Final exam - corporations generally Flashcards
Public/publicly held v. close/closely held
Public: public secondary market, shares you can buy and sell
Close: no public secondary market. Still shares, but some restriction on tradability. Often relatively small number of SHs who actively participate in management
DE
Race to bottom - make owners happy
Race to top - people want to incorporate there
Attributes of a corporation
- legal personality - separate legal existence
- limited liability
- separation of ownership and control
- Liquidity - secondary market and other ways to sell shares
- flexible capital structure - bonds, debt securities, equity securities
Creation of a corporation
Choose state, draft AOI, file with SOS, draft bylaws, organizational meeting, appoint officers, issue stocks
Amending AOI and bylaws
AOI - majority of SH
Bylaws - SH or BOD, unless AOI or bylaws say otherwise
Liability for pre-incorporation activity
When articles are filed:
corp not liable unless adopts
promotor is liable for breach of contract unless released by contracting party
When not filed:
promotor is liable
If not filed or defectively filed, defectively formed entity can enforce
Defective corporations
De facto: court may treat improperly incorporated firm as corp if organizers:
- Acted in good faith to incorporate
- Had the legal right to incorporate
- Acted as if they were incorporated
[usually used against corps]
by estoppel: court will also treat a firm improperly incorporated as corporation if third parties
- thought corporation
- would earn a windfall if now allowed to deny its existence
[help corps]
Limited liability
MBCA § 6.22(b): “Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct.”
Requirements for piercing the corporate veil
alter ego: corporation has no independent existence
1. unity of interest and ownership (lack of formalities, commingling, under-capitalization, use by one corp the assets of another)
2. failing to PCV would sanction fraud or promote injustice
Enterprise liability
Allow P to get at assets of other companies owned by the same owner - only if did not respect separateness. [like if profits were shared]
Horizontal - can sue sister corporation for acts of other corporation. Failure to follow formalities
Derivative Action Requirements and Incentives
Derivative action brought on behalf of all shareholders, nominally against corporation, but really against its offers and directors.
Settle strike suits: frivolous; settle meritorious suits
In alleging harm to corporate entity
P must be shareholder at time suit commenced and at time of alleged wrongdoing
P must be fair and adequate representative
Direct suit
Alleges injury to shareholder
Direct or derivative?
Look at the injury - are SHs secondary to injury to corporation as a whole? Or has the harm been done directly to the SHs - not shared by corp? Have all been harmed equally or in individual capacities?
Demand Requirement
MBCA: universal demand requirement.
DE: demand futility doctrine exists
“No shareholder may commence a derivative proceeding until … a written demand has been made … and 90 days have expired from the date the demand was made … unless irreparable injury to the corporation would result by waiting for the expiration of the 90-day period”
Under MBCA, three ways for C to review demand [to determine if in corp’s best interest]
- independent directors constitute quorum, may be reviewed by the board
- independent directors may appoint by majority vote a committee of themselves
- upon motion by corp, court may appoint independent panel
Demand futility - when can demand be excused in DE?
- majority has material financial/familial interest
- majority incapable of acting independently - perhaps domination of control
- underlying transaction not product of valid exercise of business judgment
When excused
Capital structure
Shareholder entitled to:
- dividends
- residual assets
- voting rights
Capital terms
Different kind of shares:
- preferred - higher dividend preference
- convertible bonds - from debt to equity
- warrants - like options but issued by corporation
Corporate purpose
Charitable donations permissible on theory that helpful to corporations. No indiscriminate giving, giving to pet charity
Shareholder wealth maximization doctrine
The BJR
Absent fraud, illegality or conflict of interest, (duty of loyalty and duty of care) the board’s business judgment is not second guessed by the court. Court defers unless breach of duty of loyalty or of care
Duty of Care and an Informed Decision
Van Gorkom: Informed decision: whether the directors have informed themselves prior to making a business decision of all material information reasonably available to them.
ALI: requires directors to be informed to the extent they reasonably believe to be appropriate under the circumstances.
Ways to avoid violation of duty of care like in Van Gorkom
do a market test, get SH ratification
When BJR rebutted…
Look at whether the questionable conduct means that the duty of care or loyalty has been rebutted. Court applies entire fairness test.
When is the BJR rebutted?
Fraud; conflict of interest (relates to duty of loyalty but not necessarily breached); illegality, no decision, egregious decision, uninformed decision, waste.
DE safe harbor for interested transactions
DE law “provides a safe harbor for interested transactions if the material facts as to the director’s relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors and the board in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors.”
Corporate opportunities - DE law
An officer/director violates DoL by embracing business opportunity if:
- corp financially able to take it
- in corp’s line of business
- corp has interest/expectancy
- taking it would create conflict of interest between self interest and corporation’s interest
Definition of corporate opportunity per ALI
for all insiders. An opportunity:
1. in connection with the performance of functions as director/sen. exec.,
or
2. under circumstances that indicate will be offered to the corporation,
or
3. acquired through corporate info or property if this would be of interest to corp.
For senior executives (not directors): any opportunity closely related to corp’s business
Insider may take advantage if corporation rejected and:
- The rejection is fair to the corporation
- The opportunity is rejected in advance by disinterested directors, a disinterested superior, in a manner satisfying BJR (in writing?)
- The rejection authorized or ratified by disinterested shareholders and
- rejection not a waste of corporate resources
The vote of _____ is the act of the board unless _______
The vote of the majority of directors present (whether interested or not) at a meeting where quorum is present shall be the act of the board unless AOI or bylaws require vote of greater number.
Quorum = majority of total number of directors (whether interested or not)
Ratification and its effect on interested transactions - §144
contract not void even if interested if:
(a)(1): with disclosure of material facts, it is approved by a majority of the disinterested directors, or
(a)(2): with disclosure of material facts, it is approved by a majority of the shareholders [technically doesn’t matter if independent, but some courts effectively insist on that], or
(a)(3) Contract is fair to the corporation at the time it is authorized, approved, or ratified
Ratification and effect on BJR
See Wheelaborator, Disney, Stone, Caremark in other deck
