Corporations

Authority of Corporate Officers: Liability

the personal liability of a corporate officer or corporate k's or debts is the same as that of any agent.

Management and Control- Directors: Director Participation

(1) A directors meeting should be a collective, deliberative proceedings at which directors lis-ten to the ideas and arguments of other directors and the then vote in the best interest of the company. Cannot vote by proxy. Should vote in best interest in accord with best judgment. Therefore, an agreement to vote a certain way is not allowed. (2) Action that may be taken at a meeting can be taken without convening if all the directors sign written consents.

Election of Directors: Cumulative Voting

(1) In cumulative voting: each share is granted as many votes as there are directors to be elected, and allows the shareholder to allocate his votes as he chooses. (2) The formula for calculating cumulation is: Shares Voting x__Directors to be elected + 1 (Directors to Be Elected + 1) EXAMPLE:ABC Corporation has three shareholders with 100 shares each. Two directors are to be elected in an election with cumulative voting. For any shareholders to determine one of the directors would require the following amount of shares: (300/(2+1)) + 1 = 101 However, if three directors are to be elected, then a shareholder with 76 votes could determine the election of one director: (300/(3+1)) + 1 = 76 (3) The impact of cumulative voting can be reduced by: staggering director's terms, reducing the number of directors, or classifying shares (4) Cumulative voting must be provided for in the articles of incorporation; it is not a right.

Insider Trading Action- Insiders

(1) Insiders (a) An insider is: Anyone who a) learns of material, non-public information about the corporation as a consequence of his corporate position; or has a fiduciary relationship to the corporation or the plaintiff.

Proxy Voting: Shareholder Voting Agreements and Voting Trusts

(1) Shareholder Voting Agreements (Pooling Agreements) (a) Shareholder voting agreements: Are, in essence, contacts designed to ensure the shareholders will vote in concert with regard to issues designated by the agreement. They are ordinarily used by minority shareholders to marshal the aggregate number of votes necessary to be elected to the board, or to veto corporate action of which they disapprove. Vote is usually set for a given person. (b) As such agreements are contracts where there has been a breach they are enforce-able in court. It is not self executing.

Management and Control- Directors: Meetings of the Board: Notice

(1) Special meetings: May be held only upon at least two days notice to the directors. The bylaws should prescribe what constitutes proper notice and may set a longer or shorter period required for notice. (2) Regular meetings: Unless otherwise stated, regular meetings fo the board may be held without notice f the time and place of the meeting are fixed by the bylaws or the board (3) Notice can be waived.

Sources of Finance: Equity Securities- Series of Stock

(1) The articles of incorporation may provide that any preferred or special class is to be divided onto series (a) This allows variations in the rights and preferences of the different series within a class. Usually tends to be preferred but can be common. EXAMPLE: Google has two classes of common stock—common stock A and common stock B. The founders of Google are the sole owners of common stock A, which has ten times the voting power of common stock B, which is what anyone else can purchase through the market.

Sources of Finance: Equity Securities- Preferred Stock

(1) The have priority over common stock in liquidation. IT is kind of like debt. The holders pay a certain amount for shares and get a dividend of a certain amount at intervals. It is a creature of K. There is still no duty to declare a dividend. But they cannot just give a dividend to common with preferred stock exits (2) Preferred stocks are controlled by the contracts which create them, and may have what-ever rights are in them. (3) Cumulative Dividends (a) If the dividend preference is cumulative, the shareholders have the right to receive: the same amount each year whether or not there are the funds to pay for it. They rollover into the next dividend period.

Voting Trusts

(2) Voting Trusts (a) Under a voting trust: There is a transfer of legal title to the shares to a trustee who votes them for a specified period according to the trust terms (e.g,m (b) Under the MBCA and most states: Voting trust cannot be for more than 10 years but you can renew (c) If a trustee breaches his duties: The shareholders can take trustee to court to enforce

Preferred Dividen Right to Vote

(4) Unlike common stockholders, preferred stockholders do not normally have the right to vote. (a) Exception:There are stocks that have a trigger. Where the voting rights may accrue if the dividend is not paid, or if an attempt is made to alter its rights by amending the articles of incorporation.

Sources of Finance: Redemption and Repurchase of Shares

1. A corporation is permitted to repurchase its own shares from time to time, by voluntary agreement or tender offer. 2. Redemption: (does not require approval) Occurs when a corporation has the right to compel a shareholder to sell his shares back to it: This must be stated in the articles of confederation; it usually applies only tp preferred stock, and gener-ally must be made ratabley among all the shares in the class; a redemption call forms a K, which a shareholder can enforce by suing for the redemption price.

Sources of Finance: Equity Securities- Common Stock

Every corporation needs at least one class of common stock. This common stock represents the residual ownership interests. These are considered to be the long term investors whom the directors have a fiduciary duty to.

Duty of Care-Personal Liability

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Sources of Finance: Equity Securities- Fractional Shares

1) A portion of a share. A corporation may de-fractionalize shares without voter approval. (2) The MBEA has done away with the designations of stock and said that corps can issue different classes of shares with different series in each class

Fiduciary and Other Duties of Management and other Shareholders-Duty of Loyalty

1. A conflict of interest constituting a breach of the duty of loyalty may arise where the individual: a. has business dealings with the corporation b. Takes advantage of a corporate opportunity c. enters into competition with the corporation 2. While these succeed more often than duty of care claims, the business judgment rule still applies and protects directors

Management and Control- Directors: Meetings of the Board: Time and Place

Time and Place (1) Meetings of the board may be held anywhere, either within or outside the state. They bylaws ma specify the time and place for meetings, but absent such a bylaw, the directors may select the time and place.

Fiduciary and Other Duties of Management and other Shareholders-Duties of Controlling Shareholders

1. Majority or controlling shareholders of a corporation owe a fiduciary duty to minority shareholders. 2. Sale of Control a. As a general rule: Even though sellers of a controlling block of shares receive a control premium above the fair market value, the sellers do not sharer that premium with all shareholders b. Exceptions: (1) If the seller is, in effect, selling an office of the corporation (2) If the buyer offered to purchase the entire corporation, but the seller reframed the transaction as just a purchase of sellers shares (3) If the seller sells to someone who he knows will loot the corporation

Management and Control- Directors

1. Number a. The minimum number is set by statute. Only one is required under the MBCA. The articles in-corporation may provide a variable range in the size of the board. 2. Election a. The initial directors are chosen by the incorporators. b. Directors are usually elected: At the annual meeting for a one year term. IF the ext annual meeting is not held, or if there is a deadlock so that successor directors are not elected, the directors remain in office until their successors are elected and qualify as directors. Removal a. Unless otherwise stated, the board can be removed with or without cause by a majority vote of the shares entitled to vote. The removal can only be accomplished at a meeting called for that purpose with notice.

Formation of the Corporation- Organization Meeting and Bylaws

1. Once the articles of incorporation are filed: The board of directors will meet and appoint officers 2. At the organizational meeting, the directors will: a. Appoint directors b. Draft bylaws (the roadmap of the corporation)

Pre-incorporation Transactions: Initial Shareholders

1. Shareholders may be there from the beginning or the promoter may be a shareholder 2. A person becomes a shareholder by: Agreeing to put in capital and get some number of the shares out (purchase shares pursuant to subscription for shares either before or after incorporation. At the beginning usually sold all for the same consideration. 3. In a pre-incorporation scenario, promoters enter into share subscriptions with people intended to be shareholders: These are K's enforceable against the corporation to buy shares that will be issued. a. Under the MBCA, stock subscriptions are irrevocable for six months unless they say otherwise.

Dividends and Distributions- Refusal to Issue Dividends

A board of directors cannot refuse a declaration of dividends if: a shareholder can prove that the directors refusal to declare a dividend amounted to fraud, bad faith, or an abuse of discretion, a court of equity can intervene to compel declaration

Fiduciary and Other Duties of Management and other Shareholders-Limiting Liability

A corporation may also include a provision: eliminating or limiting the liability of a director to the corporation or its shareholders for money damages for any action or failure to act as a director

Piercing the Corporate Veil- Alter Ego

A plaintiff can allege: The corporation is not run as a corporation but as the pocketbook of the shareholder. (1) This argument works best in a situation when there is only one shareholder, like a sole proprietorship.

Pre-incorporation Transactions: Promoters

A promoter is one who causes the corporation to be formed, organized and financed. Often become the incorporators, shareholders, officers and directors in small corporations. Their function is to set up the corporation and establish it on firm footing. Typically they will: Manage the initial financing of the corporation; arrange for a meeting with the investors; negotiate and prepare the reincorporation agreements; lease office space; and contract for initial needs of the business.

Pre-incorporation Transactions: Third Parties

A third party who enters into a K with a promoter is liable from the K's inception. The corporation cannot later claim the benefits of the promoter's contract with a third party, unless the third party accepts performance by the corporation. Generally the promoter may always enforce 2. A promoter can enforce a contract against a third party provided the promoter is himself willing to be personally liable under the contract.

Introduction to Corporations

A. Note: This chapter is devised to present the subject of Corporations based on general law. The summary generally follows the Model Business Corporation Act ("MBCA" or "Model Act"). B. The major characteristics of a corporation are (OL I.D): 1. Corporation has freely transferable shares 2. They have a continuance existence despite the death of shareholders 3. Corporations have limited centralized management. Delegated to a board of directors. Simply being a shareholder does not give one power the right to co manage. C. A corporation can be formed for any lawful purpose.

Authority of Corporate Officers: Ratification

Acts of corporate officer or agent that have not been properly authorized may be ratified by the board. It can be explicit or implied.

Piercing the Corporate Veil- Inadequate Capitalization

Although adequacy of capitalization is a factor considered by the courts, inadequate capitalization alone will not ordinarily lead to piercing the veil if corporate formalities are properly ob-served.

Piercing the Corporate Veil- Inadequate Capitalization

Although adequacy of capitalization is a factor considered by the courts, inadequate capitalization alone will not ordinarily lead to piercing the veil if corporate formalities are properly observed.

Securities Issuance: Consideration for Shares

Amount of Consideration (1) Consideration for shares: In return for shares hopefully equal to fair market value. It can be cash, property, or services. (2) Par value shares: Board of directors had to issue a par value and they would have to issue it at that value.

Examples of Corporation not following corporate formalities

An alter ego argument alleges that the corporation does not follow corporate formalities. Examples of this include: (1) The corporation has no separate existence of its own, and in fact the shareholder was the alter ego of the corporation or a mere instrumentality of a parent corporation. (2) The corporation has been used fraudulently or for an improper purpose Like using corporate assets for personal benefit (3) Failure to observe proper formalities (i.e. not voting etc...) (4) Commingling of assets

Piercing the Corporate Veil- Alter Ego: Sister Corporations

An argument can also be made with sister corporations where: Common ownership of corporations and they are not kept separate. Commingle funds, sharing of assets and offices. Common control of a group of separate entities and failing to observe formalities.

Shareholders Meeting-Written Consent

Any shareholder action that may be taken at a meeting can be taken without a meeting if all of the required number of shareholders entitled to vote on the matter act by written consent, or as otherwise provided by the articles of incorporation

Authority of Corporate Officers: Removal

Any vacancy may be filled in the matter proscribed by law or by the directors. Any officer or agent may be removed by the board of directors whenever, in its judgment, the best interests of the corporation will be served by such removal. Can be removed with or without fraud.

Formation of the Corporation- Articles of Incorporation

Articles of Incorporation (OL II.A) 1. A corporation is ordinarily created by: filing articles of incorporation in the state they want to govern their corporation.

Promoter liability pre-incorporation

As a general rule, promoters will be personally liable on preincorporation contracts unless: a. The parties intend for the proposed corporation to be held liable and b. The corporation ratifies (if the corporation is actually formed) This is called a novation

Financing the Corporation-Securities Issuance: Authority

Authority a. A corporation is empowered to issue: the amount of shares authorized in the articles of incorporation Any unissued stock authorized under the articles may be issued: (1) by vote of the shareholders; or (2) by vote of the directors under the authority of the: a provision of the bylaws or a vote by the shareholders. Once issued, shares are outstanding, in the hands of shareholders shares are authorized, issued and outstanding

Pre-incorporation Transactions: Pre-incorporation Contracts

Before incorporation, promoters frequently enter into consensual agreements with third parties relative to the proposed corporation. As the corporation is not in existence, it cannot contract in its own name, nor can the promoters con-tract on the corporation's behalf as its agents. Generally, promoters are liable for the K's entered into on behalf of the corporation not yet formed, but where the contract specifically disclaims personally liability of the promoter, the obligee will not be able to successfully maintain an action against the promoter.

Securities Issuance: Certificated Stock

Certain things must be notified in the stock: transfer restrictions need to be clear and conspicu-ous. It must state the number of shares and the class of the stock. It must be signed by officers

Duty of Loyalty- Competing with the Corporation

Competition by a director or officer will not necessarily be a breach of fiduciary duty if he acts in good faith.

Piercing the Corporate Veil- Torts

Courts are more likely to pierce the veil in tort situations: Than contract situations. So look for the K vs Tort distinction.

Formation of the Corporation- Defective Incorporation (De Facto Corporation)

De Facto Corporation a. A de facto corporation may still have been formed if: (1) There has been a good faith colorable attempt to comply with the formalities; and (2) The principals thought the filing was successful.

Formation of the Corporation- Defective Incorporation (De Jure Corporation)

De Jure Corporation a. A de jure corporation: A corporation by law. It has met all formalities and is official.

Management and Control- Directors: Defects in a Meeting

Defects in quorum, notice, or voting may be cured by: Post meeting ratification, where the majority of the board: 1.) Signs a writing that approves the resolution. 2.) Fails to object after knowledge of the resolution is acquired

Duty of Loyalty-Corporate Opportunity

Directors and officers cannot take advantage of a corporate opportunity where: it properly belongs to the corporation. Unless 1.) The opportunity is fully disclosed to the corporation, the corporation is first given a chance to pursue the opportunity, and the corporation decides not to pursue the opportunity; or (2) The corporation could not have taken the opportunity.

Sources of Finance: Equity Securities

Equity Securities a.These represent capital of the corporation that is at risk in the business. These are like common and preferred stock b. Unlike partners in a general partnership, corporate shareholders have no right to repayment of the amount invested.

Fiduciary and Other Duties of Management and other Shareholders- Duty of Care

Duty of Care (OL VI.A) 1. In general, directors, officers, and incorporators of a corporation must perform their duties: a. In good faith b. In a manner reasonably believed to be I the best interest of the corporation c. With such care as a person in a like position would use under similar circumstances

Securities Issuance: Shareholders' Preemptive Rights (tested)

EXAMPLE: A closely held corporation has 4 shareholders. John, one of those shareholders, has a 40% share, giving him a strong minority interest. John may wish to retain his 40% interest in the company; this could be difficult, because the corporation could issue more shares which would reduce John's interest.

Duties of Controlling Shareholders (example)

EXAMPLE: A controlling shareholder sells his stock in a steel company to a syndicate of steel users who thereby gained a steady supply of steel at fixed prices during wartime in-stead of continuing to pay a premium to the company for a supply commitment. The court holds that the shareholder's receipt of a price substantially in excess of market price and book value was a premium received for sale of a corporate asset—the supply commitment premium—for which he was held accountable to the minority shareholders

Pre-incorporation Transactions: Pre-incorporation Contracts (examples)

EXAMPLE: Carl owns a supply store and wants Patty to purchase some equipment from him for her new coffee shop. Patty has yet to actually form the corporation, and Carl is aware of this. Carl tells Patty that he is okay with the corporation not yet being formed and convinces Patty to sign a contract with him. Events occur and Patty is unable to form the corporation. She may be personally liable for the equipment. If Carl intended to hold just the future corporation liable and not Patty individually, Patty may not be held personally liable.

Dividends and Distributions-Declaration of a Dividend

EXAMPLE: Disney declares on May 15th that it is declaring a dividend, to be paid out on June 3rd. May 15th is the announcement date. Disney also sets a record date of May 28th. Whoever is a shareholder on May 28th will be sent the dividends on June 3rd. As soon as Disney announces this dividend, it be-comes a contractual right for shareholders to receive this dividend. Unless the payment of dividends would be an illegal dividend, shareholders could sue to enforce their right. If someone purchases stock after the record date but before the date of distribution, they will not receive a dividend. a. If dividends are unclaimed, they will escheat to the state.

Shareholders Meeting: Election of Directors (tested over) [Straight Voting]

Election of Directors to Ensure Representation EXAMPLE: A corporation has 4 shareholders, each with 25 shares, so each has 25 votes. If three directors are up for election, each shareholder can vote their shares in each election. (1) In straight voting: Each share has one vote for each director; thus, a majority shareholder can elect the entire board of directors

Piercing the Corporate Veil- Failure to Comply With Corporate Formalities

Failure to vote, hold annual meetings, elect officers etc...

Fiduciary and Other Duties of Management and other Shareholders-Indemnification

Generally a. A corporation may indemnify an individual who is a party to a proceeding because he is a director against liability incurred in the proceeding b. Indemnification is mandatory if: a director, who is successful, wither n the merits or otherwise, in the defense of any proceeding to which he was a party because he was a director of the corporation against reasonable expense incurred by him in connection with the proceeding c. Corporations may also purchase directors and officers insurance.

Even where a promoter is held liable on the contract:

He may be entitled to reimbursement by the corporation if he undertook the K in good faith, at least to the extent that the corporation benefited from the K.

Articles of Incorporation-Duration

If not in the articles then it will be perpetual.

Securities Issuance: Authorization of Additional Shares

If the corporation wants to authorize more shares, it must amend the articles to authorize more shares.

If there are multiple promoters: (has been tested)

If there is more than one promoter of a corporation, they are fiduciaries to each other as well as the corporation. They must disclose to each other information concerning the formation of the corporation. Treated as mutual partners in a partnership There is a mutual agency among the promoters, such that each can bind the others on contracts within the scope of the promotion.

Management and Control (highly tested)

In General (OL V.A) 1. The hierarchy of authority allocates power between: the shareholders, who own the corporation and elect the officers who appint the directors who manage the corporation. The highest authority is the state incorporation statute, it prevails over the articles of incorporation

In addition to express adoption...

In addition to express adoption of a contract through novation, a corporation can implicitly adopt the contract by performing under it or receiving benefits.

Duty of Care-Statutory Liabilities

In the absence of good faith action or reliance on the enumerated items, directors are subject to the following liabilities under the model act: Improper declaration of a dividend; distributions during liquidation; improper redemption and repurchase of shares or purchasing corporation's shares; failure to give notice to barred creditors.

Fiduciary and Other Duties of Management and other Shareholders-Rule 10b-5 and Insider Trading in Securities

Insider trading is the situation where:

Management and Control- Directors: Quorum of Directors

Is the number of directors that must be present for the board to be legally competent to transact businesses. Unless otherwise stated, a majority qualifies as a quorum.

Articles of Incorporation: Mandatory Provisions (possible bar issue)

Mandatory Provisions (possible bar issue) a. Under the Model Act, the articles of incorporation must include: (1) Incorporators names and addresses (2) Name of the corporation (3) Name and address of the original agent for service of process (4) Number of the shares the corporation will issue (5) The purpose of the corporation

Shareholders Meeting: Voting of Shares

Note that: (1) Stock owned by a partnership: The partners must agree by at least a majority of partners. Can be vote by a single partner (2) Stock owned by a corporation: May be vted under the terms of the partnership, or by the majority of partners.

Management and Control- Officers: Number of Officers

Number of Officers a. Four officers used to be required but now leaves it to the articles and the bylaws

Pre-incorporation Transactions: Promoters' Relationship to the Corporation

Promoters stand in a fiduciary relationship to the corporation, its subscribers of stock, and those who are expected will afterwards buy stock from the corporation . Are under a duty to avoid self-dealing

Formation of the Corporation- Piercing the Corporate Veil

Recall that a key characteristic of corporations is that they have limited personal liability for share-holders. a. Exception: Piercing the corporate veil allows them to find the shareholder personally liable. A court may disregard its separate entity and hold shareholders or affiliated corporations liable on corporate obligations.

Sources of Finance: Equity Securities- Shareholders' Rights

Shareholders have several rights, including: (a) Right to residual or liquidation (b) Right of dividend. There is no duty to every declare a dividend but if they do give out a dividend the shareholder has a right to it. Large corporations tend not to give out dividends. They use profits to reinvest (c) Voting rights- they vote on directors, merger, articles of incorporation. All shares have equal voting rights though there can be different kinds of shares. Every corp. has to have at least once class of common stock.

Management and Control- Shareholders

Shareholders have the right to: a. Elect and remove directors; (seen as the biggest right but power depends on percentage of shares) b. Approval any amendments to the articles of incorporation; (don't have right to mandate amend-ment) c. amend the bylaws d. approve fundamental changes in the corporation, such as a merger, sale of substantially all as-sets, or dissolution

Shareholders Meeting

Shareholders' Meetings a. Shareholders act: at an annual meeting b. The Annual Meeting (1) A meeting of shareholders has to be held at least once a year. (a) Under the MBCA: if the annual meeting is not held within 15 months after the last meet-ing: the shareholders may petition a court to order the annual meeting (2) The bylaws may specify the date of the annual meeting. c. The Special Meeting (1) May be called by the president, the directors or on written application of the holders of 10% of the shares entitled to vote d. Notice (1) Written notice stating the place, date, hour and purpose of the meeting between 10 and 60 days prior to the meeting. It may be waived.

Sources of Finance: Dividends and Distributions- Shareholders' Right to Dividends

Shareholders' Right to Dividends- is a distribution by a corporation to its shareholder of cash or property of the corporation a. If the board of directors does issue a dividend: then every shareholder has a right to them, they are not to be issued piecemeal. b. To prevent a board of directors shifting assets to shareholders and away from creditors: Boards of Directors can only dividend out surplus. Surplus is the difference between a corporations net assets (total assets minus total liabilities) and its stated capital, or the stated value of the corporation's multiplied by the number of outstanding shares. Can only distribute capital at the end of corporations life and after all creditors have been paid. (1) Additionally, a board of directors cannot issue a dividend if: to avoid paying creditors right before declaring bankruptcy. (if it makes corp insolvany) (a) The consequences of this are that directors would be liable for such debts and the shareholders would have to return their distributions.

Shareholders Meeting: Shareholders' Right to Information-Statutory Right

Statutory Right (1) Shareholders of record are entitled to examine the original, or attested copies, of: (a) The articles of incorporation (b) The bylaws (c) The records of all meetings of incorporators and of shareholders; and (d) The stock and transfer records, which is to be prepared on the basis generally accepted accounting principals (2) Shareholders can demand information provided: (a) They make a good faith demand for proper purpose; (b) he describes with particularity his purpose and the records he desires to inspect; and (c) the record are directly connected with his purpose

A promoter's self-interested transaction with the corporation:

They are not perse bad, particularly if no further contemplation of shareholders exists. But if they are going to have new stockholders there must be disclosure and approval because with self interested transactions the board can be liable for actions later on by those new stockholders. It is important where additional shareholders are contemplated.

Management and Control- Directors: Committees

The board may delegate its power to officers and executive comities Cannot delegate the power to: 1.) authorize payment of any dividend; 2.) approve or recommend shareholder actions or proposals required to be approved by shareholders; 3.) Fill vacancies of the board; or, 4.) adopt, amend, or appeal bylaws.

Promoters' fiduciary duties

The fiduciary duties the promoter owes to the corporation include the duty of disclosure: Once the corp. is formed the promoter has to disclose to the board what the promoter has done. If the cost and manner of acquisition of the assets by the promoter were fully disclosed to an independent board of directors, and the board approved the transaction, the promoter has not breached his fiduciary duty of loyalty and he may keep any profit from the sale. The worry is about self interested promoters. a. Disclosure is important because, at the organizational meeting of the incorporators: The board can adopt or approve the actions of the promoter. We want to make sure the promoters actions are legit. That they are no misleading investors while representing the corporation.

Articles of Incorporation- name

The name of the corporation: Must have the words corporation, company, incorporated, or INC to put people on notice they are dealing with a corporation

Shareholders' Right to Information-Federal Securities Laws on Disclosure

The shareholders right to info is protected by federal securities law. Unless there is an exemption, the Securities Act of '33 requires that all issuers proposing to offer securities through any means of interstate commerce file a registration statement wit the SEC Public companies re required to make continued disclosures to shareholders by filing reports and other disclosures with the SEC.

Where a promoter has breached a fiduciary duty

There can be an action by the corporation to set the whole transaction aside. Or they can hold the promoters liable for secret profits. (regurgitation)

Shareholders Meeting-Record Date

There must be a record date that shareholders of that date have the right to vote

Financing the Corporation- Sources of Finance

These are of two common sources of finance: a. Sell equity shares (common or preferred shares) b. Debt (issuing debts securities or bonds or you can get a loan)

Sources of Finance: Debt Securities

These represent money loaned to the corporation, and a person holding debt securities is a creditor of the corporation. The creditors rights are fixed by the instrument creating the debt, usually entitled to repayment of his principal at a specified time, with a return on the principal in the form if interest. These are creditors and they have a priority over others upon liquidation then to equity holders

Management and Control- Directors: Dissent

To avoid liability for an improper vote: The director may: object at the beginning of the meeting to holding or transacting business at the meeting; 2.) Dissent or abstention from the action entered in the minutes of the meeting; or 3.) Delivery of written notice of dissent or abstention to the presiding officer of the meeting before adjournment, or to the corporation immediately after adjournment.

Duty of Loyalty-Business Dealings With the Corporation

To rebut the presumption of the business judgment rule:

Formation of the Corporation- Ultra Vires

Ultra Vires (OL II.D) (look out for a corps q where they give you the purpose of the corp) 1. Historically, an ultra vires action by a shareholder asserted: that the corporation has gone beyond the power or purpose of the corporation 2. The ultra vires doctrine has little applicability today: because few corps state what their purpose is beyond "a lawful purpose"

Shareholders Meeting-Quorum

Unless the articles of incorporation or the bylaws provide otherwise, a quorum is typically a majority of the shares entitled to vote.

Management and Control- Directors: Compensation

Unless the articles state otherwise, the board of directors may fix the compensation of directors.

Novation of the promoter

Where a corporation has been formed it can adopt the contract and insert itself into it in place of the promoter; this is novation. a. The ideal way for novation to occur: The corporation issues a board resolution that deems the K is adopted by the corp. (express novation) A novation occurs if the corporation b. Even if a principal is fully disclosed: a novation will release him from that liability

Shareholders Meeting: Proxy Voting

a. A proxy Is the grant of authority by a shareholder to another person to vote the shareholders stock; it may also mean the instrument granting the authority, or the agent to whom authority is granted b. A proxy is generally valid: For 11 months unless it states some other duration (1) Exception: If coupled with an interest and not freely revocable. c. Revocation can be made through notice or by granting the proxy to someone else.

Management and Control- Officers: Authority of Corporate Officers

a. Corporate officers are agents and employees of the corporation. b. The authority of a corporate officer may be either actual or apparent. c. Actual authority: Can have express or implied authority expressly or impliedly authorized in the board approval of actions or under the certificate of incorporation d. Apparent Authority (1) An officer may also have apparent authority to a third party where: Where a corporation should have recognized that a third party would likely view the officer or agent in question as possessing the authority to bind the corporation to the agreement in question, it cannot avoid the transaction based on the concept of apparent authority.

Articles of Incorporation- Optional Provisions

a. Names and addresses of initial directors b. Provisions regarding management c. Rights of shareholders d. Preemptive rights

Bylaws

a. Roadmap of the corporation- who has decisions making power, what will be voted on, the types of shares, day to Some stuff cannot be taken out based on statutes Can be the private rules of the corp. or taken from the statute. b. Bylaws can be altered, amended, or appealed: By the shareholders or the board of directors. It is subject to change more than the articles of incorporation.

Rule 10b-5 and Insider Trading in Securities: Rule 10b-5

a. State law governing insider trading in corporate securities has largely been eclipsed by federal law—the Securities Exchange Act of 1934. b. Elements: (1) A misrepresentation or omission of a material fact (2) Knowledge by the defendant of the misrepresentation or omission, or reckless disregard of the truth (3) Scienter (4) Reliance of the plaintiff and damages

Articles of Incorporation- Stock

a. Stock, or shares: Certificated interests that shareholders get in consideration for the capital they put into the corporation. b. The articles of incorporation must include: What the total number of shares the corporation will be authorized to issue. Can never issue more shares than authorized. (1) To authorize more shares: Need to amend the articles of incorporation c. Every corporation must have: Common stock d. The authorization to issue preferred stock: must be in the articles of incorporation.

Shareholders' Preemptive Rights- The MBCA

a. The MBCA: Does not have preemptive rights as the defaults except to the extent to the extent provided for in the articles of confederation

Duty of Care-Business Judgment Rule

a. The business judgment rule creates a rebuttable presumption that: Directors are honest, well-meaning, and acting through decision that are informed and rationally undertaken in good faith. b. In due care cases:

Formation of the Corporation- Defective Incorporation (Corporation by Estoppel)

a. This doctrine will bar a third party from: Saying you are not a corporation if they have dealt with you as a corporation. (always thought they were dealing with a corporation) This is an equitable remedy so need clean hands. b. In the same manner, a corporation which has held itself out to be a corporation cannot try to avoid liability under this theory.

If the corporation redeems—i.e., buys back—the shares:

b. If the corporation redeems—i.e., buys back—the shares: They are treasury shares. They are no longer outstanding but they are authorized and issued stock, so their purchase does not empower the directors to issue additional stock They can be restored to unissued share status As long as they are treasury shares, the shares have not voting, liquidation or dividend rights

Shareholders' Preemptive Rights- Preemptive and no preemptive rights

b. Preemptive rights are the rights of existing shareholders to: Acquire unissued or treasury shares in the corporation, or options or rights in proportion to their holdings of the original shares, when the corporation seeks to issue additional stock that would reduce existing shareholder's ownership percentage. The shareholder must have the money to purchase the additional sales. c. Even if a shareholder doesn't have preemptive rights: A shareholders equity suit may still block issuance of stock that would unfairly dilute or transfer control on a theory of breach of fiduciary duty under some circumstances, such as a sale for less than fair market value.

Shareholders' Right to Dividends: Contractual Rights to Dividends

c. Contractual Rights to Dividends (1) One means of assuring dividend payments is a provision in the articles of incorporation, the bylaws, or a shareholder agreement: (a) making dividends mandatory when earnings are available for dividends; or (b) limiting the amount of earned surplus that may be accumulated