CORPORATIONS

Steps to adopt a fund. corp. change

(i) a majority of the board of directors adopts a resolution recommending the fundamental change; (ii) notice of the proposed change is sent to all shareholders (whether or not entitled to vote); (iii) the change is approved by the shareholders; and (iv) the change is formalized in articles (e.g., articles of amendment, articles of merger, etc.), which are filed with the state.

3 situations where the corp. veil is often pierced

(i) when corporate formalities are ignored and injustice results; (ii) when the corporation is inadequately capitalized at the outset; and (iii) to prevent fraud.

De jure corp.

A corporation formed in accordance with all applicable laws is known as

cred. claims against dissolved corp

A corporation that has been dissolved continues its corporate existence, but is not allowed to carry on any business except that which is appropriate to wind up and liquidate its affairs. A claim can be asserted against a dissolved corporation—even if the claim does not arise until after dissolution—to the extent of the corporation's undistributed assets. If the assets have been distributed to the shareholders, a claim can be asserted against each shareholder for his pro rata share of the claim, to the extent of the assets distributed to him. To provide some finality for liquidating distributions, there are special procedures that a corporation can follow to bar claims against the corporation sooner than they might be barred under the statute of limitations for the claims. To bar known claims against the corporation, the corporation must notify its known claimants in writing of the dissolution. The notice must describe the procedure for asserting a claim and set a deadline not less than 120 days from the effective date of notice by which the claim must be received. A claim is barred if a claimant who receives notice fails to deliver the claim by the deadline. To bar unknown claims, the corporation can publish notice of its dissolution in a newspaper in the county where the corporation's principal place of business is located. The notice must describe the procedure for asserting a claim and state that a claim will be barred unless a proceeding to enforce it is commenced within the statutory time period (usually three or five years) after notice is published.

shareholder record dates

A corporation's bylaws may fix, or provide the manner of fixing, a record date to determine which shareholders are entitled to notice of a meeting, to vote, or to take any other action. Here the record date was 20 days before the meeting. Thus, only persons who were shareholders as indicated in the corporation's records on the date 20 days before the meeting would be allowed to vote at the meeting. The aunt did not become a shareholder until the week before the meeting. Since she was not a shareholder of record on the record date she was not entitled to vote at the meeting. On the other hand, the record date requirement does not apply to proxies—as long as the shareholder who gave the proxy was a shareholder of record on the record date, and the proxy is valid, the proxy holder will be allowed to vote the shareholder's shares and the shares are counted as being present for quorum and other voting purposes.

At common law, in spite of a defective incorporation, a business entity can be recognized as a de facto corporation if:

A de facto corporation has all the rights and powers of a de jure corporation at common law, but it remains subject to attack by the state. The requirements for establishing a de facto corporation include: (i) there must be a corporate law under which the organization could have been legally incorporated; (ii) there must be colorable compliance (i.e., a good faith attempt to comply) with the incorporation laws; and (iii) the corporation must exercise corporate privileges. There is no requirement that the corporation halt all business when the mistake comes to light.

Corp. by estoppel

A de facto corporation must be distinguished from a corporation by estoppel. Under that doctrine, persons who treat an entity as a corporation will be estopped from later claiming that the entity was not a corporation. The doctrine can be applied either to an outsider seeking to avoid liability on a contract with the purported corporation, or to a purported corporation seeking to avoid liability on a contract with an outsider.

EX of conflicting interest trnsaction

A director has a conflicting interest with respect to a transaction if the director knows that she or a related person: (i) is a party to the transaction; (ii) has a beneficial financial interest in, or is so closely linked to, the transaction that the interest would reasonably be expected to influence her judgment if she were to vote on the transaction; or (iii) is a director, partner, etc. of another entity with whom the corporation is transacting business and the transaction is of such importance to the corporation that it would in the normal course of business be brought before the board. Nevertheless, such a conflicting interest transaction will not be enjoined or give rise to an award of damages if: (i) the transaction was approved by a majority of the directors (but at least two) without a conflicting interest after all material facts have been disclosed to the board; (ii) the transaction was approved by a majority of the votes entitled to be cast by shareholders without a conflicting interest in the transaction after all material facts have been disclosed to the shareholders; or (iii) the transaction, judged according to circumstances at the time of commitment, was fair to the corporation.

which of the following people can be held personally liable for business transacted before the articles of incorporation are filed?

A person who is charged with filing the articles, but who enters into a lease contract on behalf of the corporation the day before filing, can be held personally liable for business transacted before the articles of incorporation are filed.

Does a promoter who signs a contract in the name of a planned, but as of yet unformed corporation, remain personally liable on the contract once the corporation is formed?

A promoter who signs a contract in the name of a planned, but as of yet unformed corporation, remains personally liable on the contract once the corporation is formed unless the parties agree to a novation. Generally, a promoter's liability on a pre-incorporation contract continues after the corporation is formed, even if the corporation adopts the contract and benefits from it. The promoter's liability can be extinguished only if there is a novation—an agreement among the parties releasing the promoter and substituting the corporation.

what is a quorum at a shareholders meeting?

A quorum must attend a shareholders' meeting before a vote may validly be taken. Under the rules of the RMBCA, a majority of the votes entitled to be cast on the matter by a particular voting group will constitute a quorum unless the articles provide greater quorum requirements.

shareholder's right to notice of a shareholder meeting

A shareholder has a right to notice of both special and annual meetings but will be deemed to have waived her right to notice to a meeting by attending that meeting and not objecting to the lack of notice.

revoking a proxy that was appointed by shareholder to vote shares

A shareholder may vote his shares either in person or by proxy executed in writing by the shareholder or his attorney-in-fact. A proxy is valid for only 11 months unless it provides otherwise. During that time, the shareholder may revoke the proxy at any time. A proxy will be irrevocable only if the appointment form conspicuously states that it is irrevocable and the appointment is coupled with an interest.

Example of fundamental corp change req. a vote by the shareholders

An amendment to the articles changing the rights or preferences of one class of shares must be approved by shareholder votes (and also must be approved by the affected voting group).

10b-5 insider trading

Anyone who breaches a duty not to use inside information for personal benefit can be held liable under rule 10b-5. Typical securities insiders, such as directors, officers, controlling shareholders, and employees of the issuer are deemed to owe a duty of trust and confidence to their corporation, which is breached by trading on inside information. Constructive insiders, such as a securities issuer's CPAs, attorneys, and bankers performing services for the issuer, also owe such a duty. In addition, where an insider gives a tip of inside information to someone else who trades on the basis of the inside information, the tipper can be liable under rule 10b-5 if the tip was made for any improper purpose (e.g., in exchange for money or a kickback, as a gift, for a family member's benefit, for reputational benefit, etc.). The tippee can be held liable derivatively if the tipper breached a duty and the tippee knew that the tipper was breaching the duty.

Director's duty of care

Directors are vested with the duty to manage the corporation to the best of their ability; they are not insurers of corporate success, but rather are merely required to discharge their duties: (i) in good faith; (ii) with the care that an ordinarily prudent person in a like position would exercise under similar circumstances; and (iii) in a manner the directors reasonably believe to be in the best interests of the corporation.

Director reliance on outside info

In discharging her duties, a director is entitled to rely on information, opinions, reports, or statements (including financial statements), if prepared or presented by any of the following: (i) corporate officers or employees whom the director reasonably believes to be reliable and competent; (ii) legal counsel, accountants, or other persons as to matters the director reasonably believes are within such person's professional competence; or (iii) a committee of the board of which the director is not a member, if the director reasonably believes the committee merits confidence.

Can a corp enter into transaction where director has a conflicting personal interest?

In most states, when a corporation is to enter into a transaction in which a director has a conflicting personal interest, the transaction can be set aside unless the director can prove that the transaction was fair or that it was approved by disinterested members of the board or the shareholders after disclosure to the board or shareholders of all material facts regarding the interest and the transaction. A fact will be considered material if an ordinarily prudent person would consider it important in deciding whether to proceed with the transaction

notice of a shareholders' meeting must be delivered:

Not less than 10 days or more than 60 days before the meeting.

Notice required for board of directors meetings

Regular board meetings may be held without notice, but special meetings require at least two days' notice of the date, time, and place of the meeting, but a purpose need not be included in the notice.

Shareholder lawsuits

Shareholders can bring direct actions against their corporation to enforce their own rights and any recovery will be for their own benefit; and shareholders can sometimes bring derivative actions to enforce the rights of the corporation, but in those cases recovery generally goes to the corporation and the shareholders bringing the action can only recover their reasonable expenses.

In a corp that provides preemptive rights what could trigger those rights

Shares issued in exchange for money.

When an action creating dissenters' rights is taken, the corporation must pay the dissenters:

The amount the corporation estimates as the fair value of the shares, but if the shareholder disagrees with that assessment, the corporation must either pay the amount the shareholder demands or file a court action to determine the fair value of the shares.

What must the articles of incorp include?

The articles of incorporation are required to set out certain basic information about the corporation and may contain any other provision that the incorporators deem appropriate. ***The name of the corporation, the number of shares the corporation is authorized to issue, and the name and address of each incorporator are all mandatory provisions. (In addition, the articles must include the street address of the corporation's initial registered office and the name of the corporation's initial registered agent at that office upon whom legal process may be served.

Directors of corp want a new management rule but want to maintain future flexibility, best way to do this is?

The best choice to maintain future flexibility would be to place the rule in the bylaws, but it is not the directors' only option. Bylaws may contain any provision for managing the corporation that is not inconsistent with law or the articles of incorporation. Bylaws are adopted by the directors, but can usually be modified or repealed by either the directors or the shareholders. In comparison, amendment of the articles usually requires a vote of both the directors and the shareholders. Thus, it is less difficult to change a corporate rule contained in the bylaws than it is to change a rule contained in the articles.

Who has the power to declare the payment of a dividend?

The decision whether or not to declare distributions generally is solely within the directors' discretion. The shareholders have no general right to compel a distribution; it would take a very strong case in equity to induce a court to interfere with the directors' discretion.

How does corp. existence begin?

The filing of the articles by the state is conclusive proof of the beginning of the corporate existence. The incorporator will sign and submit the articles to the state along with any required filing fees. If the state finds that the articles comply with the requirements of law and that all required fees have been paid, then it will file the articles and corporate existence will begin. After that time, an organizational meeting will be held to adopt bylaws, elect officers, and transact other business.

Presid. of corp's powers/authority

The president of a corporation has implied authority to enter into contracts on behalf of the corporation in the ordinary course of corporate affairs. As an officer of the corporation, the president is an agent of the corporation and receives her power to manage from the directors. The president's authority may be actual or apparent. If authority exists, actions taken by a corporate officer (such as entering into contracts) bind the corporation. An officer's actual authority includes not only the authority expressly granted to the officer by the directors, the bylaws, the articles, and statutes, but also any authority that may be implied by the express grant.

Which of the following statements is true if a share has a $5 noncumulative preference?

The share is entitled to a $5 payment before a distribution can be made on account of common shares.

If less than the entire board is to be removed, a director elected by cumulative voting may NOT be removed by a shareholders' vote if:

The votes cast against her removal would have been sufficient to elect her if cumulatively voted at an election of the board.

10b-5 rule

Under rule 10b-5, it is unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or the mails, or of any facility of any national securities exchange, in connection with the purchase or sale of any security, to: (i) employ any device, scheme, or artifice to defraud; (ii) make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (iii) engage in any act, practice, or course of business that operates or would operate as a fraud or a deceit upon any person, in connection with the purchase or sale of any security. A violation of the rule can result in a private suit for damages, an SEC suit for injunctive relief, or criminal prosecution. To recover damages under rule 10b-5, a private plaintiff must show that: (i) the defendant engaged in some fraudulent conduct; (ii) the fraudulent conduct was in connection with the purchase or sale of a security by the plaintiff; (iii) the fraudulent conduct involved the use of some means of interstate commerce; (iv) the plaintiff relied on the fraudulent conduct (although this can be presumed based on the fraud on the market theory); and (v) the defendant's fraud caused the plaintiff damages. The focus is on a sale or purchase by the plaintiff; the defendant need not have purchased or sold any securities. Thus, a nontrading defendant, such as a company that intentionally publishes a misleading press release, can be held liable to a person who purchased or sold securities on the market on the basis of the press release.

Preemptive rights

When a corporation proposes to issue additional shares of stock, the current shareholders often want to purchase some of the new shares to maintain their proportional voting strength. The common law granted shareholders such rights, known as "preemptive rights." Under the RMBCA, a shareholder does not have any preemptive rights unless the articles of incorporation so provide.

When is a court most likely to disregard the separate identity of a subsidiary corporation and allow recovery from the parent corporation?

When the parent corporation has inadequately capitalized the subsidiary without a reasonable expectation that the subsidiary will achieve financial independence.

what is necessary for a shareholder to have standing to bring a derivative action?

a shareholder must have been a shareholder of the corporation at the time of the act or omission complained of, or must have become a shareholder through transfer by operation of law from one who was a shareholder at that time. Also, the shareholder must fairly and adequately represent the interests of the corporation. A derivative suit is filed to enforce the rights of the corporation, not the rights of the individual shareholder. Thus the shareholder need not have suffered personal harm by the alleged wrongful act or omission. Recovery in a derivative action generally goes to the corporation rather than to the shareholder bringing the action

Can directors with conflicting personal transactions in a corp. transaction vote to approve that transaction?

a transaction shall not be set aside merely because a director has a conflicting personal interest in the transaction if: (i) the interested director discloses all material facts regarding the transaction to the disinterested members and a majority of them (but more than one) approve the transaction, (ii) the interested director discloses all material facts regarding the transaction to the disinterested shareholders and a majority of them approve the transaction, or (iii) the transaction is fair to the corporation.

elements for a successful cause of action under section 16(b) of the Securities Exchange Act?

any profit realized by a director, officer, or shareholder owning more than 10% of the outstanding shares of the corporation from any purchase and sale, or sale and purchase, of any equity security of his corporation within a period of less than six months must be returned to the corporation. The purpose of section 16(b) is to prevent unfair use of inside information and internal manipulation of price.

Sect. 16b of the SEA of 1934 is triggered when(liability arises)

any profit realized by a director, officer, or shareholder owning more than 10% of the outstanding shares of the corporation from any purchase and sale, or sale and purchase, of any equity security of his corporation within a period of less than six months must be returned to the corporation. For the purposes of section 16(b), a person is a more than 10% shareholder if he directly or indirectly owns more than 10% of any class of equity security of the corporation at the time immediately before both the purchase and the sale. The purchase that brings a shareholder over the 10% threshold is not within the scope of section 16(b)

what must a majority shareholder do to inspect the corporation's accounting records?

any shareholder (i.e., not just a majority shareholder) may inspect the corporation's books, papers, accounting records, shareholder records, etc. To exercise this right, the shareholder must give five days' written notice of his request, stating a proper purpose for the inspection (i.e., a purpose related to the person's interest as a shareholder). The RMBCA includes an exception to this general rule, but a corporation's accounting records do not fall under the exception. Under the exception, any shareholder may inspect the following records regardless of purpose: (i) the corporation's articles and bylaws, (ii) board resolutions regarding classification of shares, (iii) minutes of shareholders' meetings from the past three years, (iv) communications sent by the corporation to shareholders over the past three years, (v) a list of the names and business addresses of the corporation's current directors and officers, and (vi) a copy of the corporation's most recent annual report.

can duly elected directors be removed by the shareholders?

directors may be removed with or without cause by the shareholders, unless the articles of incorporation provide that removal may be only for cause.

a corporation's articles of incorporation can limit or eliminate a director's personal liability for:

directors' personal liability for money damages to the corporation or shareholders for action taken, or failure to take action, as a director. However, no provision can limit or eliminate liability for: (i) the amount of a financial benefit received by the director to which she is not entitled; (ii) an intentionally inflicted harm on the corporation or its shareholders; (iii) unlawful corporate distributions; or (iv) an intentional violation of criminal law.

assuming that the articles of incorporation are silent on the issue and a quorum exists, what is the default standard used for determining the outcome of an ordinary shareholders' vote?

each outstanding share is entitled to one vote unless the articles provide otherwise. If a quorum exists, an ordinary action will be deemed approved by the shareholders if the votes cast in favor of the action exceed the votes cast against the action, unless the articles provide for a greater voting requirement.

What duty does a director own in approving a transaction

fiduciary duty to act in good faith, in the best interest of the corporation, using the same degree of care that an ordinarily prudent person would exercise under like circumstances. Including conducting an independent and detailed investigation of the pros and cons of the transaction. This director may rely on the opinions of experts as well. If director does all of these things he cannot be held personally liable for his decision under the business judgement rule.

Alter ego for purposes of piercing the corp. veil and holding the shareholder personally liable?

if a corporation is the "alter ego," "agent," or "instrumentality" of a sole proprietor, its separate identity may be disregarded. In the case of an individual shareholder, if the shareholder treats the assets of the corporation as her own (e.g., by using corporate funds to pay her private debts), courts often find that the corporate entity is a mere alter ego of the shareholder. However, sloppy administration alone may not be sufficient to warrant piercing the corporate veil. The operation of the corporation must result in some basic injustice so that equity would require that the individual shareholder respond to the damage she has caused

When is a corporation liable for a pre-incorporation contract that a promoter signed on behalf of the corporation?

the corporation may become bound on promoter contracts by adopting them. Adoption may be express or implied. The effect of an adoption is to make the corporation a party to the contract at the time it adopts, although adoption of the contract by the corporation does not of itself relieve the promoter of his liability.