Final exam - corporations generally

Question 1

Public/publicly held v. close/closely held

Answer 1

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

Question 2

DE

Answer 2

Race to bottom - make owners happy
Race to top - people want to incorporate there

Question 3

Attributes of a corporation

Answer 3

1. legal personality - separate legal existence
2. limited liability
3. separation of ownership and control
4. Liquidity - secondary market and other ways to sell shares
5. flexible capital structure - bonds, debt securities, equity securities

Question 4

Creation of a corporation

Answer 4

Choose state, draft AOI, file with SOS, draft bylaws, organizational meeting, appoint officers, issue stocks

Question 5

Amending AOI and bylaws

Answer 5

AOI - majority of SH
Bylaws - SH or BOD, unless AOI or bylaws say otherwise

Question 6

Liability for pre-incorporation activity

Answer 6

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

Question 7

Defective corporations

Answer 7

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]

Question 8

Limited liability

Answer 8

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.”

Question 9

Requirements for piercing the corporate veil

Answer 9

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

Question 10

Enterprise liability

Answer 10

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

Question 11

Derivative Action Requirements and Incentives

Answer 11

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

Question 12

Direct suit

Answer 12

Alleges injury to shareholder

Question 13

Direct or derivative?

Answer 13

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?

Question 14

Demand Requirement

Answer 14

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”

Question 15

Under MBCA, three ways for C to review demand [to determine if in corp’s best interest]

Answer 15

1. independent directors constitute quorum, may be reviewed by the board
2. independent directors may appoint by majority vote a committee of themselves
3. upon motion by corp, court may appoint independent panel

Question 16

Demand futility - when can demand be excused in DE?

Answer 16

1. majority has material financial/familial interest
2. majority incapable of acting independently - perhaps domination of control
3. underlying transaction not product of valid exercise of business judgment
   When excused

Question 17

Capital structure

Answer 17

Shareholder entitled to:
- dividends
- residual assets
- voting rights

Question 18

Capital terms

Answer 18

Different kind of shares:
- preferred - higher dividend preference
- convertible bonds - from debt to equity
- warrants - like options but issued by corporation

Question 19

Corporate purpose

Answer 19

Charitable donations permissible on theory that helpful to corporations. No indiscriminate giving, giving to pet charity

Shareholder wealth maximization doctrine

Question 20

The BJR

Answer 20

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

Question 21

Duty of Care and an Informed Decision

Answer 21

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.

Question 22

Ways to avoid violation of duty of care like in Van Gorkom

Answer 22

do a market test, get SH ratification

Question 23

When BJR rebutted…

Answer 23

Look at whether the questionable conduct means that the duty of care or loyalty has been rebutted. Court applies entire fairness test.

Question 24

When is the BJR rebutted?

Answer 24

Fraud; conflict of interest (relates to duty of loyalty but not necessarily breached); illegality, no decision, egregious decision, uninformed decision, waste.

Question 25

DE safe harbor for interested transactions

Answer 25

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.”

Question 26

Corporate opportunities - DE law

Answer 26

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

Question 27

Definition of corporate opportunity per ALI

Answer 27

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

Question 28

Insider may take advantage if corporation rejected and:

Answer 28

1. The rejection is fair to the corporation
2. The opportunity is rejected in advance by disinterested directors, a disinterested superior, in a manner satisfying BJR (in writing?)
3. The rejection authorized or ratified by disinterested shareholders and
4. rejection not a waste of corporate resources

Question 29

The vote of _____ is the act of the board unless _______

Answer 29

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)

Question 30

Ratification and its effect on interested transactions - §144

Answer 30

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

Question 31

Ratification and effect on BJR

Answer 31

See Wheelaborator, Disney, Stone, Caremark in other deck