Corporations
Appraisal remedy aka dissenters remedy
If a shareholder in a merger votes no and looses they are allowed the right to file a state court cause of action to prove that shares are more than what they are actually worth (get more $$) However when you vote yes, you forfeit this right. **only shareholders of the bidding company and shreholders of the target company are entitled to this remedy.
What constitutes bad faith on the part of corporate fiduciaries that would breach the duty of loyalty?
-subjective bad faith: when fiduciary conduct is motivated by an actual intent to do harm -intentional dereliction of duty of bad faith: Where the fiduciary intentionally acts with a purpose other than to advance the best interests of the corporation Where the fiduciary acts with the intent to violate applicable positive law (i.e., a knowing violation of the law) Where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties. The failure to exercise due care (i.e., gross negligence) DOES NOT CONSTITUTE ACTING IN BAD FAITH.
Exam Question #1: 3 circumstances in which the court has found (or a corporation statute allows a court to find) that a shareholder of a corporation owes a fiduciary duty to the other shareholders of that corporation.
1. Watered stock: when shareholder pays less than par value for shares that have been assigned value 2. piercing the corporate veil which is the main way because the court doesnt consider the corporation to be the principal but the owner. 3. NO defacto corporation or corporation by estoppel in jurisdictions that still recognize it. If a court holds that at the time the K was entered by the purported corporation, and corporation not in existence, obligations falls on shareholder **Some jurisdictions have applies like standards applicable to general partners to shareholders and certain jurisdictions (Donahue case). Some closely held corporation statutes have allowed shareholders to enter agreements to directly manage the corporation. These statutes usually impose fiduciary duties on shareholders that they would have if the corporation was managed by directors.
Business organization where one person makes all of the management decisions and other owners are passive investors. Other owners cant be able to participate in making day to day business decisions and policies. 5 owners where each owns 20% interest in the new business. Would you recommend drafting any documents?
1. Yes. Partnership agreement or an operating agreement in the case of a limited liability company. These documents would determine the rights and responsibilities of the owners but won't have to be filed with the government in order for the business org. to come into existence
3 Standards of disclosure of conflict of interest
1. directors 2. officers 3. shareholders
Regulatory Requirements applicable only to the covered publicly held corporations
1. duty to register equity stock with SEC 2. duty to file reports (10k, 10q, 8k) 3. proxy provisions 4. Section 16(a)(b) insider filing and short swing profit requirements 5. The williams act (tender offers, issuer repurchases, etc.)
Independent Directors
A director will be considered an independent director if he/she has NO direct business relationship with the corporation (e.g., if he/she does NOT receives any payment from the corporation—other than fees for service as a director)—and if the corporation DOES NOT contribute more than $100,000 a year to a charity affiliated with a director.
Outside (non affiliated) directors
A director will be considered an outside director when he/she is not an employee of the corporation and has full-time employment with some other business concern.
Partnership v. Corporation Transferability of Ownership (Equity) Interest
No single partner can transfer any portion of his ownership interest to a non-partner without the unaninmous consent of all the partners (absent an agreement to the corporation) Shares of stock and the ownership rights conferred are freely transferable
Since a corporation has some but not all of the constitutional protections available to individual persons, is a corporation deemed to be a citizen of a state or of the US for purposes of privileges and immunities Clauses?
No.
burden of proof in business judgment rule cases for breach of duty of care
BURDEN OF PROOF IN THESE CASES IS ON PLAINTIFF to prove managerial negligence usually gross negligence review standard. Directors and officers will almost always defend themselves by invoking this rule
Cumulative Voting
allows you to bunch your votes...it is possible to get some people on board...gives those people with shares more of a chance to get on the board
Three Outsiders who can be held liable for insider trading--TIPPEES
an insider's tip of material nonpublic confidential information to a tippee is for the purpose of the insider receiving a personal benefit from his/her disclosure (i.e., an improper tip ) the tippee inherits the insider's duty to disclose or abstain
Staggered Voting
anti take over defense by corporations where there is a set number of votes that a director has
Corporation existence
articles of incorporation need to be filed and approved by the applicable state government agency in order to exist.
Why do controlling shareholders have a fiduciary duty of care and loyalty to the non controlling shareholders?
because they can control people on board of directors
Demand requirement with derivitive action suits
before shareholder can bring derivative action suit, must make a demand on the board of directors. Exception: demand futility—if you can show that a majority of the board of directors implicated in the wrongdoing it would be futile for the shareholder to make a demand because the majority on board is implicated
Subsidiary Corporation
corporation may form another corporation and hold some or all of the shares in the other corporation (i.e., a subsidiary or wholly owned subsidiary) as an individual investor might do" if it decides it wishes to isolate the risks of a new line business in a separate entity. In such cases, the corporate stockholder is called the parent corporation. A corporation may also acquire another existing corporation by purchasing some or all of its shares with the same result.
Possible Exam Question: what is a Revaluation surplus?
determining whether a corporation has a surplus for purposes of legally declaring a dividend or repurchasing its shares (assets must be greater than liabilities in order for a corporation to have a balance sheet surplus), the corporation may use the actual value of the corporation's assets as opposed to the value as shown on the balance shee
Exam Question #7: Forumal for determining the PE ration of a corporation's stock once the stock begins trading in the secondary market.
divide the current market price of the stock by the earnings per share
Three Outsiders who can be held liable for insider trading--MISAPPROPRIATORS
do not have a fiduciary duty to disclose to the shareholders who lack the information because they do not improperly trade in the stock of the misappropriators client although the misappropriator, in many instances, obtains the material non-public information about another corporation while providing services to the misappropriator's client.
Freezeout mergers
don't receive interest in shares but just cash for shares and sole remedy is through an appraisal proceeding. o Controlling shareholders have a duty of fair dealing and a duty of obtaining a fair price when cashing out minority shareholders in a freezeout mergers
Duty of care
duty of of Directors and executive officers to avoid managerial negligence in acting on behalf or the corporation and its shareholders.
Defensive measures used by management of target companies to prevent being acquired by an unwanted bidder--Poisonous pills
euphemistically referred to as shareholders rights plans-- ( if unwanted bidder acquires certain percentage of target's stock, target's management virtually gives each target shareholder an additional share with the result that the bidder must pay twice as much to obtain a controlling percentage of the target's stock )
Usurping a corporate opportunity Doctrine
failing to disclose something the corporation arguably would have been interested in
Basics of Limited Liability Companies
file articles of organization...hybrid between general partnership and corporation...operated by an operating agreement and provides owners with all of the features normally desired by persons starting small closely held business including: management control, limited liability, flow through taxation, ease in recouping the owner's stake in the net worth of the business, and the ability to veto the admission of new owners to the business. ***LLC corporate veil can be pierced
Shareholder Informational Rights under Federal Law
have to more precise and specific of the document and the reason requested... Must register with SEC, file reports (10 K, 10-Q, and 8-k) with SEC, file proxy statement (disclosures to shareholders to help them understand the issues of all the discernable facts) under with SEC and provide with shareholders prior to the meeting asking to vote on
Buy Sell agreement
how an owner gets his or her portion of the net worth of the business upon departing the business
Tag Along Provisions in shareholder agreements
if a third party offers to buy out the majority shareholders of a corporation, the minority shareholders must be offered the right to sell their shares to the third party on the same terms as those offered to the majority shareholders.
when is a response preclusive?
if it deprives stockholders the right to receive all tender offers or precludes a bidder from seeking control by fundamentally restricting proxy contests or otherwise.
Straight voting
if own 10 shares and 9 directors, can only give 10votes to all 9 with a total of 90 votes
when is a statement or omission material?
if there is a substantial likelihood that a reasonable shareholder would have considered it important in deciding to vote yes or no on an issue. See at 216. Only MATERIAL misstatements or omissions are actionable under the securities laws.
Exceptions where shareholders can recover in derivitive action suit
inheritance of deceased who should have had right to recover if still alive and the continuing wrong theory where must have been owner of corporation at the time of the breach
Majority Rule for insider disclosure of information
insiders did not have a duty of disclosing material nonpublic information about their corporation before buying or selling the corporation's stock. Special Facts Exception: Since insider traded over the stock exchange, insider not liable under common law rule since no privity between insider (purchaser) and non-insider plaintiff
Corporation by estoppel considerations and facts
is it fair given all circumstances for P to hold liable for breach when they actually believed that the corporation had actually come into existence. Facts-Entered K for corp and didn't come into existence until after signed, articles filed. Remedies: restitution—benefit to D and damages looks at the value of what P lost
Promoters Liability on Pre incorporation K facts
liability for promoters arise where both parties are aware that no corporation exists as of teh date of the K and the other party has not clearly agreed to look solely to the nonexistent corporation for performance
Five voting powers of shareholders
o Shareholders has a right to determine who will sit on board of directors annually o Right to determine if articles of incorporation will be amended o Before corporation can merge with another, it must have the vote of shareholders to approve such a merger o Corporation cant sell all assets unless shareholders approve if a majority of shareholders vote for a proposal they have proposed, the board does NOT have to enact it and if shareholders doesn't like it, vote differently and only has advisory recommendation powers
Jobs Act
only way to legitimize crowd funding
Balance sheet 2 sources of assets
outside sources (loans, i.e., liabilities, provided by creditors) and inside sources (assets put into the business by owners, i.e., equity). Thus, the total of assets on the balance sheet always equals the total of liabilities and equity on the balance sheet.
Partnership v. Corporation Governance in general
partners (equity owners) are presumed to have equal rights to manage business (absent a contrary agreement) where majority vote controls all ordinary matters Shareholders (equity owners) have no right to manage the corporation where management is centralized by statute in a board of directors who need not be owners and executive officers elected by the board
Partnership v. Corporation governing law
partnership law operates only if partners have not entered into a contrary agreement whereas corporations are basically governed by mandatory and regulatory laws
Williams Act process of going dark
process by which a public company reduces the number of public stockholders below 300 so that it no longer is required to file periodic reports with the SEC
Drag along provisions under shareholder agreements
purpose of the drag-alongs is to protect the controlling shareholders in situations where they have lined up a buyer for their shares at an advantageous price, and the buyer insists on acquiring 100% of the shares. Accordingly, minority shareholders agree that if the controlling shareholders sell their shares to a given buyer, the minority shareholders will also sell their shares their shares to the buyer on the same terms.
Minority Rule for insider disclosure of information
recognized such a disclose or abstain from trading rule and imposed such a rule on insiders.
Duty of loyalty
requires that corporate managers give the organization their undivided loyalty. Whenever a director or an officer enters into a contract with his/her corporation, there is an inherent conflict of interest (so business judgment rule does not apply) since the manager is simultaneously representing his own interest on one side of the contract and the interest of the corporation on the other side. Acting in bad faith is a violation and these cases typically involve issues of nondisclosure and conflict of interest
Private offering Exemptions that help avoid expense of offerings
the investor (1) must have sufficient knowledge and experience in financial and business matters to evaluate matters to evaluate the risks involved; (2) must have access to the type of information normally provided in a prospectus; (3) must agree not to resell or distribute the securities; (4) must not have been approached by you through any form of public solicitation or general advertising.
Internal affairs doctrine
the only state's corporation statute that is applied as the standard of law to govern conduct is the corporation statute of the place where the business filed its articles of incorporation.If want to be recognized in another state where doing business, must file the foreign corporation requirements.
RUPA regulation of withdrawing partner caused by death or wrongful accusation
the remaining general partners can continue the partnership if a majority decide to continue within 90 days even though there is no continuation agreement nor consent from the estate of the deceased. See Creel v. Lilly. In any case, the partners who continue the business must buy out the ownership interest of the dead or wrongly withdrawn partner.
Three Outsiders who can be held liable for insider trading--CONSTRUCTIVE INSIDERS WHO ARE LIABLE AS TIPPERS
underwriters, accountants, lawyers, accountants who provide services directly to the corporation whose shares are traded on basis of inside information. Distinguished from a misappropriator because must here must directly trade in the stock of the client corporation on the basis of material non public information recieved from providing services to the client
Burden of proof in duty of loyalty cases
virtually always on the defendant directors and officers to show that they disclosed their conflict of interest and that, in any event, their activities were entirely fair to the corporation or, in the case of a controlling shareholder, entirely fair to the non-controlling minority shareholders. However, where the interested director transaction is first (1) approved by an independent committee of the corporation's board or (2) approved by an informed majority of the minority (i.e., non-controlling) shareholders, the burden of proving the entire fairness of the transaction shifts to the plaintiff
when is a response coercive?
when "it is aimed at forcing upon stockholders a management-sponsored alternative to a hostile offer;
Piercing the corporate veil
when a corporation is in existence and asking the court to disregard such existence to prevent fraud or to achieve equity. Court rarely does this and factors that the court considers are Adequacy of the subsidiary corporation's capitalization, Whether the subsidiary corporation was solvent, Whether the subsidiary corporation kept records of its operations (observance of corporate formalities); Whether the subsidiaries had directors and officers who functioned as such; Whether the controlling shareholder was siphoning off the funds of the subsidiary; Whether the subsidiary corporation was merely a façade for the dominate shareholder to unjustly enrich itself to the detriment of the subsidiary's creditors *JUST BECAUSE CREDITOR AND NOT PAID, IT IS NOT ENOUGH **only used in closely held corporations**
Spinoff
when a corporation takes a division and decides it doenst want it to exist anymore so they create a new corporation and sell assets of division to the corporation. IF have a division, the LLC is responsible
Shareholder suit: Derivitive Action
when a shareholder brings action on behalf of the corporation for breaches of duty/care...Since a shareholder's derivative suit seeks to vindicate a wrong to the corporation, any recovery obtained is for the benefit of the injured corporation. the analysis must be based on: Who suffered the alleged harm—the corporation or the suing stockholder individually—and who would receive the benefit of the recovery or other remedy? **only a shareholder can bring this type of action where they must have been a contemporaneous shareholder at the time of the time the breaches of fiduciary duty were taking place *contemporaneous owner theory*
Secondary Market Transaction
when an entity becomes a shareholder and sales to someone else, it is a secondary market transaction because the corporation is not the seller and what shareholder does with shares is classified as a secondary transaction
Security regulated in primary market by Security Act of 1933
whenever the value of the investment depends on the performance of the business and the entrepreneur causes the investor to expect profits solely from the efforts of the entrepreneur or a third party. In such instances, the investment meets the definition for a "security" under the Act.
Compensation and Doctrine of Waste
"waste" entails an exchange of corporate assets for consideration so disproportionately small as to lie beyond the range any reasonable person might be willing to trade. "where directors irrationally squander or give away corporate assets."
Possible Exam Question: Based on the facts, how much money does the corporation have in its earned surplus/retained earning account? Note: Earned Surplus is another account that would be located in shareholder's equity)
$0 (The corporation must earn a net profit from its business dealings before it has any money in earned surplus)
Possible Exam Question: How much money would be in the corporation's stated capital account after the corporation issued the five shares? Note: Stated Capital is one of the accounts located in shareholder's equity.
$5.00 (multiply number of shares outstanding (5) times (x) par value ($1.00))
Possible Exam Question: How much money would be in the corporation's Paid-in-Surplus Account (also called Capital Surplus). Note: Paid- in Surplus is one of the accounts located in shareholder's equity)
$50.00 (Amount received by the corporation above (i.e., in excess of) par value upon the issuance of shares) multiplied by the number of outstanding shares. In this hypothetical, the corporation received $ 10.00 above par value for each of the five shares issued. Accordingly, $10.00 (excess over par value) x 5 shares outstanding = $50.00 in Capital Surplus Equity. This excess over par value received by the corporation is called Paid-in-Surplus or Capital Surplus.
Examples of improper purposes with shareholder informational rights
( 1 ) use of information to institute annoying or harassing litigation against the corporation; ( 2 ) use of shareholder stock list to bring pressure on a third corporation; ( 3 ) obtaining the shareholder's list for purpose of selling the stockholder's names to another person or entity; ( 4 ) getting corporate information in order to conduct a fishing expedition or to satisfy the idle curiosity of the shareholder.
Steps in a classical merger
(1) Preliminary Agreement (embodied in a letter of intent; (2) Approval of Merger Agreement by Shareholders of Bidding Corporation and Shareholders of Target Corporation; (3) Articles of Merger Filed With Secretary of State (or applicable state agency); (4) Stock or other consideration is issued by the bidding corporation (surviving corporation) to pay the selling shareholders of the target corporation. The bidding corporation does this in exchange for the stock and other securities of the target corporation; and (5). The target corporation is fused into the surviving corporation (i.e., the bidding corporation) and the target loses its identity.
Closely held corporations distinguished from publicly held corporations
(1) small number of stockholders; (2) no ready secondary market for the corporate stock to be traded; (3) owners desire to keep business is their own hands and equally participate in management ***the business is the owner's primary source of earning a living in a closely held business.
Sale of control 3 exceptions
(I) did not result in the purchase by one whom the controlling shareholder should have known would loot the corporation; (ii) did not amount to a conversion of a corporate opportunity to the corporation which would be lost as a result of the sale; (iii) was not accompanied by fraud or other acts of bad faith on the part of the parties. ***controlling shareholder can sell in private to another with no obligation to share price with the non controlling shareholders but if sell to buyer who you know or had reason to know would engage in the above 3, not valid
Possible Exam Question: What would the shares be called if the corporation issued them: (a) for no consideration, (b) for fifty cents per share; (c) for property worth the equivalent of sixty cents?
(a) Bonus Stock in the amount of $1.00 per share; (b) Discount Stock in the amount of $.50 cents per share; (c) Watered Stock in the amount of $.40 cents per share. Par Value Stock CANNOT be issued by the corporation for less than the par value per share.
Possible Exam Question:(a) How many shares would be outstanding if the corporation repurchased all five of the shares it had issued? (b) What is the name used to describe such repurchased shares? (c) In what market does the corporation issue its shares?
(a): 0; (b): Treasury Stock; (c): Primary Market
Exam Question #3: with respect to the corporate accounts, would the accountant debit, and credit
***this question involves 3rd party borrowing to obtain the assets which have to be paid back because it is a loan. Debit: assets account (or cash) with a left hand entry Credit: liability (or accounts payable) with a right hand entry
Exam Question #6: formula for determining a corporations earnings per share.
**dealing with an income statement and the formula is the corporations annual net profits (after paying taxes) divided by the outstanding shares
Exam Question #2: what corporate accounts would the accountant debit, credit, and what is the specific name of the account which the accountant would credit?
**primary market transaction because the corporation is the seller** 1. Debit to assets (cash) with a left hand entry 2. credit equity because the source of the asset was provided by the owner and the corporation didnt have to borrow or go outside 3. stated capital equity because shares sold at par value (outstanding shares X value sold at which = here $100,000.
Merger
1 bidding corporation and 1 buying corporation where the bidding corporation basically buying out the buying corporation (sellers is not the corporation because a corporation cannot be an owner or shareholder of itself) are the shareholders. Shareholders of bidding corporation relying on board of directors to get the highest price possible. **News that a bidding corp wants to buy a target corp, it is universally considered to be good news for shareholders of target corporation because will almost always out buy the shares for a higher price that is substantial
when is a tender offer by a contolling shareholder non coercive?
1) it is subject to non-waivable majority of the minority tender condition; (2) the controlling stockholder promises to consummate a prompt §253 merger at the same price if it obtains more than 90% of the shares (i.e., Step two of the Transaction must be fair) and (3) the controlling stockholder has made no retributive threats. Those protections minimize the distorting influence of the tendering process on voluntary choice.
Basic restrictions on shareholders ability to transfer their shares on alienability
1. First refusal restrictions (prohibit shares of stock to be sold to 3rd parties unless shares have been first offered to the corporation, the other shareholders, or both) 2. First Option restrictions (similar to first refusal but shareholders must first offer the shares to the corporation or other shareholder for a preset price in the agreement) 3. A consent restriction (prohibts a sale of stock without the permission of the corporations board of directors or shareholders--need all consent )
Business organization where one person makes all of the management decisions and other owners are passive investors. Other owners cant be able to participate in making day to day business decisions and policies. 5 owners where each owns 20% interest in the new business. What type of business organization would you recommend?
1. Limited Partnership 2. Limited Liability Limited Partnership 3. Manager Managed Limited Liability Company
10 Control devices utilized in closely held corporations to help owners protect ownership interests and the right to participate in the management of the business
1. pooling agreements 2. voting trusts 3. Cumulative voting 4. classified stick and weighted voting 5. Control agreements which stipulate the persons who shall serve on the board of directors. 6. Control Agreements Which Stipulate that the shareholders who are parties to the agreement will vote for each other to be directors and that, in their capacity as directors, they will vote for each other to be executive officers of the corporation 7. Supermajority voting provisions *****8. Provisions making dissolution easy (buy sell agreements because no right to a mandatory buyyout) *****9. Restrictions on an owner's ability to sell his/her equity interest to a person not currently an owner in the business or other persons 10. Preemptive rights in the owners
Possible Exam Question: Clayton Harris, Inc.'s articles of incorporation authorize Clayton Harris, Inc. to issue 100,000 shares of common stock. Clayton Harris, Inc. has actually issued five shares of its stock—one share each to five individuals—for a price of $11.00 per share. Each issued share has a par value of $1.00. The Corporation has just formed and has not yet begun active business. How many shares does the corporation have outstanding?
5
Are shareholders principles of a corporation?
A corporation is an entity separate and apart from its owners and SHAREHOLDERS ARE NOT PRINCIPLES OF A CORPORATION AND THE AGENTS ARE CENTRALIZED MANAGEMENT (HIGHEST LEVEL INCLUDING DIRECTORS AND OFFICERS) OWE FIDUCIARY DUTY OF CARE
When is a corporation insolvent?
A corporation is insolvent in the bankruptcy a corporation takes a division and decides it doenst want it to exist anymore so they create a new corporation and sell assets of division to the corporation. IF have a division, the LLC is responsible
When does a sale amount to substantially all the assets of a corporation?
A sale amounts to substantially all the assets of a corp only when: 1.The transaction involves the sale of assets quantitatively vital to the operations of the corporation. 2. The sale is out of the ordinary. *3. The sale substantially affects the existence and purpose of the corporation. *4. After the sale, the corporation does not retain substantial business assets which are substantial, viable, ongoing components of the corporation.
Possible Exam Question: What is a preemptive right to purchase a corporation's shares?
A shareholder's right to purchase his/her current percentage of ownership of the outstanding shares when the corporation issues additional share for cash. The purpose is to allow the shareholder to maintain his same percentage of ownership in the outstanding shares after the corporation issues the additional shares. Thus, if shareholder currently owns 5% of the outstanding shares, shareholder will be allowed to purchase 5% of the newly offered/issued shares. In many jurisdictions, preemptive rights aren't available if the articles of incorporation or by-laws don't expressly provide for such rights.
What accounts would be debited and credited when a corporation repurchases shares that it had previously issued to its shareholders?
Accounting treatment for treasury shares: credit cash (assets) to show the corporations cash has decreased and debit equity to show that equity in the corporation has been reduced by that amount.
Agreements between owners in closely held businesses (business prenuptial agreements)
Agreements types: LLC--operating agreements between members...Corporation--shareholder's agreement...partnership--partnership agreement Essential features: how an owner gets his or her portion of the net worth of the business upon departing the business (buy sell agreement); restrictions on an owners ability to transfer his or her ownership units without the consent of the other members; loss profit split; management rights of the owners of the business; and other closely relate matters (whether to limit the right of an owner to pledge his or her right to receive his share of the profits as collateral for a personal loan)
What is the classification of business orgs.?
Any business organization other than a corporation is classified as unincorporated business organization. There is only one type of incorporated business organization and that is a corporation.
Corporations that meet the definition of being pubicly held under the 1934 SEA
Any corporations whose shares are sold on any national exchange (e.g., the New York Stock Exchange) are covered. Corporations whose shares are traded in the over the counter market that have at least 500 shareholders and assets in excess of 10 million dollars).
Possible Exam Question: What is the formula for determining: (a) the book value of a corporation's shares' (b) the earnings per share of a corporation's shares?
Divide Shareholders Equity (as determined from the balance sheet) by the total number of Outstanding Shares. 9(b) ANSWER: EARNINGS PER SHARE: Divide Annual Net Profits (as gleaned from the income statement) by the total number of Outstanding Shares.
Possible Exam Question: How does one determine the price-earnings ratio of a corporation's stock?
Divide the current market price of the stock by the stock's earning per share.
Partnership v. Corporation Agency Authority
Each partner has apparent authority to K for the business as to ordinary matter even absent actual authority if 3rd party unawarre of partners lack of actual authority Since shareholders as such dont participate in management, no apparent authority to bind the corporation
Who is a per se controlling shareholder?
IF OWN MAJORITY OF OUTSTANDING SHARES, OF ANOTHER CORP, YOU ARE A PER SE controlling shareholder—should be able to control majority of individuals on board. However if own less then majority shares, court can find that you DOMINATE the board of directors of the controlling shareholders.
Partnership Existence
It is a question of fact whether a partnership exists between 2 or more individuals where nothing need to be filed.
Limited Liability Partnership
The limited liability partnership (LLP) is a general partnership in which there is no joint and several liability for partners who did not participate in the matter which gave rise to tort liability.
Doctrine of Defective Incorporation: Defacto Corporation Doctrine and Corporation by Estoppel Doctrine
Liability arises when CORPORATION LISTED ON THE CONTRACT WAS NOT IN EXISTENCE ON THE DATE OF THE CONTRACT ALTHOUGH BOTH PARTIES BELIEVED THAT A CORPORATION WAS IN EXISTENCE AT THE TIME OF THE CONTRACT. Applicable when executed the articles of incorporation; (ii) made a bona fide effort to file the articles and (iii) both parties proceeded under the belief that the corporation had come into existence. This also referred to as the common law rule of mercy
Limited Partnership Requirements
Must have a general partner and a limited partner the limited partner wont be liable for the debts and obligation unless they take control of the management and control of the business where the general partner makes the decisions on behalf of the partnership and is liable for the debts and obligations. Limited partners are passive possessors which is why their liability is limited.
Does a corporation have shareholders immediately after come into existence?
NO Immediately after it comes into existence, the directors have the responsibility for causing the corporation to issue shares to persons who only at that point become shareholders
Since a corporation has some but not all of the constitutional protections available to individual persons, is a corporation treated like an individual person for purposes of the privilege against self incrimination and a right to privacy?
No and no
Are the provisions of the 1934 Securities and Exchange Act applicable only to publicly held corporations and persons who are affiliated with publicly held corporations?
No. the antifraud provisions of the Securities laws apply to any person and the Securities Act of 1933 applies to individuals as well as entities of PRIMARY MARKET TRANSACTIONS (where only corporation is the seller) and the business organization is attempting to raise capital for the enterprise
Who has the power to determine whether to issue a shareholder dividend?
Only board of directors have power to determine whether to issue a shareholder dividend which is apart of their business judgment
Partnership property
Partners in a partnership like shareholders in a corporation dont directly own the general partnership's specific tangible or intangible property as their individual property but instead own their portion of the dollar value of the partnership's specific assets.
Partnership v. Corporation Taxation of profit distribution and deductability of losses
Partners pay taxes on their share of the profits and take the tax deduct on their share of the loses. No double taxation. the corporation pays taxes on the profits and takes the deductable losses. Sharholders only receive profit if corporation declares a dividend, shareholders pay tax on the distribution (double taxation--corp. pays once and shareholders pay again if corp distributes to them)
Partnership v. Corporation Fiduciary Duties
Partners stand in a fiduciary relationship to each other since they are each apparent agents for the partnership in carrying out its ordinary business traditional view is that shareholders dont owe each other fiduciary duties (since shareholders as such are not agents of the corporation).
Partnership v. Corporation Profit Distribution
Partnership profits are shared per capita and no partner is entitled to a salary absent contrary agreement Corporate distributions not shared per capita but in proportion to stock ownership
Partnership v. Corporation Length of Existence and Ease/difficulty of dissolution
Partnerships are normally created for a limited term and dissolution is relatively easy. Dissolution is an event that happens voluntarily and involuntarily under a variety of circumstances Corporations are generally created for a perpetual term and dissolution is relatively disfficult (traditional corporation statutes require a majority of 2/3 of the outstanding shares to be voted in favor of dissolution
Elements of CL fraud
Plaintiff must have (1) justifiably relied and be (2) damaged by (loss causation) a (3) false representation of material fact made by the defendant. And the defendant must have (4) made the statement with knowledge of its falsity (scienter) and (5) with the intent that plaintiff act in reliance (transaction causation) on the statement.
General Partnership dissolution
Relatively easy because general partners have either the right to liquidate the assets of the partnership (if the partnership is an at will partnership and dissolution is not wrongly caused in violation of agreement) or alternatively the right of the withdrawing partner to demand a mandatory buyout by the remaining partner s if they continue the business (if continuation agreement exists or the estate of deceased partner consents to the continuation of the partnership by other partners or if the partnership is for an expressed or implied term)
Escape of liability in duty of loyalty cases
SOR comes down to disclosure and fairness contracts will not result in the director being held liable for a breach of fiduciary duty if he/she discloses the conflict of interest to either the disinterested members of the board of directors or the shareholders AND if the transaction is objectively fair to the corporation. However, even if there is disclosure of a self-interested transaction involving a fiduciary, courts may still strike down the transaction solely because the court has determined that the transaction/contract is UNFAIR to the corporation
Are shareholders Agents?
Shareholders are the owners of a corporation but NOT the agents because they make no decisions on behalf of the corporation (only can be an agent if also on the board of directors) and therefore owe no fiduciary duties to the corporation. EXCEPTION: controlling shareholders--shareholders that are able to elect a majority of board of directors and do hold a fiduciary because must take into account other interests.
Exam Question #4: In accounting for this transaction what accounts would the corporation's accountant debit and credit?
The accountant would debit with a left hand entry to the equity account of earned surplus and credit with a right hand entry to assets (cash)
Possible Exam Question: After Clayton Harris, Inc. issues 100,000 shares, what must it do, if anything, if it wishes to issue additional shares of stock?
The corporation must amend its articles of incorporation.
Sale of substantially all assets
There is no sale unless shareholders approve where the test is whether the sale is in fact an unusual transaction or one made in the ordinary course of business.
Fully Explain any laws that may be implicated by the chard from the October 24, 2011 Business Section of the Washington Post
This article implicates Section 16(a) of the Securities and Exchange Act of 1934 and Section 16(b) indirectly. Section 16(a) requires that insiders defined by the act must disclose on form 3 their equity holdings in the corporation within 10 days of achieving insider status. EDGAR stands for Electronic Data Gathering and Retrieval. SEC requires all entities offering securities to the general public to make periodic filings to the SEC electronically through EDGAR. Additionally, these insiders must disclose form 4 any purchases and sales in the equity securities of the corporation within 2 business days of the transaction. Pursuant to 16b, the corporation can recover any shot swing profits made by these insiders purchase at a lower price that can be matched with a higher sales price that takes place within a 6 month period of time.
Delaware provision on Ultra Vires
USUALLY A STANDING ISSUE Statute provides that no act of a corporation is invalid because the corporation lacked capacity or power unless raised by : ( a ) a shareholder of the corporation who seeks (in a derivative action) to enjoin an executory contract of the corporation; the court will only grant the injunction if it would be equitable to do so: (b) the corporation in a suit to recover damages against an officer or director of the corporation for loss or damage resulting from the ultra vires act; (c) In a quo warranto action by the state's attorney general to dissolve the corporation or enjoin it from performing ultra vires (unauthorized) acts. *dont have to list every purpose and power as long as its lawful.
Ultra Vires Doctrine
Ultra Vires also loosely involves any corporate acts which are unlawful or which do not provide a pecuniary benefit to the corporation and its shareholders. Traditionally, if the contract was beyond the purposes/powers of the corporation (not in its articles) the courts would invalidate the contract as unenforceable against the corporation and unenforceable by the corporation.
What is necessary to transfer interest of ownership in a partnership?
Unanimous consent of all the partners in the absence of an agreemen to the contrary. Ownership must be purchased and if not offered ability to purchase, dont share in the profit interests
In selecting a state of incorporation, why do majority of large publicly held corporations choose to incorporate their businesses in Deleware?
Under the internal affairs doctrine of conflict of laws, Delaware's corporation statute and the extensive body of corporate law decisions issued there interpreting the statute will govern a corporations internal affairs if the business files its articles of incorporation in Delaware regardless of where the corporation is actually doing business
Is a repurchase of outstanding shares by a corporation similar in any way to a decision by the board of directors to authorize a cash dividend to the shareholders?
When a corporation repurchases its own shares, it distributes assets equal to the purchase price to the shareholder from whom the shares are being purchased. however the shares of a corporation are not an asset of the corporation in any real sense and since one cannot own shares so these shares become authorized but unissued shares.
Primary Market Transaction
When corporation directly issues shares of stock directly to the subscribing shareholder and corporation is the only seller. When the corporation itself is buying shares, this is not a primary market transaction.
Since a corporation has some but not all of the constitutional protections available to individual persons, is a corporation treated like an individual person for purposes of 1st am. free speech?
Yes
Is a corporation treated like an individual person with respect to the constitutions protection from unreasonable search and seizures and the prohibition against double jeopardy?
Yes and Yes
Business organization where one person makes all of the management decisions and other owners are passive investors. Other owners cant be able to participate in making day to day business decisions and policies. 5 owners where each owns 20% interest in the new business. Would you reccomend to the client that other prospective owners obtain their own copy attorneys to review any documents that you prepare on their behalf?
Yes that way the other owners may be able to successfully sue the lawyer for breach of fiduciary duty which will result in the invalidation of the management document. Therefore, the document itself should have a provision advising the other owners that they have the right to seek counsel of their own choosing to review the agreement between owners which the attorney drafted from the view point of the prospective owner who approached him.
Is a corporation treated like an individual person with respect to the constitutions guaranty against deprivations of property without due process of law, to due process generally, and the EP laws?
Yes. Yes. Yes
Business Judgment Rule as a defense to the duty of care imposed upon directors
a presumption that when directors make decisions for the corporation they are presumed otherwise shown to: act in good faith, not have any conflict of interest with respect to the matter in question (something to gain at the expense of the corporation and if present changes from a duty of care to a duty of loyalty), keep themselves properly informed of the affairs of the business and of the particular matter to be decided (consider alternatives) and make decisions that are not so unreasonable as to be irrational...
Wholly Owned Indirect Subsidiary
a wholly owned subsidiary (Company 3) that itself is owned by a wholly owned subsidiary (Company 2) of another company (Company 1). Accordingly, Company 3 is a "wholly owned indirect subsidiary" of Company 1.
Shareholder Informational Rights under State law
right of shareholders to have access to corporate shareholder lists and other documents if shareholders request for these documents is for a proper purpose related to his/her status as a shareholder. the burden of proof is on plaintiff shareholder to show a proper purpose in order to inspect the corporation's books and records other than the shareholder's list. The plaintiff must show by a preponderance of the evidence that there exists a credible basis to find probable corporate wrongdoing . The burden of proof is on the corporation, however, to establish an improper purpose where plaintiff shareholder requests inspection of the stockholder's list.
Sell of Office prohibition
selling stock but arguably not enough to pass voting control
Exam Question #5: formula for determining a corporation's book value per share.
shareholder equity (also known as net worth) divided by the number of outstanding shares = the book value per share.
Outstanding stock
shares of stock that have been issued to and held by people or entities (shareholders)...a corporation cannot be a shareholder of itself
Income Statement
shows the earnings of the business between successive balance sheets. If the business has net income during that period, the equity account called earned surplus (or retained earnings) on the balance sheet would show an increase by the amount of the profit.
Anti Fraud Provisions of the Williams Act
states that no person can make any materially false statements in documents
Deep Rock Doctrine
states that when a corporation is in bankruptcy, the creditor claims of controlling shareholders may sometimes be subordinated to the claims of outside creditors where necessary to prevent fraud or to achieve justice and equity.
Williams Act (Federal Aspects of Tender Offers)
tender offers are offers (sometimes made solely in cash) by bidders directly to shareholders and require that the bidders give shareholders an offer cant resist and bypass the directors of the target corp. o Voluntary and don't have right to fair price, either tender or not without coercion or disclosure violations (as long as no coercion--materially false or misleading disclosures made to the shareholders in connection with the offer--it is voluntary )