Corporations BarPrep

Ordinarily, a corporation pays income tax on its profits. In addition, shareholders are taxed on distributions to them, this is called

"double taxation." That is a disadvantage in the corporate form.

B. AMOUNT OF CONSIDERATION. 1. Par means

"minimum issuance price." -- C Corp. is issuing 10,000 shares of $3 par stock. It must receive at least $30,000 -- Could it get more than $30,000? Yes *No par* means "no minimum issuance price." -- That means the board can have the stock issued for any price it sets

There are two kinds of shareholder meetings.

Annual & Special Meetings

What happens if a foreign corporation transacts business without qualifying?

Civil fine and cannot assert a claim in state But the foreign corporation can be sued and defend in this state.

II. WHAT IS AN "ISSUANCE" OF STOCK?

Corporation sells its own stock The rules in Fact Pattern 2 apply only when there is an issuance. That means they apply only when the corporation is selling its own stock.

Distributions: Types

Generally are in the form of: 1) dividends, 2) redemption of shares, 3) repurchases of shares, or 4) assets after dissolution/liquidation

The board of directors of Hair Care Extraordinaire, Inc. appoints John Stamos as president. What happens if it fires him from the presidency?

John loses the job, but: Company may be liable for breach of contract damages

Suppose the C Corp. articles provide for preemptive rights. You own 20 percent of the stock of C Corp. C Corp. issues stock to Susie to purchase property from Susie (or to pay Susie for services performed for the corporation). Do you have preemptive rights?

No, this was not an issuance for money Preemptive rights only attach if there is an issuance of stock for money.

Dissenting shareholder *right of appraisal*. What is this?

Right to force the corporation to buy your stock for fair value. Right to force the corporation to buy you out.

I. TO FORM A CORPORATION, WE NEED A PERSON, PAPER, AND AN ACT C. ACT.

The incorporators have notarized articles delivered to the Secretary of State and pay the required fees. What happens if the Secretary of State's office accepts the articles for filing? ---that is the moment that forms the corporation -- At that point, we have a de jure corporation.

Derivative Actions: Standing—Ownership at Time of Wrong

To commence and maintain a derivative proceeding, a shareholder must have been a shareholder 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

At what point does a shareholder have a "right" to a dividend or other distribution?

When the board declares it --

Let's say we are in State A. Is a corporation formed in State B considered "foreign?"

Yes, anything outside State A is foreign

*Exceptions/Defenses to Liability* Directors NOT liable if: (2)

a. Not liable if you were *absent from the meeting* (e.g., sick that day). b. *Good faith reliance on info* (including financial info) presented by an officer, employee, or committee (of which the director relying was not a member), or professional reasonably believed competent. Reliance must be in good faith (no good if you knew the person giving info was a bozo).

Insolvent means either:

a. The corporation is unable to pay its debts as they come due; or b. Total assets are less than total liabilities. Liabilities include preferential liquidation rights.

Because distributions are a decision for the board to make, it is difficult to win a case to force the declaration of a distribution. To win, plaintiff must make a very strong showing of

abuse of discretion. For example, maybe if the corporation consistently makes profits and the board refuses to declare a dividend while paying themselves a bonus.

*FACT PATTERN 3: DIRECTORS AND OFFICERS* I. STATUTORY REQUIREMENTS — DIRECTORS

adult natural person NUMBER: One or more -- The number can be set in the articles or bylaws.

S owns 1,000 shares of C Corp. There are 5,000 shares outstanding. C Corp. is planning to issue an additional 3,000 shares. If S has preemptive rights, then S has the right to buy ...

as many as 600 shares (20% of the new issuance)

DIRECTORS: Right to Inspect

directors have a right to inspect corporate books

So, if there are nine directors, at least ______ directors must attend the meeting to constitute a quorum.

five If five directors attend, at least three must vote for a resolution for it to pass.

Notwithstanding these rules, court where director or officer was sued can order reimbursement if

it is justified in view of all circumstances. If she was held liable to the corporation, this is limited to costs and attorneys' fees (cannot include judgment).

A corporation is owned by

its shareholders (AKA "stockholders")

For an action to constitute valid board action, it must be approved by a

majority of a quorum at a properly convened meeting.

A director who votes for or assents to a distribution that violates the above rules is personally liable to the corporation for the amount of the distribution ...

that exceeds what could have been properly distributed.

The record shareholder is

the person shown as the owner in the corporate records.

Failure to give required notice means that whatever happened at the meeting is

voidable (maybe void), UNLESS the directors not notified waive the notice defect.

Only outstanding shares may

vote. Repurchased shares (AKA "treasury shares") are not outstanding and may not be counted in determining the number of votes needed to approve a proposal

The directors not notified can waive the notice defect in two ways:

(1) in writing anytime or (2) by attending the meeting without objecting at the outset of the meeting.

b. Special meeting can be called by (4)

(1) the board or (2) the president, or (3) the holders of at least 10 percent of the outstanding shares, or (4) anyone else authorized in the bylaws.

To have an irrevocable proxy, it must be a *"proxy coupled with an interest."* [Comes from agency law]. This requires (2)

(1) the proxy says it's irrevocable and (2) the proxy-holder has some interest in the shares other than voting.

How do shareholders vote? Shareholders generally get to vote on these things:

(1) to elect directors (2) to remove directors and (3) on fundamental corporate changes. They may also vote on other things if the board asks for a shareholder vote on those things. EX: amend bylaws.

CLASSIC DUTY OF LOYALTY FACT PATTERNS: 1. Self-dealing

(also known as *interested director transactions*). This is any deal between the corporation and one of its directors (or a close relative of a director) or another business of the director's.

CLASSIC PCV (pierce the corporate veil) FACT PATTERNS: *1. Alter ego (identity of interests)* X and Y are the only shareholders of Close Corporation. X commingles personal and corporate funds, uses the corporate car as his own, and uses the corporate credit card to pay for personal purchases. Close Corp fails to pay its bills. Can a creditor of the corporation who has been unable to collect its claim from the corporation collect from either X or Y?

*We start with general rule* (shareholders not liable for acts or debts of corporation). *Then give the PCV standard.* 1. They must have abused the privilege of incorporating and 2. Fairness must require holding them liable. *Here a court might PCV. Why?* 1) First, did a shareholder abuse the corporation? ---Yes, X treated corporate assets as his own 2) Second, would it be unfair for X to have limited liability? ---Arguably yes, because creditors are not being paid If the court does PCV, only X would be liable. Y, the other shareholder, did nothing wrong. Only X treated corporate assets as his own.

Can a for-profit corporation (which is what we are talking about) make contributions to charity?

---Yes

VI. FUNDAMENTAL CORPORATE CHANGES Types (5)

1) Amendments to articles, 2) mergers, 3) consolidations, 4) share exchanges, 5) dispositions of substantially all assets outside of the regular course of business

Who determines her eligibility for permissive indemnification (CATEGORY 3)? (3)

1) Disinterested directors, 2) disinterested shareholders, or 3) independent legal counsel.

If there is a board meeting, the *method for giving notice is set in the bylaws.* Two kinds of board meetings:

1) Regular meetings: is notice required? No 2) Special meetings: is notice required? Yes.

Proxies may be revoked by:

1) subsequent instrument, OR 2) by the shareholder of record showing up to vote in person.

FUNDAMENTAL CORPORATE CHANGES *MERGER: Short Form Merger of Subsidiary*

A parent company owning at least 90% of the outstanding shares of each class of a subsidiary corporation may merge the subsidiary into itself *without the approval of the shareholders or directors of the subsidiary*. the parent must mail a copy of the plan of merger to each shareholder of the subsidiary.

Promoter's right to reimbursement

A promoter who is held personally liable on a preincorporaiton contract may have a right to reimbursement from the corporation to the extent of any benefits received by the corporation.

"straight" voting (non-cumulative),

A separate election for each seat on the board being elected. Each outstanding share gets one vote for each seat. The candidate who gets more votes than another is elected to that seat. EX: A and B are the only shareholders. A owns 30 shares, B owns 40 shares. They go to a meeting to elect two directors. For Seat #1, A votes 30 for herself; B votes 40 for herself. B is elected. For seat #2, A votes 30 for herself; B votes 40 for her friend. B's friend is elected. A has no representation on the board with straight voting. [Cumulative voting tries to avoid this by having one at large election instead of voting for each seat separately]

DIRECTORS: Qualifications

Absent a provision otherwise in the articles or bylaws, the directors NEED NOT BE SHAREHOLDERS in the corporation or residents of any particular state.

Promoters relationship with each other

Absent an agreement to the contrary, promoters are joint venturers who have a fiduciary relationship with each other. They will breach their fiduciary duty if they secretly pursue personal gain at the expense of their fellow promoters.

What if directors agree to have the corporation take an act by having individual conversations, without a meeting or unanimous written agreement?

Act is void unless ratified by a valid act

Directors: Duty of Loyalty *COMPETING BUSINESSES*

Directors can engage in unrelated businesses, but engaging in a competing business probably violates duty of loyalty; creates conflict of interest

Distributions: "Share Dividends"

Distribution of a corporation's own shares (i.e. "share dividends" or "stock dividends") to its shareholders are excluded from the definition of a "distribution" Thus, most of the restrictions on distributions are inapplicable. However, shares of one class or series may not be issued as a share dividend in respect of shares of another class or series unless one of the following occurs: 1) the articles so authorize 2) a majority of the votes entitled to be cast by the class or series to be issued approves the issue 3) there are no outstanding shares of the class or series to be issued.

Distributions: Declaration Generally Solely Within Board's Discretion

Even if the articles authorize distributions, the decision whether or not to declare distributions generally is: 1) solely within the directors' discretion, 2) subject to solvency limitations (below) and 3) subject to any provisions to the contrary in a shareholder's agreement or the articles. The shareholders generally have NO general right to compel a distribution.

Remember, PCV allows imposition of liability on a shareholder. That shareholder might be another corporation.

Example: a parent corporation forms a subsidiary to avoid its own obligations. The court might PCV and hold the parent corporation liable just as it could if the shareholder were a human.

The issue is whether the sale of the preferential shares would be valid.

First, a corporation may not issue more stock than is authorized in its articles of incorporation. Second, a corporation may not issue shares that have a preference unless the articles of incorporation so provide.

Board of Directors Meeting - Quorum, Notice & Waiver At issue in this question are the notice and voting requirements for special directors' meetings.

For an action to constitute valid board action, it must be approved by a majority of a quorum at a properly convened meeting. A regular directors' meeting does not require notice, but a special directors' meeting requires at least two days' notice to be properly convened. The notice must state the time and place of the meeting. Unlike a notice for a special shareholders' meeting, a notice for a special directors' meeting need not state a purpose. The meeting may be held anywhere within or outside the state. A director may waive improper notice, either by signing a notice of waiver and filing it with the minutes of the meeting, or simply by attending the meeting and voting. Absent special provisions in the articles or bylaws, a quorum will consist of a majority of the directors. A director will be considered present at a meeting if the director attends in person or through a remote communications device that allows each participant to simultaneously hear the other participants.

The board of directors declares dividends totaling $400,000. We need to figure who gets what. Who receives dividends if the outstanding stock is: 1. 100,000 shares of common stock.

Four dollars per share. You just divide it out.

Authorized stock

Max number of shares the corporation may issue (it is set in the articles).

Can a shareholder quorum be lost if people leave the meeting?

No Different from the board quorum requirement.

If the shareholder plaintiff (S) loses the derivative suit: -- Can S still recover costs and attorneys' fees?

No Is S liable to the defendant he sued for that defendant's attorney's fees? ---Yes, if he sued without reasonable cause.

outstanding stock

Shares the company issued and has not reacquired. Shares outstanding refer to a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company's officers and insiders. Unless the question says otherwise, assume that each outstanding share gets one vote. BUT you must be the "record shareholder" of the outstanding stock as of the "record date" to vote. EX: Articles allow for 10,000 authorized shares. Corporation issues 7,000 shares. Then Corporation reacquires 1,000 of those shares. How many shares are outstanding? 6,000

Distributions: Restrictions in the Articles

The articles may restrict the board's right to declare dividends. EX: a creditor might insist that the corporation include in its articles a provision prohibiting payment of any distributions unless the corporation earns a certain amount of profits.

Let's say the corporation issues stock in exchange for property or past services. Who determines the value of the property or services?

The board. It is up to the board to put a value on the consideration. Is the board's valuation conclusive? ---Yes if made in good faith

If the shareholder plaintiff wins the derivative suit: Who gets the money from the judgment?

The corporation *What does the shareholder plaintiff recover?* ---Costs and attorney's fees, usually from the judgment won for the corporation. After all, she did a favor for the corporation by suing and winning.

*Trick question*: I own 10 shares of $3 par stock of X Corp. I sell it to you for less than $3 per share. Why is there no problem?

This is not an issuance All of these rules apply ONLY when there is an issuance. An issuance is when the CORPORATION is selling its OWN stock. Doesn't apply to others who sell the corporation's stock.

Derivative Actions: Court May Order Payment of Expenses

Upon termination of a derivative action, the court may order the corporation to pay the Plaintiff's reasonable expenses if it finds that the action has resulted in a substantial benefit to the corporation. If the court finds that the action was commenced or maintained without reasonable cause or for an improper purpose, it may order the plaintiff to pay reasonable expenses of the defendant.

V. OFFICERS Traditionally, corporations were required to have the following officers: (3)

a president, a secretary, and a treasurer. It can have others. *Today, can one person hold multiple offices simultaneously?* ---Yes

On the bar exam, if they give you par stock, watch for *watered stock*. -- C Corp. issues 10,000 shares of $3 par to X for $22,000. The corporation wants to recover the $8,000 of "water." Who is liable?

a. Are the Directors liable? ---Yes if they knowingly authorized the issuance b. Is X liable? (the guy who bought the stock)? ---Yes (There is no defense; he is charged with notice of the par value.) c. What if X transfers the stock to third-party (TP)? ---TP is not liable if she acted in good faith. That means: Did not know about the water

1. Only these changes trigger the *right of appraisal*: (4)

a. Merging or consolidating; b. Transferring substantially all assets; c. Stock being acquired in a share exchange; or d. Conversion to another form of business.

EXAM TIP: Interested director transaction probably are the most tested issues in Corporations. Remember, if a director will benefit from a transaction her corporation is about to enter into, the director MUST

disclose this information to the board (or to the shareholders). Disinterested directors (or the shareholders) must then approve the transaction. If there is no disclosure, the transaction can be set aside UNLESS it is fair to the corporation. Alternatively, the corporation can recover damages equal to the directors profit

If the quorum requirement is met, the shareholders vote. What vote is required? All Other matters:

majority of the shares that actually vote on the issue.

To determine your voting power when cumulative voting exists:

multiply the number of shares times number of directors to be elected. So if there are 2 directors to be elected, how many votes does each person have? -- A (who owns 30 shares) times 2 directors being elected = 60 votes -- B (who owns 40 shares) times 2 directors being elected = 80 votes Each allocates her votes however she wants. And the top two finishers are elected to the board. Here, A can get elected to the board. If she puts all 60 of her votes on herself, she is guaranteed to finish in the top two. B can put 80 votes on herself, but A will finish in the top two. So cumulating two seats' worth of votes in one election helped A get representation on the board and is thus helpful to the minority shareholder.

Merger

one corporation is absorbed into another

A person who purports to act on behalf of a corporation knowing there was no valid incorporation is

personally liable

If the quorum requirement is met, the shareholders vote. What vote is required? 1. To elect a director:

plurality (the person who gets more votes for that seat on the board than anyone else).

If the corporation fails to allow proper inspection,...

shareholder seeks a court order. If she wins, she can recover costs and attorney's fees incurred in making the motion.

Equity Securities (Stocks) AUTHORIZED SHARES

shares described in the corporation's articles of incorporation

The number of notes required for approval of a matter at a shareholders meeting can be set by either the bylaws or the AOI, but when the two conflict,

the AOI control.

Exception: promoter will NOT be liable on a preincorporation contract between the parties if...

the agreement expressly indicates that the promoter will not be bound. In such a case, the "contract" is considered to be an offer to the proposed corporation.

Shareholders may inspect the corporation's books and records if

they have a proper purpose for doing so. A proper purpose is one reasonably related to the shareholder's interest as a shareholder, which includes investigating director or management misconduct.

Shareholders are personally liable for an improper distribution only if...

they knew the distribution was improper when they received it.

If the quorum requirement is met, the shareholders vote. What vote is required? To remove a director,

traditionally needed majority of the shares entitled to vote. Increasingly, though, treat this the same as "other matters": (majority of the shares that actually vote on the issue.)

Consolidation

two corporations become a new corporation

Partnership

two or more co-owners carry on on a business for profit. Not treated as legal entities apart from their owners. Personally liable for all obligations, management rights generally are spread among the partners. Ownership interests cannot be transferred without the consent of the other partners. Doesn't continue beyond the lives of its owners. Profits/losses flow through directly to the partners unless the partners have elected to be taxed as a corporation

In what kinds of corporations can the court PCV (pierce the corporate veil)?

CLOSE CORPORATIONS ONLY Cannot happen in a big publicly traded corporations.

V. OFFICERS: Duties

Officers owe corporation duties similar to those owed by directors. ---Officers' duties are determined by the bylaws or by the board or an officer authorized by the board Officers have right to indemnification similar to directors

DIRECTORS: General Powers

Responsible for the management of the business and affairs of the corporation

Corporation's liability for preincorporation contracts

Since the corporate entity does not exist prior to incorporation, it is NOT BOUND on contracts entered into by the promoter in the corporate name prior to incorporation. the corporation may become bound by expressly or impliedly *adopting* the promoter's contract (or by novation)

V. PREEMPTIVE RIGHT

This is the right of an existing shareholder of common stock to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock for *money* (cash or its equivalent, like a check). Right to maintain your percentage; you will not be "diluted" if you exercise your preemptive right to buy stock when there is a new issuance of stock.

How can S revoke the proxy she gave to Pam? (2)

(1) In writing to the corporate secretary or (2) by attending the meeting and voting

Business Judgment Rule: The business judgment rule (BJR) is a doctrine that protects officers and directors from liability for their good faith efforts to run the corporation. A director's decision may not be challenged if a director (3)

(1) acted in good faith, (2) with the care that an ordinarily prudent person would exercise in a like position, and (3) in a matter reasonably believed to be in the best interest of the corporation.

Bylaws

A set of governing rules adopted by a corporation or other association. May contain any provision for managing the corporation that is not inconsistent with the articles or law.

*FACT PATTERN 4: SHAREHOLDERS* I. DO SHAREHOLDERS GET TO MANAGE THE CORPORATION?

A. The general answer is NO. Why? ---The board of directors manages BUT shareholders CAN run the corporation directly in a close corporation.

The issue is whether an individual granted power to vote for another's shares by a proxy must act in accordance with the agreement between the parties.

An individual who is granted the power to vote another's shares by a proxy must act in accordance with any agreement between the parties (if the shareholder directs the proxy holder to vote a certain way, then the proxy holder must do so). A shareholder may also grant a proxy holder the ability to vote shares as the proxy holder deems appropriate. A proxy is only valid for 11 months, unless the proxy provides otherwise.

VI. RIGHT TO INSPECT RIGHT OF SHAREHOLDER (PERSONALLY OR BY AGENT) TO INSPECT (AND COPY) THE BOOKS AND RECORDS OF THE CORPORATION A. Standing: who can demand access?

Any shareholder

VI. FUNDAMENTAL CORPORATE CHANGES *Dissenters' Appraisal Remedy* (AKA "dissenters' rights") *MARKET-OUT EXCEPTION*

Appraisal rights are NOT available to 1) the shareholders of publicly held corporations (i.e. corporations whose shares are listed on a national securities exchange or market, or national quotation system) or 2) of corporations with at least 2,000 shareholders and the share of the class or series involved have a value of at least $20M, (exclusive of the shares held by senior executives, directors, and shareholders owning more than 10% of the shares).

*Example of causation*. Suppose D was an antitrust expert and breached the duty of care by never attending meetings. In his absence the board approved a contract that violated the antitrust laws and subjected the corporation to liability. Would D be liable for this?

Arguably yes because: His breach harmed the corporation

Is a suit to compel the declaration of a distribution direct or derivative?

Direct, because the harm is to the shareholder and not the corporation

Corporate Finance - Dividends & Distributions to Shareholders The issue here is the right of a shareholder to a dividend.

As a general rule, a shareholder has no right to receive a dividend until it is declared by the board of directors. The decision whether to declare a dividend is left to the sound discretion of the board. If the directors decide in good faith not to declare a dividend, the courts will not disturb that decision. The shareholder seeking the dividend has the burden of proving bad faith.

Say there are 4,000 shares entitled to vote on a proposed amendment. 3,000 shares attend the meeting (so we have a quorum) and 2,400 shares actually vote on the proposed amendment. How many would have to vote yes for the amended articles to pass?

At least 2,001, which is a majority of the shares entitled to vote -- Again, this is changing. In many states, all you would need is a majority of those that actually voted. Since 2,400 voted, you would only need 1,201.

X Corp. has 12,000 shares outstanding. They have a meeting to decide whether to amend the bylaws. Say 8,000 shares are represented at the meeting (so we have a quorum), but only 6,000 shares actually vote on the proposal. How many shares must vote yes for this to pass?

At least 3,001, which is a majority of the shares that actually voted

Right to Distributions

At least one class of stock must have a right to receive the corporation's net assets on dissolution. Beyond this, there is generally No right to receive unless/until declared by board

Special meetings Unless the bylaws say otherwise, the corporation must give what kind of notice for a special meeting?

At least two days' notice of date, time, and place; need not state purpose

Corporate Finance - Authorized, Outstanding & Reacquired Shares The issue is whether a corporation can issue more shares than authorized in the Articles of Incorporation.

Authorized shares are the maximum number of shares a corporation may issue, as set forth in the Articles of Incorporation. A corporation is not allowed to issue more shares than authorized. To increase the number of shares allowed to be issued: (1) the Articles of Incorporation must be amended; (2) the changes must be adopted by the Board of Directors; AND (3) the changes must be approved by a majority vote of the shareholders.

DUTY OF LOYALTY. These cases are about conflict of interest. The BJR DOES NOT apply in duty of loyalty cases. Why?

Because it can never apply when the fiduciary has a conflict of interest. *So the burden in these cases is on defendant* --Any time you have a director that is tempted to put her own interests above the company, that is a duty of loyalty issue, and the BJR is irrelevant.

Shareholder Suits - Derivative Action

In a derivative action, the *shareholder is asserting the corporation's rights* rather than her own rights. Recovery in a derivative action generally goes to the corporation rather than to the shareholder bringing the action. Nevertheless, the corporation is named as a defendant.

Corporation vs. Sole Proprietorship

In a sole proprietorship, one person owns all of the assets of the business. There is no business entity distinct from the owner. The owner is personally liable for the business's obligations, and the business "entity" cannot continue beyond the life of the owner. Ownership is freely transferable, and all profits and losses from the business flow through directly to the owner.

Shareholder & Member Litigation - Federal Securities Law Rule 10b-5 prohibits the use of any means or instrumentality of interstate commerce in any scheme to defraud, make material misrepresentations or omissions, or in any other way to use fraud in the purchase or sale of securities.

In order for a plaintiff to prevail under a Rule 10b-5 claim, he must show that: (1) the defendant engaged in a fraudulent scheme or device; (2) which was relied upon; (3) in connection with the purchase or sale of a security; (4) acted with scienter (actual knowledge or recklessness); (5) used some means of interstate commerce; AND (6) caused damages. Non-trading defendants may also be held liable if fraud (based on misleading information) can be proven.

B. ELECTION of DIRECTORS

Initial directors may be named in the articles. If not, they are elected by the incorporator(s) at the organizational meeting. After that, who elects directors? ----Shareholders

What's a liquidation preference?

It means "pay first," so it works like a dividend preference. Where would this preference be listed? --->IN THE ARTICLES: Articles may set out dividend preference OR liquidation preference, if any

Directors: Removal

May be removed by the shareholders for cause OR without cause. However, a director elected by cumulative voting cannot be removed if the votes cast against removal would be sufficient to elect her if cumulatively voted at an election of directors. Similarly, a director elected by a voting group of shares can be removed only by that class.

Will Court Disregard Corporate Entity (Pierce the Corporate Veil)? *Inadequate capitalization at inception*

Must start corporation with sufficient unencumbered capital to meet its prospective liabilities The corporate veil may be pierced where the corporation is inadequately capitalized, so that AT THE TIME OF FORMATION there is not enough unencumbered capital to reasonably cover prospective liabilities.

Can directors give proxies or enter voting agreements for how they will vote as directors?

NO! Such efforts are void. Why? ---Directors owe the corporation non-delegable fiduciary duties, thus they cannot tie themselves down by proxy voting or voting agreements. This is different from shareholders, who CAN vote by proxy and enter into voting agreements. See below.

Voting: Notice of meetings must be given to shareholders

NOT LESS THAN 10 OR MORE THAN 60 DAYS BEFORE THE MEETING. Notices must contain: *Annual meeting*—date, time, location *Special meeting*—date, time, location, *and purpose* *Improper notice?* ---Action taken at the meeting can be nullified ---*Can be waived* in writing or by attending without complaint

If the articles are silent, do we have pre-emptive rights?

No

Must incorporators be a citizen of the state of incorporation?

No

Shareholders - Right to Inspect Books & Records The issue here is whether a shareholder has a right to inspect a corporation's books and records to determine whether a proffered buy‑out offer is at a fair price.

Shareholders generally have a right to inspect their corporation's books and records for a proper purpose—i.e., a purpose related to their status as shareholders. To exercise his right, a shareholder will have to give a corporation five days' written notice stating the reason why he wants to inspect the records. It should be noted that a shareholder need not come alone; he may bring an attorney, accountant, or other agent with him to facilitate the inspection.

Shareholders - Voting Agreements The issue is whether shareholder voting agreements are enforceable.

Shareholders may sign an agreement providing how they will vote their shares. A voting agreement is specifically enforceable, and a claim for breach of contract may be brought to enforce this right.

IV. CONSIDERATION—What must the corporation receive when it issues stock? What kind and amount of consideration? A. FORM OF CONSIDERATION.

Stock (or an option to buy stock) may be issued for "any tangible or intangible property or benefit to the corporation." This includes money (cash or check), property, services already performed for the corporation, and discharge of a debt. Does it also include: Promissory notes to the corporation? ---Yes Future services to the corporation? ---Yes Can X Corp. give employees options to buy stock as payment for services? ---Yes

Reacquired stock

Stock previously issued and has been reacquired by the corporation, and which the corporation can resell. Sale is treated as a no par sale. stock that has been bought back by the issuing corporation and is available for retirement or resale; it is issued but not outstanding; it cannot vote and pays no dividends

III. CONSEQUENCES OF FORMING A CORPORATION A. INTERNAL AFFAIRS RULE.

Suppose we form a corporation in State X but the company only does business in State Y. What law governs the internal affairs of the corporation (e.g., roles and duties of directors, officers, and shareholders)? State X - internal affairs are governed by the state of incorporation.

Officers - Authority of Officers The issue is the authority of a corporate president to enter into a particular transaction.

The Board of Directors may elect individuals as Officers (i.e. President, Vice-President, Secretary) to manage the day-to-day business of the corporation. An officer has actual authority to act consistently with their duties: (a) as outlined in the Bylaws; OR (b) as provided by the Board of Directors. An officer has apparent authority to bind the corporation when: (1) a third-party reasonably believes the person/entity has authority to act on behalf of the corporation; AND (2) that belief is traceable to the corporation's manifestations (the corp. holds the officer out as having authority). The President of a corporation generally has implied authority to bind the corporation for matters within its ordinary course of business, BUT DOES NOT have authority to bind the corporation for extraordinary acts. An act or transaction is within the ordinary course of business if it's normal and necessary for managing the business - a person would reasonably conclude the act is directly and necessarily embraced within the corporation's business. Prosecuting a lawsuit in the name of the corporation is normally within the ordinary course of business. The Secretary of the corporation normally has the authority to maintain and authenticate the records of the corporation.

When Does Corporate Existence Begin?

The article must be submitted to the SOS, and if they comply with the law, the state will file them. The corporate existence begins when the articles are filed by state. the filing is conclusive proof of the corporate existence.

For any distribution (dividend, repurchase, redemption), which funds can be used? How do we know it is a lawful distribution?

The modern view does not look at funds. Modern view: a corporation cannot make a distribution if it is insolvent or if the distribution would render it insolvent.

FUNDAMENTAL CORPORATE CHANGES *Conversion*

The procedure for effecting a conservation generally is the same as the procedure for approving a merger in which the converting corporation is not the survivor.

IV. DEFECTIVE INCORPORATION WE WRONGLY THOUGHT THERE WAS A CORPORATION - Problem: no limited liability

The proprietors thought they formed a corporation, but they failed to do so. *That means they are personally liable for business debts (because they have formed a partnership and partners are liable for business debts).* *Two doctrines allow the proprietors to escape liability:* (A) de facto corporation (B) corporation by estoppel *Anyone asserting either doctrine must be unaware of failure to form de jure corporation.* ---these are equitable doctrines, thus you must in good faith be unaware that you didn't successfully form a corporation

Issued stock

is the number of shares the corporation has actually sold.

A large corporation sold and managed homeowners' insurance policies. The corporation was considering eliminating its product lines in all coastal markets after hurricanes caused flooding and extensive losses in those areas. The corporation's officers and directors believed that the corporation should completely withdraw from coastal markets because these areas were unprofitable and created potentially massive liability exposure. Several key employees lived in coastal areas and had homeowners' insurance policies with the corporation. These key employees and the corporation's shareholders disagreed with the officers and directors and thought that the corporation should keep serving the coastal markets. Who holds the ultimate authority to decide whether the corporation should eliminate its product lines in coastal markets?

The directors. The board of directors properly holds the ultimate authority to decide whether to pull out of coastal markets. Power is allocated between the various corporate actors in a corporation, with the power to manage the corporation given to the board of directors. The board is charged with making major, policy-level decisions related to the financial and business dealings of the corporation. Therefore, a major business decision, like moving out of coastal markets altogether, belongs to the board. The shareholders generally do not hold the authority to manage the business directly. Shareholders own a proportionate share of the corporation, but they generally do not directly manage the business. Instead, shareholders have indirect authority to manage the corporation through the election and removal of directors. In addition, the shareholders may also have the power to approve or deny important corporate changes like mergers or dissolution. Although the shareholders in close corporations may elect to do away with the board of directors and manage the business themselves, this corporation had a board of directors. This means, even if this was a closely held corporation, the shareholders had not elected to manage it themselves. If the corporation has a board of directors, the board will be the entity with the ultimate authority to make major business decisions, regardless of whether the corporation is closely held or not. Although officers may manage the day-to-day affairs of the business, major policy decisions are left to the board.

Why Purchase Back Shares?

The reason corporations sell stock to the public is to raise money. Corporations sell stock for the first time to the public via an initial public offering (IPO). Once this has been done, the stocks then trade on the secondary market as they are continuously bought and sold via the public. The corporation does not receive any cash from sales in the secondary market. The amount of shares trading in the secondary market is always a concern for a corporation. This is so because the amount affects the earnings per share (EPS). EPS is an indicator of a company's profitability. Reducing the amount of outstanding stock on the secondary market increases the EPS and therefore the corporation appears more profitable. The number of outstanding shares can also affect the stock price. A reduction in shares would lead to an increase in the share price due to the smaller supply now available. Another reason to purchase shares is to regain majority shareholder status, which is obtained by owning more than 50% of the outstanding shares. A majority shareholder can dominate voting and exercise heavy influence over the direction of the company.

Shareholders - Meetings: Election of Directors The main issue here is the vote required to elect directors.

Unless the articles or bylaws provide otherwise, directors are elected by a *plurality* of the votes cast; that is, the directors receiving the most votes win, even if they do not receive a majority. If the Articles of Incorporation provide for cumulative voting, each shareholder has a number of votes that is equal to the shares owned, multiplied by the number of director spots open for election (i.e. 100 shares owned x 3 nominees = 300 votes). A shareholder may cast all his votes for one director nominee rather than being limited to a maximum number of votes for each nominee.

IV. DIRECTORS: Delegation of authority to executive committees—

Unless the articles or bylaws provide otherwise, the board may create one or more committees, with two or more members, and appoint members of the board of directors to serve on them. ---may exercise authority given to them by board the committees may act for the board, but the board remains responsible for supervision of the committees. The board may also delegate authority to officers. *Exceptions*: In most states committees may not declare distributions, fill board vacancies, or amend the bylaws

Director Elections

Unless the articles provide otherwise, directors are elected by a *plurality* of the votes cast (most votes wins, not necessarily a majority) *Alternative Option: Cumulative voting for directors* (A) MBCA allows articles to provide for cumulative voting (B) Cumulative voting is automatic in some states (C) Mechanics—at large election where shareholder can vote shares owned x number of directors being elected; can cast all votes for one candidate or split

In some states, if there is a staggered board, shareholders can remove a director only:

With cause Outside of this, share holders can fire directors with or without cause.

V. STOCK TRANSFER RESTRICTIONS One great thing about corporations is transferability of the ownership interest. A shareholder can sell or give her stock away. Sometimes people want to restrict transferability, especially in a close corporation (to keep outsiders out). Can they?

YES. A) Stock transfer restrictions are OK if they are reasonable. What does that mean? ---Not an undue restraint on alienation, RFR (right of first refusal) is valid. Not saying she can't transfer stock, just that she has to offer it to corporation first. That is not an undue restraint. B) If the restriction is valid, can it be enforced against the transferee (X)? ---Yes, if the restriction is (i) the restriction is conspicuously noted on the stock certificate OR (ii) the transferee had actual knowledge of the restriction.

Once the corporation qualifies and pays back fees and fines, can it then assert a claim here?

Yes

EXAM TIP: Exam often asks about the formalities of directors' meetings by setting up facts where there is *no meeting* That is, the facts tell you that a director has entered into an extraordinary contract with another entity on the corporation's behalf, either on his own accord or with the approval of some of the directors, or with the approval of all of the directors, who were called individually. THIS IS IMPROPER.

You must recognize that a director does NOT have the power to bind the corporation in contract unless there is actual authority to act. Actual authority generally can arise only if: (1) proper notice was given for a directors' MEETING, a QUORUM was present, AND a MAJORITY of the directors approved the action, OR (2) there was unanimous WRITTEN consent of the directors.

Or debt obligations may be unsecured:

a debenture

DIRECTORS: Liabilities Waste—

a director has a duty to prevent corporate waste

Quorum for meetings of the board — for any meeting of the board, we must have a quorum. Unless bylaws say otherwise, a quorum is

a majority of all directors. Without a quorum, the board cannot act.

A board of directors can dismiss a shareholder's derivative suit if

a majority of disinterested directors fulfill their fiduciary duty and find in good faith and after reasonable inquiry that the suit was not in the corporation's best interest. Examples of good business reasons for dismissing the lawsuit include that there is no likelihood of prevailing, or the damage to the corporation from litigation would outweigh any possible recovery.

Generally, bylaws are adopted by directors, but they may be modified or repealed by ...

a majority vote of either the directors or the shareholders.

Subscription agreements (AKA "stock subscriptions")

agreements to purchase shares from corporation *Preincorporation subscription agreements are irrevocable for six months* ---unless otherwise provided in the terms of the subscription agreement OR unless all subscribers consent to revocation *Payment* Unless otherwise provided, payment is upon demand by the board. Demand may not be made in a discriminatory manner. A subscriber who fails to pay may be penalized by sale of the shares or forfeiture of the subscription and any amounts paid thereon, at the corporation's option.

After the derivative suit is filed, the corporation may move to dismiss. This is based upon ...

an independent investigation that concluded that suit is not in the corporation's best interest (e.g., low chance of success or expense of the case would exceed recovery the corporation would win). *Who must make this investigation?* ---Independent directors OR court appointed panel of one or more independent persons ---(Usually it's a "special litigation committee" of independent directors.)

Distributions are in the _____'s discretion.

board's

Debt obligations may be secured, known as a:

bond

Divdends

distributions of money, sock, or other property that a corporation sometimes pays to stockholders A dividend is usually a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a proportion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-invested in the business.

A staggered board is

divided into half or thirds, with one-half or one-third elected each year. Staggered board is usually set in the articles. Say there are 9 directors. Instead of electing all 9 each year we could divide the board into 3 classes of 3 directors each; they would serve 3-year terms.

The entire board is elected _____ unless ......

each year there is a "staggered" (or "classified") board

Will Court Disregard Corporate Entity (Pierce the Corporate Veil)? *If court pierces, who is liable?*:

Generally only active shareholders liable (joint and several) Generally liable only for tort obligations, but not contract cases since parties who contracted with the corporation had an opportunity to investigate its stability. ---Where the corporation is insolvent, claims of shareholder-creditors may be subordinated to outside creditors' claims if equity requires (e.g. because of fraud)

SHAREHOLDERS Voting

Generally shareholders do not run corporation on a day-to-day basis. Instead, management is vested in the directors. Shareholders indirectly control corporation by electing directors, amending bylaws, and approving fundamental changes *Exception:* Closely held corporation may dispense with board by shareholders' agreement and run corporation through a different scheme

Corporate Finance - Common & Preferred Shares The issue is what voting rights a Common Share and Preferred Share provides a shareholder.

Generally, Common Shares provide shareholders with voting rights, although they are the last in priority to be entitled to a distribution of company assets. Shareholders with Preferred Shares are generally entitled to be paid out from company assets upon dissolution before shareholders with common shares. However, Preferred Shares usually do not carry voting rights. In order for the corporation to issue Preferred Shares, the same must be described in the Articles of Incorporation. A class of shares with preferential dividend rights is entitled to receive dividends or distributions before other classes.

Close Corporations & Control Devices - Restrictions on Share Transfers At issue is whether a corporation can prohibit the transfer of shares absent unanimous shareholder approval.

Generally, a corporation can restrict the transfer of shares for any reasonable purpose. The RMBCA includes examples of permissible restrictions. For example, a restriction can require a shareholder to offer the shares to the corporation first or require the corporation or other persons to purchase offered shares. A prohibition on transfer to a designated person or class of persons is also permissible as long as the prohibition is not manifestly unreasonable.

Fundamental Corporate Changes - Mergers and Share Exchanges At issue is whether a parent company that owns 95% of a subsidiary corporation's stock can merge the subsidiary into itself without approval of the subsidiary's board of directors or shareholders.

Generally, a merger is treated as a fundamental corporate change. Ordinarily to execute a fundamental corporate change, it must be approved by a majority of the board of directors, the shareholders must be given notice of the proposed change and must approve it, and the change must be formalized in articles filed with the state. However, there are exceptions to these general rules. A parent corporation owning 90% or more of the outstanding shares of each class of a subsidiary corporation can merge the subsidiary into itself without the approval of the shareholders or directors of the subsidiary. Approval from the shareholders of the corporation surviving a merger is not required if the merger will not result in a significant change in the surviving corporation (e.g., the articles of incorporation will not differ significantly after the merger; the shareholders of the surviving corporation will hold the same number of shares as they held before the merger with the same rights, limitations, and preferences; and the number of voting shares issued as part of the merger do not exceed more than 20% of the voting power of the shares that were outstanding immediately before the merger).

a. Annual meeting.

If no annual meeting is held within 15 months, a shareholder can petition the court to order one. Annual meeting is required What do shareholders do at the annual meeting? ---Elect directors

I. TO FORM A CORPORATION, WE NEED A PERSON, PAPER, AND AN ACT B. PAPER: ARTICLES OF INCORPORATION. 1. Required contents:

*a. Name of the corporation*. Can I form a corporation with the name Bubba's Burritos? ---No. It must include one of these "magic words" (or an abbreviation): Corporation, company, incorporated, or limited *b. Name and address of each incorporator.* *c. Registered agent and street address of the registered office (in the state of incorporation).* ---Registered agent is the company's legal representative, so she can receive service of process for the corporation. *d. Information regarding stock.* *(1) Authorized stock*: Maximum number of shares the corporation can sell *(2) If the company will have different classes of stock*, many states require that the articles state the number of shares per class and the voting rights and preferences of each class of stock. Other things may be put in the articles but are not required. ---For example, the initial directors may be named in the articles (with their addresses).

Exceptions to the general rule that record owner on record date votes.

*a. The corporation re-acquires stock before the record date, so it is the owner of this "treasury stock" as of the record date*. Does it vote this stock? ---No one votes it, because it was outstanding on the record date *b. Death of shareholder.* EX: S owns stock in C Corp.; S is the record shareholder. After the record date, S dies. Can S's executor vote the shares? ---Yes *c. Voting by proxy*.

III. SHAREHOLDER AS PLAINTIFF: DERIVATIVE SUITS A. In a derivative suit, a shareholder is suing to

*enforce the corporation's claim, NOT her own personal claim*. It's a case in which the corporation is not pursuing its own claim, so a shareholder steps in to prosecute it for the corporation. Always ask: Could the corporation have brought this suit? ---->If so, it is a derivative suit.

V. PRE-INCORPORATION CONTRACTS (we knew there was NOT a corporation yet) A *promoter* is a person

acting on behalf of a corporation not yet formed. She might enter a contract on behalf of a corporation not yet formed. An incorporator is the one who signs the Articles of Incorporation. An incorporator may or may not be a promoter.

FUNDAMENTAL CORPORATION CHANGES *3. TRANSFER OF ALL OR SUBSTANTIALLY ALL OF THE ASSETS* NOT IN THE ORDINARY COURSE OF BUSINESS, OR *4. A "SHARE EXCHANGE"* (one company acquires all the stock of another) Treat these two essentially the same because functionally it is one company gobbling up all the assets or stock of another. What constitutes "substantially all of the assets" varies from state to state. A rule of thumb is that it requires transfer of at least ...

...75 percent of the assets. *Most important point - these are fundamental corporate changes for which corporation?* ---For the selling corporation only - not for the buyer.

Where do shareholders vote?

1. Shareholders usually take action at a meeting OR 2. Instead, they can act by unanimous written consent signed by holders of all voting shares (e-mail is OK).

A. DE FACTO CORPORATION ("DFC"). REQUIREMENTS: (3)

1. There is a relevant incorporation statute (there is in every state!). 2. The parties made a good faith, colorable attempt to comply with the incorporation statute. And 3. There has been some exercise of corporate privileges (they are acting as though they thought it was a corporation). -- If this doctrine applies, the business is treated as a corporation for all purposes (thus, limited liability applies!) ---EXCEPTION in an action by the state against the corporation. (Such an action would be quo warranto).

To PCV and hold shareholders personally liable, must show (2)

1. They must have abused the privilege of incorporating and 2. Fairness must require holding them liable. So courts may PCV to avoid fraud or unfairness by shareholders in a close corporation. Sloppy administration is NOT enough for PCV.

Shareholders - Meetings: Annual Meetings The issue is when a corporation holds an annual meeting.

A corporation shall hold an annual meeting of the shareholders at a date/time stated in the bylaws. Generally, the directors are elected at the annual meeting.

Dissolution & Dissociation - Voluntary Dissolution of a Corporation The issue is how a board of directors can voluntarily dissolve a corporation.

A corporation's Board of Directors may propose dissolution to the shareholders. The following procedure MUST be followed by the corporation for the proposal to be adopted: (1) adoption by the Board of Directors; (2) notice to each shareholder (whether or not entitled to vote) of a meeting to vote on the proposal - the notice must state the purpose of the meeting; AND (3) adoption by the shareholders by a majority vote (unless a greater amount is required in the Articles of Incorporation or state law).

At issue here is whether a director who derives an improper benefit from a transaction with his corporation may shield himself from personal liability under an exculpatory provision in the corporation's articles, releasing the director from liability.

A corporation's articles of incorporation may limit or eliminate directors' personal liability for money damages to the shareholders or corporation for actions taken, except to the extent that (1) the director received a benefit to which he was not entitled, (2) intentionally inflicted harm on the corporation or its shareholders, (3) approved unlawful distributions, or (4) intentionally committed a crime.

Formation of Corporation - Articles of Incorporation The issue is when a corporation's existence begins.

A corporation's existence begins on the date the Articles of Incorporation are filed with the Secretary of State, UNLESS a delayed effective date is specified. A corporation cannot request an earlier effective date to be specified because a corporation CANNOT exist until the Articles of Incorporation are properly filed.

VII. DISSOLUTION AND LIQUIDATION COURT SUPERVISION OF VOLUNTARY DISSOLUTION

A court may dissolve a corporation in an action by the corporation to have its voluntary dissolution continued under court supervision.

Derivative Actions: Discontinuance or Settlement Requires Court Approval

A derivative proceeding may be discontinued (voluntarily terminated by the plaintiff) or settled only with court approval

Shareholder Suits - Direct Action

A direct action may be brought for a *breach of a fiduciary duty owed to the shareholder by a officer or director*. To distinguish breaches of duty owed to the corporation and duties owed to the shareholder, ask: 1) who suffers the most immediate and direct damage, the corporation or the shareholder; and 2) to whom did the defendant's duty run, the corporation or the shareholder. In a shareholder direct action, any recovery is for the benefit of the individual shareholder.

DIRECTORS: Common law insider trading—Special Circumstances Rule

A director has no common law duty to disclose all facts relevant to a securities transaction between the director and the other party to the transaction. However, courts have found a duty to disclose where a director knows of special circumstances (EX: an upcoming extraordinary dividend or planned merger)

But exactly which directors are liable?

A director is presumed to concur with board action unless her dissent or abstention is noted in writing in corporate records. ---Harsh. So whatever the board did, you are presumed to have gone along with it unless you dissent in writing in the corporate records.

IV. DIRECTORS: Liabilities Corporate opportunity doctrine

A director may not divert to himself a business opportunity within the corporation's line of business without first giving the corporation an opportunity to act (a.k.a. usurpation) Remedy—corporation may recover director's profits or force director to convey the opportunity to the corporation

S sues to force the company to declare dividends. Derivative?

No, another direct suit because the corporation is not hurt.

Trick question: ten percent of the outstanding shares want to call a special shareholder meeting to remove an officer. Is that OK?

No, because shareholders do not remove officers Remember, the Board hires and fires officers. However, the special meeting could be to fire a board member, that's okay.

Do we expect successor liability in the sale of substantially all assets?

No, because the selling corporation still exists. So creditors can sue it. So the company that buys assets is not liable for the debts of the company that sold the assets. There is an exception if the buyer is a "mere continuation" of the seller - has the same management, shareholders, etc. Also there will be successor liability if a court concludes that the deal was really a *disguised (de facto) merger.* *GENERAL RULE: TRANSFER OF ASSETS IS NOT GOING TO GIVE LIABILITY TO THE BUYER*

A. Revocation of pre-incorporation subscriptions. On January 10, S signs a subscription, offering to buy 100 shares of C Corp., a corporation not yet formed. A week later, S changes his mind. Can S revoke?

No, irrevocable for six months (Unless it says otherwise or all subscribers agree to let you revoke.)

On February 2, 2018, S sent a letter to secretary of C Corp. authorizing Pam to vote her shares. Can Pam vote S's shares at the 2019 annual meeting in July 2019?

No, it is good for 11 months unless it says otherwise

A gives B an option to buy A's stock. A gives B an "irrevocable proxy" to vote that stock at a meeting. Can A revoke this proxy?

No, it says irrevocable and it is coupled with an interest -- Here, the proxyholder has an interest in the stock other than simply voting because she has an option to buy the shares. It can be any interest beyond the simple interest in voting the shares.

Stockholder pledges her stock to Lender as collateral for a loan. The stock certificate says nothing about the RFR (right of first refusal) and Lender knows nothing about it. After Stockholder defaults on the loan and Lender gets the stock, can the stock transfer restriction be enforced against Lender?

No, not noted on stock certificate and Lender has no knowledge

Do shareholders hire and fire officers?

No, the board of directors hires and fires officers.

By the way, must directors go through this procedure to get access to corporate books and records?

No, they have unfettered access

S sues board of directors of C Corp. for issuing new stock without honoring her preemptive rights. Is this a derivative suit?

No, this is a direct suit. Why? This is her own personal claim since the SHAREHOLDER is hurt, NOT the corporation's claim.

S sues another shareholder for oppression in a close corporation. Derivative?

No, this is also a direct suit. Yes, breach of FD, but it is a FD owed to the SHAREHOLDER, not the corporation.

If the articles are silent about cumulative voting, does it exist?

No.

SUPPOSE THERE'S A VACANCY ON THE BOARD (E.G., A DIRECTOR RESIGNS BEFORE HER TERM IS UP). WHO SELECTS THE PERSON WHO WILL SERVE AS DIRECTOR FOR THE REST OF THE TERM?

Board or shareholders -- But if the shareholders created the vacancy by removing a director, the shareholders generally must select the replacement.

FUNDAMENTAL CORPORATION CHANGES 5. CONVERSION.

Business converts to another form (e.g., corporation converts to LLC). REQUIREMENTS: 1) Board approval 2) notice to shareholders, 3) shareholder approval, 4) deliver document to Secretary of State, Dissenting shareholders' right of appraisal DO ATTACH, assuming it's a close corporation.

II. OTHER STEPS TO ORGANIZE THE CORPORATION B. BYLAWS.

Bylaws are an internal document. They comprise an operating manual, with things like setting record dates and methods of giving notice, etc. 1. Are bylaws filed with the state? ---No 2. If bylaws and articles conflict, which governs? ---Articles 3. Who can amend or repeal the bylaws or adopt new ones? ---Board OR shareholders (unless the AOIs reserve the power to the shareholders, or unless shareholder-amended bylaw expressly prevents the board from further amended or repealing the bylaw)

Formation General Info

Corporations are created by complying with the state corporate law, which in a majority of states is based on the Model Business Corporation Act (MBCA) *De jure* - corporation formed in accordance with law.

Indemnification of Directors, Officers, and Employees (D/O/E) *LIABILITY INSURANCE*

Corporations may purchase liability insurance* to cover directors even if they would not be entitled to indemnification under the circumstances

FUNDAMENTAL CORPORATION CHANGES 6. DISSOLUTION. *INVOLUNTARY (by court order)* *1. A SHAREHOLDER can petition because of*:

a. Director abuse, waste of assets, misconduct; -----> shows up OFTEN on exam due to breach of FDs. b. Director deadlock that harms the corporation; or c. Shareholders fail at consecutive annual meetings to fill a board vacancy. -- As an alternative to ordering involuntary dissolution, court might order buy-out of the objecting shareholder. When might this be especially likely? ---Close corporations

Shareholder management agreement (SMA). This sets up alternative management for the close corporation. 1. There are two ways to do this:

a. In the articles and approved by all shareholders OR b. By unanimous written shareholder agreement. Either way, the agreement should be conspicuously noted on the front and back of the stock certificates. (Failure to do so, though, does not affect validity.) If the shareholders do this and set up management by shareholders or by a manager, who owes the duties of care and loyalty to the corporation? ---Whoever manages

DIRECTORS: *Action by unanimous written consent* -

any action required to be taken by the directors at a formal meeting may be taken by UNANIMOUS CONSENT, in writing, without a meeting.

The group in charge of management is the

board of directors

Who may pierce the corporate veil?

creditors; courts almost never pierce at the request of a shareholder.

Shareholders hire and fire

directors

Directors are ______ liable for improper distributions.

jointly and severally EXCEPTION: Remember the directors' good faith reliance defense. ---You can rely in good faith on what the financial people told you.

Place of shareholder meetings:

may be held within or outside the state.

The board of directors has fiduciary duties of care and loyalty to the corporation. To meet the duty of care, the board members must

meet the standard of the business judgment rule, which includes carrying out one's duties in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner that the directors reasonably believe to be in the best interests of the corporation.

MERGERS, SHARE EXCHANGE, AND CONVERSION vary a little from the basic fundamental change procedure in that ...

not all shareholders have a right to approve these procedures under certain circumstances.

A conversion involves

one business entity changing its form to another business entity, such as a corporation converting into an LLC.

What is a share exchange?

one company acquires all the stock of another

A share exchange involves

one corporation purchasing all of the outstanding shares of one or more classes or series of another corporation. In a share exchange, the acquiring corporation exchanges its own stock (as opposed to cash or other property) for all of the remaining stock, in each class, of the target corporation. To effect a share exchange, the boards of both companies must adopt a "plan of exchange," which will ultimately be filed with the state, and then shareholders of the target corporation are allowed to vote. EXAMPLE: Acquire Co. has recently been the beneficiary of a great deal of public comment about their operations. The firm has been cited as having strong management, well-tuned operations, and excellent potential. All of these facts have led to an increase in the company's stock. Given this exceedingly high value, Acquire has recently gone on a buying spree - snapping up a large number of smaller firms that complement their main business line. In these deals, Acquire has been using its shares, rather than cash, to execute the transactions. Acquire's board has chosen this as a method because raising a sufficient cash supply to complete their acquisitions would be both costly and difficult and it would expose the company to a debt load that would be difficult to handle, given its current operations.

A "benefit corporation" (B Corp.) is

one formed for profit and also to pursue some benefit to a broader social-policy cause. Things work as with a regular corporation, but the articles must say it's a "benefit corporation." Files an annual benefit report assessing how it pursued its stated social mission. Decision-makers consider not just impact of decisions on shareholders, but on the broader community or environment.

If a quorum is present at a meeting, passing a resolution (which is how the board takes an act at a meeting) requires ______ vote of those present.

only a majority

Quorum of the board can be lost ("broken") if

people leave. Once a quorum is no longer present, Board cannot take an act at that meeting. The rule on this is also different for shareholder voting. See below.

Promoters generally liable for

preincorporation contracts Liability continues even after corporation formed absent a novation Corporation does not become liable unless it adopts the preincorporation contracts

Dissolution is not the end of the corporation. It is the beginning of a

process that will end the corporate existence. The corporation continues to exist, so it can sue and be sued. It cannot start new business but must wind up (liquidate).

Pre-Formation Contract Liability - Defective Incorporation & Owner Liability The issue is whether a shareholder is liable when the corporation was defectively incorporated.

Entity status is determined when the contract in question was executed. When two or more people attempt but fail to form a for-profit corporation, a partnership is formed because a partnership arises when there is an association of two or more people to operate as co-owners a business for profit. Partners are personally liable for the debts of a partnership. However, two common law exceptions to this general rule: the de facto corporation doctrine and the corporation by estoppel doctrine. An improperly formed corporation will be treated as a properly formed corporation under the de facto doctrine if there is colorable compliance with the law, or a good faith attempt to comply with the law, and the corporation acts like a corporation. In other words, it must adhere to corporate formalities and not serve as merely an alter ego of the shareholders. Alternatively, under the corporation by estoppel doctrine, a court will estop those who treat an entity like a corporation from later claiming that the entity was not a corporation. However, the Model Business Corporation Act ("MBCA") provides that persons who purport to act as or on behalf of a corporation knowing that there was no incorporation are personally liable for obligations incurred while so acting.

WHAT DOES AN INCORPORATOR DO?

Execute articles and deliver to Secretary of State

ESSAY CHARTS

FROM HERE

VI. FOREIGN CORPORATIONS

Foreign corporations (out-of-state corporations) transacting business in this state must qualify and pay prescribed fees. *Transacting business* means the regular course of intrastate (not interstate) business activity. ---So, it doesn't include occasional or sporadic activity in this state, and not simply owning property here. The foreign corporation qualifies by getting a *certificate of authority* from the Secretary of State. ---It gives information from its articles and proves good standing in its home state. The foreign corporation *must also appoint a registered agent and maintain a registered office in this state*.

Voting Quorum

Generally a majority of the outstanding voting shares must be present for valid vote, unless the articles require a greater number. Once quorum reached, shareholder leaving does not invalidate voting (i.e. it doesn't "break the quorum")

VI. FUNDAMENTAL CORPORATE CHANGES Merger of Corporations

Generally must be approved by directors and shareholders of both corporations Exceptions: Parent-subsidiary merger or when rights of survivor's shareholders not significantly affected

PROMOTERS

procure capital and other commitments. Before a corporation is formed, promoters procure commitments for capital and other instrumentalities that will be used by the corporation after its formation. An incorporator is the one who signs the Articles of Incorporation. An incorporator may or may not be a promoter.

A promoter is a person who

procures commitments for capital and instrumentalities on behalf of a corporation that will be formed in the future An incorporator is the one who signs the Articles of Incorporation. An incorporator may or may not be a promoter.

After paying creditors, there is $10,000 left for shareholders. If there were a class of 1,000 shares with a $2 liquidation preference,....?

the first $2,000 would go to those shares, with the remaining $8,000 going to the common shares. Remember, liquidation preferences may be relevant to insolvency, which we saw above.

Members of the board of directors are elected by

the shareholders The shareholders generally do NOT manage the corporation

EXAM TIP: If the examiners question you about the power of the shareholders to run the day-to-day affairs of their corporation, unless the corporation's articles or a shareholder agreement provides otherwise, you should generally respond that...

the shareholders have no such power; that power is vested in the board of directors, and the shareholders have the power to elect the board.

While the concept of par value is mostly dead under the MBCA, a corporation's articles can still specify a par value for stock. In which case, if the directors authorize a sale of stock for less than the stated par value,....

the shares will probably be treated as validly issued, but the directors who authorized the issuance can be held liable for breach of fiduciary duty.

A regular directors' meeting does not require notice, but a special directors' meeting requires at least _____ days' notice to be properly convened.

two The notice must state the time and place of the meeting.

In a close corporation, we can set up management with a board of directors and run it like a regular corporation. Or ...

we can set up management differently - eliminate the board and have shareholders run the business or appoint a manager, etc. through a shareholder management agreement (SMA)

Consequence of failure to give proper notice to all shareholders—

whatever action was taken at the meeting is voidable (maybe void), unless those not sent notice waive the notice defect.

SUBSCRIPTIONS

written offers to buy stock from corporation Issue is often whether corporation can revoke these subscriptions.

Licensed professionals, including lawyers, medical professionals, and CPAs, may incorporate as a ... (2)

"professional corporation" or "professional association." The name must have one of those phrases OR "P.C." or "P.A." The articles must state that the purpose is to practice in a particular profession.

II. ORGANIZATION AND FORMATION OF CORPORATION A. Has the Incorporator Filed Articles of Incorporation with the SOS? What must the INCORPORATOR include in the Articles to form a De Jure Corporation?

(1) Name of corporation must be included; cannot be similar to existing names (2) Number of authorized shares must be included (3) Also must include name and address of incorporators and of (4) registered agent May include any other provision regarding the operation of the corporation that is not inconsistent with law. Watch for clause limiting corporation's purpose—activities beyond scope of purpose are ultra vires (beyond their authority) and may be enjoined or directors held liable for authorizing such acts

A. DUTY OF CARE. This can come up in two ways. The burden is on the plaintiff.

1. Nonfeasance (a director does nothing - he's lazy). 2. Misfeasance (here, the board makes a decision that hurts the business - so here, causation is clear).

DE FACTO CORPORATION Under the common law, a DE FACTO CORPORATION has all the rights and powers of a de jure corporation, but remains subject to direct attack in a quo warranto proceeding by the state. For a de facto corporation to exist, there must have been: (3)

(1) a statute under which the entity could have validly incorporated [true in every state] (2) Colorable compliance with the incorporation statute [good faith attempt to comply]; and (3) conduct of business in the corporate name and the exercise of corporate privileges RESULT: if de facto corporation is found, it insulates against personal liability of shareholder, but corporation subject to quo warranto proceedings by the state [A state may also use a quo warranto action to revoke a corporation's charter.]

A special SHAREHOLDERS meeting requires proper notice to the shareholders who are entitled to vote. Notice MUST: (3)

(1) be given at least 10 days in advance of the meeting (but not more than 60 days); (2) include a full description of the purpose of the meeting; AND (3) include the date, time, and place. If the meeting concerns a fundamental change in the corporation (i.e. dissolution), ALL shareholders (whether or not entitled to vote) are entitled to notice of the meeting.

DIRECTORS: Liabilities *Reasonable reliance defense* Director may defend suits with a claim of reasonable reliance on opinions, reports, etc., if prepared or presented by: (3)

(1) corporate officers or employees whom the director reasonably believes to be reliable and competent; (2) legal counsel accountants, or other persons as to matters the director reasonably believes are within such person's professional competence; OR (3) a committee of the board of which the director is not a member

VII. DISTRIBUTIONS: These are payments by the corporation to shareholders. There are 3 different types of distributions:

(1) dividends or (2) to repurchase shareholder's stock or (3) redemption (a forced sale to corporation at price set in articles).

A director who is held liable for an unlawful distribution is entitled to contribution from (2)

(1) every other director who could be held liable for the distribution (those who voted in favor); AND (2) each shareholder for the amount she accepted while knowing that the distribution was improper.

"In writing in the corporate records" means you dissent or abstention is: (3)

(1) in the minutes or (2) delivered in writing to the presiding officer at the meeting or (3) written dissent to the corporation immediately after the meeting. KEY: So is an oral dissent effective? --Not by itself -- Director cannot dissent if she voted for the resolution at the meeting.

The articles can eliminate director (and in some states officer) liability to the corporation for damages, but not for (4)

(1) intentional misconduct, (2) usurping corporate opportunities, (3) unlawful distributions, or (4) improper personal benefit. In other words, for breaches of the duty of LOYALTY So these provisions can eliminate liability only for what kinds of cases? ---Duty of care

The issue is whether a corporation was legally formed. The Articles of Incorporation MUST contain: (4)

(1) the corporate name; (2) the number of shares the corporation is authorized to issue; (3) the address of the corporation's initial registered office and the name of its initial registered agent at that office; AND (4) the name and address of each incorporator. A legally formed corporation is called a de jure corporation.

A conflicting interest transaction cannot be set aside by the court if

(1) the director disclosed all material facts, and transaction was approved by disinterested directors or shareholders; or (2) the transaction was fair to the corporation.

EXCULPATORY CLAUSE IN ARTICLES OF INCORPORATION: A corporation's articles of incorporation may limit or eliminate directors' personal liability for money damages to the shareholders or corporations for actions taken, except to the extent that (4)

(1) the director received a benefit to which he was not entitled, (2) intentionally inflicted harm on the corporation or its shareholders, (3) approved unlawful distributions, or (4) intentionally committed a crime CAN'T ELIMINATE DUTY OF LOYALTY

Formation of Corporation - Powers of a Corporation The issue is what the powers of a corporation are. A corporation has the power to do all things necessary or convenient to carry out its business and affairs, including: (10)

(1) to sue and be sued; (2) to own, lease, or convey real or personal property; (3) to make contracts, borrow money, issue notes or bonds; (4) to lend money and make investments; (5) to own or be involved with another business entity; (6) to fix the compensation of directors, officers, and employees; (7) to lend directors, officers, employees money; (8) to make charitable donations; (9) to make payments or donations that furthers the business and affairs of the corporation; and (10) to pay or engage in lobbying to aid governmental policy.

V. FIDUCIARY DUTIES OF OFFICERS

(OWE THE SAME DUTIES OF CARE AND LOYALTY AS DIRECTORS) *NOTE: a SHAREHOLDER WHO CONTROLS THE MAJORITY OF SHARES OF A CORPORATION OWES FIDUCIARY DUTIES TO THE MINORITY SHAREHOLDERS* ---EX: If a parent corporation owns controlling shares of the subsidiary, the parent owes fiduciary duties to the shareholders of the subsidiary

Dissolution & Dissociation - Judicial Dissolution of a Corporation The issue here is whether there are grounds for judicial dissolution of the corporation. A shareholder may petition the court to dissolve the corporation if he can show: (4)

(a) a deadlock of the Directors in the management of corporate affairs and irreparable injury to the corporation; (b) the Directors have acted in a manner that is illegal, oppressive, or fraudulent; (c) the shareholders are deadlocked in voting power and have failed to elect Directors for at least two consecutive annual meetings; OR (d) the corporate assets have been wasted or misapplied. In a judicial dissolution proceeding, the corporation or shareholders may elect to purchase all shares owned by the petitioning shareholder at fair value. This election is generally irrevocable.

Shareholders - Meetings: Special Meetings The issue is how a special meeting is called. A special meeting is one held separate from the annual meeting, and may be called by:

(a) the Board of Directors; (b) persons authorized under the Articles of Incorporation or Bylaws; OR (c) by the holders of at least 10% of all votes entitled to be cast at the meeting.

A promoter will NOT be liable if:

(a) there is a subsequent novation (an agreement by all parties to substitute the corporation for the promoter and to relieve the promoter of the contractual obligation); OR (b) the contract explicitly provides that the promoter has no personal liability on the contract. If the promoter is liable to a third-party, the promoter will normally be entitled to indemnification from the corporation (unless he violated a fiduciary duty in entering the contract).

Exceptions to the general rule that record owner on record date votes. *c. Voting by proxy*. A proxy is a (4)

(i) writing (fax and e-mail are OK), (ii) signed by record shareholder (e-mail OK if can identify sender), (iii) directed to secretary of corporation, (iv) authorizing another to vote the shares. ONLY GOOD FOR 11 MONTHS unless it says otherwise

Interested director transaction will be set aside (or the director liable in damages) UNLESS the director shows either: (2)

*(1) the deal was fair to the corporation when entered,* OR *(2) her interest and the relevant facts were disclosed or known, and the deal was approved by either of these:* (A) Majority (at least two) of disinterested directors or (B) majority of disinterested shares *Special quorum rule*: a quorum is a majority (at least two) of disinterested directors. *Even if the deal is approved by an appropriate group, say this: "Some courts also require a showing of fairness"*

Ultra Vires Acts If a corporation includes a narrow business purpose in its articles, it may not undertake activities unrelated to achieving the stated business purpose. *Activities beyond the scope of the stated business purposes are said to be "ultra vires"* Under common law, ultra vires acts were void and unenforceable. *Under the MBCA, ultra vires acts generally are enforceable, and the ultra vires nature of an act can be raised in only three situations*:

*1) A shareholder* may sue the corporation to enjoin a proposed ultra vires act; *2) the corporation* may sue an officer or director for damages for approving the ultra vires act; and *3) the state* may bring an action to dissolve a corporation for committing an ultra vires act. *Keep in mind that under modern statutes, the ultra vires defense is very limited. Therefore, you should not allow a corporation to get out of a contract merely because the contract is outside the scope of the corporation's stated purposes.

Equity Securities (Stocks) Consideration for shares

*1) Acceptable form* ---Under Revised Model Business Corporations Act ("MBCA"), *any tangible or intangible property or benefit to the corporation* ---Traditionally only cash, property, or services already performed. New MBCA standard is a dramatic change. *2) Amount* ---Under MBCA, whatever amount deemed appropriate by directors, and their good faith valuation of the consideration received is conclusive ---Traditionally, shares often had a par value (minimum consideration) and could not be sold for less Consideration received for the issuance of stock need not be placed in any special account.

SHAREHOLDERS' MEETINGS AND VOTING POWER. Convening Meetings (two types)

*1) Annual Meetings* - corporations must hold annual shareholders' meetings. If the annual meeting is not held within the earlier of 6 months after the end of the corporation's fiscal year or 15 months after its last annual meeting, a court may order the meeting to be held. *2) Special Meetings* - may be called by the board of directors, the holders of 1/10th or more of all shares entitled to be cast at the meeting, or other persons so authorized in the articles or bylaws.

VII. DISSOLUTION AND LIQUIDATION Effect of Dissolution

*1) Corporate existence continues* *2) Corporation not allowed to carry on any business except business appropriate to winding up and liquidating its affairs* *3) A claim can be asserted against a dissolved corporation, even if it does not arise until after dissolution, to the extent of the corporation's undistributed assets* (A) If the assets have been distributed to the shareholders, a claim can be asserted against each shareholder for a pro rata share of the claim, to the extent of the assets distributed to the shareholder (B) A corporation can cut short the time for bringing known claims by notifying claimants of a filing deadline of not less than 120 days in which to file their claim. (C) Unknown claims can be limited to five years by publishing notice of the dissolution in a newspaper in the county where the corporation's known place of business is located

CORPORATE OPPORTUNITY DOCTRINE - *DON'T USURP ME BRO!* The director's fiduciary duties prohibit them from diverting a business opportunity from their corporation to themselves without first giving their corporation an opportunity to act. this is sometimes called the "*usurpation* of a corporate opportunity" problem. 4 Issues to Consider:

*1) Corporation Must Have an Expectancy* ---A usurpation problem arises only if a director takes advantage of a business opportunity in which the corporation would have an interest or expectancy. ---the closer the opportunity is to the corporation's *line of business*, the more likely a court will find it to be a corporate opportunity *2) Lack of Financial Ability Not a Defense* ---The corporation's lack of financial ability to take advantage of the opportunity is not a defense. The director should still present it and let the corporation decide. *3) Board Generally Decides* Whether to take an opportunity *4) Remedies* ---Corporation can *recover the profits the director made from the transaction* or ---*force the director to convey the opportunity to the corporation under a constructive trust theory for whatever consideration the director purchased the opportunity.*

Distributions: Insolvency limitations—no distribution if: (2)

*1) Corporation unable to pay its debts as they become due* in the usual course of business; OR *2) Total assets are less than total liabilities; PLUS* (unless the articles permit otherwise) *the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights on dissolution of shareholders whose preferential rights are superior to those receiving the distribution* (i.e., the corporation is insolvent in the balance sheet sense)

Preemptive Right

*1) DEFINITION: The right to purchase shares to maintain proportionate ownership interest* *2) Under MBCA, a preemptive right exists only if provided for in the articles of incorporation* *3) Where provided for, does NOT apply to:* Moreover, even if the articles DO provide a preemptive right, shareholders generally have no preemptive right to: (A) Shares issued as compensation (B) Shares issued within six months of incorporation (C) Shares issued for consideration other than money (D) Nonvoting shares with a distribution preference

Capital Structure of Corporation

*1) Debt securities (bonds) create debtor-creditor relationship* *2) Equity securities (stocks) create ownership interest* [can be certificated or uncertificated]

Shareholder Inspection Rights *1) Limited/Qualified Right*

*1) Limited/Qualified Right*—books, papers, accounting records, etc. (A) With five days' written notice, stating a (B) Proper purpose (purpose related to the shareholder's rights) ----->shareholder need not personally conduct the inspection; he may send an attorney, accountant, or other agent.

Voting: Approval

*1) MBCA—if quorum present, action approved if votes cast in favor exceed votes cast against* *2) Some states require greater vote for fundamental corporate change* *3) Cumulative voting for directors* (A) MBCA allows articles to provide for cumulative voting (B) Cumulative voting is automatic in some states (C) Mechanics—shareholder can vote shares owned x number of directors being elected; can cast all votes for one candidate or split

Shareholder Agreements *1) Voting trusts*

*1) Voting trusts* - By written agreement, shareholders transfer share ownership to a trustee who votes shares and distributes dividends as agreed ---A *copy of the trust agreement* and the *names and addresses of the beneficial owners* of the trust *must be given to the corporation.* ---Valid in most states for up to *10 years but renewable* *Legal ownership* is transferred to the *trustee*. *Shareholders retain equitable/beneficial ownership.*

DIRECTORS: Duty of Loyalty *Standards for Upholding Conflicting Interest Transactions* *SUPER IMPORTANT!!!* A conflicting interest transaction will not be enjoined or give rise to an award of damages due to the director's interest in the transaction if: (3)

*1) 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. --->*a quorum consists of* majority of the directors without a conflicting interest, but not less than two *2) 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 --->*a quorum consists of* a majority of the votes entitled to be cast, NOT including shares owned or controlled directly or beneficially by the director with the conflicting interest. 3) the transaction, judged according to circumstances at the time of commitment, was *fair to the corporation* --->*Factors in Determining Fairness*: adequacy of the consideration, corporate need to enter into the transaction, financial position of the corporation, and available alternatives ADDITIONAL POINTS: - A fact is *material* if an ordinarily prudent person would consider it important in deciding whether to proceed with the transaction - the *presence of the interested director at the meeting where the directors or shareholders voted to approve the conflicting interested transaction does not affect the action*. - *A transaction approved by the board or shareholders might STILL BE SET ASIDE* if the party challenging the transaction can prove it constitutes waste of corporate assets.

FUNDAMENTAL CORPORATION CHANGES 1. AMENDMENT OF THE ARTICLES. Requirements (4)

*1. Board of director action* *2. Notice to shareholders*. *3. Shareholder approval.* -If there are 4,000 shares entitled to vote, how many must vote for the amendment? --->At least 2,001 *4. If approved, deliver amended articles to the Secretary of State.*

DIRECTORS: Liabilities Articles may further limit or eliminate director personal liability to corporation or shareholders except: (3)

1) To the extent director received improper benefit; 2) For liability for unlawful distributions; or 3) For intentionally inflicted harms or criminal violations of law

What are the requirements for bringing a shareholder derivative suit? (4)

*1. Stock ownership when the claim arose and throughout the suit.* ---The person bringing suit must have owned stock at the time the claim arose or have gotten it by operation of law from someone who did own it then. ---What are examples of "operation of law?": Inheritance and divorce decree -- S does not own stock when the claim arose, but his uncle did. His uncle then dies and S inherits Uncle's stock. S has standing because he got the stock by operation of law from someone who owned it when the claim arose. *2. Plaintiff must provide adequate representation of the corporation's interest.* *3. Plaintiff must make written demand on corporation (usually that means the board) that the corporation bring the suit*. ---In some states you must always make this demand and cannot sue until 90 days after making the demand. -- BUT in other states, shareholders are *not required to make this demand if the demand would be futile*. ---What is a good example? When the directors will be the defendants. This happens a lot because directors might have breached a duty. Don't have to demand that they sue themselves. *4. The corporation is joined as a defendant.* ---Even though the suit asserts the corporation's claim, the corporation did not do so, so it is joined as a defendant.

The directors must act as a group (even if there is only one director). How? (2 ways)

*1. Unanimous agreement in writing* (e-mail is OK); separate documents are OK. *2. At a meeting* (which must satisfy the quorum and voting requirements below). Does a conference call (simultaneous oral communication so each can hear all others) count as a meeting? ---Yes

Indemnification of Directors, Officers, and Employees (D/O/E) DISCRETIONARY: INDEMNIFICATION

*2) Unsuccessful defense*—if D/O/E is unsuccessful in defending, corporation has discretion to indemnify if the director complied with the business judgment rule standards ---*Exceptions*: Director is found liable to the corporation or received an improper benefit *Who decides?* - the determination of whether to indemnify is made by a disinterested majority of the board. ---If there is not a disinterested quorum, by a majority of a disinterested committee or by legal counsel. ---the shareholders may also decide (the shares of the director seeking indemnification are not counted)

HOW CAN THE *SHAREHOLDERS* APPROVE AN INTERESTED DIRECTOR TRANSACTION?

*2) 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 --->*a quorum consists of* a majority of the votes entitled to be cast, NOT including shares owned or controlled directly or beneficially by the director with the conflicting interest. ADDITIONAL POINTS: - A fact is *material* if an ordinarily prudent person would consider it important in deciding whether to proceed with the transaction - the *presence of the interested director at the meeting where the directors or shareholders voted to approve the conflicting interested transaction does not affect the action*. - *A transaction approved by the board or shareholders might STILL BE SET ASIDE* if the party challenging the transaction can prove it constitutes waste of corporate assets.

Shareholder Agreements *3) Shareholder management agreements*

*3) Shareholder management agreements* - Used in small corporations ---Shareholders may agree to run the corporation in any way ---Can even dispense with board ---valid for 10 years unless they provide otherwise ---Will terminate if the corporation's shares become listed on a national securities exchange or are otherwise regularly traded on a national securities market. *To be valid, the agreement must be: (3)* 1) set forth in the articles 2) bylaws, or 3) or a written agreement approved by all persons who are shareholders at the time of its adoption

Shareholder Agreements *4) Share transfer restrictions*

*4) Share transfer restrictions* ---Ownership interests (shares) generally are freely transferable ---Shares may conspicuously provide for restriction ---Restrictions must be reasonable *A third-party purchaser is bound by the provisions of an agreement restricting transfer of stock if:* (1) the restriction's existence is CONSPICUOUSLY NOTED on the certificate (or is contained in the information statement required for uncertificated shares); OR (2) the 3P had knowledge of the restriction at the time of the purchase.

III. FIDUCIARY DUTIES OWED BY THE DIRECTORS TO THE CORPORATION Directors owe non-delegable fiduciary duties to the corporation. *The Standard: [MUST include these two sentences anytime a director is arguably in trouble for behavior]*

*A director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation. She must also use the care that a prudent person in like position would reasonably believe appropriate under the circumstances.* -- The first sentence is the duty of loyalty -- The second sentence is the duty of care AKA the "business judgment rule" *NOTE: a SHAREHOLDER WHO CONTROLS THE MAJORITY OF SHARES OF A CORPORATION OWES FIDUCIARY DUTIES TO THE MINORITY SHAREHOLDERS* ---EX: If a parent corporation owns controlling shares of the subsidiary, the parent owes fiduciary duties to the shareholders of the subsidiary

Two types of securities issued by corporations to raise capital:

*A. Debt securities*. Here, the corporation borrows money from X and agrees to repay her with interest. Debt securities are *usually called bonds* ---The person holding a bond is a *creditor not an owner* *B. Equity securities*. Here, the corporation *sells an ownership interest* to X. Equity securities are *called stock* ---The person holding stock (a shareholder or stockholder) *is an owner not a creditor*

ROLE OF THE BOARD OF DIRECTORS

*A. The board manages the corporation*: sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental corporate changes to shareholders, etc. *B. The board can delegate to a committee of one or more directors* - but the committees are limited in their powers.

FUNDAMENTAL CORPORATION CHANGES 6. DISSOLUTION. *VOLUNTARY*

*A. Voluntary*. Board of directors action and shareholder approval. ---File notice of intent to dissolve with Secretary of State. Corporation stays in existence to wind up. Notify creditors so they can make claims.

CORPORATIONS: FIVE FACT PATTERNS:

1. Organization of a corporation 2. Issuance of stock 3. Directors and officers 4. Shareholders 5. Fundamental corporate changes

Under the Model Business Corporation Act (MBCA), who has the authority to amend the corporation's articles of incorporation?

*Before the corporation issues shares of stock,* the board of directors has exclusive authority to amend the articles of incorporation. *After the corporation issues stock,* the shareholders have exclusive authority to amend the articles of incorporation.

Will Court Disregard Corporate Entity (Pierce the Corporate Veil)? *Perpetrating a fraud*

*Cannot be formed to avoid existing liabilities* The corporate veil may be pierced where necessary to prevent fraud or to prevent an individual shareholder from using the entity to avoid his EXISTING personal obligations. *CAN be formed to limit future liabilities* But the mere fact that an individual chooses to adopt the corporate form of business to avoid FUTURE personal liability is NOT a reason to pierce the corporate veil (since that is after all one of the benefits: limited liability)

VI. INDEMNIFICATION OF DIRECTORS AND OFFICERS IMPORTANT FACT PATTERN: A. Someone has been sued by (or on behalf of) the corporation in her capacity as an officer or director (D/O). She has incurred costs, attorneys' fees, maybe even fines, a judgment or settlement in that litigation. Now, she seeks indemnification (reimbursement) from the corporation. 3 CATEGORIES:

*Category 1.* The corporation *CANNOT indemnify* a director or officer who was held liable to the corporation OR to have received an improper benefit *Category 2*. The corporation *MUST indemnify* a director or officer who was successful in defending merits or otherwise -- In some states, she must win the entire case; in others, she is entitled to indemnification "to the extent" that she wins the case. *Category 3*. The corporation *MAY indemnify ("permissive indemnification")* a director or officer (D/O) her litigation expenses if she shows acted in good faith with the reasonable belief what she did was in the company's best interest -- This standard sounds familiar. Why? It's the duty of loyalty part of the standard from earlier.

II. CAN SHAREHOLDERS BE HELD LIABLE FOR CORPORATE DEBTS?

*The general answer is NO. Why?* ---the Corporation is liable for what it does, not the shareholder. *But a shareholder might be personally liable for what the corporation did if the court "pierces the corporate veil" (PCV).*

Shareholder Suits Summary: Direct vs. Derivative

*Direct suit* is to enforce right of shareholder *Derivative suit* is to enforce a right belonging to corporation 1) Must have owned shares at time of wrong 2) Must maintain ownership throughout suit 3) Demand board to bring suit (unless futile in some states) *Dismissal*—if a majority of directors with no personal interest determine in good faith that suit is not in best interests of corporation *Recovery* *1) Direct suit*—goes to shareholder *2) Derivative suit*—goes corporation (usually)

DIRECTORS: Duty to Disclose

the directors also have a duty to disclose material corporate information to other members of the board.

CLASSIC PCV (pierce the corporate veil) FACT PATTERNS: *2. Undercapitalization* (can have both alter ego and undercapitalization in one hypo) S is a shareholder of Glowco, Inc., a close corporation that hauls and disposes of nuclear waste. Glowco does not carry insurance. Glowco has an initial capitalization of $1,000. V is injured when one of Glowco's trucks melts down. Can V sue S?

*General rule* (shareholders not liable for corporate obligations); *PCV standard* 1. They must have abused the privilege of incorporating and 2. Fairness must require holding them liable. *Here,* a court MIGHT PCV because the corporation was undercapitalized when formed. Why? Shareholders failed to invest enough to cover prospective liabilities. ---No doubt about that here. This is a corporation that hauls nuclear waste. That's dangerous; people can be hurt. Yet they only put $1000 into it and didn't buy insurance. Clearly undercapitalized. *Say this: courts may be more willing to PCV for a tort victim than for a contract claimant.*

VII. DISSOLUTION AND LIQUIDATION Voluntary Dissolution

*If shares have not yet been issued* or business has not yet commenced, *a majority of the incorporators or initial directors may dissolve corporation by delivering articles of dissolution to the state* *After shares have been issued*, corporation may dissolve *by a corporate act approved under the fundamental change procedure* All corporate debts must be paid before dissolution, and if shares have been issued, any assets remaining after winding up must be distributed to the shareholders

Indemnification of Directors, Officers, and Employees (D/O/E) MANDATORY INDEMNIFICATION

*MANDATORY: Successful defense*—if D/O/E is sued as a director and successfully defends, corporation must indemnify for expenses, including attorney's fees

Corporation by Estoppel

*No liability if corporation by estoppel*—people treating business as valid corporation are estopped from denying corporation's existence [there is no requirement of following statutory formation requirement] Doctrine applies in contract to prevent the "corporate" entity and parties who have dealt with the entity as if it were a corporation, from backing out of their contracts. HOWEVER, IT DOES NOT APPLY TO TORT VICTIMS. It insulates against personal liability in contract, but NOT tort.

Share Repurchases vs. Redemptions

*Repurchases* are when a company that issued the shares repurchases the shares back from its shareholders. During a repurchase or buyback, the company pays shareholders the market value per share. With a repurchase, the company can purchase the stock on the open market or from its shareholders directly. Share repurchases are a popular method for returning cash to shareholders and are *strictly voluntary* on the part of the shareholder. *Redemptions* are when a company *requires* shareholders to sell a portion of their shares back to the company. For a company to redeem shares, it must have stipulated upfront that those shares are redeemable, or callable. Redeemable shares have a set call price, which is the price per share that the company agrees to pay the shareholder upon redemption. The call price is set at the onset of the share issuance. Shareholders are obligated to sell the stock in a redemption. *Which One to Choose?* A company may choose a repurchase over a redemption for several reasons. When the stock is trading below the call price of redeemable shares, the company can obtain the shares for a lower cost per share by buying them from shareholders through a stock repurchase. The company might offer, as an incentive, to repurchase the shares at a higher price than the current market, but below the call price of the redeemable shares. When a company enacts a redemption, the call price will typically be at or above the current market price, otherwise shareholders could incur a loss.

Shareholder Liabilities

*Shareholders are NOT fiduciaries—may act in self-interest*. ---Liability limited to the liabilities discussed above for unpaid stock, pierced corporate veil, or absence of de facto corporation. *Exceptions*— (1) close corporations: owe each other duty of loyalty and good faith (2) liability pursuant to shareholder agreement (3) controlling shareholder cannot use control to obtain a special advantage at the expense of the minority shareholders. This includes the duty to disclose all material information.

Voting: Record shareholders

*Shareholders of record on the record date have a right to vote:* 1) At the annual meeting to elect directors 2) Regarding fundamental corporate changes

If the corporation issues stock in exchange for consideration other than cash, the stock is considered

*fully paid and nonassessable* as soon as the corporation receives the consideration for which the board authorized the issuance. "Fully paid" means that the company has received proper "consideration" (payment) for the shares. "Non-assessable" means that the investor isn't required to make more payments to the company by reason of being a shareholder. ---Non-assessable refers to a class of shares that do not allow the issuer to demand additional payment for the shares from stockholders. Of course, a shareholder who fails to pay the full amount agreed upon can be held liable for any sums remaining unpaid.

DUTY OF CARE: Misfeasance (here, the board makes a decision that hurts the business - so here, causation is clear). The directors of Hedonists' Hot Tubs, Inc., vote to start a new line of hot tubs with built-in wine coolers and video cameras. The idea is a disaster and the corporation loses money. Are the directors liable for breach of the duty of care?

-- State the standard in full, then focus on the duty of care portion. STANDARD: *A director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation. She must also use the care that a prudent person in like position would reasonably believe appropriate under the circumstances.* *Here*, the directors' action caused a loss to the corporation, so causation is clear. *BUT, a director is not liable if she meets the business judgment rule ("BJR").* ---A prudent person in a like position would do appropriate homework, if they did appropriate homework, they are not liable *In ANY question relating to duties, add the following: "The director/officer/controlling shareholder who has a fiduciary duty will be presumed to be acting in a reasonable manner under the Business Judgment Rule."

Martha is a director of XYZ, Inc. If she sells wreaths to XYZ, Inc., it is an interested director transaction. ANALYSIS?

-- State the standard in full, then focus on the duty of loyalty portion (first sentence). STANDARD: *A director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation. She must also use the care that a prudent person in like position would reasonably believe appropriate under the circumstances.*

*Are there dissenting shareholder rights of appraisal for an amendment?*

---Generally not in most states.

FUNDAMENTAL CORPORATE CHANGES Disposition of Property Outside the Usual and Regular Course of Business --- *EFFECT ON PURCHASER*

---Generally, the purchaser of another corporation's property does NOT become liable for the seller's obligations; the seller remains solely liable. ---However, if the disposition of property is really a disguised merger, a court might treat it as a merger under the *de facto merger doctrine* and hold the purchaser liable for the seller's obligations just as if a merger had occurred.

DUTY OF CARE: Nonfeasance (a director does nothing - he's lazy). EX: Doofus, a director of C Corp., fails to attend any of the board of directors' meetings or to keep abreast of the company business in any way. Will he be held liable for breach of the duty of care?

---State the standard in full (both sentences) , then focus on the duty of care portion. STANDARD: *A director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation. She must also use the care that a prudent person in like position would reasonably believe appropriate under the circumstances.* HERE, A person in like position would do some work. This guy did nothing, so he has breached the duty of care. *BUT HE IS LIABLE ONLY IF: His breach causes a loss to the corporation* ---not enough to just show breach of the duty of care. Must show causation; that it hurt the corporation. Hard to do sometimes because the company might have lost money anyway.

Will Promoter be liable on the lease if Oscar de la Rental Cars, Inc. is never formed?

---Yes

Directors, officers, and shareholders of a PC usually must be licensed professionals. May the P.C. employ non-professionals?

---Yes but not to practice the profession

Are the professionals personally liable for their malpractice?

---Yes. We are ALL liable for our own torts. No way to incorporate around that.

X Corporation has 12,000 shares entitled to vote. X Corporation has 700 shareholders. What or who must be represented at the meeting to constitute a quorum?

At least 6,001 shares

VI. FUNDAMENTAL CORPORATE CHANGES General Procedure (4)

1) Board adopts a resolution 2) Notice to shareholders in writing 3) Shareholder approval of changes 4) the changes in the form of articles are filed with the state

b. Requirements for voting ("pooling") agreement.

1) Can shareholders enter into voting agreements? ---Yes 2) What is required? ---In writing and signed 3) Are voting agreements specifically enforceable? ---Increasingly yes, but in some states no. ---In states that will grant specific performance of a voting agreement, there is no need to use the voting trust.

But a committee cannot do what on behalf the board? In other words, what powers is the board NOT allowed to delegate to a committee? (3)

1) Declare a distribution, 2) fill a board vacancy, 3) recommend a fundamental change to shareholders Can a committee recommend such things to the full board for its action? ---Yes

DIRECTORS: Liabilities - *Duty of Care & Business Judgment Rule* Directors have a *duty to manage to the best of their ability*. *Business judgment rule* generally protects directors from personal liability to corporation/shareholder if (3) *SUPER IMPORTANT: MEMORIZE!!!!*

1) Director must act in good faith 2) With the care that an ordinarily prudent person in a like position would exercise, and 3) In a manner reasonably believed to be in the best interests of the corporation Directors who meet this standard will not be liable for corporate decisions that in hindsight turn out to be poor or erroneous. BOP: The challenger has the BOP to prove the above standard was not met. *In ANY question relating to duties, add the following: "The director/officer/controlling shareholder who has a fiduciary duty will be presumed to be acting in a reasonable manner under the Business Judgment Rule."

Distributions: Director liability for unlawful distributions.

1) Director who votes for an unlawful distribution is personally liable for the excess 2) Director may seek contribution from other directors who voted for distribution 3) Directors may recover from a shareholder who received a distribution knowing it was unlawful 4) Good faith defense—may rely on accountants or reliable officers and employees who indicate distribution is lawful

How can such waiver of notice occur? In either of two ways:

1) Express-in writing and signed anytime (fax and e-mail are OK) 2) Implied-attend the meeting without objecting at the outset.

What are the characteristics of a close corporation? (2)

1) Few shareholders, 2) stock not publicly traded

VI. FUNDAMENTAL CORPORATE CHANGES *Dissenters' Appraisal Remedy: PROCEDURE* Shareholders who do not like a fundamental corporate change may force the corporation to purchase their shares at a fair price if they:

1) Give corporation *written notice of intent to demand appraisal rights BEFORE vote* is taken on proposed change 2) *Do not vote in favor of the change* 3) *corporation must give dissenters notice*: If the action is approved the corporation must notify, *within 10 days after approval*, all shareholders who filed an intent to demand payment. ---must include the time/place to submit their shares and the other terms of the repurchase. 4) *Shareholders must demand payment* in accordance with the notice given by the corporation 5) *Corporation must pay* the dissenters the *amount the corporation estimates as the fair value* of the shares, plus accrued interest 6) *Notice of Dissatisfaction* - If the shareholder is dissatisfied with the corporations determination of value, the shareholder has 30 days in which to send the corporation her *own estimate of value* and demand payment 7) *Court Action* - if the corporation rejects the shareholder demand, the corporation MUST file an action in court within 60 days of receiving the shareholder's demand, requesting the court to determine the FMV of the shares. ---Otherwise the corporation must pay what the shareholder demanded.

V. OFFICERS Required Officers

1) MBCA does not require any particular officers but rather allows corporations to have officers described in bylaws or appointed by directors 2) Some states require at least two officers—a president and a secretary (to certify corporate acts and records) 3) Generally, a person may hold more than one office (but some states prohibit president and secretary from being same person)

To avoid (legally) having it pay income tax at the corporate level, we could qualify as an *S Corporation* (named after the section of the IRS code) 3 requirements of an S Corporation?

1) S Corps have no more than 100 shareholders, 2) all of whom are human U.S. citizens or residents; 3) one class of stock and it is not publicly traded.

VII. DISSOLUTION AND LIQUIDATION Judicial Dissolution: Shareholders may seek judicial dissolution on any of the following grounds: (5)

1) The *directors are deadlocked in the management of corporate affairs*, the shareholders are unable to break the deadlock, and *irreparable injury* to the corporation is threatened, or corporate affairs cannot be conducted to the advantage of the shareholders because of the deadlock; 2) The directors have acted or will act in a manner that is *illegal, oppressive, or fraudulent*; 3) The shareholders are deadlocked in voting power and have *failed to elect one or more directors for a period* that includes at least two consecutive annual meeting dates; 4) *Corporate assets are being wasted, misapplied, or diverted for noncorporate purposes*; OR 5) The corporation has *abandoned its business and failed to dissolve* within a reasonable time.

VII. DISSOLUTION AND LIQUIDATION Judicial Dissolution: Creditors may seek judicial dissolution if: (2)

1) The corporation has admitted in writing that the creditor's claim is due and owing and the corporation is insolvent, or 2) The creditor's claim has been reduced to judgment, execution of the judgment has been returned unsatisfied, and the corporation is insolvent

IV. DIRECTORS: Liabilities No self-dealing without disclosure and approval—*duty of loyalty* A transaction between a corporation and a director will NOT be set aside for self-dealing if: (2)

1) The director disclosed all material facts, and transaction was approved by disinterested directors or shareholders; or 2) The transaction was fair to the corporation

Voting: Proxies *A shareholder may vote her shares in person or by proxy executed in writing.*

1) Written proxies *valid for 11 months* 2) Generally *revocable unless (1) they specifically provide otherwise AND (2) are coupled with an interest or given as security.* 3) May be *revoked by attendance at meeting or later appointment* *4) Federal law* (A) Proxy solicitations must fully and fairly *disclose all material facts* (B) Prohibits *material misstatements and fraud in connection with a proxy solicitation* ---Materiality—a reasonable shareholder would consider it important in deciding how to vote (C) Management *must include certain shareholder proposals* on issues other than election of directors, and allow proponents to explain their position.

a. 4 Requirements for voting trust. (10-year maximum.)

1) Written trust agreement, controlling how the shares will be voted; 2) Copy to the corporation; 3) Transfer legal title to the voting trustee; ---cumbersome. This is a real trust under trust law. 4) Original shareholders receive trust certificates and retain all shareholder rights except for voting.

DISCRETIONARY: INDEMNIFICATION EXCEPTIONS: A corporation does NOT have discretion to indemnify a director who is unsuccessful in defending:

1) a direct or derivative action in which the director is found liable to the corporation, or 2) an action charging that the director received an improper benefit.

VI. FUNDAMENTAL CORPORATE CHANGES *Dissenters' Appraisal Remedy* (AKA "dissenters' rights") - If a corporation approves a fundamental change, shareholders who dissent may have the right to have the corporation purchase their shares. *WHO MAY DISSENT?* - The following are among those who have a right to the appraisal remedy: (3)

1) any *shareholder entitled to vote* on a plan of merger and *shareholders of the subsidiary* in short form merger 2) shareholders of the corporation whose shares are being *acquired* in a share exchange; and 3) a shareholder who is *entitled to vote* on a disposition of all or substantially all of the corporation's property

Shareholder Inspection Rights *2) Unqualified right for certain records* (may be inspected regardless of purpose)—

1) articles and bylaws, 2) minutes of shareholder meetings for the past 3 years, 3) names and addresses of current directors, and 4) copy of the most recent annual report 5) board resolutions regarding classification of shares 6) communications sent by the corporation to the shareholders over the past 3 years

However, a director is not liable for improper distributions approved in good faith: (2)

1) based on financial statements prepared according to reasonable accounting practices, or on a fair valuation or other method that is reasonable under the circumstances; OR 2) by relying on info from officers, employees, legal counsel, accountants, etc., or a committee of the board of which the director is not a member.

What if There Are Defects in Formation? One of the main reasons to incorporate is to avoid personal liability for the corporation's obligations. But if there is a defect in forming a de jure corporation, the shareholders, directors, and officers might be liable. There are two doctrines that may provide relief in this scenario:

1) de facto corporation 2) corporation by estoppel Some states do not recognize de facto and estoppel doctrines Where no corporation recognized, only those who acted on behalf of the business will be held liable; passive investors not liable

Additional Formation Procedures: Organizational Meeting After the articles are filed, the corporation will have an organizational meeting to:

1) elect directors 2) appoint officers 3) adopt bylaws.

Remedies for an improper conflicting interest transaction in breach of the duty of good faith include:

1) enjoining the transaction 2) setting the transaction aside, 3) damages equal to the directors profit etc.

IV. WHICH DIRECTORS MAY BE LIABLE? A. Directors may be liable to the corporation for (4)

1) improper distributions (see below), 2) improper loans, 3) "ultra vires" acts (making the company do things it has no power to do) and 4) for breaches of fiduciary duties.

DIRECTORS: Duty of Loyalty *What Constitutes Conflicting Interest Transaction?* A director has a conflicting interest with respect to a transaction if the director knows that she or a related person (spouse, parent, child, etc.) either:

1) is a party to the transaction; 2) has a beneficial financial interest in, or is closely linked to the transaction that would likely influence the director's judgment 3) is a director, general partner, agent, or employee 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 (the so-called "interlocking directorate" problem)

A debt obligation may also have special features:

1) it may provide that is convertible into equity securities at the option of the holder; 2) might provide that the corporation may redeem the obligation at a specified price before the obligation matures. etc.

Meeting Notice requirement—

1) must give written notice (fax or e-mail OK) 2) to every shareholder entitled to vote. 3) Deliver it between 10-60 days before the meeting.

Classes and Series Must be Described in Articles If shares are to be divided into classes or series within a class, the articles must: (3)

1) prescribe the number of shares of each class 2) prescribe a distinguishing designation for each class (e.g. "Class A Preferred", etc.), AND 3) either describe the rights, preferences, and limitations of each class or series OR provide that the rights, preferences, and limitations of any class or series within a class shall be determined by the board of directors prior to issuance.

FUNDAMENTAL CORPORATE CHANGES *MERGER: No significant change to surviving corporation.* Approval of a plan of merger by shareholders of the surviving corporation is not required if all of the following conditions exist: (3)

1) the articles of incorporation of the surviving corporation will NOT differ from the articles before the merger; 2) each shareholder of the survivor whose shares were outstanding immediately prior to the effective date of the merger will hold the same number of shares, with identical preferences, limitations, and rights; and 3) the voting power of the shares issued as a result of the merger will comprise no more than 20% of the voting power of the shares of the surviving corporation that were outstanding immediately prior to the merger.

LIMITATION on the right of appraisal BUT even if the company is doing one of the things that would ordinarily trigger the right of appraisal, there is no appraisal if (2)

1) the company's stock is listed on a national exchange OR 2) if the company has 2,000 or more shareholders (not shares, shareholders). So this means the right of appraisal exists in Close corporations This makes sense. If you don't like a fundamental change in a public corporation, just sell your stock on the public market. But with a close corporation, there is no market for the stock, so you can force the company to buy your stock.

VII. DISSOLUTION AND LIQUIDATION *Judicial Dissolution*: The attorney general may seek judicial dissolution on the grounds that (2)

1) the corporation fraudulently obtained its articles of incorporation, or 2) that the corporation is exceeding or abusing its authority

Contents of the notice: must state

1) the date, 2) time, and 3) place of the meeting. *For special meetings*, you must also state the purpose of the meeting. Why is the statement of purpose important? ---Cannot do anything else at that meeting

Debt securities are payable to either

1) the holder of the bond (a "bearer" or coupon" bond) OR 2) to the owner registered on the corporation's records (a "registered" bond).

Proxies are generally revocable unless...

1) they stipulate they are irrevocable, AND 2) they are coupled with an interest (i.e. situations where the proxy holder essentially pays for the right to be a proxy, such as where the proxy holder has purchased the underlying shares from the owner of record).

S Corp. wants to sell all of its assets to B, Inc. (or B, Inc. wants to buy all stock of S Corp. [a "share exchange"]) What are the requirements?

1). Board action (both corporations), and notice to selling company's shareholders. 2). Approval by the selling corporation's shareholders. *What is the Number of shares of S Corp. that must approve the sale?* ---Same as with amending articles. Number entitled to vote (majority of outstanding shares) *Number of shares of B, Inc. (the buying company) that must approve this deal?* ---None. They do not vote, because it is not a fundamental change for the buyer. 3) Deliver to SOS articles of exchange in share exchange. ---BUT usually, there is no filing in a transfer of assets.

FACT PATTERN 5: FUNDAMENTAL CORPORATE CHANGES I. CHARACTERISTICS OF FUNDAMENTAL CORPORATE CHANGE A. These are extraordinary, so the board generally cannot do them alone. What are they? (5)

1. Amend the articles; 2. Merge or consolidate into another company; 3. Transfer substantially all assets (or having stock acquired in "share exchange"); 4. Convert to another form of business; 5. Dissolve.

B. Generally, to do any of these fundamental corporate changes, we need: (4)

1. Board action adopting a resolution of fundamental change. 2. Board submits proposal to shareholders with written notice. 3. Shareholder approval. What shareholder vote is required? ---Majority of shares entitled to vote -- This is changing. An increasing number of states require only a majority of the shares that actually vote on the proposed fundamental change. But to be safe, we will apply the traditional rule. 4. In most of these changes, we need to deliver a document to Secretary of State.

Steps taken in winding up (AKA "liquidation") (5):

1. Give written notice to known creditors and publish notice of dissolution in a newspaper in the county of its principal place of business; 2. Gather all assets; 3. Convert assets to cash; 4. Pay creditors; and 5. Distribute any remaining sums to shareholders, pro-rata by share, UNLESS there is a liquidation preference.

General Characteristics of a Corporation

1. Legal entity distinct from its owners and may be created only by filing certain documents with the state. 2. Limited Liability for Owners, Directors, and Officers 3. Centralized Management: ---generally NOT the shareholders, but instead a centralized board of directors, who usually delegate management to officers. 4. Free transferability of ownership 5. Continuity of life (can exist perpetually, not affected by changes in ownership) 6. Taxation ---C Corps - taxed as a distinct entity (double taxation) ---S Corps - have "pass through" taxation (no double taxation) if meet certain requirements: (no more than 100 shareholders who must be US citizens, there can only be one class of stock)

A corporation that is administratively dissolved may apply for reinstatement within

2 years after the effective date of dissolution. The application must state that the grounds for dissolution either did not exist or have been eliminated. Reinstatement relates back to the date of dissolution, and the corporation may resume carrying on business as if the dissolution had never occurred.

AN INTERESTED DIRECTOR TRANSACTION WILL NOT BE SET ASIDE IF IT WAS "FAIR TO THE CORPORATION" WHAT FACTORS DETERMINE FAIRNESS?

3) the transaction, judged according to circumstances at the time of commitment, was *fair to the corporation* --->*Factors in Determining Fairness*: 1) adequacy of the consideration, 2) corporate need to enter into the transaction, 3) financial position of the corporation, and 4) available alternatives

Shareholder & Member Litigation - Derivative Actions: Dismissal by Board of Directors The issue is whether the board can obtain dismissal of the shareholder's derivative claim based on best interest even though it has not investigated the allegations.

A board of directors can dismiss a shareholder's derivative suit if a majority of disinterested directors find in good faith and after reasonable inquiry that the suit was not in the corporation's best interest. Examples of good business reasons for dismissing the lawsuit include that there is no likelihood of prevailing, or the damage to the corporation from litigation would outweigh any possible recovery.

Classification of Shares

A corporation may choose to issue only one type of share, given each shareholder an equal ownership right (generally called *common stock*) Or, ownership rights may be varied if the articles provide that the corporation's stock is to be divided into *classes* or *series within a class*

Share Options

A corporation may issue share options. An option is the right to purchase shares in the future under terms predetermined by the board of directors. Options may be offered in exchange for any type of consideration, including future services.

HOW CAN THE BOARD OF DIRECTORS APPROVE AN INTERESTED DIRECTOR TRANSACTION?

A conflicting interest transaction will not be enjoined or give rise to an award of damages due to the director's interest in the transaction if: 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. *a quorum consists of* majority of the directors without a conflicting interest, but not less than two ADDITIONAL POINTS: - A fact is *material* if an ordinarily prudent person would consider it important in deciding whether to proceed with the transaction - the *presence of the interested director at the meeting where the directors or shareholders voted to approve the conflicting interested transaction does not affect the action*. - *A transaction approved by the board or shareholders might STILL BE SET ASIDE* if the party challenging the transaction can prove it constitutes waste of corporate assets.

Fundamental Corporate Changes - Amending Articles of Incorporation The issue is whether a corporation can amend its articles of incorporation.

A corporation can amend its articles with any provision that would be valid in original articles. To amend, the board of directors must first adopt a resolution to amend the articles. It must then send notice to the shareholders that a shareholders' meeting will be held to vote on the proposed amendment. The notice must be sent at least 10 days before the meeting. The amendment must be approved by a majority of the shares entitled to be voted at the meeting. Articles of amendment must then be filed with the secretary of state.

Pre-Formation Contract Liability - Liability of Corporation The issue is whether a corporation is liable on pre-incorporation contracts entered into by a promoter.

A corporation is NOT liable on pre-incorporation contracts entered into by a promoter UNLESS the corporation expressly or impliedly adopts the contract post-incorporation. A corporation may expressly adopt a pre-incorporation contract (i.e. by Board of Director action or by reference in the corporation's formation documents). Implied adoption occurs when the corporation: (1) has reason to know or knows the material terms of the contract; AND (2) accepts some benefit from the contract.

CORPORATIONS OVERVIEW

A corporation is a legal entity apart from its owners (the shareholders). Generally, only the corporation (and not the people who own or work for the corporation) is liable for the corporation's obligations. To qualify for this entity treatment, the corporation must be formed by filing a document with the state (in most states "the articles of incorporation") setting out certain information. Rules for corporate governance may be set out in the articles or in bylaws adopted by the corporation. Ownership interests in the corporation are then sold in the form of stock or shares which give the shareholders certain rights (e.g., to receive distributions when declared and to vote). Shareholders elect directors to oversee the corporation, and the directors appoint officers to run the company on a day-to-day basis. Directors and officers owe the corporation a duty to act as similarly situated prudent persons and cannot "self-deal" for their own benefit. Before a fundamental change can be made to the corporation, shareholders must be informed and given an opportunity to vote on the change.

III. CONSEQUENCES OF FORMING A CORPORATION B. ENTITY STATUS.

A corporation is a legal person. It can sue and be sued, hold property, be a partner in a partnership, invest in other companies or commodities.

Indemnification of Directors, Officers, and Employees (D/O/E) *ADVANCES*

A corporation may advance expenses to a director defending an action as long as the director funishes the corporation a statement that the director believes he met the appropriate standard of conduct and that he will repay the advance if he is later found to have not met the appropriate standard.

The board of directors of a dry-cleaning chain was considering whether to open a new location. Not all of the directors on the board agreed on whether the business should expand to the new location. The controlling jurisdiction had adopted the Model Business Corporation Act (MBCA), and the dry-cleaning chain's articles of incorporation and bylaws did not alter the MBCA's default rules about meeting and voting. Which of the following accurately states how the board decides whether to open the new location?

A majority of directors must meet and a majority of those present must vote in favor of the expansion. In general, a corporation's board of directors may act by two methods: (1) by majority vote at a meeting, or (2) without a meeting, so long as all members agree. In order for a board to act at a meeting, a quorum must be present. The MBCA defines a quorum as a majority of the directors. Corporations are free to define a quorum to require a greater or fewer number of directors; however, the MBCA prohibits corporations from defining a quorum to require fewer than one-third of directors. If a quorum is present, then the board may act by a majority vote of those present, unless the articles of incorporation require more than a majority vote. Here, not all the directors agree on whether to open a new location. To act on the proposal, the board must therefore meet. A valid meeting must have at least a quorum of the directors present, which by default here is a majority of the directors. To open the new location, a majority of the directors present at the meeting must vote in favor. Therefore, to open a new location: (1) the board of directors must meet, (2) a quorum (here, a majority) of directors must be present at the meeting, and (3) a majority of directors present at the meeting must vote in favor of opening the new location.

Who may serve as an incorporator?

A person or entity.

Close Corporations & Control Devices - Preemptive Rights At issue is whether a shareholder would have preemptive rights.

A preemptive right is the right of an existing shareholder to maintain her percentage of ownership in the corporation by being offered the opportunity to purchase shares of the corporation issued for cash before outsiders are permitted to purchase them. Generally, unless the articles of incorporation provide otherwise, shareholders do not have any preemptive rights (i.e., the right to buy a sufficient number of newly issued shares in order to maintain current voting strength). Additionally, preemptive rights DO NOT apply to: (1) shares issued as compensation; (2) shares issued to satisfy conversion or option rights created to provide compensation; (3) shares authorized in the Articles of Incorporation that are issued within 6 months of incorporation; (4) shares issued for consideration other than money; OR (5) shares issued without general voting rights but with preferential rights to distributions.

Pre-Formation Contract Liability - Liability of Promoter The issue is whether a promoter is liable for their conduct.

A promoter is a person who acts on behalf of a corporation that has not yet been formed. Under the RMBCA, a person is personally liable for any liabilities arising from their conduct when (1) he purports to act as or on behalf of a corporation, (2) knowing that no corporation was formed (actual knowledge is required). If multiple promoters are liable, then each will be jointly and severally liable. A promoter remains personally liable for pre-incorporation contracts even if the corporation subsequently adopts the contract. In such a situation, both the corporation and the promoter are liable.

Promoters' relationship with corporation

A promoter's fiduciary duty to the corporation is one of fair disclosure and good faith. *Breach of Fiduciary Duty Arising from Sales to Corporation* ---A promoter who profits by selling property to the corporation may be liable for his profit unless all material facts of the transaction were disclosed. If the transaction is disclosed to an independent board of directors and approved, the promoter has met his duty and will not be liable. If the board is NOT completely independent, the promoter still will not be liable for his profits if the subscribers knew of the transaction at the time they subscribed or unanimously ratified the transaction after full disclosure. Disclosure must be to ALL WHO ARE CONTEMPLATED to be part of the initial financing scheme. If the promoters purchase all the stock and subsequently sell their individual shares to outsiders, the promoters cannot be held liable for the profits from the sale of property to the corporation. *Fraud* ---Promoters may always be liable if plaintiffs can show that they were damaged by the promoters' fraudulent misrepresentations or fraudulent failure to disclose all material facts.

Shareholders - Meetings: Quorum & Voting The issue is whether there was a quorum.

A quorum MUST be present in order for the shareholders to take action at a meeting. Unless the Articles of Incorporation provide a greater number, a quorum exists when a majority of the shares entitled to vote are present. If a quorum exists, action on a matter (other than the election of directors) is approved if a majority of votes are cast in favor of the action UNLESS the articles of incorporation require a greater number of votes. Each outstanding share is entitled to one vote on every matter voted on at a shareholders meeting (unless the Articles of Incorporation provide otherwise).

Fundamental Corporate Changes - Sale of All or Substantially All of Corporate Assets The issue is whether the sale of all or substantially all of the corporate assets are in the usual and regular course of business.

A sale of all or substantially all of the corporation's assets is deemed a fundamental change if the sale is NOT in the usual and regular course of business. The following procedure MUST be followed by the corporation for a fundamental change: (1) adoption by the Board of Directors; (2) notice to each shareholder (whether or not entitled to vote) of a meeting to vote on the proposal - the notice must state the purpose of the meeting; (3) adoption by the shareholders by a majority vote (unless a greater number is required in the Articles of Incorporation or state law).

FUNDAMENTAL CORPORATE CHANGES *Disposition of Property Outside the Usual and Regular Course of Business*

A sale, lease, exchange, or other disposition of *all or substantially all* (e.g. more than 75% of a corporation's assets, accounting for at least 75% of its revenues) of a corporation's property outside the usual and regular course of business is a fundamental corporate charge *for the corporation disposing of the property.* Thus, the corporation disposing of the property must follow the fundamental change procedure.

Repurchases of shares

A share repurchase is a transaction whereby a company buys back its own shares from the marketplace. A company might buy back its shares because management considers them undervalued. The company buys shares directly from the market or offers its shareholders the option of tendering their shares directly to the company at a fixed price. Share repurchases are a popular method for returning cash to shareholders and are *strictly voluntary* on the part of the shareholder.

Shareholders - Meetings: Proxy Voting & Revocation of a Proxy The issue is whether a shareholder can vote without physically being present at a shareholder meeting.

A shareholder may vote her shares at a shareholders meeting without physically attending the meeting through the use of a proxy. A valid proxy must be signed on: (a) an appointment form; OR (b) an electronic transmission. An oral proxy appointment is invalid. A proxy MUST be accepted if on its face there are no reasonable grounds to deny its genuineness and authenticity.

Shareholders - Meetings: Waiver of Notice of Annual/Special Meetings The issue is whether a shareholder waived notice of an Annual or Special meeting.

A shareholder may waive notice by: (a) delivering a signed writing to the corporation; OR (b) attending the meeting and not objecting at the beginning of the meeting (or by no objecting to a particular matter that is not within the purpose described in the meeting notice).

Fiduciary Duties of Directors: Duty of Loyalty At issue is whether a director with a personal interest in a transaction is protected from personal liability when the board approves the transaction but the director fails to disclose all of the material facts of the transaction to the board.

A transaction cannot be set aside merely because a director had a personal interest in the transaction if the director disclosed the material facts of the transaction to disinterested members of the board or the shareholders, who approved the transaction, or the transaction was fair to the corporation. *NOTE: a SHAREHOLDER WHO CONTROLS THE MAJORITY OF SHARES OF A CORPORATION OWES FIDUCIARY DUTIES TO THE MINORITY SHAREHOLDERS* ---EX: If a parent corporation owns controlling shares of the subsidiary, the parent owes fiduciary duties to the shareholders of the subsidiary

FUNDAMENTAL CORPORATION CHANGES 2. *MERGERS* (B, Inc. merges into A Corp.) OR *CONSOLIDATIONS* (A Corp. and B, Inc. form C Corp.) Requirements? (4)

A. Board of director action (both corporations), AND notice to shareholders (they get a voice). B. Shareholder approval (generally both corporations). Same as with amending articles. C. No shareholder approval required if a 90 percent-or-more owned subsidiary is merged into a parent corporation. What is this called? ---Short form merger D. If merger/consolidation approved, surviving corporation delivers articles of merger or consolidation to Secretary of State.

FUNDAMENTAL CORPORATION CHANGES 6. DISSOLUTION. *INVOLUNTARY (by court order)* *2. A CREDITOR can petition because*

A. corporation is insolvent, and B. (1) he has an unsatisfied judgment or (2) the corporation admits the debt in writing.

C. WHAT IS THE STATUS OF THESE TWO DOCTRINES (de facto corporation & corporation by estoppel)?

Abolished in many states

Shareholder Meeting Voting: in General

Absent a contrary provision in the articles, each share is entitled to one vote. The articles may provided for weighted voting or contingent voting. If a quorum is present, shareholders will be deemed to have approved a matter if the votes cast in favor of the matter exceed the votes cast against the matter, unless the articles or bylaws require a greater proportion. Less than a quorum may adjourn the meeting.

*What are these more controversial things?* (3)

All things that will make the Board of Directors a little nervous when we look at them: 1. Excerpts of minutes of board meetings; 2. Accounting records; 3. Record of shareholders.

Officers - Removal of Officers The issue is how an officer may be removed from a corporation.

An Officer may be removed at any time with or without cause by: (a) the Board of Directors; (b) the Officer who appointed such Officer, unless the Bylaws or the Board of Directors provide otherwise; OR (c) any other Officer, if authorized by the Bylaws or the Board of Directors. An officer's removal DOES NOT affect the officer's contract rights (if any) with the corporation.

Capital Structure of Corporation *Debt Securities*

Debt securities arise where a corporation has borrowed funds from outside investors and promises to repay them. Holders of debt securities do NOT have an ownership interest in the corporation.

OFFICERS: Resignation and Removal

Despite any contractual term to the contrary, an officer has the power to resign at any time by delivering notice to the corporation, and the corporation has the power to remove an officer at any time, with or without cause. If the resignation or removal is a breach of contract, the nonbreaching party may have a right to damages, but note that mere appointment to office itself does NOT create any contractual right to remain in office.

IV. DIRECTORS: Meetings

Directors must attend in person (no proxies) or through telecommunications equipment if all participating directors can simultaneously hear each other No particular notice required for regular meetings Special meetings typically require two days' notice of date, time, and place (but not purpose) Attendance constitutes waiver of any required notice (unless attendance is for the sole purpose of protesting lack of notice)

In ruling on the motion to dismiss the derivative suit, if the court finds that (1) those recommending dismissal were truly independent and (2) they made a reasonable investigation, what will the court in most states do?

Dismiss. If we have those showings, the court will dismiss the derivative suit.

Distributions: Who May Receive—Shareholder of Record on Record Date

Dividends are declared payable to persons whom the corporate records show to be shareholders on a specified date, known as the "record date." The owner on the record date (not the date of declaration) is entitled to the dividend.

IV. SHAREHOLDER VOTING A. Who votes.

EX: Articles allow for 10,000 authorized shares. Corporation issues 7,000 shares. Then Corporation reacquires 1,000 of those shares. How many shares are outstanding? 6,000 *Unless the question says otherwise, assume that each outstanding share gets one vote. BUT you must be the "record shareholder" of the outstanding stock as of the "record date" to vote.*

Application of the Doctrines of De Facto Corporation & Corporation by Estoppel

Generally, if a de facto corporation is found, it is treated like any other corporation for all purposes, except that the state may seek dissolution in a quo warranto proceeding. Estoppel applies only on a case by case basis. The de facto doctrine applies equally in contract and tort situations, but estoppel generally is applied only in contract cases (on the rationale that a tort victim does not allow himself to be injured in reliance on the business's status as a corporation). If there is no valid incorporation and the facts do not support a de facto or estoppel argument, generally, the courts will hold only the ACTIVE business members personally liable (not passive investors), and their liability is joint and several.

Personal Liability & Piercing the Veil The issue is the liability of shareholders for corporate liabilities.

Generally, shareholders, directors, and officers are NOT personally liable for the liabilities and obligations of the corporation. However, courts may disregard the corporate form and hold individual corporate shareholders, directors, and officers personally liable for actions taken on behalf of the corporate entity. A court will pierce the corporate veil and hold the shareholders personally liable in the following situations: (1) the corporation is acting as the alter ego of the shareholders - where there is little or no separation between the shareholder and the corporation (i.e. where an individual utilizes the corporate form for personal reasons); (2) where the shareholders failed to follow corporate formalities; (3) the corporation was inadequately capitalized at its inception to cover debts and prospective liabilities; OR (4) to prevent fraud. Even if a court does not pierce the veil, a person is always personally liable for their own torts (i.e. negligence), even while acting as an agent for a corporation or organization.

Board of Directors Meeting - Board Action by Written Consent The issue is how a Board of Directors can act without a meeting.

Generally, the Board of Directors can only take action at a meeting. However (unless the Articles of Incorporation or bylaws provide otherwise), action may be taken without a meeting by the Board of Directors if: (1) each director signs a consent describing the action to be taken; AND (2) delivers it to the corporation. A director may withdraw his consent by a signed revocation delivered to the corporation prior to the corporation receiving the written consents signed by the other directors.

Board of Directors Meeting - Removal of Directors The issue is whether cause must be shown to remove a director.

Generally, the shareholders may remove a director, with or without cause, at a specially called shareholders' meeting, unless the articles of incorporation provide otherwise.

The issue is the vote required to remove a director when cumulative voting was used to elect the director.

Generally, when a director is elected through cumulative voting, the director cannot be removed if the votes cast against removal would be sufficient to elect the director if cumulatively voted at an election of the directors.

*FACT PATTERN 1: SETTING UP A BUSINESS AS A CORPORATION* I. TO FORM A CORPORATION, WE NEED A PERSON, PAPER, AND AN ACT A. PERSON:

INCORPORATOR. MUST HAVE ONE OR MORE.

Derivative Actions: Will Be Dismissed if Found Not in Corporation's Best Interests

If a majority of the directors (but at least two) who have no personal interest in the controversy find IN GOOD FAITH AFTER REASONABLE INQUIRY that the suit is not in the corporation's best interests, but the shareholder brings the suit anyway, the suit may be dismissed on the corporation's motion. BURDEN OF PROOF: ---To avoid dismissal, in most cases the SHAREHOLDER bringing the suit has the burden of proving to the court that the decision was NOT made in good faith after reasonable inquiry. ---However, if a majority of the directors had a personal interest in the controversy, the CORPORATION will have the burden showing that the decision was made in good faith after reasonable inquiry.

DIRECTORS: Approval of action

If a quorum is present, approval of action requires affirmative vote of a majority of the directors present

EXAM TIP: Usurpation of a corporate opportunity is a very common question. Whenever the facts of a question mention that a director learns of a business opportunity, be sure to consider whether her corporation would be interested.

If so, she must present the opportunity to her corporation, disclosing all material facts, and can take advantage of the opportunity personally only if the corporation decides not to pursue it. If the corporation is not given a chance to take advantage of the opportunity, the director breached the duty of loyalty and can be forced to turn over the opportunity and/or any profits derived from the opportunity to the corporation.

GENERAL RULE: Promoters is Liable on Preincorporation Agreements with 3Ps, absent a novation. *EXCEPTION: AGREEMENT EXPRESSLY RELIEVES PROMOTER OF LIABILITY*

If the agreement expressly relieves the promoter of liability, there is no contract; such an arrangement may be construed as a revocable offer to the proposed corporation; and the promoter has no rights or liabilities under the agreement.

Will Court Disregard Corporate Entity (Pierce the Corporate Veil)? ALTER EGO ("MERE INSTRUMENTALITY")

If the corporation ignores corporate formalities such that it may be considered the "alter ego" or a "mere instrumentality" of the shareholders or another corporation, *AND* some basic injustice results, the corporate veil may be pierced. These situations may arise when: 1) Owners do not treat corporation as a separate entity 2) Commingle personal and corporate funds 3) Use corporate assets for personal purposes, OR 4) Owners do not hold meetings, Parent/subsidiary corporations or affiliated corporations can be held liable for this

The issue is the vote required to remove a director when straight voting was used to elect the director.

If the corporation uses straight voting, then a director may be removed only if the number of votes cast to remove exceeds the number of votes cast not to remove the director.

II. OTHER STEPS TO ORGANIZE THE CORPORATION A. ORGANIZATIONAL MEETING.

If the initial directors were named in the articles, the directors hold the "organizational meeting." If they were not named in the articles, incorporators hold the organizational meeting, where they elect the initial directors (who then take over management). At the meeting, the board of directors (or the incorporators if no directors were named in the articles) must "complete the organization of the corporation." *What does that mean? Appoint officers and adopt initial bylaws*

Shareholder Liabilities: Liability Pursuant to Shareholder Agreement

If the shareholders enter into agreements that vest some or all of the right to manage the corporation in one or more shareholders, the managing shareholder(s) have the liabilities that a director ordinarily would have with respect to that power

EXAM TIP: Questions often require you to discuss whether a promoter will be liable on a preincorporation contract.

If you keep in mind that promoters are FORMING a corporation, these questions should be fairly easy to answer. For there to be a valid contract, someone must be bound to the third party. It can't be the corporation, because it does not exist yet. Therefore, the promoter is liable even though she was acting on behalf of the corporation to be formed. REMEMBER: if the agreement expressly relieves the promoter of liability, it will be treated as an offer to the corporation.

If they have a meeting, must it be held in the state of incorporation?

No

THE BOARD OF DIRECTORS MUST ACT AS A GROUP. Is an individual director an agent of the corporation?

No -- So individual directors have no authority to speak for or bind the corporation.

Suppose a shareholder brings a derivative suit and loses. Can other shareholders later sue the same defendants on the same transaction?

No. They are barred.

III. CONSEQUENCES OF FORMING A CORPORATION LIMITED LIABILITY If the corporation incurs a debt, commits a tort, or breaches a contract, are the shareholders personally liable for that debt?

No. This is "limited liability": shareholders generally are liable only to pay for their stock, not for corporate debts. (We'll see an exception in Fact Pattern 4.) BTW, are directors or officers vicariously liable for corporate debts? ---No So who is liable for corporate debts? ---The corporation itself

The board appoints people to carry out its policy. Who are they?

Officers Officers are AGENTS of the corporation, APPOINTED by the Board.

V. OFFICERS Status.

Officers are agents of the corporation. The corporation is the principal and the officer is the agent. Whether the officer can bind the corporation is determined by whether she has agency authority to do so (like actual or apparent authority). EX: The president generally has inherent authority to bind the corporation to contracts in the ordinary course of business.

V. OFFICERS Appointment and Removal

Officers are appointed by board of directors (not by shareholders) Officers may be removed by the board of directors If removal is in breach of contract, officer entitled to damages

Selection and removal of officers.

Officers are selected by and removed by the board, which also sets officer compensation.

OFFICERS: Indemnification

Officers have right to indemnification similar to directors

V. OFFICERS Authority: ordinary rules of agency determine authority and powers.

Officers have the *actual authority* given by the board, articles, and bylaws Officers have *apparent authority* to do whatever someone in their position would normally have authority to do Unauthorized actions may become binding on the corporation because of ratification, adoption, or estoppel. The corporation is liable for actions by its officers within the scope of their authority, even if the particular act in question was not specifically authorized.

OFFICERS: Standard of Conduct

Officers must carry out their duties in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances (duty of care), and in a manner they reasonably believe to be in the best interests of the corporation (duty of loyalty) AKA: business judgment rule *In ANY question relating to duties, add the following: "The director/officer/controlling shareholder who has a fiduciary duty will be presumed to be acting in a reasonable manner under the Business Judgment Rule."

Distribution: Rights After Declaration—Same as General Creditor

Once a distribution is lawfully declared, the shareholders generally are treated as creditors of the corporation and their claim for the distribution is equal in priority to claims of other unsecured creditors. However, a distribution can be enjoined or revoked if it was declared in violation of the solvency limitations, the articles, or a superior preference right.

Shareholders - Meetings: Right to Vote & Record Date At issue is the record date.

Only shareholders that are registered shareholders on record date are entitled to vote at a shareholders meeting. Thus, the owner of shares on the record date is entitled to vote those shares at the upcoming shareholders meeting even if he sells the shares before the meeting occurs (the transferee is not entitled to vote). However, if the shareholder executed an irrevocable proxy in favor of the buyer of the shares, then the buyer (not the record date shareholder) will be able to vote the shares at the meeting.

FUNDAMENTAL CORPORATE CHANGES *Share Exchange*

Only the shareholders of the corporation whose shares will be acquired in the share exchange need approve a share exchange; a share exchange is NOT a fundamental corporate change for the acquiring corporation.

A rideshare service company was incorporated in Delaware. The board of directors had adopted initial bylaws, and the company had issued stock. The company's shareholders wanted to amend the portion of the bylaws that addressed meeting attendance. The company's articles of incorporation did not specify any procedures for amending the bylaws. Which of the following groups, if any, may amend the rules about meeting attendance in the company's bylaws?

Only the shareholders. Under Delaware law, after the incorporators or the board of directors adopts initial bylaws, the power to make or amend bylaws shifts to the shareholders. Nevertheless, the articles of incorporation may grant the board of directors the authority to amend the bylaws subject to the shareholders' power to make or amend them. Here, the rideshare company is incorporated in Delaware. The board of directors has already adopted initial bylaws, and the company has issued stock. The power to amend the bylaws has therefore shifted to the shareholders. The articles of incorporation are silent on any procedures for amending the bylaws, so no power to amend the bylaws has been reserved for the board of directors. Therefore, only the shareholders may amend the bylaws to alter the rules for meeting attendance. *Note that the Model Business Corporation Act (MBCA) takes a different approach*. Under the MBCA, the board of directors may also amend the bylaws, even if the articles of incorporation do not expressly grant them the power to amend. Rather, by default, the board of directors may amend the bylaws unless: (1) the articles of incorporation reserve amendments exclusively to the shareholders, or (2) the shareholders expressly provide in a particular amendment that the board of directors may not amend, repeal, or adopt the bylaw. In a jurisdiction adopting the MBCA approach, both the board of directors and the shareholders would be able to amend the bylaws of the rideshare company.

Can the parties settle or dismiss a derivative suit?

Only with court approval -- The court may give notice to shareholders and get their input on whether to settle or dismiss.

For example, the controlling shareholders of a close corporation might deny the minority any voice in corporate affairs, fire them from employment, refuse to declare dividends, and refuse to buy the minority's stock (so the minority is getting no return on investment and has no voice is the business). Why do some courts let the minority shareholder sue here for breach of FD?

Oppression thwarts her legitimate goals for investing and she has no way out ---Remember in a close corporation, there is no public market for the stock. So if you don't like what is happening to you, you can't simply just sell the stock because there is no public market for the stock. So the courts step in with this FD.

The issue is whether an outstanding share is entitled to a vote.

Outstanding shares are the total number of shares issued by the corporation and held by the shareholders. Each outstanding share is entitled to one vote (regardless of class), UNLESS otherwise provided in the Articles of Incorporation.

Which shareholders get dividends?

Preferred means paid first (but not paid more). Then pay the common stock

The board of directors declares dividends totaling $400,000. We need to figure who gets what. 2. 100,000 shares of common and 20,000 shares of preferred with $2 preference.

Preferred means pay first. 20,000 preferred shares multiplied by $2 preference equals a total preference of $40,000. That is paid first. That leaves $360,000, which goes to the common shares. Because there are 100,000 of those, each common share gets $3.60. Nothing to add

Distributions: Preferences—shares may have a preference to distributions (3)

Preferred shares have a right to receive dividends before common shareholders may receive dividends. The right to preferred dividends may or may not accumulate if unpaid in a particular year, or may accumulate only if there are sufficient current earnings. Preferred shares have no right to a share of the distributions made on common shares unless the preferred shares provide that they are "participating" *1) Cumulative*—if distribution not declared or paid in a certain year, it accumulates until paid *2) Cumulative if earned*—preference accumulates only if profits for year were sufficient to pay preference *3) Participating*—receive stated preference and a share of the distribution made to common shareholders

At issue is the revocation of a proxy.

Proxies generally are revocable unless they say that they are irrevocable and are coupled with an interest (situations in which the proxy holder essentially pays for the right to be a proxy, such as where the proxy holder has purchased the underlying shares from the owner of record). Proxies may be revoked by a subsequent instrument or by the shareholder of record showing up to vote in person.

DIRECTORS: Voting & Quorum

Quorum - a majority of directors must be present at time vote is taken ---unless a higher or lower number is required by articles or bylaws (CANNOT be less than 1/3 of the board members) ---unlike shareholders, a director can break the quorum by withdrawing from a meeting.

Shareholder Agreements *2) Voting Agreement*

Rather than creating a trust (which is cumbersome), shareholders may enter into a written and signed agreement providing for the manner in which they will vote their shares. Unless the agreement provides otherwise, it will be *specifically enforceable.* It need *not be filed with the corporation* and is *not subject to any time limit* (PERPETUAL) *Shareholders retain both legal and equitable/beneficial ownership*

The issue is whether a reacquired share is entitled to a vote.

Reacquired shares by the corporation (also called treasury shares) are considered authorized shares, but are not outstanding shares of the corporation. These reacquired shares are NOT allowed to be voted at a shareholders meeting.

CLASSIC DUTY OF LOYALTY FACT PATTERNS: 3. Corporate Opportunity (Expectancy). Cheatem is a director of C Realty Corp., which develops condo projects. Cheatem learns of land that has been zoned for condos and buys it for himself as an investment. What are C's rights, if any, against Cheatem?

STANDARD: *A director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation. She must also use the care that a prudent person in like position would reasonably believe appropriate under the circumstances.* -- State the standard in full, then focus on the duty of loyalty portion, first sentence. *A director cannot USURP a corporate opportunity*. That means the director cannot take it until he (1) tells the board about it and (2) waits for the board to reject the opportunity.

CLASSIC DUTY OF LOYALTY FACT PATTERNS: 2. Competing Ventures. Sharon is a director of Ozzie's Music Co. She can also serve on the board of directors of Home Depot because it does not compete with Ozzie's. But can Sharon start her own music company?

STANDARD: *A director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation. She must also use the care that a prudent person in like position would reasonably believe appropriate under the circumstances.* State the standard in full, then focus on the duty of loyalty portion. What else do we say? ---Director cannot compete directly with her corporation. Directors are fiduciaries that CANNOT go into competition with the corporation. *Remedy against Sharon if she goes into competition:* ---Ozzie's gets a *constructive trust on profits* Sharon made from the competing venture.

Shareholder Liabilities: Close Corporations

Shareholder in a close corporation (i.e. a corporation with few shareholders) are generally held to owe each other the same duty of loyalty and utmost good faith that is owed by partners to each other.

What is the advantage of the PC?

Shareholders are generally not liable for corporate obligations or for other professionals' malpractice. ---Better than the partnership because we are not liable for each other's malpractice. Generally, the rules governing regular corporations apply to the P.C.

What does it mean that a corporation was undercapitalized when formed.

Shareholders failed to invest enough to cover prospective liabilities.

Shareholder & Member Litigation - Direct and Derivative Actions At issue is whether the action to compel the payment of a dividend is seeking to enforce a corporate right or a personal right.

Shareholders may bring two types of suits with regard to the corporations in which they own stock: derivative actions and direct actions. A derivative action seeks to vindicate wrongs done to the corporation, and a direct action seeks to enforce duties that a corporation owes to the shareholder. Before bringing a derivative action, a shareholder must first make a demand on the board of directors to act on the corporation's behalf, although this requirement is dispensed with in many states if the request would be futile (e.g., where a majority or all of the board is accused of wrongdoing, it is unlikely they will agree to bring suit against themselves). There is no similar demand requirement for direct actions. A suit to compel a dividend seeks to enforce a right that the individual shareholders have against the corporation; it is not seeking to enforce a right that the corporation has against another.

Shareholders May Act Without Meeting by Unanimous Written Consent

Shareholders may take action without a meeting by the unanimous written consent of all shareholders entitled to vote on the action.

Shareholder's Meetings: Eligibility to Vote

Shareholders of record on the record date may vote at the meeting. The *record date* is fixed by the board but may not be more than 70 days before the meeting. If the board does not set a record date, the record date is deemed to be the day the notice of the meeting is mailed to the shareholders. Unless the articles provide otherwise, each share is entitled to one vote.

Fundamental Corporate Changes - Dissenter's Appraisal Rights for Fundamental Changes The issue is whether dissenters have appraisal rights.

Shareholders who are dissatisfied with the terms of a fundamental corporate change are permitted to compel the corporation to buy their shares at a fair value. This right is called the "appraisal right" or the "dissenters' right." To use the appraisal remedy, the shareholders must file an objection to the transfer before or at the shareholders' meeting at which the vote is taken; they must not vote in favor of the plan; and then they must send the corporation a written demand for the fair value of their shares. The shareholders must also deposit their shares with the corporation as directed. If the corporation does not want to pay what the shareholders demanded, the corporation must file a suit to have the court determine fair value. Appraisal rights are NOT available to 1) the shareholders of publicly held corporations (i.e. corporations whose shares are listed on a national securities exchange or market, or national quotation system) or 2) of corporations with at least 2,000 shareholders and the share of the class or series involved have a value of at least $20M, (exclusive of the shares held by senior executives, directors, and shareholders owning more than 10% of the shares).

Corporate Finance - Consideration in Exchange for Shares At issue is what consideration is appropriate in exchange for shares.

Shares may be issued in exchange for almost any type of consideration, including: money; tangible or intangible property; past performance of services to the corporation (including services in establishing the corporation); and future promises of service (i.e. stock options) or payment of money/property to the corporation. The Board of Directors may determine the value of any nonmonetary consideration given, and absent fraud or bad faith, their determination is conclusive on the issue. The value determined is important in the context of a corporation whose Articles of Incorporation set a par value for shares, as shares CANNOT be issued for less than par value in that instance.

What is a corporate opportunity?

Some say it's something in the corporation's business line. There are other tests to throw in: ---Something the company has an interest or expectancy in; something defendant found on company time or with company resources Is the company's financial inability to pay for the opportunity a defense? ---Probably not *Remedy*: ---If Cheatem still has it, he must sell it to the corporation at his cost. ---If Cheatem has sold it at a profit, the corporation gets the profit. (Constructive trust).

Successor liability

Surviving corporation in a merger or consolidation succeeds to all rights and liabilities of the constituents A creditor of the constituent corporation that has disappeared can sue the survivor

B. CORPORATION BY ESTOPPEL:

THIS MEANS THAT SOMEONE WHO TREATS A BUSINESS AS A CORPORATION MAY BE ESTOPPED FROM DENYING THAT IT IS A CORPORATION. EX: You do business with people who hold their business out as a corporation. They think it's a corporation. You think it's a corporation. You write checks to the "corporation" and deal with it as a corporation. Turns out it's not a corporation. You sue the proprietors individually. Under this doctrine, you cannot win. You are estopped to deny that the business was a corporation. The doctrine can also prevent the improperly-formed "corporation" from avoiding liability by saying it was not properly formed. *Corporation by estoppel applies only in what kinds of cases?* ---Contract (NOT tort)

Formation of Corporation - Amending Bylaws The issue is whether the board of directors can amend the bylaws.

The Bylaws may be amended or repealed by shareholders. In addition, the Board of Directors may also amend or repeal the bylaws UNLESS: (a) the Articles of Incorporation exclusively reserves the power to the shareholders; OR (b) the shareholders, in amending/adopting/repealing a bylaw, expressly provide that the Board of Directors cannot amend/repeal/reinstate that bylaw. If the bylaw deals with director-nomination procedures, the Board of Directors retain power to safeguard the voting process, but it CANNOT repeal a shareholder approved bylaw.

Fiduciary Duties of Directors - Duty of Care The issue is whether the directors acted as reasonably prudent people would in a like position.

The business judgment rule is a presumption that a director's decision may not be challenged if the director acted in good faith, with the care that an ordinarily prudent person would exercise in a like position, and in a manner the director reasonably believed to be in the best interest of the corporation. Corporate law allows directors to rely on the opinions of disinterested experts and corporate insiders. *NOTE: a SHAREHOLDER WHO CONTROLS THE MAJORITY OF SHARES OF A CORPORATION OWES FIDUCIARY DUTIES TO THE MINORITY SHAREHOLDERS* ---EX: If a parent corporation owns controlling shares of the subsidiary, the parent owes fiduciary duties to the shareholders of the subsidiary

Amendments to Articles of Incorporation

The corporation can amend its articles with any provision that would be lawful in original articles. Certain "housekeeping" amendments (e.g. deleting the names of initial directors or changing the number of authorized shares after a stock split) can be made without shareholder approval, but most require approval by the shareholders.

V. PRE-INCORPORATION CONTRACTS Is the corporation liable on these contracts?

The corporation is liable on a pre-incorporation contract ONLY if it adopts the contract. *1. Express adoption*: board takes an action adopting the contract. See below. *2. Implied adoption* arises when: corporation accepts a benefit of the contract

Revocation of Voluntary Dissolution

The corporation may revoke a voluntary dissolution by using the same procedure that was used to approve the dissolution

*the business judgment rule ("BJR").*

The court will not second-guess a business decision if it was made in: 1) good faith, 2) was informed, and 3) had a rational basis. BJR is a presumption that when the board took the act, it did appropriate homework. That's why the burden is on the plaintiff to show that the board either did not do appropriate homework or did something galactically stupid. *Director is not a guarantor of success* ---When director signed on, he didn't say he would never make a mistake, just that he would follow duty of care: bring to the table the kind of care a prudent would in like circumstances. *In ANY question relating to duties, add the following: "The director/officer/controlling shareholder who has a fiduciary duty will be presumed to be acting in a reasonable manner under the Business Judgment Rule."

Derivative Actions: Demand Requirements

The shareholder must make a WRITTEN DEMAND on the corporation to take suitable action. A derivative proceeding may not be commenced until 90 days have elapsed from the date of demand, UNLESS, (1) the shareholder has earlier been notified that the corporation has rejected the demand; or (2) irreparable injury to the corporation would result by waiting for the 90 days to pass.

VII. DISSOLUTION AND LIQUIDATION Administrative Dissolution

The state may bring an action to administratively dissolve a corporation for reasons such as the failure to pay fees or penalties, failure to file an annual report, and failure to maintain a registered agent in the state The state must serve the corporation a written notice of the failure. If the corporation does not correct the grounds for dissolution or show that the grounds do not exist within *60 days* after service of notice, the state effectuates the dissolution by signing a certificate of dissolution.

DIRECTORS: Number, Election, and Term of Office

There need only be one director. However, the articles or bylaws may require as many directors as desired, without limit. The directors are elected at each annual shareholders' meeting, subject to contrary provisions in the articles. If there are at least 9 directors, they may be divded into two or three equal size classes, with terms of office expiring in staggered years from one to three. *Vacancies* - on the board may be filled by the shareholders or directors.

B. AMOUNT OF CONSIDERATION. Treasury stock.

This is stock the company issued and then reacquired. It is considered authorized, and the corporation can then resell it. If it does, the board sets any issuance price it wants.

Suppose D is sued for breaching duties to the corporation. She then settles that case. Does this case fall into Category 1, Category 2, or Category 3?

Three: company MAY indemnify. Why? ---Category 3 is a catchall. If the case doesn't fall in Category 1 (here, it does not because there was no holding against her) or Category 2 (here, she was not successful in defending the claim on the merits or otherwise) it must fall in Category 3.

*FACT PATTERN 2: ISSUANCE OF STOCK* I. BACKGROUND

To start and operate a corporation, we need money (capital). The corporation can either borrow the money or raise it by selling stock (or both). Either way, the corporation will "issue" a "security" to the person. Security is a fancy word for investment.

Traditionally, a "business purpose" clause was included; but now the MBCA presumes that a corporation is formed to "conduct any lawful business business" and is allowed to undertake any act that is necessary or convenient for carrying on the business purpose, including making charitable donations and lending money to employees, officers, and directors.

Under modern corporation statutes, a corporation is given the power to do all things necessary or convenient to effect its purposes. Most modern statutes also provide that a corporation may be formed for any lawful purpose. *Combined, these provisions provide authority for a corporation to do almost anything that is rationally related to a business purpose*. *Thus, unless an exam question restricts a corporation's purposes, you should usually find corporate acts within the corporation's powers.*

Promoters' relationship with third parties—Preincorporation Agreements

Under the MBCA, anyone who acts on behalf of a corporation knowing that it is not in existence is jointly and severally liable for the obligations incurred. Thus, if a promoter enters into an agreement with a 3P on behalf of a planned but unformed corporation, the *promoter is personally liable* on the contract. This *liability continues after the corporation is formed*, even if the corporation adopts the contract and benefits from it. The promoter will be released from liability ONLY if there is an express or implied *novation* (i.e. agreement among all three parties to release the promoter from liability and substitute the corporation)

Piercing the corporate veil

Under this doctrine, the courts will disregard a corporate entity and hold individuals personally liable for corporate obligations. Two common scenarioes: 1) alter ego (AKA "mere instrumentality") 2) inadequate capitalization at time of formation

Cumulative voting (as opposed to the other option, "straight voting")

Usually only in close corporations; gives smaller shareholders a better chance of electing someone to the board of directors. This is available ONLY when shareholders elect directors. With cumulative voting, we don't vote for each seat individually (unlike "straight voting"). ---We have one at-large election. The top two (or whatever) finishers are elected to the board.

Special fiduciary duty in close corporations.

We just saw that whoever manages the corporation owes the duties of care and loyalty to the corporation. *In many states, courts impose a fiduciary duty on shareholders owed to other shareholders. Why?* ---Because a close corporation looks like a partnership (with few owners, who usually are employed by the business). Because partners owe each other a fiduciary duty of utmost good faith, these courts apply the same duty in the close corporation. -- If there is oppression of minority shareholders, they can sue the controlling shareholders who oppress them for breach of this fiduciary duty.

The issue is whether the directors will be found to have breached their duty of loyalty.

When director's have a conflicting personal interest in a transaction, most states require the directors to obtain approval of the transaction from a disinterested majority of directors without a personal interest in the transaction (but at least two) or from the shareholders, after disclosure of all of the facts material to the transaction. If neither of these are done, the interested director must prove the transaction was fair.

Redemption of Shares

When the corporation has a right to *compel* a stockholder to sell his shares back to the corporation. This right must be stated in the articles of incorporation and is subject to the restrictions on making distributions. Redeemable shares have a set call price, which is the price per share that the company agrees to pay the shareholder upon redemption. The call price is set at the onset of the share issuance

Class Voting on Article Amendments

Whenever an amendment to the articles of incorporation will affect only a particular class of stock, that class has a right to vote on the action even if the class otherwise does not have voting rights.

SHAREHOLDERS CAN REMOVE DIRECTORS BEFORE THEIR TERMS EXPIRE. Shareholders hire AND fire directors. On what bases can shareholders remove a director?

With or without cause

For close corporations, will shareholders entitled to vote on the merger or consolidation and shareholders of subsidiary in short-form merger have the right of appraisal?

YES.

S, a shareholder of C Corp., sues the board of directors of C Corp. for breaching the duty of care or loyalty. Derivative suit?

YES. That is always derivative. Why? Corporation could sue, because these duties are owed to the corporation. Vertical duties owed by the D/Os to the corporation.

V. PRE-INCORPORATION CONTRACTS Is the promoter liable on these contracts?

YES. Unless the contract clearly says otherwise, the promoter is liable on pre-incorporation contracts until there is a *novation*. A novation is an agreement of the promoter, the corporation, and the other contracting party that the corporation replaces the promoter under the contract.

Can S revoke the proxy even though it states that it is irrevocable?

Yes

Will Promoter be liable on the lease if Oscar de la Rental Cars, Inc. is formed and adopts the lease?

Yes - here there is no novation -- Remember: Adoption makes the corporation liable too, but does not relieve P. So on this fact pattern, both the corporation and P are liable.

C. LOANS (Special Rule). Can the corporation make a loan to a director?

Yes if reasonably expected to benefit the corporation EX: Board makes a loan to director to take business college classes. ---This is fine. Will make him a better director; reasonably expected to benefit the corporation

Incorporators put together the proper documents and mail them to the Secretary of State. Unbeknownst to them, the documents are lost in the mail. In the meantime, the business is being operated as a corporation, and enters a contract. Are the shareholders personally liable on the contract?

Yes unless court applies de facto corporation.

B. Is post-incorporation subscription revocable?

Yes until accepted by the corporation What does that mean? At what point are the corporation and the subscriber obligated under a subscription agreement? ---When the board accepts the offer. At that moment, we cannot get out.

Is the right of appraisal the shareholder's exclusive remedy if she does not like a fundamental change?

Yes, absent fraud

A shareholder acquired a significant majority of the outstanding voting shares in a corporation. Pursuant to the corporation's bylaws, the corporation had a board of three directors elected by a majority vote of the shareholders. The bylaws also allowed for cumulative voting. At the annual meeting, the majority shareholder voted all his shares for only one director. This meant that only one director received enough votes for re-election under the corporation's bylaws. The minority shareholders objected, arguing that the corporation could not act through only one director. The majority shareholder disagreed, arguing that the bylaws could be amended to allow only one director to manage the corporation. The corporation was governed by the laws of a jurisdiction that followed the Model Business Corporation Act. May the bylaws be amended to allow a sole director to manage the corporation?

Yes, because the board may vote to change the number of directors required to manage the corporation. Today, both the Model Business Corporation Act and the Delaware statutes permit a sole director to be an entire corporate board. A corporation may also require a specific number of directors in either the certificate of incorporation or the bylaws. Raising or lowering the number of directors specified by a certificate of incorporation requires amending the certificate by shareholder vote. In contrast, changing the number of directors specified in the bylaws may be accomplished simply by a vote of the board of directors. Here, because this corporation is governed by the Model Business Corporation Act, the law allows the corporation to have a board of directors with only one director. However, the corporation will need to amend its own rules to reduce the number of directors on its board from three seats to just one seat. This corporation set the number of director seats in its bylaws, not the certificate of incorporation. Therefore, the existing board of directors may vote to amend the corporation's bylaws to allow only one director to manage the corporation.

DUTY OF LOYALTY: Can directors set their own compensation as directors or officers?

Yes, but it must be reasonable and in good faith. If it is excessive, they are wasting corporate assets and breaching the duty of loyalty.

Are there dissenting shareholders' rights of appraisal?

Yes, for shareholders of the selling corporation (but not for the shareholders of the buying corporation).

On January 10, P, acting as a promoter for a corporation not yet formed, leases a building from Don Draper and signs the lease "Oscar de la Rental Cars, Inc." On February 20, Oscar de la Rental Cars, Inc. is formed. -- Is the corporation liable on the contract?

Yes, if it adopted the contract. How can that happen? 1. Express: board takes an action adopting the contract. See below. 2. Implied adoption arises when: corporation accepts a benefit of the contract

On February 2, 2018, S sent a letter to secretary of C Corp. authorizing Pam to vote her shares. Can Pam vote S's shares at the 2018 annual meeting in July 2018?

Yes, this is a proxy

COURT ORDERED INDEMNIFICATION

a court may order indemnification when the court feels this is appropriate

The record date is

a voter eligibility cut-off. EX: C Corp. sets its annual meeting for July 7 and record date for June 8. S sells B her C Corp. stock on June 25. Who is entitled to vote the shares at the meeting, S or B? ---S. Because she owned it on June 8. Doesn't matter that she doesn't own the stock on the actual vote date.

*Shareholder voting trusts and voting agreements.* X, Y, and Z own relatively few shares of C Corp. They ask for your advice on how they might pool their voting power. Two things to discuss:

a. 4 Requirements for voting trust. (10-year maximum.) [cumbersome] OR b. Requirements for voting ("pooling") agreement. [easier]

To perfect your right of appraisal in a close corporation: (3)

a. Before the shareholders vote, file with the corporation a written notice of objection and intent to demand payment; b. At the shareholder vote, abstain or vote against the proposed change; and c. After the vote, within time set by corporation, make written a demand to be bought out and deposit stock with the corporation.

C. Procedure for *INSPECTING more controversial things*:

same as above except here the demand *must state a proper purpose* for the demand. *What is a "proper purpose"?* One related to her interest as a shareholder

B. Procedure for INSPECTION non-controversial things:

shareholder makes a written demand *at least five business days in advance.* She need NOT state a proper purpose for these things. They include: (5) 1) articles, 2) bylaws, 3) minutes of shareholder's meetings for past three years, 4) names and addresses of current directors and officers, 5) most recent annual report of corporation.

Equity Securities (Stocks) *Authorized but unissued shares*—

shares described in the articles but not currently issued. Shares that have been reacquired by the corporation through repurchase or redemption. *Treasury shares*—former name for shares repurchased by corporation; now called authorized but unissued shares

Every time the shareholders vote, we must have a quorum represented at the meeting. Determination of a quorum focuses on the number of...

shares represented, not the number of shareholders. ---number of people is irrelevant, look at the number of shares. General rule: a quorum requires a majority of outstanding shares.

Equity Securities (Stocks) *Issued and outstanding* shares—

shares sold to investors

A director may waive improper notice of a meeting, either by

signing a notice of waiver and filing it with the minutes of the meeting, or simply by attending the meeting and voting. Absent special provisions in the articles or bylaws, a quorum will consist of a majority of the directors. A director will be considered present at a meeting if the director attends in person or through a remote communications device that allows each participant to simultaneously hear the other participants.

Unlike a notice for a special shareholders' meeting, a notice for a special directors' meeting need not ...

state a purpose. The meeting may be held anywhere within or outside the state.

What is the effect of merger or consolidation on the surviving corporation?

surviving corporation succeeds to all rights AND liabilities of the constituents. This makes sense because the constituent corporation disappeared. So a creditor of that corporation can sue the survivor. What is this called? Successor liability

A merger involves

the blending of one or more corporations into another corporation, and the latter corporation survives while the merging corporation(s) cease to exist following the merger.

In the right of appraisal process in a close corporation, if the shareholder and the corporation cannot agree on fair value of the shares, ...

the corporation sues and the court may appoint an appraiser.