Corps - Fundamental Changes & Director Liability

Question 1

In order to undertake a fundamental corporate change, a corp must

Answer 1

(1) board action adopting a resolution of fundamental change
(2) board submits the proposal to shareholders for written notice
(3) shareholder approval: majority of the shares ENTITLED to vote
(4) in most cases, deliver document to Sec. State

Question 2

Shareholder approval of a fundamental corporate change requires a ______ of shares ______ to vote.

Answer 2

majority; entitled.**States are moving in the direction of allowing majority of shares that actually vote.

Question 3

The “right of appraisal” for fundamental corporate change allows a shareholder to

Answer 3

force the corp to buy the shareholder’s stock at FMV.

Question 4

A shareholder will have the “right of appraisal” if the corporation is

Answer 4

(1) merging or consolidating
(2) transferring substantially all assets not in the ordinary course of business
(3) transferring its stock in a share exchange
(4) the company is not listed on a national exchange and has less than 2,000 shareholders**I.e. it must be a CLOSE corporation

Question 5

In order to perfect a right of appraisal, the shareholder must

Answer 5

(1) written notice to corporation(2)(3)

Question 6

Amending the corp’s articles _____ a fundamental corporate change but there is no

Answer 6

is; right of appraisal.

Question 7

A merger or consolidation ______ a fundamental corporate change and there is ________.

Answer 7

is; right of appraisal.

Question 8

If 90% of more of a subsidiary is being merged into a parent corp, this is called a _______ and shareholder approval _________.

Answer 8

short-form merger; is not required.

Question 9

The two types of security investments are

Answer 9

(1) debt securities (e.g. bonds, call them creditors)

2) equity securities (e.g. stocks, call them owners

Question 10

Rule 10b-5 prohibits ____ or ______ in connection with the purchase or sale of a ______.

Answer 10

fraud; misrepresentation; security (debt or equity).

Question 11

The elements of a 10b-5 case are

Answer 11

(1) instrumentality of interstate commerce (mail, phone, trade on national exchange)
(2) misrepresentation, insider trading, or tipping
(3) materiality
(4) scienter
(5) reliancePlaintiffs: SEC or a buyer or seller of securities who was defrauded (contemporaneous trader)

Question 12

“Insider trading” and “tipping” involve…

Answer 12

(1) insider trading for those who’s job gives them access to confidential info: someone with a relationship of trust and confidence with the shareholders.
(2) tipping

Question 13

TIPPER is liable if

Answer 13

(1) the TIPPER passed along material inside information
(2) in breach of a duty to the corp and
(3) the TIPPER benefits (making a gift or enhancing reputation is enough)

Question 14

A TIPPEE is liable if

Answer 14

(1) TIPPEE trades on the tip and
(2) TIPPEE knew or should have known that the information was improperly passed

**Merely overhearing a convo is not enough to give rise to tippee liability

Question 15

The section 16(b) “short-swing” trading rule imposes ______ liability for speculation by ____________.

Answer 15

strict; directors, officers, and 10% shareholders.

Question 16

Section 16(b) applies only to reporting corporations, which means

Answer 16

(1) listed on a national exchange, or

(2) at least 500 shareholders and $10 million in assets

Question 17

______ and _____ are covered by Section 16(b) either when they _____ OR _____,

Answer 17

Directors and officers; buy; sell.

E.g., director can buy, lose status as director, then sell, but still liable.

Question 18

10% shareholders are covered only when they _____ AND _____ while holding that status.

Answer 18

buy AND sell.

Question 19

Section 16(b) liability attaches to buying and selling stock within a single ______ period.

Answer 19

six-month.

Question 20

A section 16(b) violator owes the corporation the difference between the _____ price and the _______ price times the largest number of shares common to both the

Answer 20

sale;
purchase;
purchase and sale within the six-month period.

**This applies regardless of the order of buying/selling.

Question 21

A director owes the corporation a duty of care, meaning she must

Answer 21

act in good faith and do what a prudent person would do with regard to her own business

Question 22

A director who has breached of the duty of care is still only liable if her breach caused

Answer 22

a loss to the corporation (must show causation and not just breach)

Question 23

Even if a D caused a loss to the corporation, they are not liable if their actions meet the

Answer 23

business judgment rule, i.e. decision was made in good faith, was informed, and had a rational basis.

Question 24

The business judgement rule provides that a court

Answer 24

will not second-guess a business decision that was made in good faith, was informed, and had a rational basis. (D is not a guarantor of success)

Question 25

To prove a breach of the duty of loyalty, the burden is on the

Answer 25

plaintiff to show the conflict of interest. Once that is shown, the burden shifts to the defendant to show fairness and/or disinterested director/shareholder approval

Question 26

A D owes the corporation a duty of loyalty, which means she must

Answer 26

act in good faith and with a reasonable belief that what she does is in the corporation’s best interest

Question 27

BJR does NOT apply in duty of loyalty cases when there is an alleged

Answer 27

conflict of interest

Question 28

An interested director transaction will be set aside (or D liable in damages) UNLESS the director shows either

Answer 28

1. the deal was fair to the corporation when entered
2. her interest and the relevant facts were disclosed or known and deal was approved by either majority of disinterested Ds or majority of disinterested shares
   (although always also note that some courts also require a showing of fairness regardless of whether there was majority disinterested approval)

Question 29

A director cannot compete directly with her corporation becuase

Answer 29

1. it violates her duty of loyalty, and

2. she’s a fiduciary(remedy is constructive trust on profits)

Question 30

A director cannot usurp a corporate opportunity, meaning he cannot take it until he

Answer 30

1. tells the board about it, and
2. waits for the board to reject the opportunity (although if they reject it just for financial reasons that’s generally not a defense)

Question 31

The board can vote to lend money to a director as long as

Answer 31

it’s reasonably expected to benefit the corporation

Question 32

A director is presumed to concur with board action unless

Answer 32

her dissent or abstention is noted in writing in corporate records

Question 33

If a D voted for a resolution at the meeting, she cannot later

Answer 33

dissent

Question 34

An absent D (is/isn’t) liable for things done at the meeting she missed

Answer 34

is NOT

Question 35

Officers owe the same duties of _____ and ______ as Ds

Answer 35

care and loyalty

Question 36

Officers are selected, removed, and their compensation set by ____________

Answer 36

the board of directors

Question 37

Shareholders (do/don’t) hire and fire officers

Answer 37

DON’T. They only hire and fire Ds, who then hire and fire Os.

Question 38

A corporation is barred from indemnifying a D or O if they were

Answer 38

(1) held liable to the corporation
(2) received an improper personal benefit
(3) approved unlawful distributions
(4) intentionally committed a crime
(5) intentionally inflicted harm on the corporation or its shareholders

Question 39

A corporation MUST indemnify a D or O who is

Answer 39

successful in defending, whether on the merits or otherwise (i.e. wins a judgment)

Question 40

A corporation may, but does not have to, indemnify a D or O who

Answer 40

falls somewhere in between the other two situations (i.e. not liable to corp but not totally successful either). Good example is if the case against her settled. D or O must show she acted in good faith and with reasonable belief that her actions were in the company’s best interest (i.e. duty of loyalty)

Question 41

The articles can eliminate D (and sometimes O) liability to the corporation for damages in this type of case

Answer 41

duty of care

Question 42

Shareholders can manage the corporation directly only in a

Answer 42

close corporation (by just eliminating the board)

Question 43

A close corporation is one in which there are

Answer 43

few shareholders and the stock is not publicly traded

Question 44

If the shareholders in a close corporation want to eliminate the board they must

Answer 44

1. write it in the articles and have it approved by ALL SHs, or
2. unanimous written SH agreement

Question 45

If the SHs in a close corporation eliminate the board and run the company directly, the _________ owes duties of care and loyalty to the corp

Answer 45

those who manage it

Question 46

In a closed corporation, SHs must treat each other with

Answer 46

utmost good faith (theory is that it’s like a partnership’s fiduciary duties)

Question 47

If a minority SH in a close corp is being oppressed, they can

Answer 47

sue the controlling SHs who oppress them for breach of their fiduciary duty

Question 48

A professional corporation is one whose articles state that it is ________ and whose name must include _______

Answer 48

formed to practice a particular profession; P.C. or P.A.

Question 49

In a professional corporation, Ds, Os, and SHs must all be

Answer 49

licensed professionals; they are personally liable for their malpractice but not others

Question 50

A SH might be personally liable for corporation’s action (PCV) only if

Answer 50

1. it’s a close corp
2. they must have abused their privilege of incorporating, and
3. Fairness must require holding them accountable

Question 51

The general rule is that SHs are not liable for corp obligations, but a SH can be personally liable if

Answer 51

the corporation was undercapitalized when formed (and it meets the other requirements)

Question 52

Courts are more willing to pierce the corporate veil for a _______ victim than a _______ claimant

Answer 52

tort; contract (contractor beware; they voluntarily chose to do business with that party and could have inspected or been more cautious; a tort victim didn’t intend to be a tort victim!)

Question 53

A derivative suit is a case in which

Answer 53

a shareholder sues to enforce the corporation’s claim, not her own personal claim(key question: could the corp have brought this suit?)

Question 54

If the SH plaintiff wins a derivative suit, the judgment goes to

Answer 54

the corporation; she can recover costs and attorneys’ fees

Question 55

To bring a SH derivative suit, a plaintiff must fulfill these

Answer 55

1. stock ownership when the claim arose and throughout the suit
2. adequate representation of the corporation’s interest
3. written demand on a corporation that they bring the suit (unless it would be futile, for example if Ds will be defendants in the case)
4. corporation must be joined as a defendant

Question 56

Parties can settle a derivative suit only if there is

Answer 56

court approval

Question 57

A corporation’s articles of incorporation ______ limit or eliminate director’s personal liability for money damages to the shareholders or the corporation.

Answer 57

may