Corporations

For any distribution (dividend, repurchase, redemption), which funds can be used?

The modern view does not look at funds. It says a corporation cannot make a distribution if it is insolvent or if the distribution would render it insolvent. Insolvent means either: a. The corporation is unable to pay its debts as they come due; or b. Total assets are less than total liabilities. - Liabilities include preferential liquidation rights. Directors are jointly and severally liable for improper distributions. Remember the directors' good faith reliance defense - Shareholders are personally liable only if they knew the distribution was improper when they received it.

To avoid double taxation

- Ordinarily, a corporation pays income tax on its profits. In addition, shareholders are taxed on distributions to them, so there's "double taxation." To avoid (legally) having it pay income tax at the corporate level, we should qualify as: An S Corporation -- S Corps have no more than 100 shareholders, all of whom are human U.S. citizens or residents; one class of stock and it is not publicly traded.

Deritive vs Direct Hypos

-- S, a shareholder of C Corp., sues the board of directors of C Corp. for breaching the duty of care or loyalty. That is always derivative. Why? Corporation could sue, these duties are owed to the corporation -- S sues board of directors of C Corp. for issuing new stock without honoring her preemptive rights. Is this a derivative suit? No, this is a direct suit -- S sues to force the company to declare dividends. Derivative? No, corporation is not hurt -- S sues another shareholder for oppression in a close corporation. Derivative? No, this is also a direct suit

Corporation by Estoppel

-- You do business with people who hold their business out as a corporation. They think it's a corporation. You think it's a corporation. You write checks to the "corporation" and deal with it as a corporation. Turns out it's not a corporation. You sue the proprietors individually. Under this doctrine, you cannot win. You are estopped to deny that the business was a corporation. -- It can also prevent the improperly-formed "corporation" from avoiding liability by saying it was not properly formed. -- Corporation by estoppel applies only in what kinds of cases? Contract not tort

Two kinds of shareholder meetings:

1) Annual meeting: if no annual meeting is held within 15 months a shareholder can petition the court to order one. These are required. At annual meetings they elect directors. 2)Special meeting: can be called by (1) the board or (2) the president, or (3) the holders of at least 10 percent of the voting share, or (4) anyone else authorized in the bylaws.

FUNDAMENTAL CORPORATE CHANGES

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

To do fundamental corporate change:

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

Steps to Winding Up

1. Give written notice to known creditors and publish notice of dissolution in a newspaper in the county of its principal place of business; 2. Gather all assets; 3. Convert assets to cash; 4. Pay creditors; and 5. Distribute any remaining sums to shareholders, pro-rata by share unless there is a liquidation preference (may be set out in articles) - liquidation preferences may be relevant to insolvency (how we tell if distrb was improper; liabilities include liquidated preferences)

To pierce corporate viel:

1. Shareholders must have abused the privilege of incorporating and 2. Fairness must require holding them liable. -- So courts may PCV to avoid fraud or unfairness by shareholders in a close corporation. Sloppy administration is not enough for PCV. Alter ego (identity of interests) Undercapitalization

Where do shareholders vote?

1. Shareholders usually take action at a meeting. Instead, they can act by unanimous written consent signed by holders of all voting shares (e-mail is OK). If they have a meeting, must it be held in the state of incorporation? No

Notice for Meetings

3. If there is a board meeting, the method for giving notice is set in the bylaws. Regular meetings: No notice required Special meetings: notice is required - Unless the bylaws say otherwise, the corporation must give: At least two days' notice of date, time, and place; need not state purpose - Failure to give required notice means that whatever happened at the meeting is voidable (maybe void), unless the directors not notified waive the notice defect. - They can do this (1) in writing anytime or (2) by attending the meeting without objecting at the outset of the meeting. Can directors give proxies or enter voting agreements for how they will vote as directors? NO! Such efforts are void. Why? Directors owe the corporation non-delegable fiduciary duties -- This is different from shareholders, who can vote by proxy and enter into voting agreements.

Terminology

A corporation is owned by its shareholders (stockholders) The group in charge of management is the board of directors (board) Members of the board of directors are elected by the shareholders (shareholders own, but don't generally manage) The board appoints people to carry out its policy: Officers (agents of corporation)

INDEMNIFICATION OF DIRECTORS AND OFFICERS

A. Someone has been sued by (or on behalf of) the corporation in her capacity as an officer or director. Category 1: The corporation CANNOT indemnify a director or officer who *was held liable to the corporation or to have received an improper benefit* Category 2: The corporation MUST indemnify a director or officer who *was successful in defending merits or otherwise* - In some states, she must win the entire case; in others, she is entitled to indemnification "to the extent" that she wins the case. Category 3. The corporation MAY indemnify ("permissive indemnification") a director or officer her litigation expenses if she shows she *acted in good faith with the reasonable belief what she did was in the company's best interest* (duty of loyalty) - Disinterested directors, disinterested shares, or independent legal counsel determines her eligibility for permissive indemnification - Suits that are settled fall into category three B. Notwithstanding these rules, court where director or officer was sued CAN order reimbursement if it is justified in view of all circumstances. - If she was held liable to the corporation, this is *limited to costs and attorneys' fees (cannot include judgment)* C. The articles can eliminate director (and in some states officer) liability to the corporation for damages, but not for intentional misconduct, usurping corporate opportunities, unlawful distributions, or improper personal benefit. - So these provisions can eliminate liability only for *Duty of Care* cases

CONVERSION.

Business converts to another form (e.g., corporation converts to LLC). Board approval notice to shareholders, shareholder approval, deliver document to Secretary of State, dissenting shareholders' right of appraisal.

Which shareholders get dividends

Common vs preferred (preferred first)

Quorum Requirements for Directors

For any meeting of the board, we must have a quorum (regular or special) Unless bylaws say otherwise, a quorum is a majority of all directors. Without a quorum, the board cannot act. If a quorum is present at a meeting, passing a resolution (which is how the board takes an act at a meeting) requires only a majority vote of those present. So, if there are nine directors, at least five directors must attend the meeting to constitute a quorum. If five directors attend, at least three must vote for a resolution for it to pass. Quorum of the board can be lost ("broken") if people leave. Once a quorum is no longer present, Board cannot take an act at that meeting. -- The rule on this is also different for shareholder voting.

Foreign Corporations

Foreign corporations transacting business in this state must qualify and pay prescribed fees. Anything outside State A is foreign (states or countries) Transacting: Transacting business means the regular course of intrastate (not interstate) business activity. So, it doesn't include occasional or sporadic activity in this state, and not simply owning property here The foreign corporation qualifies by getting a certificate of authority from the Secretary of State. It gives information from its articles and proves good standing in its home state. The foreign corporation must also appoint a registered agent and maintain a registered office in this state. Consequences of transacting business without qualifying: - Civil fine and cannot assert a claim in state - But the foreign corporation can be sued and defend in this state. - Once the corporation qualifies and pays back fees and fine, it then can assert a claim here

Special fiduciary duty in close corporations

In many states, courts impose a fiduciary duty on shareholders owed to other shareholders. Close corporation looks like a partnership (with few owners, who usually are employed by the business). - Because partners owe each other a fiduciary duty of utmost good faith, these courts apply the same duty in the close corporation. - If there is oppression of minority shareholders, they can sue the controlling shareholders who oppress them for breach of this fiduciary duty. - For example, the controlling shareholders might deny the minority any voice in corporate affairs, fire them from employment, refuse to declare dividends, and refuse to buy the minority's stock (so the minority is getting no return on investment). - Oppression thwarts minority shareholder's legitimate goals for investing and she has no way out (bc can't sell stock)

Corporations for Licensed Professionals

Licensed professionals, including lawyers, medical professionals, and CPAs, may incorporate as a "professional corporation" or "professional association." The name must have one of those phrases or "P.C." or "P.A." The articles must state that the purpose is to practice in a particular profession. 1. Directors, officers, and shareholders usually must be licensed professionals. May the P.C. employ non-professionals? Yes but not to practice the profession -- Are the professionals personally liable for their malpractice? Yes 2. Shareholders are generally not liable for corporate obligations or for other professionals' malpractice. 3. Generally, the rules governing regular corporations apply to the P.C.

Notice Requirement for Meetings

Must give written notice (fax or e-mail OK) to every shareholder entitled to vote. Deliver it between 10-60 days before the meeting. a. Contents of the notice: must state the date, time, and place of the meeting. b. For special meetings, you must also state the purpose of the meeting. Why is the statement of purpose important? Cannot do anything else at that meeting c. Consequence of failure to give proper notice to all shareholders—whatever action was taken at the meeting is voidable (maybe void), unless those not sent notice waive the notice defect: 1) Express-in writing and signed anytime (fax and e-mail are OK) 2) Implied-attend the meeting without objecting at the outset.

STOCK TRANSFER RESTRICTIONS

OK if they are reasonable: not an undue restraint on alienation. Right of first refusal is not unreasonable Restriction can be enforced against transferee if (a) the restriction is conspicuously noted on the stock certificate or (b) the transferee had actual knowledge of the restriction.

Officers

Owe the same duties of care and loyalty as directors Status: Officers are agents of the corporation. The corporation is the principal and the officer is the agent. Whether the officer can bind the corporation is determined by whether she has agency authority to do so (like actual or apparent authority). - The president generally has inherent authority to bind the corporation to contracts in the ordinary course of business. Traditionally, corporations were required to have a president, a secretary, and a treasurer. It can have others. Today, one person hold can multiple offices simultaneously Selection and Removal: - Officers are selected by and removed by the board, which also sets officer compensation. - Company may be liable for breach of contract damages in firing - Shareholders DO NOT hire and fire officers

Right of Appraisal

Right of dissenting SH to force corporation to buy shares at fair value Only these changes trigger the right of appraisal: a. Merging or consolidating; b. Transferring substantially all assets; c. Stock being acquired in a share exchange; or d. Conversion to another form of business. 2. BUT even if the company is doing one of these, there is no appraisal if the company's stock is listed on a national exchange or if the company has 2,000 or more shareholders (not shares, shareholders). -- So this means the right of appraisal exists in Close corporations

How do shareholders vote?

Shareholders generally get to vote on these things: (1) to elect directors (2) to remove directors and (3) on fundamental corporate changes. They may also vote on other things if the board asks for a shareholder vote on those things (amend bylaws) - Every time the shareholders vote, we must have a quorum represented at the meeting. Determination of a quorum focuses on the number of *shares* represented, not the number of shareholders. *General rule: a quorum requires a majority of outstanding shares* - quorum cannot be lost if people leave the meeting What vote is required? 1. To elect a director: plurality (the person who gets more votes for that seat on the board than anyone else). 2. To approve a fundamental corporate change: majority of the shares that actually vote 3. To remove a director, traditionally needed majority of the shares entitled to vote. Increasingly, though, treat this the same as "other matters." 4. Other matters: majority of the shares that actually vote on the issue

CAN SHAREHOLDERS BE HELD LIABLE FOR CORPORATE DEBTS?

The general answer is NO. Why? Corporation is liable for what it does But a shareholder might be personally liable for what the corporation did if the court "pierces the corporate veil" (PCV). In what kinds of corporations can this happen? Close corporations only

Cumulative Voting

Usually only in close corporations; gives smaller shareholders a better chance of electing someone to the board of directors This is available ONLY when shareholders elect directors. Usually, with "straight" voting, we have a separate election for each seat on the board being elected. Each outstanding share gets one vote for each seat. The candidate who gets more votes than another is elected to that seat. With cumulative voting, we don't vote for each seat individually. We have one at-large election. The top two (or whatever) finishers are elected to the board. To determine your voting power when cumulative voting exists: multiply the number of shares times number of directors to be elected. Does NOT exist if articles silent on voting

Alter Ego Fact Pattern:

X and Y are the only shareholders of Close Corp. X commingles personal and corporate funds, uses the corporate car as his own, and uses the corporate credit card to pay for personal purchases. Close Corp fails to pay its bills. -- Can a creditor of the corporation who has been unable to collect its claim from the corporation collect from either X or Y? -- We start with general rule (shareholders not liable for acts or debts of corporation). Then give the PCV standard. Here a court might PCV. Why? -- First, did a shareholder abuse the corporation? Yes, X treated corporate assets as his own -- Second, would it be unfair for X to have limited liability? Arguably yes because creditors are not being paid -- If the court does PCV, only X would be liable. Y did nothing wrong. Only X treated corporate assets as his own.

For-profit vs B-Corp

a. A for-profit corporation (which is what we are talking about) can make contributions to charity b. A "benefit corporation" (B Corp.) is one formed for profit and also to pursue some benefit to a broader social-policy cause. Things work as with a regular corporation, but the articles must say it's a "benefit corporation." - Files an annual benefit report assessing how it pursued its stated social mission. - Decision-makers consider not just impact of decisions on shareholders, but on the broader community or environment.

To have an irrevocable proxy

it must be a "proxy coupled with an interest." This requires (1) the proxy says it's irrevocable and (2) the proxy-holder has some interest in the shares other than voting. -- A gives B an option to buy A's stock. A gives B an "irrevocable proxy" to vote that stock at a meeting. Can A revoke this proxy? No, it says irrevocable and it is coupled with an interest; Here, the proxyholder has an interest because she has an option to buy the shares. It can be any interest beyond the simple interest in voting the shares.

Issuance of Stock and Bonds

"issue" a "security" to the person to get capital A. Debt securities (bonds): the corporation borrows money from X and agrees to repay her with interest. - The person holding a bond is a creditor not an owner B. Equity securities (stocks): the corporation sells an ownership interest to X. - The person holding stock (a shareholder or stockholder) is an owner not a creditor Issuance of stock: corporation sells its *own* stock (not when you or I sell)

Directors - Statutory Requirements

(adult natural persons) A. One or more; set by articles or bylaws B. Election: - Initial directors may be named in the articles. If not, they are elected by the incorporator(s) at the organizational meeting. - After initial, elected by shareholders - The entire board is elected each year unless there is a "staggered" (or "classified") board (board is divided into half or thirds, with one-half or one-third elected each year; usually set in the articles) C. Removal by Shareholders - with or without cause - In some states, if there is a staggered board, shareholders can remove a director only with cause D. Vacancy on Board: - Board or shareholders selects the person who will serve as director for the rest of the term - But if the shareholders created the vacancy by removing a director, the shareholders generally must select the replacement.

Duty of Care:

(burden on plaintiff) 1. Nonfeasance (a director does nothing - he's lazy). - State the standard in full, then focus on the duty of care portion. A person in like position would do some work. This guy did nothing, so he has breached the duty of care. - BUT HE IS LIABLE ONLY IF: His breach causes a loss to the corporation 2. Misfeasance (here, the board makes a decision that hurts the business - so here, causation is clear). - State the standard in full, then focus on the duty of care portion. Here, the directors' action caused a loss to the corporation, so causation is clear. BUT, a director is not liable if she meets the *business judgment rule* ("BJR"). - A prudent person in a like position would do appropriate homework, if they did appropriate homework, they are not liable - BJR is a presumption that when the board took the act, it did appropriate homework. That's why the burden is on the plaintiff to show that the board either did not do appropriate homework or did something galactically stupid. - The court will not second-guess a business decision if it was made in good faith, was informed, and had a rational basis; Director is not a guarantor of success

Duty of Loyalty

(conflict of interest) (burden on defendant) The BJR DOES NOT apply in duty of loyalty cases 1. Self-dealing (also known as interested director transactions). This is any deal between the corporation and one of its directors (or a close relative of a director) or another business of the director's. - Interested director transaction will be set aside (or the director liable in damages) UNLESS the director shows either: (1) the deal was fair to the corporation when entered, OR (2) her interest and the relevant facts were disclosed or known, and the deal was approved by either of these: a. Majority (at least two) of disinterested directors or b. majority of disinterested shares -- Special quorum rule: a quorum is a majority (at least two) of disinterested directors. -- Even if the deal is approved by an appropriate group, say this some courts also require a showing of fairness 2. Competing Ventures: Director cannot compete directly with her corporation - Remedy against Director if she goes into competition: Corporation gets a constructive trust on profits Director made from the competing venture. 3. Corporate Opportunity (Expectancy). - Rule: A director cannot USURP a corporate opportunity. That means the director cannot take it until he (1) tells the board about it and (2) waits for the board to reject the opportunity. - What is a corporate opportunity? Some say it's something in the corporation's business line. - Something the company has an interest or expectancy in; something defendant found on company time or with company resources - Is the company's financial inability to pay for the opportunity a defense? Probably not - Remedy: If Director still has it, he must sell it to the corporation at his cost. If Director has sold it at a profit, the corporation gets the profit. (Constructive trust).

Types of Stock

1. Par means "minimum issuance price." -- C Corp. is issuing 10,000 shares of $3 par stock. It must receive *at least* $30,000 2. No par means "no minimum issuance price." -- That means the board can have the stock issued for any price it sets 3. Treasury stock (authorized by unissued shares). This is stock the company issued and then reacquired. It is considered authorized, and the corporation can then resell it. If it does, the board sets any issuance price it wants. 4. Let's say the corporation issues stock in exchange for property or past services. Who determines the value of the property or services? The board - *Boards valuation conclusive if made in good faith* 5. On the bar exam, if they give you par stock, watch for watered stock. -- C Corp. issues 10,000 shares of $3 par to X for $22,000. The corporation wants to recover the $8,000 of "water." Who is liable? a. Directors: Yes if they knowingly authorized the issuance b. X (the guy who bought the stock): Yes (There is no defense; he is charged with notice of the par value.) c. If X transfers the stock to third-party (TP): TP is not liable if she acted in good faith. That means: Did not know about the water 6. Trick question: I own 10 shares of $3 par stock of X Corp. I sell it to you for less than $3 per share. Why is there no problem? This is NOT an issuance (only corporation selling the stock)

Requirments to Bring Derivite Suit

1. Stock ownership when the claim arose and throughout the suit. - The person bringing suit must have owned stock at the time the claim arose or have gotten it by operation of law from someone who did own it then (Inheritance and divorce decree) 2. Plaintiff must provide adequate representation of the corporation's interest. 3. Plaintiff must make written demand on corporation (usually that means the board) that the corporation bring the suit. In some states you must always make this demand and cannot sue until 90 days after making the demand. - BUT in other states, shareholders are not required to make this demand if the demand would be futile (i.e. when the directors will be the defendant) 4. The corporation is joined as a defendant. Even though the suit asserts the corporation's claim, the corporation did not do so, so it is joined as a defendant. 5. Can the parties settle or dismiss a derivative suit? Only with court approval -- The court may give notice to shareholders and get their input on whether to settle or dismiss.

De Facto Corporation

1. There is a relevant incorporation statute (there is in every state!). 2. The parties made a good faith, *colorable* attempt to comply with it. And 3. There has been some exercise of corporate privileges (they are acting as though they thought it was a corporation). -- If this doctrine applies, the business is treated as a corporation for all purposes except in an action by the state. (Such an action would be quo warranto). EX: Incorporators put together the proper documents and mail them to the Secretary of State. Unbeknownst to them, the documents are lost in the mail. In the meantime, the business is being operated as a corporation, and enters a contract. Are the shareholders personally liable on the contract? Yes unless court applies de facto corporation

PRE-INCORPORATION CONTRACTS (we knew there was NOT a corporation)

A. A promoter is a person acting on behalf of a corporation not yet formed. She might enter a contract on behalf of a corporation not yet formed. B. The *corporation* is liable on a pre-incorporation contract ONLY if it adopts the contract. - Types of adoption: 1. Express: board takes an action adopting the contract. 2. Implied adoption arises when: corporation accepts a benefit of the contract C. Unless the contract clearly says otherwise, the *promoter* is liable on pre-incorporation contracts *until* there is a novation. -- Remember: Adoption makes the corporation liable too, but does not relieve P (until novation)

MERGERS (B, Inc. merges into A Corp.) OR CONSOLIDATIONS (A Corp. and B, Inc. form C Corp.)

A. Board of director action (both corporations), and notice to shareholders. B. Shareholder approval (generally both corporations). Same as with amending articles. C. No shareholder approval required if a 90 percent-or-more owned subsidiary is merged into a parent corporation (Short form merger) D. If approved, surviving corporation delivers articles of merger or consolidation to Secretary of State. E. Remember the right of appraisal. Generally, for shareholders entitled to vote on the merger or consolidation and also for shareholders of subsidiary in short-form merger. F. Effect of merger or consolidation: surviving corporation succeeds to all rights and liabilities of the constituents. So a creditor of that corporation can sue the survivor (successor liability)

AMENDMENT OF THE ARTICLES

A. Board of director action and notice to shareholders. B. Shareholder approval (maj of shares entitled to vote but this is changing) C. If approved, deliver amended articles to the Secretary of State. D. Are there dissenting shareholder rights of appraisal? Generally not

WHICH DIRECTORS MAY BE LIABLE?

A. Directors may be liable to the corporation for improper distributions (see below), improper loans, "ultra vires" acts (making the company do things it has no power to do) and for breaches of fiduciary duties. B. A director is *presumed* to concur with board action unless her dissent or abstention is noted *in writing* in corporate records. - In writing means (1) in the minutes or (2) delivered in writing to the presiding officer at the meeting or (3) written dissent to the corporation immediately after the meeting. So is an oral dissent effective? Not by itself - Director cannot dissent if she voted for the resolution at the meeting Exceptions. a. Not liable if you were absent from the meeting (e.g., sick that day). b. Good faith reliance on info (including financial info) presented by an officer, employee, or committee (of which the director relying was not a member), or professional reasonably believed competent. Reliance must be in good faith (no good if you knew the person giving info was a bozo).

Consideration for Stock

A. FORM OF CONSIDERATION. - Stock (or an option to buy stock) may be issued for "any tangible or intangible property or benefit to the corporation." - This includes money (cash or check), property, services already performed for the corporation, and discharge of a debt. Includes promissory notes to corporation and future services to corporation. -- Can X Corp. give employees options to buy stock as payment for services? Yes.

Shareholders and Corporation Management

A. Generally, the board of directors manages B. BUT shareholders can run the corporation directly in a close corporation. - *Few shareholders, stock not publicly traded* - In a close corporation, we can set up management with a board of directors and run it like a regular corporation. Or we can eliminate the board and have shareholders run the business or appoint a manager, etc. C. *Shareholder management agreement (SMA)* - This sets up alternative management for the close corporation. 1. There are two ways to do this: a. In the articles and approved by all shareholders OR b. By unanimous written shareholder agreement. - Either way, the agreement should be conspicuously noted on the front and back of the stock certificates. (Failure to do so, though, does not affect validity.) - Whoever manages owes the duties of care and loyalty

III. CONSEQUENCES OF FORMING A CORPORATION

A. INTERNAL AFFAIRS RULE. The internal affairs of the corporation (e.g., roles and duties of directors, officers, and shareholders) are governed by the law of the state of incorporation B. ENTITY STATUS. - A corporation is a legal person. - It can sue and be sued, hold property, be a partner in a partnership, invest in other companies or commodities. C. LIMITED LIABILITY. If the corporation incurs a debt, commits a tort, or breaches a contract, the shareholders are NOT personally liable for that debt? - This is "limited liability": shareholders generally are liable only to pay for their stock, not for corporate debts. BTW, are directors or officers vicariously liable for corporate debts? No So who is liable for corporate debts? The corporation itself

SHAREHOLDER AS PLAINTIFF: DERIVATIVE SUITS

A. In a derivative suit, a shareholder is suing to enforce the corporation's claim, not her own personal claim. It's a case in which the corporation is not pursuing its own claim, so a shareholder steps in to prosecute it for the corporation. - Always ask: Could the corporation have brought this suit? If so, derivative (as opposed to direct suit) B. If the shareholder plaintiff wins the derivative suit: The corporation gets money from judgment, shareholder gets costs and attorney's fees, usually from the judgment won for the corporation. C. If the shareholder plaintiff (S) loses the derivative suit: Can S still recover costs and attorneys' fees? No -- Is S liable to the defendant he sued for that defendant's attorney's fees? Yes, if he sued without reasonable cause. -- Suppose a shareholder brings a derivative suit and loses. Can other shareholders later sue the same defendants on the same transaction? No

Other Steps to Organize the Corporation

A. ORGANIZATIONAL MEETING. - If the initial directors were named in the articles, the directors hold the "organizational meeting." - If they were not, incorporators hold the organizational meeting, where they elect the initial directors (who then take over management). - At the meeting, the board of directors (or the incorporators if no directors were named in the articles) must "complete the organization of the corporation." -What does that mean? Appoint officers and adopt initial bylaws B. BYLAWS. Bylaws are an internal document. They comprise an operating manual, with things like setting record dates and methods of giving notice, etc. 1. Are bylaws filed with the state? No 2. If bylaws and articles conflict, which governs? Articles 3. Who can amend or repeal the bylaws or adopt new ones? Board or shareholders

To form a corporation

A. PERSON: INCORPORATOR. MUST HAVE ONE OR MORE. - Execute articles and deliver to Secretary of State - A person or entity. - Must incorporators be a citizen of the state of incorporation? No B. PAPER: ARTICLES OF INCORPORATION. a. Name of the corporation. It must include one of these "magic words" (or an abbreviation): Corporation, company, incorporated, or limited b. Name and address of each incorporator. c. Registered agent and street address of the registered office (must be in this state of incorporation). Registered agent is the company's legal representative, so she can receive service of process for the corporation. d. Information regarding stock. Authorized stock: Maximum number of shares the corporation can sell - If the company will have different classes of stock, many states require that the articles state the number of shares per class and the voting rights and preferences of each class of stock. - Other things may be put in the articles but are not required. For example, the initial directors may be named in the articles (with their addresses). C. ACT. The incorporators have notarized articles delivered to the Secretary of State and pay the required fees. What happens if the Secretary of State's office accepts the articles for filing? Forms of the corporation -- At that point, we have a de jure corporation.

Subscriptions (written offers to buy stock from corporation)

A. Pre-incorporation subscriptions irrevocable for six months (unless it says otherwise or all subscribers agree to let you revoke) B. Post-incorporation subscritpion revocable until accepted by corporation - so subscriber and corporation obligated under agreement when the board accepts the offer

Role of the Board of Directors

A. The board manages the corporation: sets policy, supervises officers, declares distributions, determines when stock will be issued, recommends fundamental corporate changes to shareholders, etc. B. The board can delegate to a committee of one or more directors. But a committee cannot do what? Declare a distribution, fill a board vacancy, recommend a fundamental change to shareholders - Can a committee recommend such things to the full board for its action? Yes

DISSOLUTION

A. Voluntary. Board of directors action and shareholder approval. File notice of intent to dissolve with Secretary of State. Corporation stays in existence to wind up. Notify creditors so they can make claims. B. Involuntary (by court order). 1. A shareholder can petition because of: a. Director abuse, waste of assets, misconduct; b. Director deadlock that harms the corporation; or c. Shareholders fail at consecutive annual meetings to fill a board vacancy. (court might order buyout of objecting shareholder instead; esp in close corp) 2. A creditor can petition because corporation is insolvent and (1) he has an unsatisfied judgment or (2) the corporation admits the debt in writing.

SHAREHOLDER VOTING

A. Who votes. - Outstanding stock: Shares the company issued and has not reacquired. -- Unless the question says otherwise, assume that each outstanding share gets one vote. BUT you must be the "record shareholder" of the outstanding stock as of the "record date" to vote. 1. The record shareholder is the person shown as the owner in the corporate records. The record date is a voter eligibility cut-off. 2. Exceptions to the general rule that record owner on record date votes. a. The corporation re-acquires stock before the record date, so it is the owner of this "treasury stock" as of the record date. Does it vote this stock? No one votes it, because it was not outstanding on the record date b. Death of shareholder (executor can vote in place) c. Voting by proxy. A proxy is a (i) writing (fax and e-mail are OK), (ii) signed by record shareholder (e-mail OK if can identify sender), (iii) directed to secretary of corporation, (iv) authorizing another to vote the shares. - it is good for 11 months unless it says otherwise - revocable: In writing to the corporate secretary or by attending the meeting and voting; can revoke even if it says irrevocable

Corporation Dismissing Deriviative Suit

After the derivative suit is filed, the corporation may move to dismiss. This is based upon an independent investigation that concluded that suit is not in the corporation's best interest (e.g., low chance of success or expense of the case would exceed recovery the corporation would win). -- Who must make this investigation? Independent directors or court appointed panel of one or more independent persons (Usually it's a "special litigation committee" of independent directors.) -- In ruling on the motion to dismiss, if the court finds that (1) those recommending dismissal were truly independent and (2) they made a reasonable investigation, what will the court in most states do? Dismiss

Board of Directions Role:

Individual director NOT agent of corporation. -- no authority to speak for or bind the corporation. -- The directors must act as a group (even if there is only one director): 1. Unanimous agreement in writing (e-mail is OK); separate documents are OK. OR 2. At a meeting (which must satisfy the quorum and voting requirements below). -- A conference call (simultaneous oral communication so each can hear all others) counts as a meeting -- What if directors agree to have the corporation take an act by having individual conversations, without a meeting or unanimous written agreement? Act is void unless ratified by a valid act (writing or meeting)

Undercapitalization

S is a shareholder of Glowco, Inc., a close corporation that hauls and disposes of nuclear waste. Glowco does not carry insurance. Glowco has an initial capitalization of $1,000. V is injured when one of Glowco's trucks melts down. Can V sue S? -- General rule (shareholders not liable for corporate obligations); PCV standard. Here a court MIGHT PCV because the corporation was undercapitalized when formed. Why? Shareholders failed to invest enough to cover prospective *Say this: courts may be more willing to PCV for a tort victim than for a contract claimant* -- Remember, PCV allows imposition of liability on a shareholder. That shareholder might be another corporation. Example: a parent corporation forms a subsidiary to avoid its own obligations. The court might PCV and hold the parent corporation liable just as it could if the shareholder were a human.

RIGHT OF SHAREHOLDER (PERSONALLY OR BY AGENT) TO INSPECT (AND COPY) THE BOOKS AND RECORDS OF THE CORPORATION

Standing: any shareholder Procedure for non-controversial things: shareholder makes a written demand at least five business days in advance. She need NOT state a proper purpose for these things. - They include: articles, bylaws, minutes of shareholder's meetings for past three years, names and addresses of current directors and officers, most recent annual report of corporation. Procedure for more controversial things: same as above except here the demand must state a proper purpose for the demand. - What is a "proper purpose"? One related to her interest as a shareholder -- What are these more controversial things? 1. Excerpts of minutes of board meetings; 2. Accounting records; 3. Record of shareholders. If the corporation fails to allow proper inspection, shareholder seeks a court order. If she wins, she can recover costs and attorney's fees incurred in making the motion. Directors have unfettered access (don't have to go through this procedure)

Fiduciary Duties to Corporation

The Standard: *A director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation. (loyalty). She must also use the care that a prudent person in like position would reasonably believe appropriate under the circumstances. (care)* - this should go in any answer! 1. Duty of Care 2. Duty of Loyalty

Defective Incorporation

The proprietors thought they formed a corporation, but they failed to do so. That means they are personally liable for business debts (because they have formed a partnership and partners are liable for business debts). Two doctrines allow the proprietors to escape liability. *Anyone asserting either doctrine must be unaware of failure to form de jure corporation.* 1. De facto corporation 2. Corporation by Estoppel Doctrines abolished in many states

Preemptive Right

The right of an existing shareholder to purchase newly-issued shares in proportion to their percentage of ownership of the corporation prior to the issue of the new shares, before the newly-issued shares are offered for sale to the general public. - for *money* (cash or check) (not for anything else) NO preemptive right if the articles are silent

DISTRIBUTIONS

There are different types of distributions: (1) dividends or (2) to repurchase shareholder's stock or (3) redemption (a forced sale to corporation at price set in articles) Distributions are in the board's discretion. At what point does a shareholder have a "right" to a dividend or other distribution? When the board declares it - to win, plaintiff must show abuse of discretion (i.e. corp consistently making profits and board refuses to declare dividends while paying themselves bonus) - this is a direct suit, not derivative

TRANSFER OF ALL OR SUBSTANTIALLY ALL OF THE ASSETS NOT IN THE ORDINARY COURSE OF BUSINESS OR A "SHARE EXCHANGE" (one company acquires all the stock of another)

What constitutes "substantially all of the assets" varies from state to state. A rule of thumb is that it requires transfer of at least 75 percent of the assets. Most important point - these are fundamental corporate changes for which corporation? *For the selling corporation only - not for the buyer* A. Board action (both corporations), and notice to selling company's shareholders. B. Approval by the selling corporation's shareholders (same as amending) C. Are there dissenting shareholders' rights of appraisal? Yes, for shareholders of the selling corporation (but not for the shareholders of the buying corporation). D. Deliver to Secretary of State articles of exchange in share exchange. Usually, there is no filing in a transfer of assets. E. Do we expect successor liability in the sale of substantially all assets? No, because the selling corporation still exists. So creditors can sue it. - So the company that buys assets is not liable for the debts of the company that sold the assets. - There is an exception if the buyer is a "mere continuation" of the seller: has the same management, shareholders, etc. - Also there will be successor liability if a court concludes that the deal was really a disguised (de facto) merger.

LOANS. Can the corporation make a loan to a director?

Yes if reasonably expected to benefit the corporation

Can directors set their own compensation as directors or officers?

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

To protect right of appraisal

a. Before the shareholders vote, file with the corporation a written notice of objection and intent to demand payment; b. At the shareholder vote, abstain or vote against the proposed change; and c. After the vote, within time set by corporation, make written a demand to be bought out and deposit stock with the corporation. If the shareholder and the corporation cannot agree on fair value of the shares, the corporation sues and the court may appoint an appraiser. Is the right of appraisal the shareholder's exclusive remedy if she does not like a fundamental change? Yes, absent fraud

Shareholder voting trusts and voting agreements.

a. Requirements for voting trust. (10-year maximum.) 1) Written trust agreement, controlling how the shares will be voted; 2) Copy to the corporation; 3) Transfer legal title to the voting trustee; 4) Original shareholders receive trust certificates and retain all shareholder rights except for voting. b. Requirements for voting ("pooling") agreement. - In writing and signed - Are voting agreements specifically enforceable?Increasingly yes: -- In states that will grant specific performance of a voting agreement, there is no need to use the voting trust.