Corporations 2

Promoters

Promoters are persons acting on behalf of a corporation not yet formed. The corporation becomes liable on a promoter's pre-incorporation contract when the corporation adopts the contract.

Corporate Adoption of a Promoter's Pre-Incorporation Contract

Adoption of a promoter's pre-incorporation contract either by: (1) express board of directors resolution; or (2) implied adoption by knowledge of the contract and acceptance of the benefits (ratification).

Promoter's Release of Liability on Pre-Incorporation Contracts

A promoter will be released from liability on pre-incorporation contract only when there has been a novation.

Promoter Duties and Remedies for a Breach

Promoters are fiduciaries of each other and the corporation. Therefore, promoters cannot make a secret profit on their dealing with the corporation. If a promoter secretly profits from his dealing with the corporation by selling property to the corporation BEFORE he becomes a promoter, any profits he acquires for selling the property in excess of fair market value must be disgorged. Additionally, if the sale to the corporation occurs AFTER he became a promoter, any profits are recoverable.

Subscriber Offer to Purchase Pre-Incorporation Shares

A persons or entities who make written offers to buy stock from a corporation not yet formed cannot revoke that offer for six months.

Articles of Incorporation

To form a proper De Jure Corporation, the incorporators must sign and file articles of incorporation with the state that include information regarding: (1) the maximum number of authorized share; (2) the purpose; (3) the name and address of the agent; (4) the name and address of the incorporators; and (5) the name of the corporation.

Ultra Vires Activities

If a corporation engages in ultra vires activities, those out side the corporation's stated purpose, (1) the state can enjoin the ultra vires activities; or (2) the corporation may sue its own directors and officers for losses caused by the ultra vires activities.

Is a general corporate purpose allowed?

YES

Additionally,
If the articles of incorporation fail to state a purpose, a general purpose for a perpetual duration will be presumed.

Are the by-laws required to be in the articles of incorporation?

NO.

The board of directors adopts the by-laws.

De Jure

v.

De Facto

(1) De Jure
-Legal corporation
-A PAIN

(2) De Facto
-Good faith
-Colorable attempt to comply w/ A PAIN
-No knowledge of lack of corporate status

When can you pierce the corporate veil?

To avoid fraud or unfairness:

(1) alter ego
-failed to comply w/ A PAIN; or

(2) undercapitalized
-failed to maintain funds to cover foreseeable liabilities

PCV is an equitable doctrine

Because piercing the corporate veil is an equitable doctrine, what other considerations should be discussed?

(1) whether the shareholders are controlling
-court will slam controlling SHs

(2) whether the victim is a tort or K victim
-court will help tort V over K V

What must an out of state corporation do to engage in regular intrastate business?

File a certification of authority
-contains A PAIN

What is the difference between:

(1) Par Value Stock
(2) No Par Value Stock
(3) Treasury Stock

(1) Par Value Stock
-stock that when first sold must be sold at a specified minimum price

(2) No Par Value Stock
-stock that when first sold has no specified minimum price

(3) Treasury Stock
-resold stock that can be sold at any reasonable price

What are the consequences of issuing stock for less than par value?

(1) Director Liability
-Directors are personally liable for authorizing a below par issuance
-May recover difference from them

(2) Shareholder liability
-Shareholder who purchased the under valued shares is personally liable
-May recover difference from him
-*SH's only duty to the corp is to pay fair share for ownership

What is preemptive right?

(1) existing shareholder
(2) maintain his percentage of ownership
(3) by buying stock
(4) whenever there is new issuance of stock for cash
(*) Must be expressly granted in the Articles of Incorporation

On what basis can the shareholders remove directors?

ANY

W or W/O cause

Requirements for a valid board of directors vote?

(1) Meeting is required
-unless unanimous written consent

(2) Notice
-to all directors (set by bylaws)

(3) No proxies

(4) Quorum
-majority of all directors (unless bylaws state otherwise)

(5) Majority Vote
-Majority of those present

(6) Assent
-Presumed to have concurred unless dissent or abstention is recorded in writing

Directory Liability

(1) Duty to manage

(2) Business Judgment Rule
-Not liable for innocent mistakes

(3) Fiduciary Duties
-Care (may be altered)
-Loyalty (may not be altered)
-Disclose
-Not commit waste

(1) Duty of Care

(2) Duty of Loyalty

(1) Duty of Care
-Act with the care a prudent person would use with regard to her own business
-Articles may limit director liability for a breach of the duty of loyalty

(2) Duty of Loyalty
-No self-dealing or usurpation of business opportunities
-Unless ratification by: independent shareholders, committee, or directors

What officers must a corporation have?

(1) President
(2) Secretary
(3) Treasurer

-Directors have unlimited power to select and remove officers
-Watch for breach of employment K

Director or Officer Indemnification

(1) Always
(2) Never
(3) Sometimes

(1) Always
-Is sued and prevails

(2) Never
-Is sued and loses

(3) Sometimes
-Is sued and settles
-Acted in good faith
-Believed that act was beneficial for corp

Derivative Suit

(1) Standing
-Ownership of share at time claim arose
-Continuous ownership throughout litigation

(2) Demand
-Denied; or
-90 days have passed; or
-Demand is futile

(*) Corporation's COA

Requirement to vote by proxy

(1) Writing
(2) Signed
(3) directed to secretary of corp.
(4) Authorizing another
(5) Valid for 11 months

Irrevocable Proxy

(1) Valid proxy

(2) Labeled Irrevocable

(3) Coupled w/ interest
-sold shares after record date
-ability to vote induced sale

(1) Annual Meeting

(2) Special Meeting

(1) Annual Meeting
-Mandatory
-At least one director position must be open for election
-Notice of time and place

(2) Special Meeting
-Called by board, president, or 10% of voting shares
-Held ONLY for special purpose
-Notice of time, place and special purpose

Requirements for a valid shareholder vote?

(1) Quorum
-Majority of outstanding shares

(2) Vote
-Votes in favor must exceed votes against
-Don't account for abstaining shares

(1) Shareholder voting agreement

(2) Voting trust

(1) Shareholder voting agreement
-written agreement to vote shares a specified way

(2) Voting trust
(a) written trust agreement,
(b) typically filed with the corporation
(c) a transfer of shares to the voting trustee
(d) a trust certificate given to shareholder
(e) shareholder retains all rights of the shares except the right to vote
(f) generally last for 10 years

(1) Straight Voting

(2) Cumulative Voting

(1) Straight Voting
-1 election per seat available
-minority shareholder always loses
-default rule

(2) Cumulative Voting
-1 election total
-# of shares * # of seats = # of votes
-minority shareholder may compile votes
-must be stated in articles of incorporation

(1) Common Stock
(2) Preferred Stock
(3) Preferred Participating Stock
(4) Preferred Cumulative Stock

(1) Common Stock
-Paid last
-Paid Equally

(2) Preferred Stock
-Paid first
-Paid at constant rate (e.g., $3/share)

(3) Preferred Participating Stock
-Paid first
-Paid at constant rate (e.g., $3/share)
-Also participates in general distributions

(4) Preferred Cumulative Stock
-Paid first
-Paid at constant rate (e.g., $3/share)
-Also paid for periods in which no distributions were made

(1) Closely-held corporation

(2) Professional corporation

(1) Closely-held corporation
-Unanimous SH vote to abrogate formalities
-Reasonable share transfer restrictions

(2) Professional corporation
-All SH are licensed professionals
-Only one profession
-Liable for personal malpractice
-Not liable for other SH malpractice

Shareholder Liability

Shareholders are generally not liable for the debts of the corporation.

Controlling Shareholder's Obligation to Minority Shareholders

(1) Not to sell to looters
-Liable for damages
-Unless reasonable investigation

(2) Not to sell shares at a premium
-Premium paid to buy ability to control BOD
-This premium is not available to minority holders

Controlling Shareholder's Duties

May not sell controlling interest to a party who wants to "loot" the corporation.

What are "fundamental" corporate changes?

(1) Merge

(2) Consolidation

(3) Dissolution

(4) Amendments of Articles (fundamental)

(5) Sale of substantially all corporate assets

Procedural Steps to Make Fundamental Corporate Changes

(1) Resolution by the board at valid meeting
(2) Notice of special meeting to SH
(3) Approved by majority of ALL shares entitled to vote
(4) Approved by majority of each adversely affected voting group
(5) Dissenting SH may force Corp to buy back stock at FMV
(6) File notice with state

When is Sh approval NOT required for a fundamental change?

Short-Form Merger
-When parent corporation (90% + ownership) wants to merge with sub

Procedures for a SH who dissents to a fundamental change to force the corporation to buy his shares.

(1) Before vote:
-File written notice of objection and intent to demand payment

(2) During Vote:
-Abstain from voting or vote against

(3) After Vote:
-Written demand to be bought out

Elements of Anti-Fraud §10b(5)

(1) Intentional Fraudulent Conduct
-Misrepresentation
-Insider trading

(2) Interstate Commerce/National Stock Exchange

(3) Induces V to purchase or sale

Insider Trading

(1) Misappropriation
-Nonpublic info used for personal benefit

(2) Tipper
-Disclosure of nonpublic info given to tippee

(3) Tippee
-Beneficiary of tipper's disclosure

Elements of a §16(b)

Short-Swing Profits

(1) Big Corporation
-listed; OR
-≥500 SH + $10 million in assets

(2) Big Shot ∆
-Officer
-Director
->10% shareholder (before + after)

(3) No "flipping" stock
-no purchase & sell in <6-month

(4) Strict Liability

Sarbanes-Oxley

No knowingly false filings and no benefit while false documents are outstanding or during during a black out period.

Derivative Suit

v.

Direct Suit

(1) Derivative Suit
-Brought by SH to enforce corporate right

(2) Direct Suit
-Brought by SH who faces immediate and direct damage

Redemption

The articles may provide that certain classes of shares may be reacquired by the corporation at the discretion of the board.

Reacquisition of Shares

The corporation may repurchase shares from SHs who voluntarily offer to sell their shares to the corporation, but the SH cannot force the corporation to purchase.

Involuntary Dissolution

A Sh may apply to a court for liquidation of the corporation where the directors are deadlocked and the corporation is threatened with irreparable injury, or where oppression or waste is occurring.

10b(5)

Section 10b(5) prohibits any manipulative or deceptive device through an instrumentality in interstate commerce in connection with the purchase or sale of a security.