Corporations

Director's Duties: Resignation and Removal

*The officer has the power to resign at any time by deliver notice to corporation* *Corporation has power to remove officer with or without cause* 1. If removal/resignation breached contract, non-breaching party can get damages 2. Mere appointment to office doesn't create contractual rights to remain in office

Derivative Action: Requirements

*To bring a derivative suit, the shareholder must have:* 1. *Standing either by:* - SH at the time of the act/omissions complained of - Must have become shareholder through operation of law from someone who was SH at time of act/omission 2. *Demand either by:* - *Written demand:* must wait 90 days after demanding, unless SH is notified earlier that corporation has rejected demand - Irreparable injury to corporation will result by waiting - Proving demand would be futile

Shareholders: Meetings

*Types of Meetings* 1. *Annual/regular meetings* = mandatory meetings (if not held within earlier of 6 months after fiscal year or 15 months after last meeting, court can order meeting to be held) 2. *Special meetings* = may be called for by the board of directors of holders of 10%+ shares eligible to vote, or by other persons authorized by articles *Place of meetings:* can be held anywhere (in or out of the state) *Notice of Meetings:* 1. SHs must get notice between 10-60 days before meeting, stating: - Date, time, and place of meeting (regular meeting) - Purpose of the meeting (special meetings only) - Can't do anything at meeting not mentioned in purpose 2. Notice may be waived in writing or by attendance

Piercing the Corporate Veil: Alter Ego

*When corporate formalities are ignored and corporation can be considered the "alter ego" of its shareholders/another corporation, if:* 1. Treat corporate asses as their own assets 2. Fail to observe corporate formalities (sloppy administration insufficient) 3. Some basic injustice results (damages is necessary)

Shareholders: Voting Trust

*Written agreement of SHs where all shares owned by those SHs are transferred to a trustee who will vote the shares and distribute the dividends in accordance to the voting trust agreement* *Rule: the corporation must be given:* 1. Copy of the trust agreement 2. Names/addresses of beneficial owners of the trust *Duration:* Not valid for more than 10 years, unless otherwise agreed to

Shareholders: Voting Agreements

*Written/signed agreement providing for the manner in which they will vote their shares (specifically enforceable)* 1. Does not need to be filed with corporation and not subject to time limits 2. Less beneficial than voting trust agreement (only have breach of contract remedy)

6 Essay Fact Patterns

1. Organization/creation of corporations 2. Issuance of Stock 3. Directors and Officer's Liability 4. Shareholder's Liability and Powers 5. Fundamental corporate changes 6. Securities/Insider Trading

De Facto Corporation

1. Relevant incorporation statute that they could have used(there always is) 2. Good faith, colorable attempt to comply with the statute 3. Conduct of business in corporate name and exercise of corporate privileges *If applied, business is treated as a corporation for all purposes except in an action by the state (quo warrant)*

Other Bases of Director Liability

1. Ultra vires acts 2. Improper distributions 3. Improper loans (only allowed if reasonably expected to benefit corporation)

Formation: Incorporators

only need 1 incorporator, who signs the articles of incorporation and delivers them to the Secretary of state

What is included in Articles of Incorporation?

*1. Name of corporation* - Corporation (corp.) - Company (co.) - Incorporated (inc.) - Limited (ltd.) *2. Capital structure* - Authorized stock (max. # of shares corporation can sell) - Numbers of share per class - Information on voting rights and preferences of each class *3. Name/address of corporation's registered agent* *4. Name/address of each incorporator* *5. Duration of corporation* - If not, presumed perpetuity *6. Statement of business purpose*

Limited Liability of a Corporation

*Directors, officers, and shareholders are not liable for what the entity does. The corporate entity is regarded as a separate legal person who can be held liable for its conduct.*

Officers: Standard of Conduct

*Officers must carry out duties in good faith, and:* 1. With care of ordinarily prudent person in like position under similar circumstances 2. In a manner reasonably believed to be in best interest of the corporation

Piercing the Corporate Veil

*Once corporate veil is "pierced", courts will disregard the corporate entity and hold individuals personally liable for corporate obligations* - Usually done by creditors - Almost never allowed from SHs *When Corporate Veil is Usually Pierced:* 1. Alter ego 2. Undercapitalization 3. Avoidance of liability

Fundamental Changes in Corporate Structure: Amending Articles of Incorporation

*Rule:* corporation can amend its articles with any provision that would be lawful under their original articles (usually require SH approval) *Exception:* certain housekeeping amendments can be made without SH approval (No dissenting SHs rights of appraisal)

Stock Issuance: Amount of Consideration

*Adequate consideration is usually par, the minimum issuance price* *Modern Rule:* corporation is allowed to issue share for whatever consideration the board of directors deems appropriate *CL Rule:* stock couldn't be issued for less than stock's par value 1. *Par *= minimum issuance price (could still sell for more) 2. *No par* = no minimum issue price and board of directors set price 3. *Treasury stock* = can be issued at any price it once (since it has already been issued out and re-acquired) 4. *Watered stock* = shortfall between the par stock price and the amount received for the stock (deficiency) - Directors liable for watered stock if knowingly authorized sales - Purchaser of watered stock is strictly liable (no defenses) - Bona fide purchasers/third parties not liable for transfers

Shareholders: Management Agreement

*An agreement regarding almost any aspect of exercising corporate power, requiring:* 1. Agreement set forth in articles, bylaws, written agreement approved by all SHs 2. Valid for 10 years, unless otherwise agreed to, but will be terminated if: - Corporation's shares are listed on national securities exchange - Otherwise regularly traded on national securities market

Foreign Corporations

*Any corporation not incorporated within a particular state* 1. Foreign corporations cannot transact business within a state until they have obtained a certificate of authority from the Secretary of state 2. If failure to obtain certificate, then they will have to pay a fine and will not be able to bring suits within the state (but they can still be sued against) 3. Failure to obtain a certificate does not impair validity of corporate acts

Distributions

*At least one class of stock must have right to receive the corporation's net assets on dissolution (beyond this, distributions are generally discretionary)* - Even if articles authorize distributions, the decision whether to declare a distribution is solely within the directors' discretion *Limitations on discretion:* 1. *Solvency:* distribution is not permitted if after giving it effect, either: - Corporation would not be able to pay debts as it becomes due in ordinary course of business - Corporation's total assets < total liabilities 2. *Restrictions in Articles:* may restrict board's right to declare dividends 3. *Share Dividends:* distributions of corporation's own shares to its SHs are not considered distributions (above restrictions are not applicable) *The shareholder of record on record date receives the distribution (not date of declaration of the dividend)*

Delegation of Director Authority

*Board may create committees and appoint members of the board of directors to serve on those committees (or to officers) to act for the board, except to:* 1. Fill vacancies on the board 2. Declare dividends *Board remains responsible for supervising the committee*

Judicial Dissolution

*By Attorney General:* 1. Fraudulently obtaining its articles of incorporations 2. Exceeding or abusing its authority *By Shareholders: * 1. Directors are deadlocked in managing corporate affairs, SHs cannot break the deadlock and irreparable injury to the corporation is being threatened 2. Directors have acted illegally, oppressively, fraudulently 3. SHs are deadlocked and failed to elect 1+ directors for a period of at least 2 consecutive annual meetings 4. Corporate assets are being wasted, misapplied, or diverted for non-corporate purposes 5. Corporation has abandoned its business and failed to dissolve *By Creditors:* 1. Creditor's claim has been reduced to a judgment, execution of the judgment is returned unsatisfied, and the corporation is insolvent 2. Corporation has admitted in writing that creditor's claim is due and corporation is insolvent

S-Corporations

*Certain small corporations that are taxed like partnerships, if they meet the following requirements:* 1. Stock can't be held by more than 100 persons 2. Shareholders must be individual persons (no entities) 3. Only one class of stock (and not publicly traded)

Classification of Shares

*Common shares:* only 1 type of share, giving SH equal ownership rights *Rule:* if shares are to be divided into classes or series within a class, the articles of incorporation must: 1. Prescribe number of shares in each class 2. Prescribe distinguishing designation for each class 3. Describe rights, preference and limitations of each class/series (or say they will be determined by directors prior to issuance)

Director's Duties: Conflicting Interested Director

*Conflicting Interest:* director knows that they/related person either is: 1. Party to the transaction 2. Has beneficial financial interest/interest reasonably expected to influence director's judgment in transaction 3. Direct, general partner, agent or employee of another entity with whom corporation is doing business and business is of the normal course of business brought before the board *Interested director transactions will be set aside (and the director liable for damages), unless either:* 1. Transaction was approved by majority of disinterested directors after all material facts have been disclosed to the board - Interested director's presence at meeting is irrelevant - *Material fact:* if ordinarily prudent person would consider it important in making decision about transaction - *Quorum:* majority excluding interested parties 2. Transaction was approved by majority of eligible votes by disinterested SHs after all material facts have been disclosed 3. Transaction was fair to the corporation - Adequacy of consideration - Corporate need to enter into the transaction - Financial position of corporation - Available alternative *Remedies:* 1. Enjoining the transaction/setting transaction aside 2. Damages (equal to director's profit)

Debt Securities

*Corporation borrowing funds from outside investors promising to repay them (they are creditors, not owners)* 1. *Bonds* = secured debts 2. *Debentures* = unsecured debts 3. *Bearer/Coupon Bonds* = payable to the holder of the bond 4. *Registered Bonds* = payable to owner registered in corporate records *Special features:* - Becoming convertible into equity securities at option of the holder - Corporation to redeem at specified price before obligation matures

Liability for Pre-Incorporation Contracts: Corporation Liability

*Corporation not liable on pre-incorporation contract until it adopts the contract* 1. Express (board of Directors adopts the contract) 2. Implied (corporation accepts benefits of the contract) Corporation liability does not automatically relieve promoter liability!

Derivative Action: Settlements

*Derivative suits may only be settle/discontinued with court approval* 1. *Substantial benefit*: once terminated, court can order corporation to pay SH's reasonable expenses if action resulted in substantial benefit to the corporation 2. *Without reasonable cause:* if court finds the suit was brought without reasonable cause or for an improper purpose, can order SH to pay reasonable expenses for defendants/corporation 3. *Claim preclusion:* SH's derivative suit bars others SHs from bringing the same claim against same defendants later on

Direct v. Derivative Actions

*Direct actions:* may be brought for breach of a fiduciary duty owed to SHs directly by an officer or director (recover is for the benefit of the individual SH) *Derivative actions:* SH asserting the corporation's rights rather than their own rights (recovery goes to the corporation, even if corporation is named as a defendant) *Determining whether direct or derivative suit:* 1. Who suffers the most immediate and direct damage? 2. To whom did defendant's duty run?

Board of Directors

*Directors are responsible for management of business and affairs of corporation* *Number:* only 1 director is necessary (but bylaws may require as many desired) *Qualification:* unless otherwise agreed to, directors need not be shareholders in the corporation or residents of a particular state *Election:* directors are elected at each annual shareholders' meeting *Terms of Office: if there are at least nine directors, they may be divided into equal classes with staggered terms of offices - Vacancies are generally filled by the shareholders or the directors *Inspection Rights:* directors have an unfettered right to inspect corporate books

Director Meetings

*Directors may act in both regular and special meetings* 1. *Regular meetings:* may be held without notice 2. *Special Meetings:* require 2 days written notice of: - Date, time and place of meeting (purpose not required) - Attendance constitutes a waive on required notice (unless attending to protest the lack of notice) *Quorum:* majority of board directors constitutes a quorum for the meeting (but cannot be agreed to be any less than 1/3 of board members) - *Unlike SHs:* quorum can be broken by withdrawing from the meeting *Approval of Action:* can only be done in 2 ways: 1. *Meeting:* if quorum is present, deemed approved if approved by majority of the directors present 2. *Unanimous agreement in writing:* by entire board of directors

Removal of Directors

*Directors may be removed by shareholders, with or without cause, except:* 1. Director elected by cumulative voting cannot be removed if votes cast against removal would be sufficient to elect them if cumulatively voted at an election of directors 2. Director elected by voting group of shares can only removed by that class

Director's Duties: Business Judgment Rule

*Directors who meet the duty of care (at least do something) will not be liable for corporate decisions that end up being unsuccessful as long as:* 1. Decision was informed (made with the level of care of ordinarily prudent person in a like position under similar circumstances) 2. Decision was made in good faith 3. Decision was made without conflicts of interest (reasonably believed to be in the best interests of the corporation) 4. Decision had a reasonable basis *Rationale:* directors are not guarantors of business success *BOP:* challenger has to prove statutory standard was not met

Director's Duties: Usurping Corporate Opportunity

*Directors' fiduciary duties prohibit them from diverting a business opportunity from their corporations without first doing:* 1. Telling board of directors about the opportunity 2. Giving corporation opportunity to act on it *Opportunity must have properly belonged to the corporation first* - The closer the opportunity to corporation's line of business, the more likely it is a corporate opportunity - Corporation has legal interest or expectancy in opportunity -Director found opportunity on corporate time/records - *Not a defense:* lack of corporation's financial ability *Remedies:* 1. Convey the opportunity to the corporation (sell it to them at the consideration the director received) 2. Constructive trust of the profits from usurping opportunity

Fundamental Changes in Corporate Structure: Shareholder Protection

*Dissenting shareholders from a fundamental change may require the corporation to buy their share for current FMV + interest, if:* 1. Shareholder entitled to vote on a merger plan 2. Shareholders of a subsidiary in a short-form merger 3. Shareholders of the corporation whose shares are being acquired in share exchange 4. Shareholder entitled to vote on a disposition of all/substantially all of the corporation's property *Exception:* not available to shareholders of publicly held corporations (they can sell their shares out on the market instead) *Procedure to Assert Remedy:* 1. File written notice of objection and intent to demand payment with the corporation before a vote is taken 2. Abstain from voting or vote against the proposed change 3. After the vote, within time set by the corporation, make written demand to be brought and deposit stock with the corporation 4. Disagreement of Value: court appoints appraiser if can't agree on FMV

Stock Issuance: Form of Consideration

*Each stock issuance (since it is a contract) needs adequate consideration* *Forms of consideration allowed:* 1. Money (cash or check) 2. Tangible or intangible property 3. Services already performed for corporation 4. *Split in authority:* promissory notes and future services

Act of Incorporation

*Effective Date:* corporation becomes effectives once incorporates file the Articles of Incorporation with the state (conclusive proof of valid formation) - *De jure corporation* is formed - Board of Directors holds and organizational meeting where it selects officers, adopts any bylaws, and conducts other appropriate business

Equity Securities

*Give an ownership interest in the issuing corporation* 1. *Authorized stock* = maximum number of shares corporation allowed to sell (by articles of incorporation) 2. *Issued stock* = number of shares corporation actually has sold 3. *Outstanding stock* = shares that have been issued and not reacquired 4. *Treasury stock* = issued shares that have been reacquired

Professional Corporations

*Licensed professionals may incorporate in order to provide professional services as a group [governed by corporate law]* 1. *Name:* must include either "profession association/corporation" or "PC/PA" 2. Professional corporations can hire non-professionals, but not render any professional services 3. Professionals are still personally liable for their own malpractice

Indemnification of Directors, Officers, and Employees

*Mandatory Indemnification:* corporation must indemnify directors and officers who prevailed in defending against a proceeding - Reasonable expenses incurred in proceeding, attorneys' fees *Discretionary Indemnification:* corporation may identify directors who successfully defended a suit (or settled) if: 1. Director acted in good faith 2. Believed their conduct was either: - In the best interests of the corporation (official capacity) - Not opposed to the best interests of the corporation (not official capacity) - Not unlawful (criminal proceedings) *Corporation cannot indemnify a director who was unsuccessful if:* 1. Direct or derivative action in which director was liable to the corporation 2. Director received an improper benefit *Court-Ordered Indemnification:* court can order indemnification if justice requires *Liability Insurance:* corporation may purchase liability insurance to indemnify directors or officers for actions against them that they would not have been entitled to for indemnification otherwise *Agents and Employees:* there is no limit on corporation's power to indemnify, advances expenses to, or maintain insurance for agents/employees

Fundamental Changes in Corporate Structure: Merger

*Merger* = blending of 1+ corporations into another corporation (merging corporation ceases to exist after the merger) *Approval of the merger is not required by SHs of the surviving corporation as long as:* 1. Articles of incorporation of surviving corporation will not different from articles before the merger 2. Each shareholder of surviving corporation whose shares were outstanding immediately prior to effective date will hold same number of shares, identical preferences, limitations, and rights 3. Voting power of the shares issued as a result of a merger will not exceed 20% of the voting power of shares of surviving corporation that were outstanding before merger *Parent corporation owning at least 90% of shares in a subsidiary can merge without approval of SHs or directors of the subsidiary (parent corporation must mail copy of merge plan to subsidiary SHs)*

Shareholders: Mechanics of Voting

*Ordinary Voting Rule:* must first have a quorum at meeting before matters are voted on 1. *Quorum* = majority of outstanding shares entitled to vote (not shareholders), unless articles require a higher number 2. Once established, the quorum must be held throughout meeting 3. Once established, there must be more votes cast in favor of an action than votes cast against the action to approve it *Rule:* generally, each share is entitled to one vote *Exceptions to one-vote rule:* 1. Director elections are elected by plurality of votes cast (cumulative voting) 2. If amending the articles of incorporation will affect only a particular class of stock, that class has the right to vote on the action even if they wouldn't otherwise have voting rights *Exception to voting:* shareholders may act without meeting if they have a unanimous written consent of al shareholders entitled to vote on a particular action

Liability for Pre-Incorporation Contracts: Promoter Liability

*Promoter is personally liable on pre-incorporation contract until there's a novation* - This applies even if the corporation accepts and is now liable too - If held personally liable, promoter may have right of reimbursement from corporation to extent of benefits received - Promoters are always liable if plaintiffs can show they were damaged by promoter's fraudulent misrepresentations or failure to disclose all material facts *Exception:* agreement expressly relieve promoter of liability

Shareholders: Inspection Rights

*Qualified right:* shareholder may inspect corporation's books, papers, accounting records, shareholder records upon 5 days written notice stating a proper purpose 1. *Proper purpose* = reasonably related to person's interest as a shareholder 2. May send an attorney, accountant, or agent to conduct inspection *Unqualified right:* any shareholder may inspect regardless of purpose these records: 1. Corporation's article and bylaws 2. Board resolutions regarding classification of shares 3. Minutes of SH's meetings from past 3 years 4. Communications sent by corporation to SHs over past 3 years 5. List of names/business addresses of corporation's current directors and officers 6. Corporation's most recent annual report

Shareholders: Who Has Voting Power

*Record shareholder on arbitrary record date has the right to vote, except if:* 1. Corporation re-acquires stock before the record date (becomes owner of the treasure stock as of its record date) 2. Death of the shareholder (executor can vote shares) 3. Proxies

Section 16(b)

*Requires the surrender to the corporation of any profit realized by any director, officer, or shareholder owning more than 10% of stock if they purchased within 6-month period* - Imposes strict liability on covered transactions to prevent unfair use of inside information and internal manipulation of price *Must prove:* 1. Sale/purchase of equity securities (not debt instruments) 2. Purchase and sale/sale and purchase within 6 months (order is irrelevant) 3. Officer, director, or 10%+ SH being sued (or anyone deputized by them) - Share ownership is measured both at the time of the purchase and sale 4. Profit realized (highest sales price - lowest purchase price) in 6-month period

Stock Issuance: Preemptive Rights

*Right of existing SH to maintain their percentage of ownership by buying stock whenever there is a new issuance of stock for money, except:* 1. Issuance of treasury stock is new issuance (split in authority) 2. Issuances of stock in exchange for property or services 3. Within 6 months after incorporation 4. Without voting rights but having a distribution preference *Preemptive rights are "opt-in" and not automatic rights*

Personal Liability for Directors

*Rule:* A direct is presumed to concur with board action unless their dissent or abstention is noted in writing in the corporate records, either:* 1. In the meeting minutes 2. Delivered in writing to the presiding officer at the meeting 3. Written dissent delivered to corporation immediately after meeting *Exceptions:* 1. Absent directors 2. Directors relying in good faith on reasonable information *Rule:* Articles of incorporation may limit or eliminate directors' personal liability for money damages to the corporation/SHs from actions/failure to take action *Exception:* cannot eliminate personal liability for: 1. Financial benefits received by director to which they were not entitled 2. Intentionally inflicted harm on corporation/SHs (tort) 3. Intentional violation of criminal law 4. Unlawful corporate distributions

Corporation by estoppel

*Rule:* Persons who have dealt with the entity as if they were a corporation will be estopped from denying that it is a corporation - Can also prevent the improperly formed "corporation" from avoiding liability by saying it was not properly formed *Exception:* does not apply to torts case (they didn't choose to deal with the entity)

Shareholders: Restrictions on Transfer of Stock

*Rule:* Stock transfer restrictions must be reasonable and cannot be an outright restraint on alienation *Exception:* right of first refusals are reasonable *Third-party purchaser bound by restrictions on transferring stock if either:* 1. Restriction's existence is consciously noted on certificate/statement 2. Had knowledge of the restriction at time of the purchase

Shareholder Liability

*Rule:* generally, shareholders owe no fiduciary duty to the corporation or their fellow shareholders (may act in their own personal interests) *Exceptions where there is no corporate entity:* 1. Unpaid stocks 2. Pierced corporate veil 3. Absence of de facto corporation *Exception for closely held corporations:* controlling SHs cannot oppress minority SHs (and they can sue to enforce this rule, because they have no market to sell their stocks on and get out of oppression) - A controlling shareholder must refrain from using their control to cause the corporation to take action that unfairly prejudices minority shareholders - Generally owe each other the same duty of loyalty and good faith owed by partners *Exception for management agreements:* if shareholders enter into agreements that vest some/all power to manage into 1+ shareholders, then managing shareholder is liable as if they were acting as a director

Derivative Action: Corporation's Motion to Dismiss

*Rule:* if a majority of disinterested directors find in good faith after reasonable inquiry that the suit is not in the corporation's best interest (or by a court-appointed independent panel), then it may be dismissed - *Majority:* courts just look at the independent finding and dismiss - *Minority:* court will make its own assessment of whether dismissal was in the company's best interest *BOP*: to avoid dismissal, SH has burden of proof to show that decision was not made in good faith after a reasonable inquiry *Exception*: if it was a majority of interested directors, then board has burden of proof showing it was made in good faith

Liability for Distributions

*Rule:* once the distribution is declared, SH is treated as a creditor of the corporation (their claim is equal in priority to those of other unsecured creditors) *Exception:* when distribution can be enjoined/revoked because it violates solvency limitation, articles of incorporation, or superior preference right *Rule:* Director who votes or assents an unlawful distribution is personally liable to the corporation for the amount that exceeds what could have been properly distributed to the SHs *Exception:* direct will not be liable for good-faith distributions, if: - Based on financial statements prepared according to reasonable accounting practices or on a fair reasonable valuation under the circumstances - Relying on information from officers, employees, legal counsel, accountants or a committee of which the director is not member *Rule:* director held liable is entitled to contribution from: 1. Every other director who could be held liable for the distribution 2. Each SH, for amount accepted knowing distribution is improper

Stock Issuance: Stock Subscriptions

*Rule:* pre-incorporation subscriptions are irrevocable for 6 months *Exception:* alternative provision in subscription agreement or consent of all subscribers *Rule:* post-incorporation subscriptions are revocable until they are accepted by the board of directors *Rule:* unless otherwise agreed, payment is required upon demand by the board - Cannot be demanded in a discriminatory manner - Subscriber who fails to pay may be penalized by sale of their shares, forfeiture of their subscription, or the amounts they paid (at corporation's option)

Piercing the Corporate Veil: Who is liable?

*Rule:* shareholders who were active in the operation of the business will be held personally liable (J+S liability) *Types of liability:* *Tort:* easily pierced veils (they didn't choose to deal with entity) *Contract:* party contracting could've investigated corporation's stability *Insolvency:* shareholder creditors claims will be subordinated to outside creditors if equity requires (fraud)

Shareholders: Management Control

*SHs generally have no direct control in managing corporation; shareholders only exercise indirect control through voting power for:* 1. Electing and removing directors 2. Adopting and modifying bylaws 3. Approving fundamental charges in corporate structure *Exceptions:* 1. SHs agree to dispose of board/vest management power in themselves by: - Allowed in articles/bylaws + approved by all shareholders - Unanimous written shareholder agreement 2. Closely held corporations, if: - Small number of shareholders - No market for the company stock (no way out)

Shareholders: Proxies

*SHs may by proxy (placing agency in another voter) if:* 1. In writing (fax and email allowed) 2. Signed by record shareholder (email okay if identifiable) 3. Directed to secretary of corporation 4. Authorizing another to vote their shares *Duration:* valid for 11 months (unless agreed otherwise) *Revocability:* generally revocable by the shareholder by either coming to the meeting to vote themselves or making a subsequent appointment - *Irrevocable*: only if states that it is irrevocable + coupled with interest or is given as security

Bylaws

*Scope:* can contain any provision for managing the corporation that is not inconsistent with the articles or applicable law - Used for internal governance purposes - Not statutorily required - Adopted by directors at the organizational meeting - Modified and repealed by a majority vote of either SHs or directors *Examples*: responsibilities of officers, time and places for regular board meetings, methods of giving notice

Fundamental Changes in Corporate Structure: Share Exchange and Conversion

*Share Exchange* = 1 corporation purchasing all the outstanding shares of 1+ classes/series of another corporation - Only SHs of the corporation whose shares are being acquired need to approve (not fundamental change to acquiring corporation) *Conversion* = 1 business entity changing into another form of business entity (corporation converting into an LLC) - Similar produces as approving a merger in which the converting corporation is not the survivor

Administrative Dissolution

*State may bring action to administratively dissolve corporation by serving written notice of their failure if:* 1. Failure to file an annual report 2. Failure to pay fees or penalties 3. Failure to maintain a registered agent in the state *Corporation has 60 days to fix the problem before being dissolved; after that point, may apply for reinstatement within 2 years of effective date of dissolution*

Fundamental Changes in Corporate Structure

*some changes are so extraordinary that both the board of directors and the SHs must vote on them* 1. Amending Articles of Incorporation 2. Merge, share exchanges, conversion 3. Sale of corporation property outside usual course of business

Voluntary Dissolution

1. *Dissolution by Incorporators:* allowed if shares have not been issued or business has not yet commenced by delivering articles of dissolution to the state - Corporate debts must be paid and an assets remaining must be distributed to the shareholders 2. *Dissolution by Corporate Act:* allowed if approved under fundamental change procedure for corporation *Rule:* once dissolved, the corporate existence continues but is not allowed to carry on any business except those for winding up and liquidating their affairs - Claims can still be asserted against dissolved corporation to the extent of the undistributed assets (and then, to the SHs depending on their pro rata share of the claim) - Corporation can cut show time to bring a claim by notifying claimants in writing of the dissolution and giving at least 120 days to bring their claims *Revocation:* corporation can revoke voluntary dissolution using same procedure to approve the dissolution

Types of Distributions

1. *Dividends* = excess corporate funds 2. *Redemptions* = forced sale of SH's stock to corporation for price set in articles 3. *Repurchases* = voluntary sale of SH's stock to corporation 4. Distribution of assets upon liquidation

Funds Allowed for Distributions (CL)

1. *Earned surplus* = business earnings - losses - previous distributions 2. *Stated capital and capital surplus* = both generated by issuing stock, but dividends must be allocated between the two - Par issuances go to stated capital first - Non-par issuances are allocated between stated capital and capital surplus by the board of directors - All excess goes to capital surplus (can be used as a distribution if the SHs are notified)

Rule 10b-5: Types of Fraudulent Conduct

1. *Misrepresentation:* of material information - *Material* = substantial likelihood that reasonable investor would consider it important in making an investment decision 2. *Misappropriation or insider trading:* person owed a duty of trust and confidence to the source of the information to either abstain or disclose information 3. *Tipping:* passing off material inside information for wrongful purpose - *Tipper* = passes along material inside information in breach of a duty and benefitted from that passing along (making a gift or enhancing reputation is sufficient) - *Tipper* = liable if tipper actually breached a duty and tippee knew that tipper was breaching the duty (there can be no liable tippee if there is no liable tipper)

Fundamental Changes in Corporate Structure: Procedure

1. Board adopts a resolution 2. Proposal and written notice is given to shareholders 3. Shareholders approve the changes (ordinary voting rule) 4. Changes in the form of articles are filed with the state

Winding Up Process

1. Gathering all corporate assets 2. Converting corporate assets to cash 3. Paying creditors 4. Distributing remainder to SHs based on their pro-rata share (unless there is a liquidation preference in articles of incorporation)

Director's Duties: Care

1. If a director does nothing and a reasonably prudent person in the similar situation would have done something, the director is liable for breaching his fiduciary duty as long as there is some damage (similar to negligence) 2. When director does something, use BJR 3. In discharging his duties, directors are entitled to rely on information from: - Corporate officers/employees reasonably believed to be both reliable and competent - Legal counsel, accountants, or other persons as to matters reasonably believed to be within their professional competence - Committee of the board that the director is not a member of, if it is reasonably believed that the committee merits confidence

Formation Requirements

1. Incorporators (people) 2. Articles of incorporation (paper) 3. Notarized and delivered to the Secretary of State (act)

Rights to Distribution

1.*Preferred shares = paid first, before common SHs receive dividends ($400,000 and 100,000 common and 20,000 of preferred w/ $2 preference $40,000 to preference paid first, $360,000 split amongst common at $3.60/share) 2. *Participating shares* = paid first, but are also paid once again with common shares' payment ($400,000 and 100,000 common and 20,000 of preferred participating with $2 preference. $40,000 to preference paid first, $360,000 split amongst all stock (120k) for $3/share) 3. *Cumulative preferred shares* = paid first, with the right to payment cumulating in unpaid years 4. *Cumulative if earned shares* = paid first, with the right to accumulate only present if there is sufficient current earnings 5. *Common stock* = remaining dividends split amongst # of common stock ($400,000 and 100,000 stock, $4 per share)

Officers

A corporation is not required to have officers and they can be added pursuant to state law and articles/bylaws *Examples:* president, secretary, treasurer (1 officer can hold multiple positions) *Duties:* officer's duties are determined by the bylaws or by the presiding board *Powers:* agency law

Fundamental Changes in Corporate Structure: Disposition of Property Outside Usual Course of Business

A sale, lease, exchange, or other disposition of all or substantially all of a corporation's property outside the usual and regular course of business is a fundamental corporate change for the corporation disposing of the property *Effect on purchaser:* does not become liable for the seller's obligation (seller remains solely liable) *Exception:* if disposition is disguised merger, court might hold purchaser liable as if a merger had occurred

Director's Duties: Loyalty

Direct owes corporation a duty of loyalty to act in good faith and with the reasonable believe that what they are doing is in corporation's best interest (no BJR)

Director's Duties: Competing Ventures

Director may not engage in a competing business in corporation's same line of business

Director's Duties: Disclosure

Directors have duty to disclose material corporate information to other board members

Director's Duties: Director Compensation

Directors may set their own compensation, but it must be reasonable and in good faith (excessive compensation is considered a waste of corporate assets and breach of duty of loyalty)

Statement of Business Purpose (Specific)

If a corporation includes a specific or narrow business purpose, it may not undertake activities unrelated to that stated business purpose *Ultra vires acts:*acts beyond scope of stated business purpose *CL:* the acts could be voided as being beyond the scope of the corporation's business purpose. *Modern Rule:* ultra vires acts are enforceable if: - Valid against third parties - Shareholder suing the corporation to enjoin ultra vires act - Corporation suing an officer/director for damages for approving an ultra vires act - State bringing an action to dissolve a corporation for committing ultra vires acts

Internal Affairs Doctrine

Internal affairs of a corporation are governed by law of the state in which the corporation is formed.

Rule 10b-5

It is illegal for any person to use means of interstate commerce to defraud within the sale of securities, requiring: *1. Use of an instrumentality of interstate commerce* - Mail, telephone, national exchange *2. Plaintiff's sale or purchase of a security* - Excludes potential sellers or already holders, but can be brought by SEC *3. Fraudulent conduct* - Misrepresentation - Misappropriation - Tipping *4. Scienter* - Intent to deceive, manipulate, or defraud - Recklessness to truth could be sufficient (negligence is not enough) *5. Reliance* - Plaintiff must have proved he relied on defendant's fraudulent statement - Reliance will be presumed if plaintiff proves omissions was material *6. Damages* [price paid/received - average share price after corrected information out]

Promoter

Persons who procure commitments for capitals and other contracts before a corporation is formed that will be used by corporation after its formation *Fiduciary Duties:* 1. Promoters are joint venturers with a fiduciary relationship with each other - Will beach their duty if they secretly pursue personal gain at their expense) 2. Owe a fiduciary duty to corporation of fair disclosure and good faith in their dealings - • Can be liable for profits from selling property to the corporation if all material facts were not disclosed to all those who are contemplated to be part of the initial financing scheme

De Facto Corporation and Corporation by Estoppel

Proprietors failed to form a de jure corporation, so they will be personally liable for what the business does, normally. However, under these doctrines, the business is treated as a corporation, so shareholders are not liable for what the business did. *Rule:* anyone asserting either doctrine must be unaware of failure to form de jure corporation

Stock Issuance

Rules only apply with a corporation is selling its own stock (not to subsequent sales of a certain corporation's stock)

Formation: Articles of Incorporation

Serve as both a contract between the corporation and its shareholders and a contract between the corporation and the State

Statement of Business Purpose (Broad)

Usually "to engage in lawful activity, after first obtaining necessary state agency approval", which allows them to undertake any act necessary or convenient for carrying on their business purpose

Piercing the Corporate Veil: Avoidance

When necessary to prevent fraud or prevent an individual shareholder from using entity to avoid existing personal obligations *Exception:* adopting the corporate form to avoid future personal liability

Piercing the Corporate Veil: Undercapitalization

When there is not enough unencumbered capital to reasonably cover foreseeable liabilities at the time of corporate formation