not an agent or fiduciary.
Requires:
- Misrepresntation/omission
- Scienter (intent to defraud)
- Reliance on fiduciary misreprentation/omission
- Damages on part of shareholder
Federal securities law:
16(b) applicability and elements
A corporation may recover short swing profits made by insiders on in-and-out transactions within less than 6 months.
Insider: officer, director, or 10% beneficiarl owner
Applies only to public companies; no intent required (strict liability)
Fundamental changes to corporate structure:
- Amendment of articles of incorporation
- Mergers & consolidations
- sale of all assets
- dissolution of corporation
Shareholder remedies to amendment of articles of incorporation
If a shareholder is adversely affected by fundamental change:
- Shareholder must object to amendment w/ written notice
- Entitled to FMV of shares
- Cannot vote to approve plan of fundamental change
Sale of all corporate assets
When is board or shareholder approval required?
Sale of assets in ordinary course of business: board approval, but not shareholders
Sale of assets not in ordinary course of business: shareholders MUST authorize in specially called meeting
Rules apply when corp retains less than 25% of assets and revenues following sale.
Williams Act:
Requirements for Tender Offers
- disclosures whenever you acquire >5%: early warning system for “creeping” tender offers
- If you plan to make a tender offer, must make certain disclosures
- Acquisition rules: must keep open for 20 days, etc
- must buy pro rata at same price for all shares
Promoter Liability
A promoter is personally liable on contracts entered into on an nonexistent corporation, whether in sole name or in name of corporation.
Exceptions:
- Novation: parties agree to substitute the corporation as party in place of promoter
- Indemnification: corporation may indemnify him against liability if liablity taken in good faith
