BLAW308 Ch.41-44
Sale of all or substantially all of the assets of the business
-(unrelated to the regular course of business) -Drastically changes shareholders' investment -usually applies only if 25% (or less) of business activity/income/revenue remains
When and what created the SEC?
-1934 Act created the SEC -Securities Act of 1933, Securities Exchange Act of 1934
e
-A state law that regulates business activities of a foreign corporation is constitutional if : a)It serves a legitimate state interest b)The legitimate state interest outweighs the burden on interstate commerce c)It is the most burdensome means of promoting that interest d)All of the above e)A and B, but not C
Changes Requiring Shareholder Action
-Amendment of articles of incorporation -Merger -Consolidation -Share exchange -Sale of all or substantially all of the assets of the business -Dissolution
Tombstone Ad
-During the waiting period (more of an announcement than an offer) must state "not an offer" -Contains less information than the prospectus
Special meetings of shareholders can be scheduled as needed
-Example: merger, dissolution -Notice must list purpose of the meeting -Shareholders that represent at least 10% of voting shares can call a special meeting
Dissolution
-First step in the termination of the corporation's business
2 Principal Regulatory Components of the 1933 Act
-Registration provisions : •issuer may not offer to sell or sell securities unless -registered with the SEC or exempt from registration -Liability provisions
Judicial Dissolution
-Shareholders, secretary of state, or creditors of a corporation may ask a court to order involuntary
3 types of underwriting
-Stand-by underwriting •Sell subscriptions—only sell securities when enough sold •Usually used to sell common shares to existing shareholders based on shareholder rights agreements -Best efforts underwriting •Promise to "do their best" to sell securities •Usually—issuer not well known-underwriter not willing to take the risk -Firm commitment underwriting •"Underwriting Group" and "Selling Group" •Buy securities at a discount •Guarantee sell •Most common and most profitable •Also most risk •The "classic" underwriting agreement
c
-The Steel Inc. Board of Directors plans to issue dividends this year. Which of the following is false? a)Preferred shareholders receive their dividends before common shareholders b)Creditors receive their dividends before common shareholders c)Common shareholders receive their dividends before either creditors or preferred shareholders
Shareholder Control Devices
-Voting Trusts -Shareholding Voting agreements -Proxies
c
-Which of the following activities meet the requirements for doing business in a state? a)Owning personal property as investment b)Maintaining a bank account for collection purposes c)Maintaining a storefront for product sales d)Soliciting product orders through a catalog e)All of the above
Voluntary Dissolution
-corporation must file articles of dissolution with secretary of state -Effective when articles filed
Shareholder rights in a publicly-owned corporation are limited to
-electing and removing directors, -approving vital matters, and -ensuring that management actions are consistent with state corporation statutes, the articles of incorporation, and the bylaws
Share Exchange
-one corporation becomes owner of all outstanding shares of second corporation •(compulsory exchange of shares) -Second corporation remains •becomes a wholly owned subsidiary of first corporation -Only selling shareholders must approve exchange
Merger
-one corporation dissolves -second corporation takes •business, •assets, and •liabilities of both corporations
Administrative Dissolution
-requires that the secretary of state give written notice to the corporation of grounds for dissolution -If, within 60 days, the corporation has not corrected the default, secretary dissolves corporation with certificate of dissolution
Consolidation
-two corporations join to create a new corporation •but both original corporations cease to exist
Involuntary Dissolution
-without consent of corporation by administrative action of the secretary of state or judicial action
Violations related to Section 5 of the Securities Act of 1933 and the related waiting periods
1. Prefiling period -No one may not offer to sell or sell the securities to be registered -Marks start of the quiet period, which continues for full duration -Must avoid publicity 2. Waiting period -Waiting period is time between filing date and effective date of registration statement -Securities may be offered in accordance with certain limits, but may not be sold -Preliminary prospectus used that omits price -Issuers typically send CEOs and other top officers on a "road show" to talk to securities analysts and institutional investors -Tombstone ad (more of an announcement than an offer) must state "not an offer" -Contains less information than the prospectus 3. Posteffective period -After effective date and once buyer has a final prospectus, Sec. 5 permits the security to be offered and sold -Internet may be used during the posteffective period
A right of redemption (or a call) is a:
right of the corporation to force an involuntary sale by a shareholder at a fixed price.
Zapata Rule
rule adopted by the MBCA to deal with shareholder derivative suits; states that -If majority of directors not independent (i.e., an interest in the derivative suit), corporation has burden to prove directors made the decision to dismiss the action in good faith and dismissal serves the best interests of the corporation -If majority of directors are independent, the shareholders bringing the derivative action have burden to prove bad faith or no reasonable investigation
state incorporation statutes
set out the basic rules regarding the relationship between the corporation, its shareholders, and its managers
close
shares in a publicly held corporation are freely transferable, but often ___ corporations restrict transfer through things such as rights of first refusal and option agreements, buy-and-sell agreements, consent restraints, and provisions disqualifying purchasers
Model Business Corporation Act (MBCA)
states that a corporation has power to do anything that an individual may do
long-arm statutes
statutes that allow the state to exercise jurisdiction over an entity that harms the state interest, but due process is still required
board of directors
supervises the actions of its committees, chairman, and officers to ensure that policies are being carried out and the corporation is managed wisely; elected by shareholders
articles of incorporation
the basic governing document of a corporation stating the rights and responsibilities of a corporation, its management, and its shareholders
for-profit corporations
the most common type of business corporation; issue stock to their shareholders who invest in the corporation with the expectation that they will earn a profit on their investment; incorporated under the general incorporation law of the state
duty of care
this duty under the MBCA requires that a director or officer make a reasonable investigation and honestly believe that his/her decision is in the best interests of the corporation
indemnify
to protect or insure; refers to practice by which corporations pay expenses of officers or directors named as defendants in litigation; mandatory under MBCA
annual report
to retain its status as a corporation in good standing, a corporation must file an ___ with the secretary of state of incorporation and pay an annual franchise fee or tax
false (government can pierce the corporate veil)
true or false: -Cole Inc. is owned by two people. Each owner built a home with money obtained by a loan from State Bank to Cole Inc. The corporate shield provides absolute protection to both owners from personal liability for repayment of the loans.
true
true or false: A company organized under Kansas corporate law is a domestic company when it operates within the state of Kansas and a foreign company in any state other than Kansas
true
true or false: Prior to the mid-1800s, U.S. corporations were limited by law in terms of time and scope of operations.
true
true or false: a US business may incorporate in any state
true
true or false: a corporation is a fictitious, but legal person
false (this is a de jure corporation)
true or false: a de facto corporation exists when promoters and incorporators actually comply with each mandatory requirement to incorporate
false
true or false: a promoter is always liable for contracts made during the preincorporation period
false (may also be qualified in terms of purpose)
true or false: corporations may be classified only in terms of ownership
false
true or false: for-profit corporations are financed only by issuing securities in the form of shares
false (this is true for common shareholders)
true or false: preferred shareholders have exclusive right to elect corporate directors and the exclusive right to dividend payments
true
true or false: the MBCA permits shares to be issued in return for any tangible or intangible property or benefit to the corporation
false (federal government has power to regulate interstate commerce)
true or false: under the commerce clause, states have the power to regulate commerce within their state
true
true or false: warrants are stock options evidenced by certificates
conclusive proof
under the MBCA, filing the articles of incorporation is ___ that the corporation exists
commerce clause
under this clause of the constitution, the federal government has the power to regulate interstate commerce among the several states
class voting
voting method in which corporations have classes of shareholders: preferred and common (and sub-classes) and give separate voting rights to separate classes; each class may be entitled to elect one or more directors to balance power in a corporation
legitimate state interest, least burdensome, state interest outweighs the burden on interstate commerce
what are the three requirements for a state law that regulates business activities to be constitutional?
10-K
•10-K annual report includes: -audited financial statements; -current information about the conduct of business, management, and status of securities; -management's description and analysis of issuer's financial condition (MDA section); -names of directors and officers with compensation
10-Q
•10-Q quarterly report requires a summarized, unaudited operating statement, unaudited figures on capitalization, shareholders' equity
Ownership of Working Papers
•A client's personal records, such as accounting records, are the property of the client and the professional must return the records at end of job •Material created by a professional, such as working papers produced by independent auditors, belong to the professional -Client has a right of access to working papers
Share Repurchase
•A corporation may also distribute assets by repurchasing shares from its shareholders: -Right of redemption (or a call) •a right of the corporation to force sale by a shareholder at a fixed price •must be allowed by articles of incorporation -Open-market repurchase
Share Dividends and Share Splits
•A corporation may distribute additional shares of the corporation to shareholders instead of a cash or property dividend -Share dividend: each shareholder receives specified percentage of shares •Declared by the board, but revocable -Share split: shareholders receive specified number of shares in exchange for each share they currently own
Winding Up
•A dissolved corporation continues to exist for the sole purpose of -winding up - the orderly collection and disposal (liquidation) of assets and distribution of the proceeds from the sale of assets •Distribution of proceeds: -creditor claims are paid first, then preferred shareholders, then common shareholders
Solvency Test
•A dividend may not make a corporation insolvent, •thus a corporation may pay a dividend to the extent it has excess solvency
Conduct of Meetings
•A quorum of outstanding shares must be represented at the shareholder meeting •A majority of votes cast decides (most) issues put to a vote •Shareholders have right of full participation, including -the right to offer resolutions, -speak for or against proposed resolutions, and -ask questions of corporate officers
Shareholder Lawsuits
•A shareholder has the right to sue in his own name to prevent or redress a breach of the shareholder's contract •class action suits are an option if the requirements are met
Balance Sheet Test
•After a dividend has been paid, the corporation's assets must be sufficient to cover its liabilities, thus a corporation may pay a dividend to the extent it has excess assets
The Opinion Letter
•After auditing financial statements, the independent auditor issues an opinion letter about the financial statements expressing: -Whether the audit was performed in compliance with GAAS, and -Whether financial statements fairly present client's financial position and results of operations in conformity with GAAP •Usually, the opinion letter expresses an unqualified opinion (i.e., compliance with GAAS and GAAP), but the professional may issue a qualified opinion, disclaimer of opinion, or an adverse opinion
Termination
•After completing the winding up process, the corporation's existence terminates
Professional-Client Privelage
•Although professionals owe a duty of confidentiality to clients, communications between clients and nonlawyer professionals generally are not protected from judicial and administrative agency scrutiny when the professional's client is a party to legal or administrative action or the professional possesses evidence probative to an action •Many states have enacted an accountant- client privilege of confidentiality that protects communications between a client and an accountant as well as accountants' working papers -The privilege belongs to the client -Federal courts do not recognize the privilege in matters involving federal questions, including antitrust and criminal matters
Shareholder Litigation Committee
•Boards may create a shareholder litigation committee (SLC) whose purpose is to decide whether to sue if a shareholder makes a demand to file suit •SLC usually has independent legal counsel •Most courts have upheld SLC decisions if they comply with the business judgment rule
Conflicts of Interest
•Concerned that securities analysts might provide overly optimistic stock recommendations due to a conflict of interest (unwillingness to offend firms), the SEC adopted Regulation AC (Analyst Certification) -Requires analyst's research report to include certification that (a) views expressed in report accurately reflect analyst's personal views, and (b) whether any part of compensation is related to the recommendations or views in the reports
The Derivative Action
•Corporation harmed by another's actions •the right to sue belongs to the corporation -A shareholder has no right to sue even if shareholder's investment impaired -However, one or more shareholders may bring a derivative action for the benefit of the corporation if the directors failed to pursue a corporate cause of action
Straight Voting
•Generally— •Directors elected by a single class of shareholders •straight voting: each share has one vote for each director-nominee -Shareholder may vote for as many nominees as are directors to be elected and cast votes for each nominee with as many votes as shares held -Example: •15 people nominated for 5 director positions: a shareholder with 100 shares can vote for up to 5 nominees and cast up to 100 votes for each of those 5 nominees
Nonprofit Organizations
•In a nonprofit corporation, a member's rights and duties are defined by the ability of members to use the corporation's facilities (e.g., social club) or consume its output (e.g., cooperative grocery store) and by their obligations to support the enterprise periodically with their money (e.g., dues paid) or labor (e.g., duty to work) -All members equal unless bylaws state otherwise •With a few exceptions, rules for nonprofit corporation meetings, voting, and inspection are similar to rules of corporations for profit •A nonprofit corporation generally is prohibited from making any distribution of assets to members •A member may resign or be expelled at any time from a nonprofit corporation -Certain procedures may be necessary •Members of a nonprofit corporation have a limited right to bring derivative actions on behalf of the corporation
Dissenter's Rights
•In general, those who oppose an approved action have little recourse •Dissenters' rights or a right of appraisal do exist in some situations -generally, the right to receive fair value of shares -MBCA and many state statutes exclude shares traded on a recognized securities exchange
What is a security?
•Investment of money •Common enterprise •Profits solely from the efforts of others
Periodic Reporting
•Issuers that also register securities under the 1934 Act must file several periodic reports: -annual report (Form 10-K), -quarterly report (Form 10-Q), and -a monthly report (Form 8-K) when material events occur -(Comparable reports must be sent to shareholders)
The Zapata Rule
•MBCA has adopted the Zapata rule: -If majority of directors are not independent (i.e., an interest in the derivative suit), corporation has burden to prove directors made the decision to dismiss the action in good faith and dismissal serves the best interests of the corporation -If majority of directors are independent, the shareholders bringing the derivative action have burden to prove bad faith or no reasonable investigation
Dissolution of Corporations
•MBCA provides that a corporation may be dissolved by directors and shareholders -Voluntary dissolution -Involuntary dissolution -Administrative dissolution -Judicial dissolution
Liability and Organizational Form
•Organizing a professional business to achieve limited liability (e.g., LLP, LLC, or corporation) does not insulate professionals from liability for professional misconduct (malpractice) -Read that last statement again. It's really important
Third Parties and Liability
•Other persons besides a professional's clients may use a professional's work product -professional (especially accounts) are most likely sued by third parties under securities laws •If a professional prepares documents that prove to be incorrect, nonclients who relied on the documents may suffer damages •Nonclients may sue professionals for common law negligence, common law fraud, and violations of the securities laws •In the 1931 Ultramares case, Judge Cardozo required privity of contract (primary benefit) to hold a professional liable for negligence •State courts now adopt one of three tests to determine whether a nonclient may sue a professional for negligence: -Primary Benefit Test •privity of contract required -Foreseen Users and Foreseen Class of Users Test -Foreseeable Users Test
8-K
•Reg. FD (fair disclosure) states that when an issuer or person acting for the issuer discloses material nonpublic information to securities market professionals and holders of the issuer's securities, it must make public disclosure of that information -File or furnish Form 8-K or use other method designed to effect broad, nonselective disclosure to the public
Shareholder Liability
•Shareholder may be liable to the corporation if: -Shareholder receives dividends/distributions with knowledge of their illegality -Defective attempts to incorporate and piercing the corporate veil provide a basis to hold a shareholder liable for corporate debts beyond a capital contribution -Selling shares for a premium over the fair market value of minority shares is due to wrongful act or omission -Controlling shareholder breaches the fiduciary duty to control the corporation in a fair, just, and equitable manner that benefits all shareholders proportionately
Cumulative Voting
•Shareholders may accumulate votes by multiplying number of directors to elect by number of shares held -allocate votes among nominees as s/he chooses and may choose to cast all votes for only one nominee
Distributions to Shareholders
•Shareholders may receive distributions of the corporation's assets, generally in the form of cash or property dividends •property dividend, alternative to cash or stock, equipment, property, or stock in a subsidiary -Declared by the board of directors and paid on the date set by the directors -Once declared, dividends are debts of the corporation •shareholders may sue to force payment of the dividends -Preferred shares generally have a set dividend rate •stated in the articles of incorporation
Shareholder meetings
•State statutes and the Model Business Corporation Act (MBCA) require annual meeting of shareholders to be held -Primary purpose: elect directors
Document Retention
•The Arthur Andersen case highlights the rules about document retention -All professional firms have rules about document retention and destruction -Federal law requires all audit or review working papers to be retained for 7 years -No requirement to retain documents that prove professional's or client's guilt, as long as they do not destroy documents (i.e., evidence) with the intent to obstruct a criminal prosecution
Prospectus
•The sales document of an offering registered under the 1933 Act •Contains most of the information in the registration statement •Allows a potential investor have "all the information" about security
Procedure to Effect Changes
•To effect fundamental changes: -the board of directors must approve, -notice must be given to all shareholders (even if not entitled to vote), and -there must be majority approval •State law may alter these requirements
Limits on Cash or Property Dividends
•To protect creditor claims, statutes limit extent to which dividends may be paid: -Solvency Test -Balance Sheet Test
Elements of the General Duty
•Two elements: skill and care -must have the skill of the ordinarily prudent person in her profession •Focuses on education or knowledge -must act as carefully as the ordinarily prudent person in her profession
Fraud-on-the-market Theory
•Under the fraud-on-the-market theory, an investor's reliance on the availability of the securities on the market satisfies the Rule 10b-5 reliance requirement because market is defrauded as to the value of the securities -Market performs substantial part of valuation process, thus acts as unpaid agent of the investor -See Basic, Inc. v. Levinson: fraud-on-the-market theory provides a rebuttable presumption about an investor's reliance
Working Papers
•Work programs, audit plan, evidence of the testing of accounts, explanations of the handling of unusual matters, data that reconciles an accountant's report with client records, and comments about a client's internal controls
Class Voting
•corporations have classes of shareholders: preferred and common (and sub-classes) and give separate voting rights to separate classes •each class may be entitled to elect one (or more) directors to balance power in a corporation
What does the SEC have the power to do?
•investigate violations and hold hearings to determine whether laws have been violated •the SEC has legislative, executive, and judicial functions SEC Adjudicatory Process •Hearings before an administrative law judge -Employee of the SEC and finder of both fact and law •Decisions reviewed by commissioners of the SEC •Commissioner decisions may be appealed to the U.S. Court of Appeals SEC Consent Orders •Most actions resolved through consent orders (not litigation) -No admission of guilt—promises not to do it again •SEC has power to impose fines up to $500,000 and issue cease and desist orders Injunction and Ancillary Relief •SEC may courts to grant an injunction or ancillary relief -including disgorgement of profits •usually related to fraudulent sale or insider trading
Voting Trusts
•limited in duration (10 years) •shareholders transfer shares to voting trustee(s) •receive voting trust certificates •concentrates voting power in the voting trustees •goal—to achieve control of the corporation
Shareholder Rights of Inspection
•managers don't like shareholders' inspection of corporate books/records -most states specifically grant shareholders inspection rights •MBCA grants shareholders an absolute right of -inspection of the shareholder list and -the articles, bylaws, and minutes of shareholder meetings (within the past three years) -Shareholders have right to receive some information about the corporation financial statements •balance sheet, •income statement, and a statement of changes in shareholders' equity •Shareholders have a qualified right to inspect records older than three years -must make the demand in good faith and with a proper purpose
Criminal Violations
•maximum penalty for a criminal violation of the 1933 Act is a $10,000 fine and five years imprisonment •under the 1934 act, an individual may be fined up to $5M and imprisoned for up to 20 years •RICO -two offences in a ten-year period -max: fine of $250,000 and 20 years -treble damages in civil
Tort liability for fraud
•may be liable to a client for fraud if s/he misstates or omits facts in client communications and acts with scienter -Scienter: knowledge of the falsity of a statement or a reckless disregard for truth •Most courts extend a professional's liability for fraud to all foreseeable users of the professional's work product
Problems of Straight Voting
•nominees with most votes win, •a majority shareholder could elect the entire board -Minority shareholders cannot elect nominees without the cooperation of the majority shareholder -Such control also possible in close corporations
Derivative Action Rules
•person bringing suit must be a current shareholder -must have also held shares at time of the alleged wrong •Shareholder must first demand that board of directors bring the suit
Contractual Liability
•professional contracts include an expectation to perform as the ordinarily prudent person in the profession -failure to do so may leas to liability compensatory damages and consequential damages •not liable for breach of contract if the client obstructs performance -(this can happen when a person knows he is in trouble) •may not delegate a duty to perform the contract without the client's consent
Proxies
•shareholder may appoint a proxy •allows minority shareholders to hove more power collectively •Limited duration and generally revocable •Irrevocable if coupled with an interest •Ex: party to a shareholder voting agreement •A proxy is normally valid for 11 months
Securities exempt from registration
1. SECURITIES EXEMPTION •Exempt securities never need to be registered 1. Government-issued securities 2. Short-term note or draft (< 9 months to maturity) 3. Security issued by a nonprofit religious, charitable, educational, benevolent, or fraternal organization 4. Securities issued by a bank or savings and loan 5. Securities issued by common carriers regulated by the Interstate Commerce Commission 6. An insurance policy or an annuity contract 2. TRANSACTION EXEMPTIONS •Requirement to register depends upon the type of transaction 1. Intrastate (Rule 147) - Offering securities solely to investors in one state by an issuer resident and doing 80% of firm's business in that state 2. Private Offering (Rule 506 of Regulation D) •Rule 506, Regulation D: Private offering to unlimited accredited investor-purchasers and less than 35 unaccredited purchasers with sufficient investment knowledge -Accredited investors: Institutional investors (banks, mutual funds), wealthy investors, and high-level insiders of the issuer (executive officers, directors, partners) -General selling efforts prohibited -See Mark v. FSC Securities Corp. 3. Small Offerings: - Rule 504 -Regulation D: Nonpublic issuer may sell up to $1 million of securities in a 12-month period to any purchaser -General selling efforts permitted -Rule 505 -Regulation D: Any issuer may sell up to $5 million of securities in a 12-month period to less than 35 unaccredited investors (unlimited accredited investors) -General Selling efforts prohibited -Regulation A -Regulation A: Nonpublic issuer may sell up to $5 million of securities in one year period -No limit on number of purchasers, no purchaser sophistication requirement, and no purchaser resale restriction -Disclosure document is the offering circular, which must be filed with the SEC
no
A corporate officer ordinarily has _________ liability on contracts made for the corporation if the officer signs on behalf of the corporation rather than in a personal capacity
torts, crimes
A person is always liable for his own _________ or __________, even if committed on behalf of a principal
business judgment rule, directors
A shareholder must first demand that the board of directors bring a suit. If the board refuses, the shareholder cannot bring derivative action since the _____________ insulates the board's decision. However, the shareholder may still sue _______
conflict of interest
As agents, directors and officers owe the corporation duties of loyalty, including the duty not to self-deal; if a director has this, a court may void the transaction with the corporation if it is unfair to the coporation
crimes
Corporations may be liable for ________ when the act is requested, authorized, or performed by: (a) board of directors, (b) an officer, (c) another person with responsibility for formulating company policy, or (d) a high-level administrator with supervisory responsibility over the subject matter of the offense and acting within the scope of his employment
Once declared, dividends are _______ of the corporation.
Debts.
fiduciary duty
Directors and officers owe a ___________ to the corporation, including duty to act within the scope of the powers of the corporation
Dividends must in the form of cash.
False
The board of directors own a corporation
False
Under the intrinsic fairness test, directors and officers are protected from liability to their corporation for usurping corporate opportunities
False
A "hostile takeover" occurs when there is an offer to the shareholders of the target corp. to buy their shares at a price above current market price.
False. A tender offer is an offer to shareholders to buy their shares at a price above current market price.
Class voting permits shareholders to multiply their shares by the number of directors to be elected and cast the resulting total for one or more directors.
False. Cumulative voting permits shareholders to multiply their shares by the number of directors to be elected and cast the resulting total for one or more directors.Class voting may give certain shareholder classes the right to elect a specified number of directors.
quorum
For directors to act, a ________ (generally, a majority) of directors must be present and each director has one vote
AN, A, A, AN, A, AN, AN
For the following examples state whether you are (A) or are not (AN) doing business: soliciting orders contracts related to local business or sales owning/using real property for business selling through independent contractors performing service activities owning property for investment purposes maintaining a bank account for collection purposes
ultra vires
Historically, an act of a corporation beyond its powers was a nullity by this doctrine meaning "beyond the powers"; now corporate purposes are broadly stated limiting the use of this doctrine
corporation, shareholders
If a corporation was harmed by another's actions, who does the right to sue belong to? Who has no right to sue?
class action
If several shareholders have been similarly affected by a wrongful act, a shareholder may bring a ___________ on behalf of all affected shareholders
Nine Month rule in rule 147
In securities, exemptions: •Exempt securities never need to be registered -Short-term note or draft (< 9 months to maturity)
Accredited Purchasers
Institutional investors (banks, mutual funds), wealthy investors, and high-level insiders of the issuer (executive officers, directors, partners) -General selling efforts are prohibited -Private offering to unlimited accredited investor-purchasers and less than 35 unaccredited purchasers with sufficient investment knowledge
consent
Most state corporation laws and the MBCA permit action by directors without a meeting if all directors __________ in writing or through telecommunications
express, implied
Officers are agents of the corporation, thus have _________ authority conferred on them by the bylaws or the board of directors and __________ authority to do things reasonably necessary to accomplish duties
Shareholding Voting Agreements
Shareholders agree how they will vote their shares
absolute, discretionary
Shareholders have a(n) _________ right to look at records from within the last three years. Shareholders have a(n) _________ right to look at records beyond three yeras old
Absent bad faith, fraud, or breach of fiduciary duty, the rule that the judgment of directors and officers is conclusive is known as:
The business judgment rule
Which of the following statements is false? -Each person is liable for his/her own torts -A corporation may be criminally liable if an officer or director authorized an employee to commit a criminal act. -A director or officer cannot be personally liable for a crime. -Corporations may protect or insure their officers and directors from the risk of liability.
The correct answer is (C). A director or officer may have criminal liability if he or she requests, conspires, authorizes, or aids and abets the commission of a crime by an employee.
president and secretary
The same person may hold any two or more offices except for what two offices?
When must securities be registered?
They must be registered before you can offer to sell securities, unless exempt from registration
not disclosing information
This action is just as bad as disclosing false information
A corporation has legal power to do anything that an individual may do
True
Directors generally are elected by a single class of shareholders in straight voting
True
MBCA has adopted the Zapata rule.
True
MBCA provides that a corporation may be dissolved by directors and shareholders.
True
Officers are agents of the corporationt
True
Shareholder action is required to approve a merger.
True
False
True or False: Only majority shareholders have the right to receive important information about the corporation
False
True or False: Shareholder meetings are at the discretion of the board of directors
False
True or False: Under the intrinsic fairness test, directors and officers are protected from liability to their corporation for usurping corporate opportunities.
true
True or False: officers are agents of the corporation
True
True or False: the MBCA provides that a corporation may be dissolved by directors or shareholders
majority shareholder
Under straight voting, nominees with the most votes win, so __________ could elect the entire board of directors
loans
Under the Sarbanes-Oxley Act, ________ to directors or officers from the corporation cannot be made
respondeat superior
Under the vicarious liability doctrine of _____________, a corporation is liable for employee's tort that is reasonably connected to authorized conduct of the employee
prepare articles of incorporation, sign them, file with secretary of state, receive a copy of them stamped "filed", hold organization meeting
What are the basic steps for incorporating?
informed decision was made, managers have no conflicts of interest, and managers had a rational basis to believe that the decision is in the best interests of the corporation
What are the three requirements that must be satisfied for the business judgment rule to protect managers from liability?
elect board of directors and approve external auditors
What are the two actions that shareholders customarily perform at the annual shareholder meeting that is required by the MBCA?
shareholder domination and using domination for an improper purpose
What are the two requirements for piercing the corporate veil?
amending articles of incorporation, mergers, and dissolution
What are three actions that require board initiative and shareholder approval?
merger/acquisition, increase/decrease in dividends, and change/enlarge business
What are three things that must be approved by shareholders usually by a super majority?
board of directors has imprudently managed the corporation
What do most derivative actions claim?
legal person and legal entity
What is the legal status of a corporation?
corporate secretary
What is the only officer required for nonprofit corporations?
burden shifting
What is the phrase used to describe the impact of the Zapata Rule on who has the burden of proof?
enhance corporate profits and shareholder gain
What is the traditional objective of the corporation?
limited
What type of liability do shareholders in a corporation have?
a
Which of the following is not a debt security: a.) stock b.) bond c.) debenture d.) note e.) none of the above
C
Which of the following statements is false? a)Each person is liable for his/her own torts b)A corporation may be criminally liable if an officer or director authorized an employee to do a criminal act c)An officer or director cannot be personally liable for a crime d)Corporations may protect or insure their officers and directors from risk of liability
shareholder seeking to enjoin a corporation, corporation suing management, or state's attorney general
Who are the three types of persons that the MBCA and the MNCA state that ultra vires may be asserted by?
may
a corporation (may/may not) acquire, hold, and convey property or sue and be sued in its own name
domestic, foreign
a corporation is ___ in the state in which the company incorporates, and a ___ in all other states in which it operates
alien
a corporation is an ___ corporation in other countries in which it does business
permission of government
a corporation may be created only by ___
criminal liability
a director or officer may bear __________ if he/she requests, conspires, authorizes, or aids and abets the commission of a crime by an employee
going private
a freeze-out of shareholders of publicly owned corporations
proxy
a person designated to vote for a shareholder; once public ownership of shares exceeds 50%, management must solicit these from passive shareholders to have a quorum and achieve a valid shareholder vote
fiduciary duty
a promoter is not an agent of the proposed corporation or investors since they did not appoint the promoter, but a promoter owes a ___ to the corporation and its perspective investors
sue
a shareholder has the right to _____ in his/her own name to prevent or redress a breach of the shareholder's contract
intrinsic fairness standard
a transaction is fair if reasonable persons in an arm's-length bargain would have bound the corporation
cumulative voting
a voting method in which shareholders may accumulate votes by multiplying number of directors to elect by number of shares held and shareholder may allocate votes among nominees as he/she chooses and may choose to cast all votes for only one nominee
business judgment rule
absent bad faith, fraud, or breach of fiduciary duty, the judgment of directors and officers is conclusive; essentially gives management a lot of discretion in terms of decisions
tender offer
an offer to shareholders to buy their shares at a price above current market price; made when an outsider (raider) attempts to gain control of a publicly held corporation (target); usually opposed by a corporation's management using a variety of defenses
director or officer
are not usually liable for the torts of employees of the corporation, but is liable if he/she authorizes a tort or participates in its commission
Notice must be given to shareholders of record
as a date fixed by the Board of Directors
nominating committee
board committee that chooses a slate of directors to be submitted to shareholders at the annual election of directors
shareholder litigation committee
board committee that decides whether a corporation should sue someone who has allegedly harmed the corporation
executive committee
board committee that has the authority to act for the board on most matters when the board is not in session
audit committee
board committee that is directly responsible for appointment, compensation, and oversight of independent public accountants; publicly held firms are required to have these by the Sarbanes-Oxley Act
compensation committee
board committee that reviews and approves salaries, stock options, and other benefits of high-level corporate executives
Violations related to Section 5 of the Securities Act of 1933 and the related waiting periods
broadly prohibits the use of any manipulative or deceptive device in contravention of any SEC rules prescribed as "necessary or appropriate in the public interest or for the protection of investors" •Rule 10b-5 specifies the elements of the prohibition and applies to all transactions in all securities, whether or not registered under 1933 or 1934 acts Rule 10b-5 Elements •Rule 10b-5 prohibits misstatements or omissions of material fact -Material information is any information where there is substantial likelihood that a reasonable investor would consider it important to a decision and disclosure of the fact would alter the decision •Defendant not liable without scienter, or intent to deceive, manipulate, or defraud -Probably includes gross recklessness •Rule 10b-5 requires private plaintiffs seeking damages to be actual purchasers or sellers of securities and to prove they relied on the misstatement of material fact •Rule 10b-5 prohibits a person with inside information (nonpublic, confidential) from using the information when trading securities with a person without the information
preincorporation share subscriptions
contracts in which a prospective shareholder offers to buy a specific number of shares in a new corporation at a stated price; under the MBCA a prospective shareholder may not revoke this for a six month period
government-owned corporation
corporations that are owned by governments and perform governmental and business functions; seek corporate status to free themselves from governmental operating procedures which are more cumbersome than business operating procedures (ex: municipality, school corporations, etc)
not-for-profit corporations
corporations who do not issue stock and do not expect to make a profit; have members rather than shareholders and none of the surplus revenue from their operations may be distributed to their members
close corporations
corporations with very few shareholders whose shares are not available to the general public; controlling shareholders are usually the only managers of the business
shareholder litigation committee (SLC)
created by boards with the purpose of deciding whether to sue if a shareholder makes a demand to file suit; usually has independent legal counsel and its decisions are mostly upheld in court if they comply with the business judgment rule
care or diligence
directors and officers are liable for losses to the corporation caused by their lack of _______________
usurping corporate opportunities
directors and officers have the opportunity to steal business opportunities their companies could have exploited; for this to have occurred, three conditions must be met: 1. opportunity came to the director or officer in his/her corporate capacity 2. opportunity has a relation or connection to an existing or prospective corporate activity 3. corporation can financially take advantage of the opportunity
Wall Street Rule
either support management or sell the shares
de jure corporation
exists when promoters and incorporators substantially comply with each mandatory (shall, must) requirement to incorporate the business
de facto corporation
exists when promoters fail to comply with all of the mandatory requirements, yet comply with most of the mandatory provisions
are not, are
for an isolated transaction, completed within 30 days, you (are/are not) required to be doing business; for an ongoing transaction you (are/are not) required to be doing business
freely transferrable
generally the ownership interest in a corporation is ___ meaning that a shareholder may sell her shares to whomever she wants whenever she wants and the purchaser becomes a shareholder with the same rights the seller had
international shoe
in this case, the Supreme Court ruled that a foreign corporation must have "certain minimum contacts" with the state in order to benefit from the state's jurisdiction
model nonprofit corporation act (MNCA)
laws applied to nonprofit corporations; substantially similar to for-profit law; governs the formation, operation, and termination of not-for-profit corporations
special meetings
may be held whenever a corporate matter arises that requires immediate shareholders' action; notice must list purpose of the meeting and must be given to shareholders of record as of a date fixed by the board of directors
more
modern incorporation statutes are (more/less) flexible than they were originally in terms of establishing, financing, and operating a corporation
straight voting
most commonly used voting method in which each share has one vote for each director-nominee; allows shareholders to vote for as many nominees as are directors to be elected and cast votes for each nominee with as many votes as shares hold
officers
must act within authority conferred by the articles of incorporation, bylaws, and the board of directors
adoption
occurs when the corporation adopts contracts made by the promoter and accepts the contract with knowledge of all material facts
novation
occurs when the corporation and a third party agree to release the promoter from liability and agree to substitute the corporation for the promoter as the party liable for the contract
derivative action
one or more shareholders may bring a ______________ for the benefit of the corporation if the directors failed to pursue a corporate cause of action
freeze-out
oppression in which the corporation merges with a newly formed corporation under terms by which minority shareholders receive cash instead of shares of the new corporation
shareholders
own a corporation and elect a board of directors and officers to run or manage the corporation
Shareholders
owners, but not (necessarily) the managers of a corporation
statutory close corporation supplement to the MBCA
permits a close corporation to dispense with a board of directors and be managed by the shareholders and grants unlimited power to shareholders to restrict the board's discretion
promoter
person who incorporates the business, organizes its initial management, and raises its initial capital; individually liable for any contracts entered into preincorporation unless the adoption or novation occurs
double taxation
possibility that the corporation will have to pay income tax on its profits as well as taxes on the dividends they distribute
due process clause
requires that a foreign corporation have sufficient contacts with a state before the state may exercise jurisdiction over the corporation
