Business ch.10-15
proxy
written authorization from one directing anouter to vote his shares -may be revoked at an time before they are exercised -they are used to insure a quorum is present
meeting minutes
written record of events occurring at a meeting - required
Securities Exchange Act of 1934
-Created the SEC; regulates brokerage firms & stock exchanges -Focuses on sales of securities after they're issued -Imposes reporting requirements for on (reporting or Sec. 12) companies with: -->$10 million in assets and -->2K securities holders (500 if unaccredited); OR --securities listed on a national exchange --Must file Form 8-K (any material event); Form 10-Q (quarterly, unaudited financials); Form 10-K (annual, audited financials) -Prohibits insider trading under Rule 10b-5 of securities based on information not available to public -Prohibits short-swing profits made by insiders (officers, directors, >10% shareholders) - profits from purchase or sale must be recaptured if made within 6 month period
Securities Act of 1933
-Passed in response to Stock Market Crash of 1929 -Before that: sale of fraudulent securities, insider trading & secretive trading b/w small groups to drive up stock prices -Act has 2 main objectives: --requires that "investors receive financial and other significant information concerning securities being offered for public sale" --prohibits "deceit, misrepresentations, and other fraud in the sale of securities" -Securities must be registered with SEC by filing S-1 registration statement on EDGAR - becomes effective in 30 days -No SEC filing required if: offering of limited size, sophisticated (or accredited) investors; instrastate offerings; municipal & government securities
Publically Traded Corporations
-Significant part of economy - over half of Americans own stock in public company -IPO (initial public offering) occurs when company first decides to sell stock to public/(ICO - cryptocurrency) -Securities usually issued in form of equity (stock) or debt (bonds) offerings -Governed by Securities & Exchange Commission (SEC) --Securities Act of 1933: issuance of securities to public --Securities Exchange Act of 1934: buying & selling after issuance -State "blue-sky" laws: state statutes regulating issuance of securities within its borders
Securities Market
-Stock Exchange: marketplace where securities are sold --Each exchange has various requirements --NYSE ("big board") is most prestigious =companies must trade at least 1.1 million shares with global market value of $200 million ="blue chip companies" --NASDAQ - electronic trading system with no specific location --Over-the-counter (pink sheet) stocks: don't trade on major exchange -Stock Market Indexes --Standard & Poor's 500, Dow Jones Industrial Average --show trend in stock prices by reporting on certain selected stocks
business judgment rule
rule minimizing directors and officers for action taken so long as they acted in good faith
amending the articles
to distribute share dividends, corp must have sufficient authorized but unissued shares to distribute
shareholder action without a meeting
- must get every shareholder's written consent, then no need of meeting
Cont. What is NOT "transacting business
--Soliciting/obtaining orders whether by mail or through agents/employees, if orders require acceptance outside the state --Creating or acquiring indebtedness, mortgages, and security interests in real or personal property --Securing or collecting debts or enforcing mortgages and security interests in property --Simple ownership of real or personal property --Conducting an isolated transaction that is completed within 30 days and is not in the course of repeated transactions --Transacting business in interstate commerce -List is not exhaustive: must look at case law
modern trends
-2009 SEC "notice and access"- rules where all publicly traded companies are reuired to post their proxy materials on website and provide shareholders with notice of the availability of these proxy materials 40 dyas before meeting - householding: practice of sending only one report and proxy statement to shreholders with the same surname at the same time
Distribution to Shareholders
-After all debts discharged & liquidation expenses paid, shareholders divide remaining assets -Remaining shareholder distribution is a "liquidation distribution" -Directors are personally liable if distribution is made to shareholders without first paying off creditors • includes taxes, employee wages, rent, insurance etc. • -Shareholders generally receive cash distributions in proportion to ownership --liquidation preferences must be honored
Articles of Amendment
-After approval of amendment by shareholders then Corp. must prepare & file articles of amendment with secretary of state -Some jurisdictions require statement that articles amended pursuant to state statute & with shareholder approval --Any requirements relating to original articles must also be followed for amendments (publishing requirements, etc.) Should review statutes in any jurisdiction where company does business
Articles of Dissolution
-After director/shareholder approval, articles (or certificate) of dissolution prepared & filed with secretary of state -Generally contain the following information: --Corporation name --Date dissolution was authorized --Dissolution approved by requisite shareholder vote • Some states, including CA, require statement that all debts & liabilities have been paid & remaining assets distributed -States require corporations to obtain a tax clearance showing it does not owe taxes (must also notify IRS within 30 days of resolution)
Tender Offers & Proxy Contests
-Aggressor corps. may decide to take target by surprise by purchasing stock on open market -Disclosure requirements kick in once acquiring corp. reaches 5% -Most acquiring corps. will purchase a little less than this before identifying itself (AKA "toehold" or creeping tender offer) - under Williams Act- federal law regulating tender offers and takeovers -May also make tender offer outright on open market by announcing cash offer to shareholders -Federal laws & SEC govern disclosure of tender offers & takeovers • If bidder makes public offer to purchase more than 5%, must make Sec. 14(d) filing with SEC to identify intent -Proxy Contest: aka proxy fight , competition b/w corp. mgmt. to take over board of directors
Benefit Corporations
-Also known as "B" corporations or "B Corps." - recognized in most states, including CA -Hybrid: combines profit-making with social good -Directors consider social values when making decisions -Makes it easier to find funding for social ventures & to find socially responsible companies -High level of transparency - must publish annual benefit report -Measured by standards set by 3rd party evaluators, ex: "B Lab" -Not tax exempt - pay 21% corp. rate -Warby Parker, Ben & Jerry's, Patagonia -Social purpose corporation: recognized in CA, not usually vetted by 3rd party standards
Significant & Extraordinary Changes Require Shareholder Approval
-Amending Articles of Incorporation -Mergers -Consolidations -Share Exchanges -Sales of Corporate Assets -Corporate Domestication -Entity Conversion -Dissolution
Procedure for Amending Articles of Incorporation
-Board discusses proposed amendment and votes on resolution at meeting -Passes resolution and makes recommendation to shareholders to approve -Some amendments don't require shareholder approval in many jurisdictions if it doesn't affect shareholder rights =change of names, addresses of initial directors or registered agents =minor changes to name such as "Inc" or "Corp" =increasing number of shares for stock split or to distribute dividends =change of agent for service of process
Domestication
-Both can occur via merger with a wholly owned subsidiary -Domestication: allows corporation to change its state of incorporation in order to be governed by laws of a different state --Board adopts "plan of domestication" & submits to shareholders for approval --If approved, corporation files "articles of domestication" with the new jurisdiction & surrenders it articles to the former state --Has no effect on corporation's debts, assets or liabilities
A. Amending Articles of Incorporation
-Can amend articles at any time to modify, add or delete provisions -Shareholder approval required because articles created the corporation and are available for inspection by any potential shareholder -Most common reason to amend is change of name or increase in authorized shares -Amendments also happen due to creation of new shareholder rights or classes of stock, change in par value etc. -Generally whatever is stated in original articles & then changed
Federal Regulation of Mergers
-Clayton Act gives federal government authority to review mergers and acquisitions to ensure they don't result in monopolies or unfair competition -1976 Hart-Scott Rodino Antitrust Improvement Act requires parties to file premerger notification with FTC & DOJ if merger exceeds ~$85 million -Must wait for 30 days before closing transaction -Government may prohibit transaction or require companies to restructure to avoid antitrust violations -Stiff financial penalties for violations
Transacting Business
-Company may not "transact business" in foreign juris. until it registers or obtains a cert. of authority -Transacting business: engage in repeat, systematic, continuing business -What is NOT "transacting business"? --Maintaining, defending, or settling any proceeding --Holding BOD/shareholder meetings of or carrying on other activities concerning internal corporate affairs --Maintaining bank accounts --Maintaining offices/agencies for the transfer, exchange, and registration of the corporation's own securities --Selling through independent contractors
Consolidations
-Consolidations: combination of 2 or more corporations into 1 new entity =newly formed corporation acquires everything previously held by both corporations =neither entity survives - very uncommon now --reorganization is a term used by IRS to clasify various corporate combination
Liquidation
-Constitutes following under MBCA: --Collection of assets --Disposition of property that won't be distributed --Discharge of liabilities --Distribution of remaining property -Non-judicial liquidation: officers & directors liquidate the corp. • occurs when dissolution is voluntary (initiated by directors or shareholders) or administrative -Judicial liquidation: court liquidates corp. & appoints a "receiver" or "liquidator" • occurs when dissolution is involuntary
Withdrawal of Foreign Qualification
-Corporation should file application for withdrawal when it ceases to do business in foreign state --secretary of state will then issue certificate of withdrawal --Corporation is then no longer qualified to do business -States can also revoke qualification when corporation acts unlawfully or fails to comply with state laws --failure to file annual report, pay taxes or have a registered agent --most states will provide a delinquency notice and/or give corporation opportunity to cure defect
Defensive Strategies
-Corporations can adopt a number of strategies to avoid a takeover -Business judgment rule applies with respect to takeovers - managers can't take action at expense of shareholders -Common Defenses --Staggered boards: make it difficult to obtain control of board, especially if they can only be removed "for cause" --Golden parachutes: expensive exit packages for senior mgrs. --Poison pills: supermajority voting or right to acquire additional shares at bargain prices (shareholder rights plan) --Crown jewel defense: target makes itself unattractive by selling off certain assets & taking on debt --People pill: managers all agree to resign in takeover --Constituent statutes: allow directors to consider 3rd parties
Corporate Dissolution
-Corporations created & dissolved by state statute -3 types of dissolution: --voluntary: initiated by directors or shareholders --administrative: initiated by secretary of state for technical or administrative defects such as failure to file reports or pay taxes --involuntary (judicial): initiated by state, shareholders or creditors against the corporation's will -Once decision is made to dissolve, then liquidation (or winding up) must take place
Corporate Combinations
-Corporations increase their size or take control of others for various reasons -Usually accomplished through following transactions between constituent(party involved in merger or other similar transaction) parties: =Merger (merged companies assets/property & liability transferred to another) =Corporation purchases assets of another =Acquire sufficient stock to assume control -Most corporate combinations require shareholder approval since shareholders rights are affected
Involuntary Dissolution
-Dissolution is not desired by board of directors -Also called judicial dissolution because it's effected by court that enters decree of dissolution -Initiated by state, shareholders or dissatisfied creditors --State action: brought by state attorney general b/c corp. committed fraud in filing articles of incorporation or abused/exceed authority --Creditor action: must establish that corp. is insolvent & has judgment or acknowledged claim against corp.
& Entity Conversion
-Entity Conversion: corporations may change their structures to become unincorporated entities --Board adopts "plan of conversion" outlining how shares will be converted into unincorporated interests --Shareholders have appraisal rights --Each shareholder who would take on personal liability within new entity must sign separate written consent --After shareholder approval, corporation will file "articles of entity conversion"
"S" (small business) Corporations
-Existing corp. that qualifies for special tax treatment -May elect pass-through taxation rather than having income taxed at corporate level -"Small business" refers to number of shareholders not amount of revenue or size of business -Shareholders may not exceed 100 -S election made with IRS - not mentioned in articles of incorporation -All shareholders must sign consent for election & can only be revoked by: --majority shareholder vote --no longer meeting statutory requirements
Formation of Nonprofit Corporation
-Formed by filing articles of incorporation -Specific purpose should be identified in articles -Function similarly to profit making corps. -Offer memberships: not stock or shareholders -Under 2017 Tax Cuts Act, corp. pays 21% excise tax on salaries >$1 million for 5 highest-paid employees • can view info. on Form 990 -Receive tax exempt status under Section 501(c)(3) of tax code, also exempt from state & property taxes -Donations to nonprofits are deductible from individual income taxes -Dues to social clubs are not
Effects of Qualifying
-Four primary effects on foreign corporations --Will be subject to any restrictions imposed on domestic corporation --Will be subject to service of process in the new state --Corporation must pay various fees to the state that has permitted it to transact business within its borders --Corporation must file annual reports with the foreign jurisdiction
Amendment to Bylaws
-Generally need no shareholder approval unless required by statute, articles or bylaws -Directors can amend or restate by voting (majority vote at meeting or unanimous written consent)
Administrative Dissolution & Reinstatement
-Handled by secretary of state -Less serious than involuntary dissolution -Can occur for: --failure to pay taxes or file annual report --failure to maintain registered agent --failure to notify state of change of address or agent --continuing to operate after corporation's period of duration expires -Many states provide for notice of technical defaults & give corp. chance to cure within 60 days -MBCA & other states allow corp. to be reinstated within 2-year period after dissolution
Stock Purchase
-Highly similar to an asset purchase except one corp. purchases all the shares of another company's outstanding stock -Once owner holds majority of shares, it then controls destiny of target -No permission of shareholders of acquiring corp. needed -Selling corp.'s board can vote & make recommendation to sell to its shareholders -acquiring corp has power to remove target's existing directors and elect own , thereby controlling target -Acquiring corp. may decide to deal with shareholders directly by making a tender offer (public offer made by bidder to acquire shares in a target corp) -acquiring corp will pay higher than the stocks's current market value to induce shareholders to sell -Tender offers heavily regulated by SEC(security exchange act of 1934) rules -Sec. 13(d) form be filed with SEC at the time of offer when shareholder owns 5% or more of company's stock - any person who owns more than 5% of class stock must file an information statement with SEC w/in 10 days of acquisition
Qualification of Foreign Corporations
-In order for a foreign corporation to lawfully do business in a state outside its juris., it must be qualified to operate there -Most states require that a foreign corp. file an application to transact business, appoint an agent & pay the appropriate filing fees -"Domestic corporation": corporation within juris. where it was incorporated • a corp. has no legal existence beyond the borders of its incorporation -"Foreign corporation": corporation outside of juris. where it was incorporated • corp. should ensure that it registers name so that it's available for corp. use
Professional Corporations
-Incorporation of a professional's practice (doctor, lawyer, accountant, etc.) -Two distinguishing characteristics: --Share ownership limited to licensed professionals --Professionals retain personal liability for own wrongful conduct & acts of negligence or for those of whom they supervise --Professionals are employees of corp. -Articles must include service provided, naming signal -Pay taxes at flat 21% corp. rate
known Claims against the corporation
-Known Claims --Must be resolved against the dissolving corp. --Claims & obligations corporation knows about --Corporation must: =send written notice of dissolution informing claimant or creditor where to submit claim info. =provide 120 days for claim to be made =inform creditor/claimant that claim will be barred if not submitted in timely fashion
Characteristics of a Close Corporation
-Limitation on the number of shareholders (25-30) -Shareholders typically enter into agreements restricting the transfer of shares ("buy-sell agreements") --no readily available market for the shares of a close corp. --restriction on transfer of shares is automatic in many states & corp. is given right of first refusal -All or most of the shareholders participate in management of the corporation -May be able to eliminate board, bylaws & annual meetings
One Step vs. Two Step Dissolution
-MBCA & some states only require articles of dissolution to be effective --after articles are dissolved, corporation is dissolved --liquidation (payment of debts/distribution of assets) follows -Other states, including CA, require filing of notice of intent --articles of dissolution are then filed but must include statement that all debts have been paid & assets distributed --liquidation precedes dissolution -Revocation of dissolution: MBCA allows corp. to file articles of revocation within 120 days of dissolution
Registration/Qualification Procedures
-MBCA requires the following information in the qualification application or registration statement --Name --State of Incorporation --Principal address and registered agent --Identities of Directors and Officers --Nature of business -Application must also be accompanied by certificate of good standing from home jurisdiction -Foreign state then issues certificate of authority
"S" Corp. Characteristics
-May not be formed in foreign country -No more than 100 shareholders (family members & husband/wife treated as one shareholder) -Only individuals, estates or certain trusts may be shareholders (not corporations or partnerships) -May not be nonresident aliens of US -Tax year is generally calendar year -Only one class of stock -May not be a financial institution, insurance company or domestic international sales company
Mergers
-Mergers: combination of 2 or more corporations into 1 remaining entity =one corp. acquires assets, contracts, obligations, shareholders & rights of the other =one corp. ceases to exist (merged, disappearing or extinguished corp.); the other survives (survivor) =can also occur b/w different entities (cross-species or interspecies mergers)
Procedures for Mergers & Consolidations
-Negotiations between constituents produces letter of intent setting forth basic terms of transaction -Later replaced by plan of merger containing: --names of constituents & identity of survivor --terms and conditions of merger --manner of converting shares of extinguished corp. into shares or survivor --any required amendments to articles -Boards of both entities adopt & submit for approval to shareholders at annual or special meeting -After approval, articles of merger filed with sec. of state -Merged corp. ceases to exist after effective date
Hostile Takeovers
-Not all corporate combinations are consensual -Some combinations occur without the consent of the acquired, or target, corporation -Usually referred to as hostile takeovers -Two primary methods of conducting a hostile takeover: tender offer or a proxy contest (fight) -Constitute minority of merger situations -Even if situation starts off as hostile, mgmt. will come to some form of agreement
Nonprofit Corporations
-Not formed for profit-making -Must be recognized by IRS - not subject to taxation -Most states also have laws governing nonprofits -3 types: --public benefit corporation: formed for charitable purposes such as science, health, education, arts --religious corporation: formed for religious purposes --mutual benefit corporation: professional associations, social clubs, homeowners associations etc.
Shareholder action to dissolve corp.
-Occurs when directors act fraudulently or waste corp. assets -To prevail, shareholders must prove one of the below: --Directors are deadlocked in managing & corp. is being irreparably harmed --Mgmt. acted in illegal, oppressive or fraudulent manner --Shareholders deadlocked & failed to elect directors at 2 successive annual meetings --Corp. assets are being wasted or mismanaged --Abandonment & unreasonable delay in liquidation -MBCA provides that complaining shareholder can be bought out by corp. or other shareholder -Freeze-out/Squeeze-out: directors who own large majority of shares force dissolution over shareholder wishes
Share Exchange ("Interest Exchange")
-One corp. acquires all the shares of another corporation (the "target-corp subject to a takeover") -Acquiring corp. uses shares to acquire target -Acquiring corp. receives target's shares & target receives shares of acquirer, or cash or both -Both corporations may continue to exist -Acquiring company doesn't necessarily become owner of target company's assets or liable for obligations -Often occurs when corporation's stock is valuable & can be used as "currency" to purchase smaller companies -Shareholders of acquiring corporation do not vote b/c viewed as within decision-making authority of board
Asset Purchase
-One corp. purchases all or substantially all (>75%) of another corp.'s assets -At end, selling corp. is often a mere shell -May pay creditors & then dissolve -Approval of acquiring corp.'s shareholders is not required b/c within business judgment of directors -Shareholder approval of selling corp. is required --Board votes & submits to shareholders for approval --Appraisal rights offered to dissenting shareholders -Asset purchase agreement prepared & signed by both parties
Parent & Subsidiary Corporations
-Parent: "creator" corp. that forms another -Subsidiary: corporation formed or acquired by another -Subsidiaries owned by same parent are affiliates -If parent owns all of subsidiary's stock, called wholly- owned -Tax code provides dividends received deduction to parent to prevent triple taxation -Separate legal entities: parent typically not liable for subsidiary's debts & obligations UNLESS --commingling of funds, consolidated tax returns & financial statements, shared business depts., domination of subsidiary to an inequitable result
Restatements of the Articles of Incorporation
-Restating articles of incorporation is somewhat similar to amending except it combines previous amendments into one easily understandable & complete document -Composite "clean-up" of what are often piecemeal amendments -No changes are made to the articles, so restatements may be made without shareholder approval
Voluntary Dissolution
-Shareholders must approve b/c they are owners -Directors make recommendation for shareholder vote -Most dissolutions need simple majority vote --Some states may require 2/3 vote• -If shareholders initiate dissolution, most states require unanimous approval --California only needs majority -Dissenting shareholders rarely have appraisal rights because they will share in remaining assets during liquidation
Close Corporations
-Shares are held by a small group who actively manage the corporation -Not publicly traded -Functions informally -Failure to adhere to formalities will not generally result in piercing corporate veil -Also called "statutory close" or "closely held" corporation -IRS defines closely held as corp. that is not personal service corp. with >50% held by 5 or fewer individuals -Increasingly less popular with establishment of LLPs and LLCs
Stock Split & Corp. Purchase of its Own Shares
-Stock split (share split): division of outstanding shares --Corporate purchase of its own shares corp. may acquire some or all of its own outstanding shares if state statute & articles of incorporation permit & if corp. is solvent or would not be rendered insolvent by transaction --may wish to do so for following reasons: ---decrease supply of stock, thereby increasing price ---prevent shareholders from selling to outside parties ---improve equity to debt ratio ---increase earnings per share by reducing total number of outstanding shares
unknown Claims against the corporation
-Unknown Claims --Haven't matured or surfaced --Corporation must: • publish a notice on website or newspaper of that claims will be barred unless brought within 3 years of publication --May set aside assets to avoid continuing liability to shareholders --Under MBCA, corp. may initiate court proceeding to establish an amount to set aside ----then no continuing liability to corp. or shareholders
conduct meetings (directors)
-action taken is usually by simple majority vote -if vote not unanimus then recorded on minutes
notice of meetings & who is entitled
-all jurisdictions require that shareholders receive notice of all meetings -to determine who will recvieve notice, corp. bylaws establish record date (date selected in advance; 30 days before meeting) --any shareholder who owns shares on the record date will recveive notice
Shareholder Voting Rights types
-articles of incorporation may grant,deny, or limit voting rights 2 types: 1. straight voting- 1 vote per share (most common) 2. cumulative voting- applies to only election of directors, each share carries as mnay votes as there are directors being elected (vacancies)
miscellaneous restrictions
-contractual if agreed between corp and bondholder to not pay dividends -some classes of stock might have certain preferences over others with regard to dividends -perferred stock with cumulative rights must be paid back dividends before others - shares of one class of stock may not be used as dividends for anothe class
procedure for declaring and paying dividends
-decision to declare a dividend is made by board of directors through majority vote at a meeting or unanimous written consent action without meeting - then establish a record date to determine eligibility of to recieve -once dividend is declared, newspaper financial sections will note that the stock is ex-dividend (if you buy the stock on or after the ex dividend date, you wont recieve dividend) --usually 2 business day before record date --sometimes causes price to drop
compensation and inspection rights
-directors may fix their own comepnstaion in some states -directors have rights to inspect corporate records and books like corp list of clients to sell to a competitor
directors standards of conduct
-directors standard of conduct requires them to discharge his or hers duties in good faith and in a manner reasonbaly bleieved to be in the best interst of corp
corporate scandals and their suspected causes
-excessive compensation given to company management causing focus on short term profits -borad conflicts of interest -lack of accounting oversight -wall street "hype" and euphoria -lack of regulatory oversight -greed
Rights of Dissenting Shareholders
-have appraisal right: to have shares purchased at their fair value in cash unless their shares are easily traceable on stock exchange
defective notice: 2 ways to be saved by corporation
-if corp. fails to give notice, it may be attacked my shareholder -2 ways corp. can be saved: 1. shareholder signed a written waiver of notice 2.shareholdere may consent in writting to ratify action taken at the meeting
election, term, vacancies, and removal of directors
-if initial directors are not named in articles of incorporation then elected in first organizational meeting -elected my common shareholders at corp annual meetings - in a staggered system: AKA classified system, directors are not all elected at same time which promotes continuity in the board - 2 approaches: 1. common law- remove for only "for cause" like fraud, incompetence, or dishonesty 2. modern approach- can remove with or wihtout cause
piercing the corporate veil
-means holding individual shareholders liable for corporate obligations -in order to prevent fraud or injustice -shareholders can be liable if they have not acted as if corp. is a seperate entity, rather treat it as their mere alter ego
contents and timing of notice
-notice must specify date,time,place -notice must be 10-60 days before meeting -if special meeting then must say purpose of meeting -annual report mailed with annual meeting notice`
dividend
-paid to shareholders based on their ownership -distribution of a corporation's profits to its shareholders
other shareholder rights
-preemptive rights (right to purchase as many newly issue shares as will maintian the sharholders proportionate ownership interest in the corporation) -right to recieve dividens -right to transfer shares -buy sell agreements: prevents outsiders from buying first from shareholders -legend: notation mark on stock certification indicating the stock is subject to some restriction or limitation
conducting the meeting: 2 ways to vote
-resolutions presented and voted -2 ways to vote: 1.majority voting-must receive a majority or 51% of affirmative votes 2.plurality voting-only needs to get more vtoes for than against *voting agreements: an agreement among shareholders specifying how they will vote
Shareholder Inspection Rights
-right to be informed of corp. affairs -right to review list of shareholders at any time so long as review is for proper purpose -some states require certain minimum amount of stock before allowing to inspect corp. records
effect of illegal dividends
-rules involve legally available funds -its unlawful if issue a dividend outside (unauthorized account) -as shareholder, if you knew it was unlawful then you cant receive dividend
restrictions relation to dividends
1. MBCA Approach: provides 2 alternative tests to determine whether a corp can legally pay a dividend: i. equity insolvency test: states that a corp may pay a dividend only if the corp is solvent (it must be able to pay its debts as they come due in the usual couse of business) ii. balance sheet test: (aka excess assets test) - dividend may be paid only if after giving it effect, the corps assets will equal or exceed its liabilities and any amount that would be required to satisfy the rights of perferred shareholders
Exceptions to shareholder approval: 2 types
1. Short-Form Merger:parent company merges with subsidiary (corp formed by another) -only needs approval from board of parent company -dissenting shareholders still have appraisal rights 2. Small-scale merger: need not be approved by shareholders of surviving corp. if <20% needs to be transferred -only needs approval of boards of both corporations & shareholders of target -survivor's shareholders have no appraisal rights
3 types of dividends
1. cash dividend: (most common)cash distribution made by a corp - under the dividend reinvestment plans (AKA DRIPs)- can use immediatly to buy more stock 2. Property Dividends: distribution of some form of property by a corp 3. Share dividend: distribution by a corp of its own shares
3 examples of piercing corp veil
1. commingling of assets- combing funds owned by different individuals or entities 2. lack of formalities-when corp never has meetings,issues stocks,never appoints officers 3. inadequate capitalizarion
Shareholder actions: 2 types against corp.
1. direct action-(AKA individual action) is litigation initiated by shareholder who has been directly injusred by some act of the corp. like refuse voting rights or deny dividen when everyone else recieved one 2. derivative action- brought by shareholder to enforce a right owned by another
2 basic principals applicable to dividends
1. dividends are allocated to shareholders in direct proportion to their respective ownership interest in the corp 2. shareholders w/in a clas must be treated the saem
meeting requirements
1. location and notice- held anywhere -not entitled to notice regular meetings but are entitled for special meetings *can waive to recieve notice like shareholders 2. quorom and proxies- must have quorom present in order to take action; -becuase directors are charged with the duty of managin the corp, may not vote by proxy in most states
voting methods for electing directors
1. plurality voting- nominees who receive the most votes are elected 2.plurality plus voting- where director offers to resign if he or she does not recieve majority support; board may reject or accept resignation 3.majority voting- uncontested elecction where requires a candidate to recieve more "for" votes than against 4.consequential majority voting- where an uncontested nominee must recieve more for than agianst votes and must irrecovably resign if he or she does not
titles of officers
1. president- acts as general manager of the corp 2. vice president- acts in place of president in her absence and assists the president; there can be more 3. secretary- prepares notices and minutes of shareholders and directors meetings and maintaining minute books 4. treasurer- is the financial officer of the corp; duty to maintian , recieve, and disburse corp funds and paying taxes 5. other officers: - cheif executive officer: individual who supervies other officers - cheif financial officer: individual with primary responsibility for all financial matters - chair: individual who presides at corporate meetings of the board
4 criticial dates
1.declaration date: the date the corp's board announces payment of a dividend 2.record date: the date set by a corp to determine eleigibility of shareholers 3.ex-dividend date: date after which shares purchased no longer carry a right to a previously announced dividend 4.payment date: the date the dividend is sent to a shareholder
directors meetings
2 types: 1. regular meeting- pre-scheduled; once a month; board ocnducts business and manages corp. 2. special meeting- any meeting held between regular meetings
Effects of Failure to Qualify
= MBCA provides that foreign corporation may NOT maintain (continue) a proceeding to do business in any court until it has registered• -- May commence or defend itself -Penalties for transacting business in a foreign jurisdiction without authority --Monetary penalties & fines --May be enjoined from conducting further business --Maintain a lawsuit -Most states allow a corporation to "cure" a defect -Must also inform state of changes- structural changes, merger or change of name
functions of directors
Authorize distributions Adopt, amend & repeal bylaws Appoint, supervise and remove officers Oversee financial matters such as issuing stock, reacquiring stock, obtaining loans and issuing bonds Determine employee benefits and compensation Initiate extraordinary matters such as mergers or purchase/sale of corporate assets Exercise responsibility for corporate operations
Liquidation Distribution
Distribution made to shareholders when a corporation liquidates (also called dissolution distribution)
quorum
The minimum number of members who must be present for business or action to be conducted
shareholder list
after record date determined, corp. makes a alphabetical list of shareholders available, which promotes shareholder discussion and to vote together to acheive a goal
shareholder
an owner of a corporation, yet no management -aka stockholder -do not vote on day to day management -vote on election of directors and fundamental changes to the corp. (amending articles of incorporation and mergers) - responsibility is to pay for the stock issue to them -their rights, responsibilities,liabilities,dutiesw are governed by state statutes, articles of incorporation, and corporate bylaws
Shareholders' Meetings types
bylaws or notice of meeting will specifiy place 2 types: 1. annual meeting- required once a year -primary business is election of directors 2. special meeting- held if needed between annual or regular meetings - investigate mismanagement or to vote on removal of directors or unexpected event like merger proposal
directors action without meeting
can take action without meeting with written consent - unanimous written consent is signed by all and placed in minute book
reliance on others
directors are entitled to rely on info and opinions of others like employees, officers, experts, attorneys, and accoutants
delegation of authority
directors may delegate some functions to committees but required to supervise closely
directors extent of liability and defenses
directors who violate their fiduciary duty may personally be liable for the injury cause to the corp by their breach
tax considerations
double taxation - corp pay 21% on net profits - shareholders pay 0 to 20% on dividens - DRIPs also taxable when received - property dividens: shareholders pay fair market value on property received - share dividends: taxes paid when shares are sold copr may also be taxed on any earnings on excess of what is reasonably needed for business purpose small crop whos employess are activily involved can issue dividends as salaries or bonuses
governance guidelines `
formal written policies relating to management of corporation -many guildines call for diversity in boards of directors -require more independent directors (director with no business or family relationship with corp or its managers) -link executive pay to compnay performance -require periodic audits and reviews of corp operations -impose mandatory stock ownership by directors
Conflict of interest
if a director has a conflict of interest the MBCA approach provides a safe harbor for such transaction if the director discloses his interst and majority of disinterested directors approve it
officers
individuals appointed by directors to carry out various corporate activites -president -vice president -secretary -treasurer they cary out day to day corp activites and are selected, removed, supervised by directors
authority of officers
officers are agents of corp - actual authoriity - apparent authority - inheret authority
legally available funds
some statutes mandate dividends may be paid only from certain corp accounts: -retained earnings or "earned surplus" (net profits) OR -capital surplus or "paid in capital" (net assets greater than its stated capital) OR in some jurisdictions -Nimble dividends-may be paid if corporation has current profits even if it has a deficit or operating loss
directors
those who manage a corporation -duties and rights comer from state statutes, articles of incorporation, and coporate bylaws - full authority for determining coporate policy and excersize auhtority in meetings -each director has one vote -owe due care and good faith to corp
Corporate Dividends: distribution
used strictly to refer to payments to sharholders that are not sharing of profits; ex: liquidation/dissolution distribution
