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Lecture outline for Corporation Law Start Date 3/16/16

 
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PostPosted: Wed Mar 16, 2016 11:58 am    Post subject: Lecture outline for Corporation Law Start Date 3/16/16 Reply with quote

Introduction: To simplify the often unwieldy presentation of the law of Corporations My lectures on this subject consist of a combination of Professor Cheeseman’s book, my notes gathered through the years, and my own information gained from my years of practice. The lecture does not necessarily follow Cheeseman’s subjects in order. HOWEVER, I do use the hypotheticals from the back of each chapter to illustrate points made in my lectures. With this in mind, I am giving you a basic “skeleton outline” of my lecture materials for the presentation of Corporation law. You are free to each make your own copy of it and use it in class to follow, with this caveat: It is not a substitute for reading the materials in your text and certainly does not cover all the law. It’s for your ease in following my lectures.

Note: There may be typos as well as grammatical structure errors in this outline. It is not perfect in either of these regards, it’s taken from my lecture notes and I didn’t correct errors that are in my own work product.

And lastly, this outline is copyrighted.


GENERAL CHARACTERISTICS OF A CORPORATION

A Corporation is a legal entity distinct from its owners.

A shareholders liability for the debts and obligations of a corporation is limited to his or her capital contribution.

CORPORATION Creation Generally requires filing certain documents with the state, and running a corporation generally requires more formality than required to run most other types of business entities.

Generally:

1. Limited Liability for Owners, Directors, and Officers.
Generally only the corporation itself can be held liable for corporate obligations.

CENTRALIZED MANAGEMENT

Generally: Right to manage a corporation not spread out among the shareholders, but rather is centralized in a board of directors.

The Board: Usually delegate day-to-day management duties to officers.

FREE TRANSFERABILITY OF OWNERSHIP

Generally ownership of corporation Freely transferable; as shareholder can sell his shares to whomever he wants, whenever he wants, at whatever price he wants in most circumstances.

NOTE: Transferability of shares can be restricted by agreement of shareholders. Such restriction is popular in CLOSE CORPORATIONS so current owners have some control over who may join their business in the future.

CONTINUITY OF LIFE

Corporation may exist perpetually and generally not affected by changes in ownership (i.e., sale of shares).
TAXATION:

Generally corporation taxed as an entity distinct from its owners; i.e., it must pay income taxes on any profits that it makes, and generally shareholders do not have to pay income tax on the corporation's profits until the profits are distributed.

S CORPORATIONS

Tax laws permit certain corporations to elect to be taxed like partnerships and yet retain other advantages (above) of the corporate form. Such corporations are called "S corporations" under the tax laws.

HOWEVER: There are a number of restrictions on S Corporations {e.g., stock can be held by no more than 75 persons, generally shareholders must be individuals, there can be only one class of stock, etc.).

CONSTITUTIONAL CHARACTERISTICS OF A CORPORATION

"PERSON" Treated as a “person” under the law.

MULTIPLE INCORPORATION

If corporation incorporated in more than one state:

Preferable rule: Deemed to be a citizen of every state of incorporation.
]
TYPES OF CORPORATIONS

Types of Corporation: See textbook for more description.

1. Private, for profit corporation.
2. Closely Held
3 Private, nonprofit corporation. (Nonprofit corporations are formed for charitable, educational, religious, or scientific purposes.) Although the corporation does generate revenue from ticket sales and concession stands, this money is never distributed to officers or directors. All revenue that the corporation generates is used to fund the corporation is activities.
A corporation is a domestic corporation in the state in which it is incorporated. It is a foreign corporation in all other states and jurisdictions. Foreign corporations have to qualify, i.e., register, to conduct business in states other than their state of incorporation.

FORMATION AND STATUS OF THE CORPORATION CREATED UNDER STATUTE

Corporations created by complying with STATE corporate law.

Corporation formed accordance with all applicable laws is a dejure corporation; Must file a document called the "articles of incorporation" with the state and must pay whatever fees the state directs.

However, if all applicable laws not followed, a business may still be treated as a corporation under de facto corporation doctrine if there was a good faith attempt to incorporate. Even if no attempt to incorporate was made, under some circumstances, a business may be treated as a corporation for the purposes of a particular transaction under an estoppel theory.

INCORPORATOR DEFINED

Simply a person who signs the articles of incorporation. Only one incorporator is necessary, but there may be more than one.

CONTENTS OF ARTICLES

Required to set out certain basic information about the corporation and may contain any other provision the incorporators deem appropriate.

A. MANDATORY PROVISIONS

Name of corporation which must include the word "corporation," "incorporated," "company," "limited," or the like (or an abbreviation of such words) and| generally may not be similar to the name of another business entity qualified to do business in the state, unless the other business consents. If this was not the case could lead to confusion.


B. NUMBER OF SHARES CORPORATION IS AUTHORIZED TO ISSUE;

C. Street address of the corporation's initial registered office and name of the corporation's initial registered agent at that office upon whom legal process may be served.

D. The name and address of each incorporator.

OPTIONAL PROVISIONS

Any other provision not inconsistent with law regarding managing the business and regulating the affairs of the corporation.

BUSINESS PURPOSES

Traditionally, articles had to include statement of the business purposes of corporation, and corporation was limited to activities pursuing the stated purposes. Over time, statutes became more lenient and allowed a broad purpose statement, such as "to conduct any lawful business." Trend now gone even further: presumes corporation is formed for any lawful business unless the articles provide a more restricted business purpose.

ULTRA VIRES ACTS

If a corporation includes a narrow purpose statement in its articles of incorporation, it may not undertake activities unrelated to achieving stated business purpose (e.g., if the articles state that the corporation's purpose is to operate restaurants, the corporation may not undertake to run a mink farm). If a corporation undertakes activities beyond scope of its stated purpose, it is said to be acting "ultra vires."

Modern Trend: Common law: ultra vires act is enforceable, and ultra vires nature of an act may be raised in only three circumstances:

Shareholder may sue the corporation to enjoin a proposed ultra vires act

Corporation may sue an officer or director for damages arising from the commission of an ultra vires act authorized by the officer or director; and

The state may bring an action against corporation to have it dissolved for committing an ultra vires act.

ALSO NOTE: Ultra vires act will be enjoined only if it's equitable to do so.

CHARITABLE DONATIONS

At one time, charitable donations thought to be outside scope of any business purpose, trend now allow corporations to make charitable donations.

LOANS

Formerly, some courts held corporations did not have power to make loans to employees, officers, or directors. Trend today, most allow such loans.

INITIAL DIRECTORS

Articles may provide names and addresses of the persons who will serve as corporation's initial directors until new directors are elected.

CORPORATE EXISTENCE BEGINS CONCLUSIVE PROOF

Upon Filing by the State and if state finds that articles comply with requirements of law and all required fees paid, it will file the articles. This filing of the articles by the state is CONCLUSIVE PROOF of the beginning of the corporate existence.

ADDITIONAL PROCEDURES TO MAKE DE JURE CORPORATION OPERATIVE

After articles are filed, initial directors will hold an organizational meeting to adopt bylaws, elect officers, and transact other business. If articles do not name the initial directors, the incorporators call the organizational meeting.

BYLAWS

May contain any provision for managing corporation that is not inconsistent with law or the articles of incorporation.

Bylaws are adopted by the directors, but can usually be modified or repealed by either the directors or the shareholders. However, the articles of incorporation may reserve this power exclusively to the shareholders. Even without such a reservation, the shareholders may provide that a particular bylaw adopted or amended by them may not be repealed or amended by the directors.

Amendment of the articles usually requires a vote of both the directors and the shareholders. LESS DIFFICULT to change a corporate rule contained in the bylaws than it is to change a rule contained in the articles.


E. DISREGARD OF CORPORATE ENTITY (PIERCING THE CORPORATE VEIL) See Case 37.1 P. 623

In some circumstances, even though a corporation has been validly formed, courts will hold the shareholders, officers, or directors personally liable for corporate obligations because the corporation is abusing legislative privilege of conducting business in the corporate form.

ELEMENTS JUSTIFYING

WHEN CORPORATE FORMALITIES ARE IGNORED

WHEN THE CORPORATION IS INADEQUATELY CAPITALIZED AT THE OUTSET

TO PREVENT FRAUD

ALTER EGO (IGNORING CORPORATE FORMALITIES)

If corporation is the "alter ego,""agent," or "instrumentality" of sole proprietor or of another corporation, its separate identity may be disregarded.

INDIVIDUAL SHAREHOLDERS If shareholders treat assets of corporation as their own, use corporate funds to pay their private debts, fail to keep separate corporate books, and fail to observe corporate formalities (such as holding meetings, issuing stock, and conducting business by resolution), courts often find that corporate entity is a mere "alter ego" of the shareholders. However, sloppy administration alone may not be sufficient to warrant piercing the corporate veil. The operation of the corporation must result in some basic injustice so that equity would require the individual shareholders respond to the damage they have caused.

CORPORATIONS NEED FINANCING

Another name for EQUITY SECURITIES: Stocks

What does stock represent: ownership rights.

Two kinds of stock: common stock or preferred

COMMON STOCK Represents residual value of the corporation.

Usually no preference so: Creditors and preferred shareholders must receive required interest and dividend payments before common shareholders receive anything.

When do they usually mature: Not have fixed maturity date.

Preference for Common stock holders If Corporation is liquidated: Creditors and preferred shareholders paid value of their interests first, and the common shareholders paid value of their interests (if any) last.

Another name for Persons who own common stock: are called common stockholders.

Common shareholders: Represented by common stock certificate.

Main benefit for Common shareholders: right to elect directors and to vote on mergers and other important matters. In return for their investment,

How do common shareholders receive dividends: declared by the board of directors.

Par Value and No Par Shares

TRADITIONAL PAR VALUE APPROACH

Articles of incorporation indicate what: whether the corporation's shares were to be issued with a stated par value or with no par value. If par value what result at IPO: could not be issued by the corporation for less than par value; money received from the issuance of par value stock had to go into a special account called stated capital. The stated capital account could not be reduced: below the aggregate par value of all the stock that had been issued. The idea was to guaranty creditors that the corporation would be capitalized at a certain level.

Modern Trend: Allows corporate directors to issue stock for whatever consideration they deem adequate.

Standard: good faith determination as to adequacy of consideration received is conclusive as to whether stock exchanged for the consideration is validly issued, fully paid, and non-assessable

WATERED STOCK

If par value stock issued for less than its par value, original purchaser and the directors who authorized the sale would be liable for the difference (known as: "water") between the par value and the amount received.

UNPAID STOCK

Shareholder is liable to pay the corporation full consideration for which her shares were authorized to be issued. If the shareholder fails to pay full consideration, the shares are referred to as: "unpaid stock." If the corporation is insolvent, a trustee in bankruptcy can enforce the corporation's claim for unpaid stock.

PREFERRED STOCK

An equity security that is given certain preferences and rights over common stock, called preferred stockholders

Preferred shareholders generally are not given right to vote for the election of directors or such. However often given the right to vote if there is a merger or if the corporation has not made the required dividend payments over a certain period of time (e.g., three years).

DIVIDEND PREFERENCE FOR PREFERRED STOCK: Right to receive fixed dividend at set periods during the year (e.g., quarterly). Rate is usually set percentage of initial offering price.

LIQUIDATION PREFERENCE: Right to be paid before common stockholders if corporation dissolved and liquidated Normally stated dollar amount. NOTE: Because must pay creditors first, may be insufficient funds to pay this preference.

CUMULATIVE DIVIDEND RIGHT

Must pay preferred dividend if they have earnings to do so. Cumulative preferred stock provides any missed dividend payments must be paid in the future to preferred shareholders before the common shareholders receive any dividends.

CONVERSION RIGHT

CONVERTIBLE PREFERRED STOCK PERMITS STOCKHOLDERS TO CONVERT SHARES INTO COMMON STOCK. Terms and exchange rate of the conversion established when shares issued. Holders usually exercise this option if corporation's common stock increases significantly in value. Preferred stock w/out conversion feature called nonconvertible preferred stock. NONCONVERTIBLE STOCK MORE COMMON. The preceding list of preferences and rights is not exhaustive . Corporations may establish other preferences and rights for preferred stock.


NON REDEEMABLE PREFERRED STOCK MORE COMMON BUT THERE EXISTS REDEEMABLE OR CALLABLE PREFERRED STOCK

Permits corporation to redeem (i.e., buy back) the preferred stock at some future date. Terms of redemption established when shares are issued. Corporations usually redeem shares when current interest rate falls below dividend rate of preferred shares. Preferred stock not redeemable called nonredeemable preferred stock. Nonredeemable stock is more common.

AUTHORIZED, ISSUED, AND OUTSTANDING SHARES

Number of shares provided for in articles of incorporation called authorized shares Shareholders may vote to amend articles of incorporation to increase.

Authorized shares sold: CALLED ISSUED SHARES. Not all authorized shares have to be issued at same time.

Authorized shares not been issued called: UNISSUED SHARES.

Board of directors can vote to issue unissued shares at ANY TIME W/O SHAREHOLDER APPROVAL.

Corporation permitted to repurchase own shares Repurchased shares commonly called: TREASURY SHARES.

VOTING RIGHTS AND DIVIDEND RIGHTS OF TREASURY SHARES: cannot be voted by corporation and dividends not paid on these shares.

Treasury shares can be reissued by corporation. The shares that are in shareholder hands, whether originally issued or reissued treasury shares, are called OUTSTANDING SHARES. Only outstanding shares have the right to vote

SEE P. 611 FOR SUMMARY

CONSIDERATION TO BE PAID FOR SHARES STUFF

Allows shares to be issued in exchange for any benefit to the corporation, including cash, tangible property, intangible property, promissory notes, services performed, contracts for services performed, or other securities of the corporation.

In the absence of fraud, JUDGMENT OF THE BOARD OF DIRECTORS OR SHAREHOLDERS AS TO VALUE OF CONSIDERATION RECEIVED FOR SHARES IS CONCLUSIVE.

CONTEMPORARY BUSINESS ENVIRONMENT

STOCK OPTIONS

Corporation can grant stock options (options) and stock warrants (warrants) that permit parties to purchase COMMON OR PREFERRED SHARES at certain price for a set time.

Corporations commonly grant stock options TO TOP LEVEL MANAGERS. THEY ARE NON-TRANSFERABLE.

DEBT SECURITIES OR FIXED INCOME SECURITIES

Securities establish DEBTOR-CREDITOR relationship by corporation borrowing money from investor to whom debt security is issued.

Corporation often raises funds by issuing. These establish debtor-creditor relationship wherein CORPORATION BORROWS MONEY FROM INVESTORS to whom debt security is issued. CORPORATION PROMISES TO PAY INTEREST on the amount borrowed and REPAY PRINCIPAL AT SOME STATED MATURITY DATE in the future. Corporation is debtor/holder creditor

THREE CLASSIFICATIONS OF DEBT SECURITIES:

A. DEBENTURES

LONG-TERM (OFTEN 30 YEARS/MORE. UNSECURED INSTRUMENT based on corporations general credit standing. If corporation encounters financial difficulty, unsecured debenture holders TREATED AS GENERAL CREDITORS, they are paid only after the secured creditors' claims are met).

BONDS

LONG-TERM DEBT SECURITY SECURED BY SOME FORM OF COLLATERAL (e g real estate, personal property and such). Actually the same as debentures except they are secured. Secured bondholders can foreclose on collateral in the event of non payment of interest, principal, or other specified events.

NOTES

DEBT SECURITY W/MATURITY OF FIVE YEARS OR LESS.

Either unsecured or secured. Usually do not contain conversion feature. Sometimes made redeemable.

INDENTURE AGREEMENT

TERMS OF DEBT SECURITY ARE COMMONLY CONTAINED IN A
CONTRACT BETWEEN CORPORATION AND HOLDER KNOWN AS INDENTURE AGREEMENT (or simply indenture). Generally contains maturity date of debt security, the required interest payment, the collateral (if any), conversion rights into common or preferred stock, call provisions, any restrictions on corporation's right to incur the indebtedness, the rights of holders upon default, and such. Also establishes rights and duties of the indenture trustee. Generally, trustee is appointed to represent the interest of debt security holders. Bank trust departments often serve in this capacity.

INTRACORPORATE PARTIES

PROMOTERS

PROMOTERS PROCURE CAPITAL AND OTHER COMMITMENTS

First step in forming corporations: Procurement of commitments for capital and other instrumentalities that will be used by the corporation after formation. Done by promoters

Generally, promoters enter contracts with third parties who are interested in becoming shareholders of the corporation once it is formed (i.e., "stock subscriptions").

Promoters might also enter into contracts with others for goods or services to be provided to the corporation once it is formed. Usually, the promoters will go on to serve as incorporators, but this is not necessary

PROMOTERS' RELATIONSHIP WITH EACH OTHER

Absent agreement indicating contrary relationship, promoters are considered to be joint venturers, and they occupy a fiduciary relationship to each other. As fiduciaries, promoters are prohibited from secretly pursuing personal gain at the expense of their fellow promoters or the corporation to be formed. EXAMPLE: Amie and Barb have agreed to form a corporation to engage in a real estate business. Amie tells Barb that he can acquire a piece of land suitable for subdividing for $100K. Amie acquires the land for $70K and pockets the difference, Amie liable to Barb for breach of a fiduciary duty, since the promotion began when Amie and Barb agreed to form the corporation.

PROMOTERS' RELATIONSHIP WITH CORPORATION

Upon incorporation: Promoters owe fiduciary duties to the corporation, and to those persons investing in it. The promoters' duty in this respect is one of fair disclosure and good faith. Promoters are not permitted to retain a secret profit resulting from transactions w/or on behalf of the corporation.

PROMOTERS' LIABILITIES

(1) BREACH OF FIDUCIARY DUTY ARISING FROM SALE TO CORPORATION

(2) FRAUD

PROMOTERS' RELATIONSHIP WITH THIRD PARTIES—PRE-INCORPORATION AGREEMENTS

PROMOTER'S LIABILITY

(The RMBCA provides that) If a person acts on behalf of a corporation, knowing that there has been no incorporation, the person is jointly and severally liable for any obligations incurred. Thus, as a general rule, if a promoter enters into an agreement with a third party to benefit a planned, but as of yet, unformed corporation, the promoter is personally liable on the agreement. Example: Fred and Barney agree to pool their money to form a corporation ("Dyno, Inc.") to run a rock quarry. Fred approaches Mr. Slate, explains his plans, and enters into a contract to purchase a small quarry from Slate for $100K. $50K to be paid at closing and an additional $50K to be paid six months later. Contract provides: closing will not be held for 45 days so that Fred and Barney will have time to incorporate Dyno, Inc. Before the closing. Fred signs the contract, "Fred, on behalf of Dyno Inc." Subsequently, Fred and Barney have a falling out, and Dyno, Inc. never formed. Fred probably will be found to be personally liable on the contract with Mr. Slate since he entered the contract knowing that Dyno, Inc. had not yet been formed.

LIABILITY CONTINUES AFTER FORMATION ABSENT NOVATION

Promoter's liability on pre-incorporation agreements continues after the corporation formed, even if corporation adopts the contract and benefits from it. The promoter's liability can be extinguished only if there is a novation: Agreement among ALL parties releasing the promoter and substituting the corporation. To clearly establish a novation, the third party should expressly release the promoter after the corporation has adopted the contract, although some cases have implied a novation from the conduct of the third party and the corporation. EXAMPLE: Same facts as Example above, but Fred and Barney do not have a falling out, Dyno, Inc. formed, and a few days later parties close on the quarry. At closing, title to quarry is transferred to Dyno, Inc. Despite Dyno, Inc.'s adoption of the purchase contract, Fred remains personally liable for the remainder of the purchase price unless the parties agreed to a novation at the closing.

FSHAREHOLDERS

A. SHAREHOLDER CONTROL OVER MANAGEMENT

General rule: SHAREHOLDERS No right to directly control day-to-day management of corporation. Instead, vested in BOARD OF DIRECTORS, WHO USUALLY DELEGATE DAY-TO-DAY MANAGEMENT DUTIES TO OFFICERS.

INDIRECT CONTROL

Even absent agreement vesting direct control of corporation in shareholders. INDIRECT CONTROL over their corporation through power to ELECT DIRECTORS, AMEND BYLAWS, AND APPROVE FUNDAMENTAL CHANGES to corporation. Removal W/OR W/O CAUSE AT ANY TIME.

SHAREHOLDERS' MEETINGS AND VOTING POWER

ANNUAL MEETINGS MUST BE HELD!!!

PRIMARY PURPOSE ELECTION OF DIRECTORS.

IF NOT held W/IN EARLIER of SIX MONTHS AFTER END OF CORPORATION'S FISCAL YEAR / 15 MONTHS AFTER LAST ANNUAL MEETING; COURT MAY ORDER an annual meeting to be held ON APPLICATION OF ANY SHAREHOLDER ENTITLED TO PARTICIPATE in an annual meeting.

SPECIAL MEETING

Board of directors, or persons authorized by Articles or Bylaws may call special meetings during year to conduct business that requires shareholder approval. May also be called by holders of at least 10% OF ALL THE VOTES ENTITLED TO BE CAST at the meeting.

NOTICE

Generally, written notice special/ annual MUST be sent to shareholders entitled to vote. NOT LESS THAN 10 DAYS OR MORE THAN 60 DAYS BEFORE THE MEETING.

CONTENTS OF NOTICE

MUST: state place, day, and hour of meeting.

FOR SPECIAL MEETINGS, THE PURPOSES.

NOTICE MAY BE WAIVED

ELIGIBILITY TO VOTE

RECORD DATE

Bylaws MAY FIX, OR PROVIDE MANNER OF FIXING, a record date to determine which shareholders ENTITLED TO NOTICE OF A MEETING, TO VOTE, OR TO TAKE ANY OTHER ACTION

VOTING ENTITLEMENT OF SHARES

UNLESS OTHERWISE PROVIDED IN ARTICLES, EACH OUTSTANDING SHARE, REGARDLESS OF CLASS, ENTITLED TO ONE VOTE ON MATTERS VOTED AT MEETING.

PROXIES

Shareholder may vote his shares either in person or by proxy executed in writing by the shareholder or his attorney-in-fact.

DURATION OF PROXY

Valid only 11 months unless provides otherwise.

REVOCABILITY OF PROXY

REVOCABLE by shareholder UNLESS APPOINTMENT FORM CONSPICUOUSLY STATES it’s IRREVOCABILITY AND APPOINTMENT COUPLED WITH AN INTEREST, e.g.:
(i) A PLEDGEE;
(II) A PERSON WHO PURCHASED OR AGREED TO PURCHASE THE SHARES;
(III) A CREDITOR OF CORPORATION WHO EXTENDED CREDIT TO THE CORPORATION UNDER TERMS REQUIRING THE APPOINTMENT;
(IV) AN EMPLOYEE OF THE CORPORATION WHOSE EMPLOYMENT CONTRACT REQUIRES THE APPOINTMENT; OR (V) A PARTY TO A VOTING AGREEMENT.

MECHANICS OF VOTING

MUST BE A QUORUM:

Before vote may validly be taken.

NO BREAKING OF QUORUM RULE: ONCE SHARE REPRESENTED AT MEETING: DEEMED PRESENT FOR QUORUM PURPOSES FOR THE REMAINDER OF THE MEETING; THUS, SHAREHOLDER CANNOT PREVENT VOTE BY LEAVING BEFORE VOTE TAKEN.

VOTING BY GROUP

ARTICLES MAY GRANT APPROVAL BY CERTAIN GROUPS.

CUMULATIVE VOTING OPTIONAL

Instead of normal one share, one vote paradigm, ARTICLES MAY provide for election of directors.

Gives minority shareholders better chance to elect directors. Each share may cast as many votes as there are board vacancies. E.G.: If three directors to be elected, each voting share entitled to cast three votes. E.G: Votes may be for single candidate, or divided among candidates in any manner shareholder desires.

NOTICE REQUIRED FOR CUMULATIVE VOTING EVEN IF ARTICLES ALLOW.

DEVICES TO AVOID CUMULATIVE VOTING

SHAREHOLDER AGREEMENTS

Most encountered in close corporations, w/few holders; not actively traded.

VOTING TRUSTS by signed agreement setting forth terms; and Transferring legal ownership of shares to trustee. who must vote in accordance w/trust.

RESTRICTIONS ON TRANSFER OF SHARES

Articles/ bylaws, agreement among holders, or agreement between holders and corporation may impose restrictions on transfer of shares for any reasonable purpose (e.g. to preserve S status; securities law exemption.) ENFORCEABLE
Only if: Existence noted conspicuously on certificate or contained in information statement, or holder of transferee had knowledge of the restriction.

SHAREHOLDERS' INSPECTION RIGHTS

Common law: Qualified right inspect books and records: Upon request if proper purpose; more modern trend: UNQUALIFIED RIGHT and if not allowed by corporation: INSPECTION BY COURT WILL BE ORDERED

PREEMPTIVE RIGHTS

Corp. proposes issue additional shares; current holders want to purchase some new shares to maintain proportional voting strength. Common law granted right, known as "preemptive right." MODERN Trend: No preemptive unless articles provide.

SHAREHOLDER SUITS

Shareholders have a dual personality they are entitled to enforce their own claims against corporation, officers, directors, or majority shareholders by direct action; also a Guardian of Corporation to pursue cause of action provided no one else in the corporation will assert. May sue DERIVATIVELY to enforce corporate c/a, IF: meet requirements specified by law and made necessary demands on corporation/directors to enforce c/a. Since shareholders enforcing rights of another i.e., the Corp. Recovery to Corp. rather than shareholder bringing action.

STANDING TO SUE:

Must have been shareholder at time of act/omission complained of, or must have become shareholder through transfer by operation of law from one who was. Also must fairly and adequately represent interests of the Corp. AND MUST MAKE A
WRITTEN DEMAND ON CORPORATION OFFICERS TO TAKE ACTION.

May not be commenced until 90 days after date of demand, unless:

A. Earlier notified Corp. rejected demand; or

B. Irreparable injury result by waiting 90 days.
IN DERIVATIVE ACTION THE CORPORATION NAMED AS PARTY DEFENDANT

DISMISSAL IF NOT IN CORPORATION'S BEST INTERESTS

If majority of directors (but at least two) w/no personal interest in controversy found in good faith after reasonable inquiry, but shareholder brings suit anyway, suit may be dismissed on Corp's motion.

Good business reasons for directors refusal: e.g.: No likelihood prevailing, or damage to Corp. from litigating outweigh any possible recovery.

LEGAL RESTRICTIONS ON THE PAYMENT OF DIVIDENDS

Cannot be paid if corporation not able to pay debts as they became due in usual course of business, or corporation's total assets less than total liabilities, and these insufficient funds to pay liquidation preferences to preferred shareholders if corporation were terminated.

Directors who vote for or assent to illegal dividend or distribution jointly and severally liable to corporation for that amount.

Stock Dividends

Corporations may use additional shares of stock as a dividend; not a distribution of corporate assets. Paid in proportion to existing ownership interests of shareholders, so do not increase shareholder's proportionate ownership interest.

SHAREHOLDERS HAVE NO FIDUCIARY DUTY TOWARD CORPORATION.

LIMITATIONS ON CONTROLLING SHAREHOLDERS

Certain common law limitations emerged w/regard to sale by controlling shareholders (an individual or group) of controlling interest WHO Must refrain from using to obtain special advantage/cause Corp. take action unfairly prejudices minority shareholders.

VI. BOARD OF DIRECTORS GENERAL POWERS

Board general responsibility for management of business and affairs.

QUALIFICATIONS DESCRIBED IN ARTICLES OR BYLAWS

ELECTION OF DIRECTORS OCCUR AT FIRST ANNUAL AND EACH SUCEEDING UNLESS STAGGERED THEIR TERM EXPIRES AT NEXT SHAREHOLDER MEEING UNLESS STAGGERED

RESIGNATION OF DIRECTOR

At any time by delivering written notice and then any VACANCIES MAY BE FILLED BY DIRECTORS OR SHAREHOLDERS

REMOVAL OF DIRECTORS W/W/O CAUSE UNLESS ARTICLES STATE FOR CAUSE ONLY

DIRECTORS' MEETING

Regular/special meetings unless otherwise provided in articles/bylaws, board may permit any/all directors participate in regular/special meeting by, or conduct the meeting through, USE OF ANY MEANS OF COMMUNICATION BY WHICH ALL DIRECTORS PARTICIPATING MAY SIMULTANEOUSLY HEAR EACH OTHER (e.g., conference call).

INITIAL MEETING AFTER INCORPORATION Board MUST hold ORGANIZATIONAL meeting, called by majority of directors.

NOTICE OF MEETINGS

Regular may be held w/o notice. Special require: two days notice of the date, time, and place of the meeting, purpose need not be in the notice.

NOTICE MAY BE WAIVED

Director may waive notice by signed writing, filed w/minutes or corporate records. Attendance at/participation in meeting waives notice unless director, at beginning of meeting or promptly on arrival, objects to holding meeting or transacting business at meeting, and does not thereafter vote for or assent to action taken at the meeting.


QUORUM = MAJORITY UNLESS ARTICLE/BYLAWS NO FEWER THAN 1/3

Majority of board constitutes quorum for meeting unless higher/lower number required by articles/bylaws, but quorum may be no fewer than one-third of board members.

BREAKING QUORUM: IF DIRECTOR LEAVES AND THEN NOT ENOUGH FOR A QUORUM

APPROVAL OF ACTION MAJORITY UNLESS ARTICLES BY/LAW

RIGHT TO DISSENT IF PRESENT DEEMED ASSENTED UNLESS DISSENTS:

ACTION MAY BE TAKEN W/O MEETING BY UNANIMOUS WRITTEN CONSENT

MAY DELEGATE AUTHORITY TO MANAGE CORP. TO COMMITTEES OR OFFICERS

EXECUTIVE COMMITTEES

Board may create one/more committees, each made up of two/more members of board.

OFFICERS

Board remains responsible for |supervision of officers despite delegation of duty.

DIRECTORS RIGHT TO INSPECT CORPORATE BOOKS

DE FACTO DIRECTORS

Not properly elected, either by failure to call proper shareholders' meeting, error in balloting, failure to satisfy bylaw qualifications = de facto directors. Bind corp. in performance of normal director activities.

DIRECTORS DUTIES AND LIABILITIES

Management duties; typical fiduciary duties, including due care, loyalty, and protection of interests of other intra-corporate parties.

PERSONAL LIABILITY OF DIRECTORS MAY BE LIMITED

Articles can limit/eliminate directors' personal liability for money damages to Corp. or shareholders for action taken or failure to take action as director. However, no provision can limit or eliminate liability for:

(i) amount of financial benefit received by director to which not entitled,

(ii) Intentionally inflicted harm on the Corp. or shareholders,

(iii) Unlawful Corp. distributions; or

(iii) Intentional violation of criminal law.

DUTY OF CARE

Directors vested w/duty manage Corporation to best of ability not insurers of corporate success, rather merely required discharge their duties: In good faith;
W/care ordinarily prudent person in like position would exercise under similar circumstances; and In manner directors reasonably believe to be in best interests of Corp.

Directors who meet standard not liable for corporate decisions that, in hindsight, turn out to be poor/erroneous. At common law known as "BUSINESS JUDGMENT RULE."

DUTY OF LOYALTY

(Common Law) Not permitted profit at expense of Corp.

CAN NOT HAVE ANY CONFLICTING INTEREST TRANSACTIONS

Director personal interest in transaction which Corp. is party = conflict of interest.

FACTORS TO BE CONSIDERED IN DETERMINING FAIRNESS

Courts traditionally look to factors such as adequacy of consideration, corporate need to enter into transaction, financial position of Corp, and available alternatives.


CORPORATE OPPORTUNITY DOCTRINE

MUST first giving Corp. any opportunity to act. Sometimes known as a "usurpation of corporate opportunity" problem.

CORPORATION MUST HAVE INTEREST OR EXPECTANCY
Not extend to every conceivable business opportunity, neither does opportunity have to be necessary to current business. Closer opportunity is to line of business, more likely court will find corporate opportunity.


LACK OF FINANCIAL ABILITY Probably Not a Defense must ALLOW CORP. THE OPPORTUNITY TO DECIDE
.
COMPETING BUSINESS DIRECTORS

Permitted engage in unrelated businesses, clear conflict of interest may arise if director's personal business in direct competition.

OFFICERS

IN GENERAL

Doesn't say MUST have them.

DUTIES - bylaws or to extent consistent w/bylaws, by board or officer so authorized by the board.

POWERS - Officers agents of corp.; receive power to manage from directors.

Ordinary rules of agency determine authority and powers.

Authority actual or apparent. If authority exists, actions taken by officer/agent e.g.: entering into contracts bind corp.

Actual Authority

Includes not only authority expressly granted by directors, bylaws, articles, and statutes, also any that may be implied by express grant.

Appointment to following offices IMPLIES following powers absent express provision otherwise:


PRESIDENT

Enter contracts/otherwise act on behalf of corp. in ordinary course of corporate affairs.

VICE PRESIDENT

Act when president unavailable because of death, illness, or other incapacity.

SECRETARY

Keep corporate records.

TREASURER

Receive and keep corporate funds.

APPARENT AUTHORITY

Corporation "holds out" officer as possessing certain authority, inducing others reasonably believe authority exists, officer has apparent authority to act and bind corporation even though actual authority not granted.

STANDARD OF CONDUCT

Similar to standard for directors.

RESIGNATION AND REMOVAL

Despite contractual term to contrary, officer power to resign any time by delivering notice to corp., and corp. power to remove officer any time, w/ or w/o cause. If resignation/ removal constitutes breach of contract, non-breaching party's right to damages.

INDEMNIFICATION OF DIRECTORS, OFFICERS, AGENTS AND EMPLOYEES

IN GENERAL Made party to legal proceeding because of this status, depending on circumstances, corp. may be required indemnify, may have discretion to indemnify, or may be prohibited from indemnifying.

LIABILITY INSURANCE

Corp. may purchase.

AGENTS AND EMPLOYEES

Corp. power to indemnify, advance expenses to, or maintain insurance on an agent or employee.

AMENDING ARTICLES OF INCORPORATION

Any provision that could have been lawfully included in original.After approved by shareholders, corporation must file w/secty. state.


DISSOLUTION AND TERMINATION OF CORPORATIONS

VOLUNTARILY/INVOLUNTARILY.

VOLUNTARY DISSOLUTION

CORP. not commenced business or issued any shares by a vote of majority of incorporators or initial directors.

ADMINISTRATIVE DISSOLUTION BY SECTY/STATE:

A. Failure to file annual report.
Failed for 60 days to maintain registered agent in state, or Failed, for 60 days after change of its registered agent, to file statement of such change w/secty. state.
Did not pay its franchise fee, or period of duration stated in corp's articles incorporation has expired

If non-cure default w/in 60 days of notice, secty state issues certificate of dissolution that dissolves.

JUDICIAL DISSOLUTION

Instituted by ATTNY. GENERAL of state of incorporation if the corp.: Procured articles through fraud or exceeded or abused authority conferred upon it by law. If a court judicially dissolves it enters decree of dissolution that specifies date of dissolution.

JUDICIAL DISSOLUTION OF A CLOSELY HELD CORPORATION

If a deadlock as to direction corporation should take/or damage being caused to corporate assets most corporation statutes solve problem by providing shareholder can go to court and seek judicial dissolution of corporation if directors deadlocked in management of corporate affairs, and are unable to break deadlock, and irreparable injury being suffered by or threatened corporation.

WINDING-UP, LIQUIDATION, AND TERMINATION

Dissolved corporation continues corporate existence but may not carry on any business except as required to wind up and liquidate. In voluntary dissolution, liquidation usually carried out by Board. If dissolution involuntary or dissolution is voluntary but directors refuse to carry out liquidation, court-appointed receiver carriers out winding-up and liquidation of corporation.

TERMINATION occurs only after winding-up of corporation's affairs, the liquidation of its assets, and distribution of proceeds to claimants.

Liquidated assets paid to claimants according to the following priority: expenses of liquidation and creditors according to respective liens and contract rights, preferred shareholders according to their liquidation preferences and contract rights, and (3) common shareholders.


REGULATIONS

SECURITIES REGULATION

WE’LL COVER RULE l0b-5 AND §16(b)

RULE 10b-5: GENERAL RULE: ANY ATTEMPT TO CHEAT IS UNLAWFUL

REMEDIES FOR CHEATING:
Violation of rule can result in 1. Private suit for damages; 2. SEC suit for injunctive relief, or criminal prosecution.

I. GENERAL ELEMENTS OF CAUSE OF ACTION UNDER RULE 10b-5

To recover damages Private plaintiff must show following:

A. FRAUDULENT CONDUCT

ANY TYPE: OF Making material misstatement or omission.

WHAT DETERMINES MATERIALITY?

Was there a substantial likelihood a reasonable investor would consider it important in making investment decision. EG: Insiders buying stock when they know the information will make stock rise; or sell knowing it will reduce the value.

B. SCIENTER (Non-Legal Term: Guilty Mind)

Statement needs intent to deceive, manipulate, or defraud. District Courts go further and hold: misstatements made recklessly as well.

C. IN CONNECTION WITH PURCHASE OR SALE OF A SECURITY BY PLAINTIFF

Interpreted broadly. E.G.: A broker's sale of her/his client's securities w/intent to misappropriate proceeds

D. WITH A SALE OF A SECURITY BY PLAINTIFF

Includes transactions such as: exchanges of stock for assets, mergers, contracts to sell, etc.
NONTRADING DEFENDANTS CAN BE HELD LIABLE

The Focus here is on the Plaintiff, purchases or sells stock. The DEFENDANT might not have purchased or sold. A company that makes an intentionally misleading press release, can be held liable to persons who purchased or sold securities on market on basis of press release.

E. IN INTERSTATE COMMERCE

Fraudulent conduct must involve use of some means of interstate commerce; as simple as use of e-mail/phone snail mail.

F. RELIANCE:

IS PRESUMED

When it’s undisclosed information it’s presumed. If it should be “out there” the public would have relied on it.

Similarly, in misrepresentation lawsuits when securities sold in well-defined market (e.g., national stock exchange), reliance on any public misrepresentations may be presumed based on fraud on market theory: Investor who buys/sells stock at price set by market does so in reliance on integrity of stock, which in turn based on publicly available information. [Basic, Inc. v. Levinson, 485 U.S. 224 (1988)]

BUT: REBUTTAL OF PRESUMPTION (UNLIKELY)

Presumption may be rebutted (e.g., by showing plaintiff would have acted same way even w/full disclosure; price not affected by misrepresentation, or plaintiff didn't trade in reliance on integrity of market).

G. DAMAGES

Private plaintiff must show defendant's fraud caused plaintiff damages.

INSIDER TRADING UNDER 10B5

L0B-5's greatest impact: prohibits most instances of trading securities on basis of inside information (i.e., information not disclosed to public that an investor would think important when deciding whether/not to invest in the security).

Earlier: Focused on duty of trader to disclose or abstain from trading. Trend: Clear person violates l0b-5 if he breaches duty of trust and confidence owed to: (i) the issuer, (ii) shareholders of the issuer, or (iii) misappropriation (see below), 3rd. party person source of the material nonpublic information.

WHO MAY BE LIABLE?

"INSIDERS"

Anyone who breaches duty not to use inside information for personal benefit.

Typical securities insiders: Directors, officers, controlling shareholders, and employees of issuer deemed to owe duty of trust and confidence to their corporation; AND breached by trading inside information.

CONSTRUCTIVE INSIDERS, e.g.: Securities issuer's, CPAs, attorneys, and bankers performing services for the issuer. EXAMPLE: Company’s President knows cancer cure product will greatly increase stock price of publicly held company and contacts company's outside attorney, to discuss revelation to public. Decide wait 5 days; Neither President, researcher or attorney may purchase company stock before information made public, unless they disclose information to anyone selling them stock.

TIPPERS AND TIPPEES

Insider gives tip of inside information to someone else who trades on basis of inside information, tipper can be liable under l0b-5 if the tip made for any improper purpose (e.g., in exchange for money/kickback, as a gift, for a family member's benefit, for reputational benefit, etc.).

Tippee can be held liable derivatively if tippee knew tipper was breaching duty. President meets brother, Bob, in restaurant tells him Brother purchases company stock B4 announcement, President can be held liable as a tipper and Brother derivatively as tippee. But: Earl eavesdropper overhears and purchases stock B4 public announcement not 4 liable under l0b-5.


INSIDER TRADING

41.4 P. 207 Chiarella worked as a "markup man' in NY composing room Pandick Press, a financial printer. Documents Chiarella handled: 5 secret announcements of corporate takeovers. Tender offerors had hired Pandick Press to print offers, would be made public when tender offers made to shareholders of target corporations. Documents delivered to Pandick Press, identities of acquiring and target corporations concealed by blank space or false names. True names would not be sent to Pandick Press until night of final printing. Chiarella able to deduce names of target companies before final printing. W/o disclosing knowledge, he purchased stock in target companies and sold shares immediately after takeover attempts were made public. Chiarella realized gain of $30K in 14 months. Federal government indicted Ghiarella for criminal violations of Section 10(b) of Securities Exchange Act of 1934. Is Chiarella guilty? Chiarella v. United States, 445 U.S. 222, 100 S Ct 1108 63 , L.Ed.2d 348 (1980)]

Insider Trading

38.5. U.S. Supreme Court reversed trial court's judgment that had convicted Chiarella on all counts. Court of Appeals: Anyone an insider or not who receives material nonpublic information may not use that information to trade in securities until information made public. USSCT. rejected rule, holding: SECTION 10B-5: Not liable for insider trading unless owes duty to disclose information. Duty only arises if person owes fiduciary duty to company in whose shares he has traded.
Chiarella did not owe fiduciary duty to target companies of whose shares he purchased. Court: Not every instance of financial unfairness constitutes fraudulent activity under Section 10(b). Element required making silence fraudulent: duty to disclose absent in this case. No duty could arise from Chiarella's relationship w/sellers of target company's securities for Chiarella had no prior dealings with them. He was not their agent, he was not a fiduciary, and he was not a person in whom sellers had placed their trust and confidence. He was, in fact, a complete stranger who dealt with the sellers only through impersonal market transactions. Duty to disclose under §10(b) not arise from the mere possession of nonpublic market information.

MISAPPROPRIATORS: MISAPPROPRIATION DOCTRINE

Government can prosecute under l0b-5 for trading on market information. See P. 703 of textbook.

JURISDICTION

Federal courts exclusive jurisdiction over claims arising under l0b-5.

REMEDYS FOR 10B-5 VIOLATIONS

Individual plaintiffs: Damages or rescission.

NEW TOPIC: INSIDER TRADING SANCTIONS ACT AND
INSIDER TRADING AND SECURITIES FRAUD ENFORCEMENT ACT 1934 Act §21A

Important weapon against insider trading. Authorizes SEC (SECURITIES AND EXCHANGE COMMISSION) to sue persons who illegally trade on SECURITIES EXCHANGES while in possession of material, nonpublic information (and their tippees), as well as persons who violate Act by communicating such information, for a civil penalty equal to THREE TIMES profit gained or loss avoided by defendant's unlawful purchase, sale, or communication.

Treble-damages penalty important, because it means defendant may lose more than ill-gotten profits, thereby creating powerful disincentive to insider trading.

PRIVATE RIGHT OF ACTION INSIDER TRADING AND SECURITIES FRAUD
ENFORCEMENT ACT

Creates private remedy against one who illegally trades while in possession of material, nonpublic information on behalf of any person who contemporaneously traded same class of securities.

CRIMINAL PENALTIES

Civil penalties discussed above in addition to all other existing sanctions, including jail terms up to 10 years, and criminal fines of up to $1M for individuals and $2.5M for corporations.

II. SECTION 16(B) OF THE SECURITIES EXCHANGE ACT OF 1934

Any profit realized by director, officer, or shareholder owning more than 10% of outstanding shares of corporation from any purchase and sale, or sale and purchase, of any equity security of his corporation w/in a period of less than six months must be returned to the corporation.

Applies to publicly held corporations whose shares traded on national exchange or that have at least 500 shareholders in any outstanding class and at least $10M in assets.

STRICT LIABILITY IMPOSED

THE PURPOSE IS to prevent unfair use of inside information and internal manipulation of price. Accomplished by imposing strict liability for covered transactions whether or not any material fact that should or could have been disclosed NO PROOF OF USE OF INSIDE INFORMATION IS REQUIRED.

ELEMENTS OF CAUSE OF ACTION

PURCHASE AND SALE OR SALE AND PURCHASE W/IN SIX MONTHS

Only to profits (or avoidance of loss) from purchases and sales made w/in six month period.


EQUITY SECURITY

Applies only to purchases and sales of equity securities

OFFICER, DIRECTOR, OR TEN PERCENT SHAREHOLDER

APPLIES ONLY TO PURCHASES AND SALES MADE BY OFFICERS, DIRECTORS, OR MORE THAN 10% SHAREHOLDERS.

DEPUTIZATION OF DIRECTOR

Ordinarily, easy to identify officers, directors, and 10% shareholders. Income instances, however: Person may "deputize" another person to act as his representative on board. In these cases, securities transactions of principal will come w/in section 16(b).

TIMING ISSUES

OFFICERS OR DIRECTORS

Purchases/sales made by persons before becoming officer or director generally EXCLUDED from 16(b), because person generally not have access to inside information sought to be protected from abuse under section 16(b) before becoming officer or director.

Other hand, purchases and sales made w/in six months AFTER ceasing to be officer/director can come w/in section 16(b).

TEN PERCENT SHAREHOLDER

Person is more than 10% shareholder if directly or indirectly owns more than 10% of any class of equity security of Corp. at time immediately before both purchase and sale.

Thus, purchase that brings shareholder over the 10% threshold is not w/in scope of section 16(b).





PROFIT REALIZED "SHORT SWING PROFITS"

Not only traditional profits, also losses avoided. "Profit" determined by matching highest sales price against lowest purchase price during any six-month period.

REMEMBER use of inside information not material to recovery.

EXAMPLE:


X Buys 100 shares @$9/share on 2/1

X Sells 100 shares @7/share on 8/1 lost $2/share

X Buys 100 Shares @$1/share on 11/15 here profit of $6/share

Liable for $600.00 back to corporation
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