Corporations MEE Flashcards
Shareholders
owners of the corporation
Board of Directors
group in charge of management of the corporation
Officers
agents of the corporation appointed to carry out the corporation’s policies
C Corporations
a corporation is taxed as an entity distinct from its owners - subject to double taxation
S Corporations
taxed like partnerships and yet retain the other advantages of the corporation form
Limited Liability Company (LLC)
limited liability of a corporation and the flow through of a partnership
B Corporations
benefit corporations - intends to benefit the public and the enviornment
Corporation Creation
are created by complying with state corporate law - majority of states is based on Revised Model Business Corp Act
De Jure Corporation
a corporation formed in accordance with the law
De Facto Corporation
corporate laws not followed - may result
Corporation by Estoppel
corporation may be recognized this way
De Jure Corporation Requirements
(A) Person
(B) Paper
(C) Act
Incorporators
person who undertakes to form a corporation
Articles of Incorporation Required Contents
(i) name of the corporation (corp., company, incorporated, limited)
(ii) name and address of each incorporator
(iii) registered agent and address
(iv) corporations stock
Articles of Incorporation Optional Contents
articles may include any other provision regarding operation of the corporation that’s not inconsistent with law
Articles of Incorporation Business Purposes
traditionally, corporations have included a statement of business purposes
Articles of Incorporation Absence Business Purposes
MBCA presumes that a corporation is formed to conduct any lawful business and is allowed to undertake any act that is necessary or convenient for carrying on their purpose
Ultra Vires Act
activities beyond the scope of the stated business purposes are said to be “ultra vires”
Common Law Ultra Vires Act
void and unenforceable
MBCA Ultra Vires Act
generally enforceable and can be raised in three situations
MBCA Ultra Vires Act Situations
(1) shareholder may sue the corporation to enjoin a proposed ultra vires act
(2) corporation may sue an officer or director for damages for approving ultra vires act
(3) state may bring an action to dissolve a corporation for committing an ultra vires act
Act
incorporators will have notarized articles delivered to the secretary of state and pay any required fees
If Directors Named in Articles
the board of directors hold the organizational meeting
If Directors Not Named in Articles
the incorporators hold the organizational meeting
Purpose of Organizational Meeting
(1) adopt initial bylaws
(2) appoint officers
Bylaws
internal document
Internal Affairs Doctrine
internal affairs of the corporation are governed by the law of the state of incorporation
Entity Status
upon formation, a corporation has entity status - the corporation can sue and be sued, hold property, be a partner, invest in other companies and commodities
Limited Liability
shareholders are liable only to pay for their stock, not for corporate debts
De Facto Corporation Requirements
(A) must be relevant incorporation statute
(B) parties made a good faith, colorable attempt to comply with the statute, meaning the parties tried and came close to forming a corp
(C) been some exercise of corporate privileges - meaning the parties were acting as though they were a corp
Promoters
person acting on behalf of a corporation not yet formed - procure commitments for capital and other instrumentalities that will be used by the corporation after its formation
Promoters Status
promoters are joint venturers who have a fiduciary relationship with one another
Promoter Selling Property to Corporation Disclosed to Independent Board
if the transaction is disclosed to an independent board of directors and approved, the promoter has met his duty and will not be liable for his profits
Promoter Selling Property to Corporation Non-Independent Board
if the board is not completely independent, the promoter still will not be liable for his profits if the subscriber or knew of the transaction at the time they subscribed or unanimously ratified the transaction after full disclosure
Promoter Fraud
promoters may always be liable if plaintiffs can show that they were damaged by the promoters fraudulent misrepresentations or fraud failure to disclose all material facts
Corporations Liability on Preincorporation Promoter Contracts
since the corporation does not exist prior to incorporation, it is not bound on contracts entered into by the promoter in the corporate name prior to incorp - may become liable only if it expressly or impliedly adopts the promoter’s contract
MBCA Promoter Liability
anyone who acts on behalf of a corporation knowing that it is not in existence is jointly and severally liable - promoter is personally liable on the contract
MBCA Promoter Liability After Corporation Formed
promoter’s liability continues after the corporation is formed - even if the corporation adopts the contract and benefits from it
MBCA Promoter Liability After Novation
promoter is released from liability only if there is an express or implied novation
Promoter Expressly Relieved
if the agreement expressly relieves the promoter of liability, there is no contract; such an arangement may be construed as revocable offer to the proposed corp and the promoter has no rights or liabilities under the agreement
Foreign Corporation in State
must register with the secretary of state in each state in which it wishes to transact - may have to pay fees and register if acting in regular course of intrastate business activity
Debt Securities “Bonds”
when the corporation borrows money, it issues a debt security, usually called a bond
Bond
bond is a promise that the corporation will repay its loan with interest
Debenture
loan unsecured by corporate assets
Debt Securities Holder
creditor - but not an owner - of the coproration
Who Are Debt Obligations Payable To?
(a) the holder of the bond (bearer or coupon bond) or
(b) owner registered on the corporations records (registered bond)
Equity Securities
when the investor buys an ownership interest in the corporation, it issues equity securities, which is stock
Securities Equity Holder
owner, but not a creditor, of the coproration
Authorized Shares
shares described in the articles of incorporation
Issued and Outstanding Shares
shares that have been sold
Authorized Unissued Shares
shares that have been reacquired by the corporation through repurchase or redemption
Common Shares
corporation issues only one type of share, giving each shareholder an equal ownership right
Classes or Series Within a Class
ownership rights may be varied if the articles provide that the corporation’s stock is to be divided into classes or series
Share Options
right to purchase shares in the future under terms predetermined by the board - may be offered in exchange for any type of consideration - including future services
Issuance
an issuance of stock is when a corporation sells its own stock
Subscriptions
written offers to buy stock from a corporation
MBCA Preincorporation Subscription
preincorporation are irrevocable for six months unless otherwise provided in the terms of the subscription agreement or unless all subscribes consent to revocation
Payment for Pre-Incorporation Subscription
unless otherwise provided, payment is due upon demand of the board -
Subscriber Fails to Pay
may be penalized by sale of the shares or forfeiture of the subscription and any amounts paid on the subscription, at the corporation’s option
Post incorporation Subscriptions
revocable until accepted by the corporation - corporation and the subscriber are obligated under an agreement when the board accepts
MBCA Form of Consideration for Stock
stock (or option to buy stock) may be issued for any tangible or intangible property or benefit to the coproration
Par
minimum issuance price
No Par
no minimum issuance price - board can have the stock issued for any price it sets
Watered Stock
occurs when par value stock is issued for less than its par value
Who is responsible for watered stock?
directors or officers
Does MBCA use par value?
No - generally has eliminated the concept and allows corporations to issue shares for whatever consideration the directors deem appropriate
MBCA - Who Determines Value of Property or Services
if the corporation issues stock in exchange for property or past services, the board determines the value of the property or services
MBCA Conclusive Valuation
boards valuation is conclusive if made in good faith
MBCA Receives Consideration for Stock
considered fully paid and nonassessable as soon as the corporation receives the consideration for which the board authorized the issuance
Preemptive Right
right of an existing shareholder of common stock to maintain their percentage of ownership in the company by buying stock whenever there is a new issuance of stock for money (cash or its equivalent)
MBCA Preemptive Rights
shareholders do not have the right to purchase newly issued shares to maintain their proportional ownership interest unless the articles provide the right - if silent no rights
Preemptive Limitations
even if the articles provide for preemptive rights, shareholders do not have preemptive right in shares issued:
(a) for consideration other than cash
(b) within six months after incorporation or
(c) without voting rights but having a distribution preference
Board of Directors Qualifications - Need to be Shareholders?
absent a provision otherwise in the articles or bylaws, the directors need not be shareholders
Board of Directors Qualifications in Articles or Bylaws
any qualifications for directors prescribed by the articles or bylaws must be reasonable and lawful; no qualifications may limit the ability of a director to discharge their duties
Board Elections
shareholders elect directors at each annual shareholders meeting, subject to contrary provisions in the articles
Staggered Boards
usually set in articles of incorporation - divided into half or thirds with one half or one third elected each year
Removal of Directors
Shareholders may remove directors with or without cause
Removal of Directors - Cumulative Voting
a director elected by cumulative voting cannot be removed if the votes case against removal would be sufficient to elect if cumulatively voted at an election
Removal of Directors - Voting Group
a director elected by a voting group of shares can be removed only by that class
Vacancy caused by Shareholder Removal
if the shareholders created a vacancy by removing a director, the shareholders generally must select the replacement
Vacancy caused by Resignation
board or the shareholders may fill the vacancy
Board Action
directors must act as a group - may act in the following ways:
(a) unanimous agreement in writing (email is okay) or
(b) at a meeting which must satisfy the quorum and voting requirements
Ratification of Defective Corporate Actions
directors, incorporators, and officers may ratify defective actions - the board must state the action to be ratified and the nature of the failure of the authorization, approve the ratification, and seek shareholder approval if necessary
Methods for Giving Notice of Meetings
the method is set in the bylaws
Notice for Regular Meetings
notice is not required
Notice for Special Meetings
at least two days written notice of date, time, and place is required - purpose is not
Failure to Give Notice
whatever happened at the meeting is voidable - maybe even void - unless the directors who were not notified waive notice
Directors Waiving Failure to Give Notice
(1) in writing any time or
(2) by attending the meeting without objecting at the outset of the meeting
Director’s Proxies
directors cannot give proxies or enter into voting agreements for how they will vote as directors
Board Quorum
majority - unless the bylaws say otherwise
(can be no fewer than one-third of the board members)
Broken Quorum and Effects
if people leave - once a quorum is no longer present, the board cannot take an act at the meeting
Director Action by Unanimous Written Consent
any action required to be taken by directors at a formal meeting may be taken by unanimous consent. in writing, without a meeting
Committees Actions
while the board can delegate actions to a committee, a committee cannot take the following actions:
(a) declare a distribution
(b) fill a vacancy
(c) recommend a fundamental change to shareholders
Board of Directors Duties Owed
(A) Duty of loyalty - discharge duties in good faith and with the reasonable belief that their actions are in the best interest of the corporation
(B) Duty of Care - use the care that a person in like position would reasonably believe appropriate under the circumstances
Burden in Challenging Directors Duty of Care
person challenging the directors actions on the basis of the breach of duty of care has the burden or proving that the statutory standard was not met
Two Situations in Which Director is Challenged for Breach of Duty of Care
(1) nonfeasance - director basically does nothing and
(2) misfeasance - board makes a decision that hurts the business
Misfeasance - Business Judgment Rule
directors who meet the standard will not be liable for corporate decisions that in hindsight turn out to be poor or erroneous
Business Judgment Rule Burden
Plaintiff must show that the board either did not do their homework or did something glactically stupid
Information a Director May Rely Upon
in discharging duties, a director is entitled to rely on information, opinions, reports, or statements if prepared and presented by:
(1) corporate officers or employees whom the director reasonably believes to be reliable and competent
(2) legal counsel, accountants, or other persons as to matters the director reasonably believes are within such persons professional competence
(3) a committee of the board in which the director is not a member if the director reasonably believes the committee merits confidence
Duty of Loyalty Burden
burden is on the defendant
Common Duty of Loyalty Scenarios
(a) conflicting transactions (self-dealing)
(b) competing ventures
(c) corporate opputrunity doctrine
(d) insider trading
Conflicting Transactions (self dealing)
any transaction between the corporation (on one side) and (1) one of its directors, (2) directors close relative, or (3) another business of the director’s (on the other side)
Conflicting Transaction Upheld
(1) it was approved by a majority
(2) it was approved by a majority of votes entitled to be case by disinterested shareholders
(3) judged by the circumstances at the time of the corporation entered into the transaction, it was fair to the corporation
Special Quorum Requirements
for purposes of the vote on a conflicting interest transaction, at a directors meeting, a quorum is a majority (at least two) of disinterested directors
Factors to be Considered in Determining Fairness
some court’s also require a showing of fairness (on conflicting interest transactions) - in determining whether a transaction is fair, courts look to factors such as adequacy of consideration, corporate need to enter into the transaction, financial position of the corporation, and available alternatives
Remedies for Conflicting Interest Transactions
enjoining the transaction, setting the transaction aside, damages, and similar remedies
Directors May Set Their Own Compensation
unless the articles or by laws provide otherwise - the board can set compensation if reasonable and in good faith
Competing Ventures
directors may engage in unrelated businesses, but engaging in a directly competing business raises serious duty of loyalty problems
Corporate Opportunity Doctrine (usurpation of a corporate opportunity)
directors fiduciary duties prohibit them from diverting a business opportunity from their corporation to themselves without first giving their corporation an opportunity to act
When Does a Usurpation of a Corporate Opportunity Problem Arise?
only if a director takes advantage of a business opportunity in which the corporation would have an interest or expectancy - closer the opportunity is to the corporations line of business, the more likely a court will find it to be a corporate oppurtunity
Usurpation Defenses
lack of financial ability to take advantage of the opportunity is not a defense
Usurpation Remedies
corporation can sue to recover under a constructive trust theory
Usurpation Remedies
corporation can sue to recover under a constructive trust theory
Limiting or Eliminating Director’s Liability in Articles Permitted:
for money damages to the corporation or shareholders for actions taken or for failure to take action
Limiting or Eliminating Director’s Liability in Articles Prohibited:
articles may not limit or eliminate liability for financial benefits recieved:
by the director to which she is not entitled, an intentionally inflicted harm on the corp or its shareholders, unlawful corporate distributions, or an inentional violation of criminal law
Directors May Be Liable For:
(A) improper distribution
(B) improper loans
(c) ultra vires
(d) breaches of fiduciary duty
When is a director presumed to concurr?
a director is presumed to concur with board action unless her dissent or abstention is noted in writing in the corporate records
For Objection to Conflicting Interest Transaction Wiring Means:
(1) in the minutes
(2) delivered in writing to the presiding officer at the meeting or
(3) written dissent to the corporation immediately after a meeting
Exception to Presumption of Concurrence
a director is not liable under the presumption if they were absent from the board meeting
Power of Officer - Binding Corporation
whether officer can bind corporation is determined by whether they have agency authority to do so
Power of Officer - Unauthorized Actions
may become binding on the corporation because of ratification, adoption, or estoppel
Power of Officer - Scope of Corporation’s Liability for Officer
is liable for actions by its officers within the scope of their authority, even if the particular act in question was not specifically authorized
Officer’s Duties
determined by the bylaws or to the extent consistent with the bylaws, by the board or an officer so authorized by the board - owe same duties of care and loyalty as directors
Officer Resignation
an officer has the power to resign at any time by delivering notice to the corporation
Officer Removal by Corporation
corporation has the power to remove an officer at any time, with or without cause
Officer Resignation or Removal on Breach of Contract
the nonbreaching party may have a right to damages, but note that mere appointment to office itself does not create any contractual right to remain in office
Indemnification
director or officer sued by or on behalf of the corporation - may seek (reimbursement) form the corp.
Indemnification Category One
a corporation cannot indemnify a director who is (1) held liable to the corporation or (2) held to have received an improper benefit
Indemnification Category Two
a corporation must indemnify a director or officer who was successful in defending a proceeding on the merits or otherwise against the officer or director for reasonable expenses including, attorneys fees, incurred in connection with the proceeding - some states have to win entire cause others to extent won
Indemnification Category Three
a corporation may indemnify a director for reasonable litigation expenses incurred in unsuccessfully defending a suit brought against the director on account of the directors position if the director: (1) acted in good faith and (2) believed that their conduct was in the best interests of the corporation
Who Makes the Indemnification Decision?
made by:
(a) disinterested majority of the board, or if there is not a disinterested quorum, by a majority of disinterested committee or by independent legal counsel - the shareholders may also make the determination
Court-Ordered Indemnification
a court in which a director or officer was sued may order indemnification if it is justified in view of all the circumstances - if the director/officer was held liable to the corporation, reimbursement is limited to costs and attorneys fees
Advances to Directors
a corporation may advance expenses as long as the director furnishes the corporation with a statement that the director believes he met the appropriate standard of conduct and that he will repay the advance of he is later found to have not met the appropriate standard of conduct
Liability Insurance
a corporation may purchase liability insurance to indemnify directors or officers for actions against them even if the directors or officers would not have been entitled to indemnification under the 3 categories
Shareholder Liability
generally limited to:
(1) liabilities for unpaid stock
(2) a pierced corporte veil
(3) absence of a de facto corporation
Close Corporations
shareholders can run the corporation directly in a close corporation - few shareholders and stock is not publicly traded
Shareholder Management Agreement
alternative management for a close corporation
Shareholder Management Agreement - Not in Articles of Incorporation
shareholders exercise only indirect control of the corporation through their voting power, by which they elect and remove directors, adopt and modify bylaws, and approve fundamental changes in the corporate structure
Two Ways to Set Up Shareholder Managment Agreement
(1) in the articles and approved by all shareholders OR
(2) unanimous written shareholder agreement
Special Fiduciary Duty in Close Corporations
court’s impose a fiduciary duty on shareholders owed to other shareholders
Close Corporations - Oppression
if there is oppression of minority shareholders, they can sue the controlling shareholders who oppress them for breach of this fiduciary duty
Professional Corporations
licensed professionals, including lawyers, medical professionals, and CPAs may incorporate as professional corporations
Employees of Professional Corporations
directors, officers, and shareholders must be licensed professionals
Liability in Professional Corporations
personally liable for malpractice - shareholders generally not liable for corporate obligations or for other professional’s malpractice
Shareholder’s Liability for Debts
shareholders generally cannot be held liable for corporate debts
Piercing the Corporate Veil - Major Limitation
can happen in close corporations only
Piercing the Corporate Veil Elements
(A) shareholders must have abused the privilege of incorporating and
(B) fairness must require holding them liable
Three Common Piercing Veil Situations
(i) Alter Ego Theory
(ii) Undercapitalization
(iii) Fraud, Avoidance of existing obligations, or evasion of statutory provisions
Piercing Situation One - Alter Ego Theory
if shareholders ignore corporate formalities such that the corporation may be considered the “alter ego” or mere instrumentality of the shareholders, and some basic injustice results
examples: shareholders treat corporate assets as their own, commingle their money with corporate money
Piercing Situation Two - Undercapitalization
where the corporation is inadequately capitalized, so that at the time of formation there is not enough unencumbered capital to reasonably cover prospective liabilities
Piercing Situation Three - Fraud, Avoidance of Existing Obligations, or Evasion of Statutory Provisions
necessary to prevent fraud or to prevent an individual shareholder from using the entity to avoid his existing personal obligations
Piercing Limited to Existing Personal Obligation
mere fact that an individual choses to adopt the corporate form of business to avoid future personal liabillity is not itself a reason to pierce
Piercing Corporate Veil - Who is Liable
normally, only shareholders who are active in the operation of the business will be personally liable - shareholder may even be another corporation
Piercing Corporate Veil - Types of Liability
easily done in tort cases, but not in contract cases because the parties who contracted with the corporation had an opportunity to investigate its stability
Piercing Corporate Veil - Corporation Insolvent
claims of share-holder creditors may be subordinated to outside creditors claims if equity so requires
Who May Pierce the Corporate Veil
generally creditors may be allowed to pierce the corporate veil - court’s almost never pierce the veil at the request of a shareholder
Shareholder as Plaintiff - Derivative Suit
a shareholder is suing to enforce the corporations claim, not their own personal claim
Shareholder as Plaintiff - Direct Action
a direct action may be brought for a breach of fiduciary duty owed to the shareholder by an officer or director
Distinguishing between Breach of Duty Owed to the Corporation and Duties Owed to Shareholder
Ask:
(1) who suffers the most immediate and direct damage, the corporation or the shareholder and
(2) to whom did the defendant’s duty run, the corporation or the shareholder?
Derivative Suit - Recovery
the shareholder is asserting the corporation’s rights rather their own rights - so corporation recovers
Derivative Suit - Expenses
(a) if the shareholder wins, may recover costs and attorneys fees
(b) if lose, cannot recover costs and attorneys fees
Derivative Suit - No Reasonable Cause
if the court finds that the action was commenced or maintained without reasonable cause or for an improper purpose, it may order the plaintiff to pay reasonable expenses of defendant
Derivative Suit Requirements
(a) standing
(b) adequate representation
Derivative Suit Requirements
(a) standing
(b) adequate representation
Derivative Suit Requirement One - Standing
shareholder must have been a shareholder at the time the claim arose or must have become a shareholder through transfer by operation of law from someone who did own stock at the time the claim arose
(through inheritance or divorce decree example)
Derivative Suit Requirement Two - Adequate Representation
shareholder must also fairly and adequately represent corporation’s interest
Derivative Suit MBCA Requirements
the shareholder must make a written demand on the corporation (usually to board) to take suitable action
Derivative Suit - State Requirements
some states, this demand must always be made, and the shareholder cannot sue until 90 days after making this demand, unless:
(1) the shareholder has earlier been notified that the corporation has rejected the demand; or (2) irreparable injury to the corporation would result by waiting the 90 days
Derivative Suit - State Requirements in Some States
in other states, shareholders are not required to make this demand if th demand would be futile
Derivative Suit - Corporation Joinder
corporation must be joined to the suit as a defendant
Derivative Suit - Dismissal or Settlement
the parties can settle or dismiss a derivative claim only with court approval
Derivative Suit - Dismissal if not in Corporation’s Best Interest
dismissal must be based upon an independent investigation that concluded that the suit is not in the corporation’s best interest
Derivative Suit - Dismissal if not in Corporation’s Best Interest
dismissal must be based upon an independent investigation that concluded that the suit is not in the corporation’s best interest
Derivative Suit - Investigation by Independent Directors or Panel for Dismissal
the investigation must be made by independent directors or a court appointed panel of one or more independent persons
Derivative Suit - Court Determination on Dismissal
in ruling on the motion to dismiss, if the court finds that (1) those recommending dismissal were truly independent and (2) they made a reasonable investigation
Derivative Suit Dismissal - Burden of Proof
in most cases, the shareholder bringing the suit has the burden of proving to the court that the decision was not made in good faith after reasonable inquiry
Derivative Suit Dismissal - Burden of Proof Majority of Directors Personally Interested
if a majority of the directors had a personal interest in the controversy, the corporation will have the burden of showing that the decision was made in good faith after reasonable inquiry
Authorized Stock
number of shares the corporation may issue
Issued Stock
number of shares the corporation has sold
Outstanding Stock
shares corporation has issued but is not reacquired
Record Shareholder and Record Date
shareholder of record on the record date may vote at the meeting - the record date is fixed by the board but may not be more than 70 days before the meeting
Exceptions to General Rule of Record Owner/Record Date
(1) Treasury Stock
(2) Voting by Proxy
Treasury Stock
stock required by a corporation before the record date
Exception One - Treasury Stock
no one votes on this stock - because it is outstanding at the record date
Exception Two - Voting by Proxy
a shareholder may vote shares in person or by proxy executed in writing
Proxy
is a (a) writing (fax and email executed in are fine), (b) signed by the record shareholder (email is fine if the sender can be identified), (c) directed to the secretary of the corporation, (d) authorizing another to vote the shares
Revocation of Proxy
generally revocable by the shareholder and may be revoked by the shareholder attending the meeting to vote themselves, in writing to the corporation secretary, or by subsequent appointment of another proxy
Irrevocable Proxy
a proxy will be irrevocable only if it states that it is irrevocable and is coupled with an interest or given as security
Irrevocable Proxy Requirements
this requires (1) the proxy says its irrevocable and (2) the proxy holder has some interest in the shares other than voting
Statutory Proxy Control
rules governing proxy solicitation provide that:
(1) there must be full and fair disclosure of all material facts with regard to any management submitted proposal upon which the shareholders are to vote
(2) material misstatements, omissions, and fraud in connection with the solicitation of proxies are prohibited
(3) management must include certain shareholder proposals on the issues other than election of directors, and allow proponents to explain their position
Voting Trust
a voting trust is a written agreement of shareholders under which all of the shares owned by the parties to the agreement are transferred to a trustee, who votes in accordance with the provisions of the voting trust agreement
Voting Trust Requirements
(a) a written trust agreement, controlling how the shares will be voted
(b) a copy of the agreement is given to the corporation
(c) legal title to the shares is transferred to the voting trustee and
(d) the original shareholders receive trust certificates and retain all shareholder rights except for voting
Voting Agreements
shareholders can enter into a voting (or pooling) agreements providing for how they’ll vote their shares
Voting Agreements Requirements
the agreement be in writing and signed
Two Kinds of Shareholder Meetings
(a) annual meetings
(b) special meetings
Annual Meetings
if the annual meeting is not held within the earlier of six months after the end of the corporations fiscal year or 15 months after its last annual meeting, shareholder can petition for court order to do so
Special Meetings
special meetings may be called by (1) the board of directors, (2) the president, (3) the holders of at least 10 percent of the outstanding shares, or (4) anyone else authorized to do so in the articles or by laws
Meetings Notice
Shareholders must be notified of meetings not fewer than 10 or more than 60 days
must be in writing
may be waived by writing or attendance
Contents of Meeting Notice
notice must state date, time, and place and if special meetings, notice must also state the purpose of the meeting
Consequences of Failure to Give Proper Meeting Notice
if proper notice is not given to all shareholders, whatever action was taken at the meeting is voidable (maybe void), unless those who were not sent notice waive the notice defect
Waiver of Failure to Give Notice
(a) express waiver, meaning in writing and signed any time or
(b) implied waiver, meaning the shareholder(s) attend the meeting without objecting
Shareholders Vote On
(i) to elect directors
(ii) to remove directors
(iii) on fundamental corporate changes
Shareholder Quorum
general rule is that a quorum is a majority of outstanding shares entitled to vote, unless articles or bylaws require a greater number
Shareholder Voting Quorum Present
each share is entitled to one vote - shareholders will be deemed to have approved a matter if the votes cast in favor of the matter exceeded the votes case against the matter, unless the articles or bylaws require greater proportion
Specific Matters on Voting
electing a director - plurality
approve fundamental corporate change - majority of shares entitled to vote (other matters somtimes)
remove a director - majority entitled to vote (other matters sometimes)
other matters - majority of the shares that actually vote on the issue
Cumulative Voting Optional
usually comes up in close corporations - available only when shareholders elect directors - if articles silent it does not exist
Mechanics of Cumulative Voting
top two finishers are elected to the board
Calculating Cumulative Voting
multiply the shareholders number of voting shares times the number of directors to be elected - total number may be divided as they decide
Class Voting on Amendments
class has a right to vote on the action even if the class otherwise does not have voting rights
Shareholder Resolutions
permitted to submit resolutions or proposals for action at shareholder meetings
Shareholder Resolutions
permitted to submit resolutions or proposals for action at shareholder meetings
Transferability of Stock
a shareholder can sell or give stock away
Restrictions are Fine if Reasonable
restrictions are valid if they are not an undue restraint on alientation
Right of First Refusal
requires to offer it first to the corporation - does not restrict the ability to transfer, but only requires the shareholder to offer the stock first to the corporation
Restriction Enforced Against Transferee
yes - if (1) the restriction is conspicuously noted on the stock certificate (or is contained in the information statement required for uncertificated shares) or (2) the transferee had actual knowledge of the restriction at the time of the purchase
Shareholders Inspection Rights
a shareholder has the right, personally or by an agent, to inspect (and copy) the books and records of the corporation
Unqualified Right for Certain Records
(1) corporations articles and bylaws
(2) board resolutions regarding classification of shares
(3) mintues of shareholders meetings from past three years
(4) communications sent by the corporation to shareholders over past three years
(5) a list of the names and business addresses of the corporation’s current directors and officers, and
(6) copy of the corporation’s most recent annual report
written demand at least five days in advance
Qualified Right for Certain Records
for more controversial things, such as (1) excerpts of the minutes of board meetings, (2) corporations books, papers, and accounting records, (3) shareholder records
must state proper purpose (reasonably related to the person’s interest as a shareholder) and demand must be five business days in advance
Failure to Allow Proper Inspection
if the corporation fails to allow proper inspection, the shareholder can seek a court order
Distibutions
are payments by the corporation to shareholders
Types of Distributions
can take the form of dividends, redemptions of shares, repurchase of shares, distribution of assets upon liquidation
Rights to Distributions Requirements
at least one class of stock must have a right to recieve the corporation’s net assets on dissolution
Declaration of Distributions
the decision whether to declare distributions is generally within the directors discretion, subject to solvency limitations and any provisions to the contrary in shareholder’s agreement or articles
Compelling Distributions
shareholders have no general right to compel - plaintiff must prove abuse of discretion
Preferred Stock v Common Stock
preferred stock is to be paid before common stock
Rights After Declaration
once a distribution is lawfully declared, the shareholders generally are treated a creditors of the corporation and their claim of distribution is equal in priority to claims of other unsecured creditors.
Limitations After Declaration
a distribution can be enjoined or revoked if it was declared in violation of solvency limitations, the articles, or a superior preference
Share Dividends (stock dividends - additional shares rather than cash)
distribution of a corporates own shares, to its shareholders are excluded from the definition of distribution
Share Dividends Exception
shares of one class or series may not be issued as a share dividend in respect to shares of another class or series unless one of the following occurs:
(1) the articles so authorize
(2) a majority of the votes entitled to be cast by the class or series to be issued approves the issue or
(3) there are no outstanding shares of the class or series to be issued
Modern View Situations in Which Distributions Cannot be Made
(1) the corporation would not be able to pay its debts as they become due in the usual course of business (insolvent) or
(2) the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights on dissolution of shareholders whose preferential rights are superior to those receiving the distributions
Director Liability for Unlawful Distributions
directors are jointly and severally liable for improper distributions
Director Liability for Unlawful Distributions
directors are jointly and severally liable for improper distributions - directors are directly liable to the corporation for the amount of the distribution that exceeds what could have been properly distributed
Unlawful Distribution Defense for Directors
approved in good faith: (1) based on financial statements prepared according to reasonable accounting practices or on a fair valuation or other method that is reasonable under the circumstances or (2) relying on information from officers, employees, legal counsel, accountants, ect
Unlawful Distribution Contribution
director is entitled to contribution from:
(1) every other director who could be held liable for the distribution and (2) each shareholder, for the amount they accepted while knowing that the distribution was improper
Shareholder Liability for Unlawful Distribution
personally liable only if they knew that distribution was improper when they received it
Fundamental Corporate Changes:
(a) amending the articles
(b) merging or consolidating into another company
(c) transferring substantially all assets
(d) converting to another form of business
(e) dissolving
Fundamental Corporate Change Procedure
(1) board action adopting a resolution of fundamental changes, (2) the board submits the proposal to the shareholders with written notice and (3) shareholder approval
Shareholder Approval with Fundamental Changes
a majority of the shares entitled to vote - an increasing number of states require only a majority of shares that actually vote on the proposed fundamental change
Dissenting Shareholder’s Right of Appraisal
shareholders who did not vote in favor of the fundamental change have a right to force the corporation to buy their stock at fair value
When Right of Appraisal is Triggered
(A) merging or consolidating
(B) transferring substantially all assets
(C) stock being acquired in a hare exchange
(d) converting to another form of business
Market Out Exception
right of appraisal is only in close corporations
that is, if the company’s stock is listed on the national exchange or if the company has 2000 or more shareholders and the shares involved with a value of at least $20 million - no appraisal right
Right of Appraisal Procedures
see page 70
Right of Appraisal - Exclusive Remedy
shareholders only remedy if they do not like a fundamental change
Merger
involves the blending of one or more corporations into another, and the latter corporation survives while the merging corporations cease to exist
Consolidation
consolidation involves two corporations combining to form a new entity
Approval by Shareholders of Surviving Company Not Required If:
(1) the articles of incorporation of the surviving corporation will not differ from the articles before the merger
(2) each shareholder of the survivor whose shares were outstanding immediately prior to the effective date of the merger will hold the same number of shares with identical preferences, limitations, and rights; and
(3) the voting power of the shares issued as a result of the merger will comprise no more than 20% of the voting power of the shares of the surviving corporation that were outstanding immediately prior to the merger
Short Form Merger of Subsidiary
a parent corporation owning at least 90% of the outstanding shares of each class of a subsidiary corporation may merge the subsidiary corporation into itself without the approval of the shareholders or directors of the subsidiary corporation - parent co must mail a copy of the plan of merger to each shareholder of the subsidairy
Successor Liability
a creditor of a subsidiary/merger co may sue the survivor corporation
Fundamental Corporate Change for Selling Corporation Only
both the transfer of all or substantially all assets and the share exchange are fundamental corporate changes for the selling corporation only
Procedure for Transfer of all Or Substantially All Assets and Share Exchange
board action by both corporations is required, as well a notice to the selling company’s shareholders - approval by the selling company’s shareholders only (have appraisal rights)
Successor Liability for Transfer of all or Substantially All Assets and Share Exchanges
if the buyer is a “mere continuation” of the seller, that is, it has the same management, shareholders, and so on - there is successor liability
also happens if court conclude that the deal was disguised as a defacto merger
Conversion
conversion involves one business entity changing its form to another business form (ie corporation to an LLC)
Conversion Requirements
board approval and notice to shareholders, shareholder approval, delivery to secretary of state
Voluntary Dissolution - Dissolution by Incorporators or Initial Directors
if shares have not yet been issued or business has not yet been commenced, a majority of the incorporators or initial directors may dissolve the corporation by delivering the articles of dissolution to the state
all debts must be paid and if shares have been issued, any assets remaining after winding up must be distributed to the shareholders
Voluntary Dissolution - Dissolution by Corporate Act
corporation may dissolve by corporation act approved under the fundamental change procedure - need board of director action, shareholder approval, and notice to the secretary of state
Effect of Dissolution
a corporation that has been dissolved continues its corporate existence but is not allowed to carry on any business except as to wind up and liquidate its affairs
Claims after Dissolution
p 75
Revocation of Voluntary Dissolution
corporation may revoke a voluntary dissolution by using the same procedure that was used to approve the dissolution
Involuntary Dissolution - Action by Attorney General
the attorney general may seek judicial dissolution of a corporation on the ground that the corporation fraudulently obtained its articles of incorporation or that the corporation is exceeding or abusing its authority
Involuntary Dissolution - Action(s) by Shareholders
shareholder’s may petition for involuntary dissolution on any of the following grounds:
(i) director abuse, waste of assets, or misconduct
(ii) directors are deadlocked in the management of corporate affairs, the shareholders are unable to break this, and irreparable injury to the corporation is threatened, or corporate affairs cannot be conducted to the advantage of the shareholders because of the deadlock
(iii) shareholders are deadlocked in voting power and have failed to elect one or more of the directors for a period that includes at least two consecutive annual meeting dates
(iv) corporation has abandoned its business and failed to dissolve within a reasonable time
Election to Purchase in Lieu of Dissolution
as an alternative to ordering involuntary dissolution, a court might order a buy-out of the objecting shareholder
Dissolution by Creditor
creditors may seek judicial dissolution if:
(1) the creditors claim has been reduced to judgment, execution of the judgment has been returned unsatisfied, and the corporation is insolvent; or
(2) the corporation has admitted in writing that the creditor’s claim is due and owing and the corporation is insolvent
Administrative Dissolution
state may bring an action to administratively dissolve a corporation for reasons such as the failure to pay fees or penalties, failure to file an annual report, and failure to maintain a registered agent in the state
60 days to correct
Reinstatement following Administrative Dissolution
a corporation may apply for reinstatement within 2 years after the effective date of dissolution
Reinstatement Application
must state the grounds for dissolution either did not exist or have been eliminated - relates back to the date of dissolution and the corporation may resume carrying on business as if the dissolution had never occurred
Winding Up Steps
(A) give written notice to known creditors and publish notice of dissolution in a newspaper in the county of its p.p.b.
(B) gather all assets
(C) convert assets to cash
(D) pay creditors
(E) distribute any remaining sums to shareholders, pro rata share, unless there is a liquidation preference
Liquidation Preference
liquidation preference means “pay first”
