Corporations Condensed outline

I. Formation of the corp

A. Formalities: requirements to be complied w/ before corp deemed validly formed

1) 2) 3) Filing articles of incorp Organizational meetings By laws govern how corp will operate

B. Defective Incorp: 3 equitable defenses raised by corp - de jure, de facto, estoppel (argue
all 3)

Basically have creditor going after SHs CL: all SHs liable; ML: only liable if participate in mgmt & control 1) De jure: full or substantial compliance w/ all mandatory conditions precedent to incorp minor defect a) Substantial compliance: sufficient for de jure status re: completion of all mandatory conditions precedent b) De jure status cannot be attacked by anyone, conclusive against the whole world for all intensive purposes it is a corp c) When corp becomes insolvent, creditors attempt to hold SHs, officers, & directors liable if there was defect in incorp d/t failure to comply literally w/ statutory procedures 2) De facto: good faith, colorable compliance w/ all mandatory conditions precedent to incorp under valid statute, follwed by good faith exercise of corp powers; greater defect; creditors not able to attack a) Colorable compliance: good faith attempt failure to - have articles accepted by Sec of State, signatures notarized, atty fails to file articles b) Good faith: requires at minimum incorporators be unaware of defect in incorp process & carry on in belief that corp entity was validly formed conducting business in corp name c) Upon filing of articles, de facto corp is treated as corp w/ respect to dealing w/ 3rd parties, status as corp can only be attacked by quo warranto proceeding by AG; creditors cannot question corps status 3) Corp by Estoppel: defect in incorp serious enough to deny entity de jure or de facto status; but person who dealt w/ entity as though it was corp may be estopped from denying corp validity a) Denial of corp status good only for particular transaction in issue, so for that transaction it is a corp b) Party who dealt w/ entity as if it was corp prevented from avoiding K or holding officers or SHs liable c) As to 3rd parties: 3rd party must have dealt w/ entity believing it to be corp; does not protect SHs, officers & directors who were aware of defect in formation (requires good faith) only applies to K creditors applied to suit by corp against outsider who dealt w/ entity as if it were de jure, now they are attempting to avoid K by alleging some formation defect d) As to corp: Corp cant maintain of defend action by outsider on grounds of its own invalidity, entity cannot avoid its obligations if it dealt w/ 3rd party as if it were de jure corp

4)
a)

debts

Consequences of Defective formation: Individual liability: CL assoc treated as partnership so each owner jointly & severally liable for ML liability applied only to those actively involved in mgmt Effect is under CL - SHs personally liable; ML mgmt is liable

b)

C. Piercing Corp Veil: SHs may be subject to unlimited liability where corp entity cast aside
by court of equity; corp validly formed suit generally brought by creditor (creditor v. SH)
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1) Factors required to establish grounds for piercing corp veil (K creditor needs 2 factors; tort creditor needs 1 factor) a) Lack of corp formalities (alter ego theory): corp so utilized its SHs that no separate entity has been maintained; corp merely alter ego of its owners (it is not really a corp) Small corp has greater risk b/c often fail to follow corp formalities Need to look for facts that corp has had no corp meetings, no minutes, no tax return, commingling of SH & corp finances b) Inadequate capitalization: SHs did not invest enough capital to meet corps prospective business risks & obligations reasonably expected to arise at time of corps initial formation Determination made at time of incorp; need to look at corps purpose Look to see if dominant SH milked corp of its capital & used for personal gain, prevented corp from meeting expanding business needs c) Fraud by SHs: can be a factor if it is used to avoid corp obligations

2) a) b)

Effect of piercing the veil: Majority active SHs liable Minority all SHs liable

3)

Enterprise Liability theory: affilitated corps considered fragments of 1 business enterprise where subsidiary wholly owned by parent (not piercing the corp veil) a) This is where liability is imposed on other corps same SHs own stock of both corps & both in same business b) Corp can be only SH of another corp; if enterprise liability theory fails, then have to pierce corp veil & hold SHs liable

D. Deep Rock Doctrine: (insolvency v. BK) corp becomes insolvent, debts owing to SHs
subordinated to claims of other creditors; SH claims against corp not paid until all secured & unsecured creditors are paid SHs paid last 1) Equitable remedy avail where SH acted in bad failth in under capitalizing or mismanaging corp

II. Promoter Transactions

Promoter participates in formation of corp by securing initial capital, arranging compliance w/ legal formalities & entering into necessary Ks on behalf of corp before it is formed

A. Fiduciary duty to other promoters: promoters owe each other fid duty including duty not to
make profit at expense of other promoter, not engage in secret dealings, & duty of full disclosure & fair dealing as to all matters pertaining to corp

B. Fiduciary Duty to Corp: promoters owe duty of full disclosure to corp to be formed as to
any dealings in which promoter has personal interest 1) Basic duty not to profit secretly as result of corp 2) If promoter transferring asset to corp to avoid liability need to fully disclose to indep board of dir & need ratification by quorum; full disclosure to all SHs; or if promoter buys all shares himself 3) Beware of 10b-5 based on inside info

C. Pre-incorp transactions w/ 3rd parties: promoter enters into K on behalf of corp to be

formed (who is liable promoter or corp) 3 potential lawsuits 3rd party v. promoter; 3rd party v. corp; corp v. 3rd party 1) If K expressly provides for promoters liability promoter primarily liable even though K for benefit of corp; promoter remains liable even after incorp; only novation can extinguish liability (3rd party agreement) 2) If K silent as to liability - promoter primarily liable; agreement where promoter expressly relieved of liability is revocable offer since K requires 2 parties & corp not yet formed
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D. Corp Adoption & Ratification 1) Corp not automatically bound by promoters pre-incorp Ks upon formation; board weighs merits in deciding whether to approve K a) If corp adopts K (ratifies or accepts benefits of K), promoter still liable, corp is just guarantor 2) Remedies of promoter: a) Indemnification: if corp adopted K, basically creates a novation b) Quasi-K relief: If corp retains benefits of K promoter can seek restitution

III. Pre/Post-Incorp Stock Subscriptions (enter into K to buy stock) A. Pre-incorp stock subscriptions: Offer from potential SH to corp to buy stock before corp
formed; only corp can accept 1) CL (majority) revocable 2) Minority subscription irrevocable for 6 mo., unless otherwise agreed 3) Acceptance: some jurisdictions - implied upon incorp; others must be accepted by board 4) Transactions subject to 10b-5 5) Remedy for corp: a) If subscriber breaches corp may sell chares & w/hold deposits as a forfeiture b) Corp can bring suit under the K for damages or SP (if unique) 6) Defenses of SH: why should get out of K a) corp became materially different (not de jure) b) denied participation in mgmt c) sale fraudulently induced (10b-5) d) if indication K should be in writing & it is not, might be SOF problem

B. Post-incorp subscriptions: K between corp & subscriber for issuance / purchase of shares
after corp formed 1) Majority K revocable prior to acceptance; minority & CA irrevocable 2) Offer from subscriber to corp or from corp to individual to become SH 3) Must be accepted by act of corp, normally resolution by board of dir IV. Powers / Mgmt of corp Relationship between board of dir, officers & SHs A. Powers of corp mgmt: 1) Expressed in articles or bylaws (if articles & bylaws conflict, articles control) 2) Implied powers: power to perform all other acts or transactions reasonably necessary to carry out any of expressed powers or authorized business a) Ultra vires transactions: transaction which exceeds or is beyond purposes& power of corp, corp does not have legal power to engage in act; mgmt goes beyond expressed & implied powers Effect: CL: corp/3rd party could assert as defense to K obligation but not tort or crime ML: no longer defense to perf of K; SH can enjoin transaction while mgmt may be personally liable for losses (SH bring suit for injunction (enjoin corp from entering into trans); corp bring suit against officers or directors; AG can also bring suit) now defense of very limited viability

B. Board of Dir Mgmt & Control: right to manage prop & affairs of corp vested in board & not
in SHs (SHs have indirect control w/ voting rights b/c elect board) 1) Appt of directors a) In articles / elected annually b) Dir can appoint vacancies or call for special election by SHs 2) Tenure of directors: hold office until next annual meeting unless articles state otherwise a) CL: majority SHs could only remove dir for cause; violation of fid duty b) ML: removal of dir allowed w/o cause thru majority vote of SHs
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3) Functioning of board: corp powers generally exercised by or under authority of board meeting w/ quorum present; board exercises final authority over all corp business transactions a) Quorum required: directors must act by quorum (51% must be present), absent modification by articles or bylaws b) Notice requirements: Regular meeting no notice required Special meeting advance notice required to every director w/in reasonable time Anything that happens at meeting is void if no proper notice 4) Delegation of board authority & functions: a) Discretionary powers non-delegable: board not permitted to delegate policymaking & discretionary powers Directors may delegate to others power to implement decisions & to carry on day-to-day corp business b) Delegation to outside mgmt: K which delegates critical mgmt functions to indep contractors or SHs most likely invalid delegation of authority (dir to non-dir) Unlawful delegations are breach of directors fid duty of due care c) Unlike SHs, directors not permitted to vote by poxy & cant give anyone else proxy to vote for them 5) Compensation & reimbursement: (look to see if ripping off corp) a) No compensation for ordinary services, unless provided for in articles & bylaws, or board authorizes b) Compensation permitted for extraordinary services c) If director also serves as officer or employee of corp entitled to compensation for services d) Look for conflict of interest if board adopts or approves K fixing compensation for director Agreement must be valid & need approval by disinterested majority or directors or SHs e) Doctrine of waste: if compensation is unreasonable or excessive it cannot be forced against the corp & can be enjoined Excessive compensation approved by board is breach of directors duty of loyalty 6) Directors right of inspection of corp records a) Unqualified right to inspect at any reasonable time, if current director b) Former director has qualified rights must show good cause 7) Director as creditor of corp legitimate if: a) Debt liquidated (amount certain); & b) Debt unmatured (not yet due); & c) Debt uncontested d) Beware of breach of duty of loyalty conflict of interest 8) Indemnification of directors a) Corp promises to reimburse officers & directors for expenses incurred in defending suits brought against them based on conduct while acting in representative capacity on behalf of corp b) Indemnification can be: Barred if judgment issued against officer or director Discretionary if officer or director under reasonable belief their actions would benefit the corp & majority of disinterested directors & SHs approves indemnification, there is no conflict of interest Mandatory if directors or officers obtain judgment on merits in their favor (win)

C. Officers: major officers of corp (Pres, VP, Sec & tres) elected & removed by board (SHs
cant remove officers) & answer to board in their mgmt of corps day-to-day affairs (agency c/o) 1) Officers are agents of corp& their authority (express actual; inherent based on corp position; or apparent based on rep by corp) is controlled by agency principles; they can bind the corp a) Board vicariously liable for officers actions
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to 3rd party 2) Officers entitled to reasonable compensation, excessive compensation may be conflict of interest (duty of loyalty) 3) Retroactive compensation deemed waste of corp assets if paid for services rendered in past; GR not allowed a) Look for officer retiring & board trying to reward violation of duty of loyalty

If board ratifies the action or relies on it If officer exceed authority (Ultra vires act), board incurs no liability, officer liable

D. SH rights 1) SH subject to minimal ownership requirement & have unqualified right to obtain SH list w/ addresses (d/t proxy) 2) SH has right to inspect books & records for proper corp purpose (to oust current mgmt) a) Purpose must be related to & affect SHs ownership interest b) Social issue not considered a proper purpose c) need to balance SH right to inspect corp books v. coprs right to run w/o outside interference 3) SH voting rights SHs control corp indirectly thru their voting rights (elect & remove directors) a) Shs have right to vote for: Election & removal (CL w/ cause; ML w/o cause) of directors Amend articles or bylaws Extraordinary corp actions sale of all or part of corp assets, dissolution or liquidation, fundamental changes in corp structure 4) Eligibility to vote: right to vote held by SH of record on stock transfer book as of day the book is closed on the record day (either set by board or it is the day notices are sent out) a) SHs duties when voting: SHs under fid duty to minority SHs to exercise good faith when voting their shares Straight voting 1 vote for each share held Cumulative voting 1 vote for each share owned times each director to be elected; this protects minority representation on the board Dilute voting rights of SHs by staggering election of directors or reducing size of board b) Proxies: POA given by SH to someone else to exercise their voting rights, person to whom authority is given (proxy holder) becomes SHs agent to vote their shares only SHs vote by proxy Writing required c) Proxy solicitations re proxy contests: solicitation of proxies by corp mgmt is most effective way of maintaining control of corp SHs have unqualified right to SH lists in order to solicit proxies; but to inspect corp records must alleged proper purpose Expense of proxy contests: who bears costs Losing proxy insurgent no right to reimbursement Mgmt always permitted to use corp funds to wage proxy campaigns to defend corp policy Winning insurgents can vote themselves recovery & allow old mgmt to recover their expenses as long as fight was over policy Use BJR to determine if costs awarded were reasonable 5) SH meeting: SHs can only act at duly called & noticed meetings, at which quorum (usually majority) present, by resolution passed by specific % of those present (usually majority) a) Annual meeting election of directors b) Special meetings reasonable notice required (10 days); if no notice actions are void (unless SH waived notice in writing; requires proper purpose 6) Preemptive rights: allows SHs to keep the proportionate interests in corp, if new issuance of stock SHs have right to subscribe to that amount of shares in new issuance which will preserve their existing proportionate interest a) Right must be expressed in articles or bylaws b) Rights only exist for cash issuances of new shares (treasury stock not subject to preemptive rights)
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c)

Remedies: if corp denies preemptive rights to SH SP to enforce right, sue for damages, obtain an injunction or shares could be canceled by rescission d) Equitable limitations: Argument by SH Majority SH or director not permitted to cause unfair dilution of minority SH interest by issuing shares to themselves at less than FMV d/t fid duty of good faith owed to minority 10b-5: it is a violation for directors to cause corp to issue stock to themselves or associates at unfairly low price or for purpose of obtaining or perpetuating control 7) Fid obligations of controlling SHs (maj SH to min SH) : majority under fid duty to exercise control for benefit of all SHs; must refrain from using power to obtain special advantage designed to prejudice minority (controlling SH engaged in self-dealing) a) Duty of good faith corp action caused by controlling SH requires good faith & fairness in all business affairs & dealings; majority owes duty of good faith to minority b) Sale of corp control (remedy is to corp thru derivative suit) Majority has duty to exercise good faith & fairness & not sell control to looter See if majority knew or should have known purchaser would loot corp If majority breaches duty, minority SHs can shares in premium price paid for control Any sale of controlling interest can give rise to 10b-5 (if based on inside info / fraud) c) Sale of shares at premium Majority SH has a right to sell stock at a premium; but if illegal sell corp asset for their own benefit they will be forced to disgorge their profit to corp Officers & directors cannot sell their office for private gain; in transaction involving sale of ones office, if seller received premium price for stock which included payment for their resignation or other official action, including assistance in picking successor it will be considered private gain d) Beware of close corp If controlling SH in close corp sells shares to corp, minority SH has right to have their shares repurchased by corp to avoid freeze out of minority by majority 8) Resolution of disputes among SHs a) Usually provisional directors appointed or done by arbitration 9) SH suits direct actions & derivative actions a) Direct action: SH enforcing his own personal rights for personal harm, SH v. corp, could be a class action if a # of SHs are affected; recovery goes to SH directly & no requirement to post security for costs Test to determine if bring direct suit: Who suffered direct & immediate injury if SH then direct suit Denial of voting rights (or dilution), refusal to pay dividends, refusal to inspect books or records, denial of SH meeting Who is duty owed to if directly to SH bring direct suit Recovery in direct action belongs to SH individually b) Derivative action: (equitable) SH suit where SH suing on behalf of corp for corp harm; mgmt or 3rd partu abridged legal duty owed to corp & corp fails to enforce its cause of action; SH brings suit in name of corp P SH nominal P; corp named as party D but is real party P; real D is party being sued Conditions precedent to bringing derivative action - 4 requirements to bring derivative action, burden on SH Demand on directors SH must make demand on corp & show corp cannot or will not enforce its rights; demand excused if futile (if board is the wrongdoers) or burden of demand is too great BJ honestly exercised if matter complained of did not involve director wrongdoing, boards good faith refusal to bring suit may bar action, where no likelihood of recovery or cost outweighs recovery Demand on SHs required in some jurisdictions, SH needs SH list, excused if majority SH is wrongdoer Standing in order to have right to bring suit party must be owner of shares at beginning, during & upon termination of suit
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Contemporaneous ownership rule: SH must have been holder of shares at time injured occurred thru judgment; exceptions received shares by operation of law (will/gift), continuing wrong theory & 16b suits Post security for expenses (bond) P SH required to post bond to indemnify corp against litigation expenses in event suit fails Defending against derivative action any defense which could have been asserted if corp brought action can also be asserted in P derivative action Recovery under derivative action usually goes to corp Exceptions: recovery can go to SHs if corp dissolved & all creditors paid, actions was against corp insiders who wasted corp assets & where recovery would benefit wrongdoers Reviewing boards decision not to bring suit (look to see if special litigation committees decision not to bring suit was made in good faith) court uses 1 of 2 approaches Auerbach: court respect BJ of board , enforce boards decision if made in good faith, independent, & well informed Court reviews procedures & methodologies behind investigation Zapata: court will look to see if boards decision was made in good faith, independent, & well informed; but the court can exercise its own BJ & require the liability suit Court makes its own determination as to merits of dismissing; whether it will serve best interests of corp & SHs V. Directors / Officers duty of due care & loyalty A. Duty of Due Care: Officers & Directors owe fid duty to corp & must discharge their duties (decision making) w/ same degree of diligence, care & skill which ordinary prudent person would exercise in mgmt of his own affairs PIR 1) Liability arises if no reasonable school of thought supports behavior, transaction so unfair or one-sided no one would have engaged in b/c net result waste of corp assets = breach of duty of due care (to find liability must find breach) 2) Injury & Causation party alleging breach bears burden of proving breach & that damages caused proximately thereby; just b/c decision caused harm does not make dir/officer liable not guarantors of success 3) Responsibility if duty of due care breached, BJR will not act as a defense, dir/officer will be jointly & severally liable for harm to corp; just b/c corp incurs loss d/t dir/off actions does not mean they are liable 4) Defenses (5) a) BJR dir/officers not liable for losses flowing from business decision provided decision was result of well informed, indep, & good faith decision, look at decision making process, if satisfied dir/officer not liable; minor errors in judgment not considered below std of good faith b) Reasonable reliance on expert advice c) Good faith reliance on mgmt d) Majority requires unanimous ratification by SHs, minority only requires majority ratification e) If dir/officer not present at meeting which misconduct occurred
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B. Duty of Loyalty (conflict of interest): dir/officers held to fid duty of loyalty in all dealing w/
corp, promote interests of corp w/o regard for personal gain & to avoid conflicts of interest 1) Conflict of interest generally arise when corp contracts directly w/ officer, director or company in which person has a financial interest 2) Asserting party (P) must prove - breach, causation, prox damages 3) Burden on D to show that even though there was a conflict of interest transaction was fair & not voidable (opposite duty of due care) 4) 4 sub issues: a) Interested Director Transactions dir/officer sells or buys prop or services to or from corp Look for lack of full disclosure/unfairness in transaction & if disinterested parties ratified conduct CL transaction was automatically voidable at option of corp, regardless of fairness & full disclosure
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ML not automatically voidable, only where K found to be unfair to corp (fraud Transaction not voidable if (dir/officer argument to avoid liability): Dir/officer disclosed interest & majority of disinterested dir approved Dir/officer interest disclosed or known to SHs & majority of SHs

or bad faith)
-

approved
-

Transaction fair & reasonable to corp Remedy for corp rescission of agreement, sue interested dir/officer for damages (impose CT for unfair profit made) b) Interlocking Directorates same person is dir on 2 board simultaneously & corps are contracting w/ each other, inherent conflict of interest If there is full disclosure & transaction is fair to both corps it will cure problem of being liable c) Corp Opp Doc duty of loyalty bars dir/officer from making profit in violation of fid duty to corp (corp has right of 1st refusal); dir/officer takes advantage of opp corp would have taken advantage of Would corp normally have taken advantage of opp look at: Corp purpose, what kind of corp is it Line of business test: if corp is in the line of business opp should have been offer to corp Powers of corp Is opp one corp could have afforded Even if corp could not afforded, most jurisdictions still require it to be offered to corp 1st, if it is so great they can get loan If dir/officer fully discloses to corp & the corp either rejects or is unable to participate, dir/officer may pursue interest for himself (look for good faith) Remedy to corp CT on profits, damages, rescission, & injunction d) Director as creditor of corp if dir/officer lending $ to corp, cant use position unfairly or harm corp

C. Review of transactions anytime it is necessary to review propriety of corp transaction,

decision of directors must be reviewed 1) 1st determine if act was legal a) look to applicable state statutes b) look to applicable internal rules & regs articles & bylaws 2) just b/c act was legal does not mean it is proper 3) after determining legality, determine if act was valid a) are stds of fid duty satisfied duty of due care (decision making, entering into trans) & loyalty (con of interest) 4) just b/c act is legal does not mean it is valid VI. Sec Exchange Violations A. Insider trading CL rule (state sec law) 1) CL duties a) Insider (D) (dir, officer, or controlling SH) who trades on basis of affirmative misreps (lies or truths) made to a trading partner will be liable for CL fraud (SH v. insider); privity required b) Insiders duty to disclose to SH at CL (majority) corp insiders, dir & officers owed no duty of disclosure to investor; not liable for omissions Exception majority rule: Special Facts Doc (misrep theory) doc developed to protect injured SH if SH traded w/ officer, dir or insider, Officer, dir or insider traded on the basis of special info or facts & failed to disclose info to SH; Privity existed between insider & SH must be direct dealing Individual was seller, buyers not protected (ML extends to all SHs) Seller had to be existing SH Minority rule: absolute duty to disclose, insider owes duty to disclose c) Disclose to Corp - CL P is corp: (P v. Insider) - insider owes duty to disclose to corp b/c corp info = corp asset, failure to disclose is a breach of fid duty to corp
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2)

10b-5: it is unlawful for any person, directly or indirectly, by use of any means or instrumentality of interstate commerce or the mails, to employ any fraudulent or manipulative devices in connection w/ the purchase or sale of securities (basis for civil remedy for injured party) fed law (broader than CL rule) a) element required to prove 10b-5: (Jeff Once Made Some Spicy Revolting Pork Rice) if 1 element missing can fall back on CL fraud Jurisdiction using Interstate commerce/ mail/ listed on national stock exchange Omission / misstmt need not constitute CL fraud; lie, truths or omission Material reasonable investor test: would reasonable investor rely omitted fact is material if for purposes of sec fraud law if there is a substantial likelihood its disclosure would have been considered info must not have been effectively disclosed to investing public Scienter Corps reckless disregard for applicable rules & regs, specific intent not required, only need intent to manipulate or deceive stock market or to act in reckless manner Standing P normally a SH who is injured, but SEC or corp issuer & purchaser/seller can bring suit Sale includes mergers & forced sales Exceptions to rule: derivative suits & injunctive relief sought Reliance presumed if material, not required for omission For affirmative misrep P must prove reliance Privity not required; only required at CL Remedies injunction / rescission / CT / out-of-pocket damages (excess profit) b) Who can be a D in 10b-5 action? Affirmative misrep any person may be sued, dont have to be an insider Omissions to be sued person must have had duty to disclose info, must be an insider D must owe duty to corp in whose stock he trades Insiders agent of corp who has access to material nonpublic info, cant act on inside info Required to publicly disclose info (& give time for it to disseminate) or refrain from trading Tipper insider who tips someone who then deals on the info, even though dont deal themselves can still be liable Look to see if (1)insider was (2) exploiting info for personal gain, & (3) tip made for improper purpose Tippee non-insider who receives a tip & then deals Only liable if insider who provided info breach duty to corp & tippee knew insider breach duty Tippees duty derived from tipper, if tipper owed no duty then tippee has no duty Misappropriation theory (expanded concept of duty): a individual w/ no relationship to the corp Courts impose liability under 10b-5 on individuals who are in violation but had no duty to corp in whose stock they traded D had no duty to corp but steals info w/in fid relationship If use of inside info was breach of Ds fid duty to somebody (anybody), duty requirement is satisfied ** for exam begin w/ 10b-5, if required element is missing, proceed to CL fraud unless call states dont talk about CL

B. 16b: Profits realized in connection w/ purchase or sale w/in 6 mo, of securities listed on
nat. stock exchange by officer, dir or holders of >10% of stock of corp are recoverable by corp, penalized b/c take advantage of position (JISP) 1) Elements a) Jurisdiction to qualify as corp subject to 16b violation, corp must be listed on nat. stock exchange or have $10 mil in assets & at least 500 SHs b) Statutory Insiders 3 ways to be liable
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Officer/Dir who holds position at time of either purchase or sale (on 1 side of

swing)

SH of >10% at time of both purchase & sale (on both sides of the swing) Initial purchase does not count, next buy w/in 6 mo can violate the rule c) Short Swing Profit match lowest purchase price minus highest sale price times # of shares, only gains are counted, period must be <6 mo d) Purchase or Sale of a security any acquisition or disposition of stock (gift not subject to 16b) 2) Recovery (if prove all 4 elements) to corp under CT, but SH can sue derivativly 3) No defenses avail strict liability for all unnatural profits

C. Section 14a prevents abuses in proxy solicitation, someone solicits proxies from SHs &
lies or omits info in proxy (Jump On My Little Red Raft) 1) Elements a) Jurisdiction b) Omission / Misstmt c) Material omitted fact would have had actual significance in deliberations of reasonable SH d) Liability negligence may be sufficient e) Reliance f) Remedy Injunction, private suits VII. Close Corps Closed corps include features of corp & partnership, owners manage day-to-day operations (usually < 30 SHs), some restrictions on transferability of stock, no public offerings of stock A. Liability SHs who assume role of officers or dir are liable, more active role, delegation back to SHs so they are liable

B. SH agreement allows SHs more active role in mgmt; control over some of more detailed
aspects of corp policy & mgmt traditionally left to Board, must be legal & done in good faith, must be unanimously passed C. Majority v. Minority rights 1) Majority owes fid duty to minority a) Look for majority/minority freeze outs or unfair repurchase (forced to sell back shares at unreasonable price) 2) Individual SH can institute invol dissolution (fundamental change) proceedings a) If minority is frozen out & cant sale shares on the open market only remedy is dissolution

D. Restriction on transfer of shares stock restriction transfers permitted b/c cant sale stock
on open market 1) Restrictions permitted to control who becomes SH a) Must be reasonable & legitimate purpose b) Corp has right of 1st refusal if giving SH reasonable price c) Corp can refuse to transfer shares if SH violates valid restriction d) Absolute restrictions void e) Restrictions must be conspicuous in agreement so SH knows upon purchase VIII. Capitalization of Corp A. Authorization & Issuance of Shares 1) Authorization shares issued must be authorized by articles, if all authorized shares have been issued no more can be issued 2) Issuance process by which authorized shares are sold, requires action by Board 3) Beware of preemptive rights if new issuance for cash, minority allowed to retain proportionate share
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B. Consideration required to be paid for shares proper consideration for stock, statutes
regulate form (quality) & amount (quantity) of consideration copr must receive upon issuance of shares 1) Terms: a) Bonus stock no consideration paid, corp sells stock & gets nothing in return b) Discount stock SH pays cash for stock but it is less than par value c) Watered stock pay for stock w/ prop or services which is worth more than value of stock 2) Valid Consideration - $ paid, labor done, prop (real or personal) acquired, secured promissory note, cancellation of corp debt 3) Not valid consideration pre-incorp services (maj not valid; min valid), future services (CL not valid, ML valid), unsecured promissory note, goodwill a) shares issued w/o proper consideration are void & corp can cancel issuance 4) Watered stock problem stock is watered when sold for less than par value & so it is not fully paid for; if corp has asked SH for amount less than par value & SH paid requested amount a) Par value shares must be sold at par or better except when corp cant sell shares at par & its capital is impaired b) Stated value set by board for no-par stock can be sold for reasonable value if no stated value c) Where prop transferred Majority not watered unless bad faith or overvaluation of assets, good faith rule; allows for reasonable mistake Minority any substantial variance equals watered stock; true value rule d) Remedies eventually corp will be insolvent Corp can cancel stock to extent watered Issuance may be enjoined / or SP Creditors (P) going after buyer of stock, can normally recover damages from buyer (SH) Trust fund theory (all creditors) SH liable to any creditor, prior or subsequent to issuance, w/ or w/o notice, for share received having par value in excess of assets transferred to corp Misrep theory (subsequent creditors only) creditors who extend credit after watered stock issued can complain of watered stock b/c those who already extended credit cant be said to have been misled; no damage to creditor until corp becomes insolvent & action belongs to creditor Statutory obligation theory (all creditors) creditor cant sue corp Liability buyer of watered stock, unless no knowledge Transferee of watered stock (to BFP) not liable absent participation or knowledge of watering IX. Regulation of Issuance of Security A. Types of Securities for fed law 1) Equity sec demonstrates ownership interest in company generally rep by share or cert of share, holder is owner of co 2) Debt sec exists in debtor-creditor relationship, debt does not create ownership interest 3) Hybrid sec resemble both debt & equity sec; look to maturity date & determine if specific obligation to repay amount at specific time, look to voting rights, right to participate in mgmt, whether there is guarantee of repayment B. Fed Level 1) Section 5: forbid use of interstate commerce to offer to sell sec unless reg stmt has been filed w/ SEC a) Exempt Sec Section 4 2) Section 11: Regis required; person w/o knowledge acquiring sec issued under reg stmt w/ material misstmt/omission of material fact, may sue every person who signs reg stmt

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3) Section 12: imposes civil liability on any person who offers sec in violation of Sect 5 or offers/sells sec using interstate commerce by prospectus/oral comm. containing false stmt or omission of material stmt X. Distribution of Shares & Dividends to SHs A. Shares share rep stockholders proprietary interest in corp which arises from acceptance by corp of consideration offered by subscriber 1) Rep rights to receive dividends as declared by board 2) Right to receive portion of corp assets in liquidation 3) Where voting shares involved, get right to vote

B. Classes of Shares shares of 1 or more classes may be authorized in articles & at least 1
class must have voting rights 1) Common Stock: owner entitled to pro rata dividends w/o priority or preference over other stock & to voting rights& entitlement to share in asset distribution upon liquidation 2) Preferred stock: preference over other classes, preferred right to dividends before paid to other class of stock

C. Dividends any distribution of cash, prop, or other corps own shares paid to SH on
account of their stock ownership; usually SHs want dividend & Board is not declaring, they are not required to, but need to look at reasons for refusal 1) No absolute right to dividend distribution, matter of board discretion a) Look to see if board abusing its discretion, acting in bad faith or attempting to freeze out minority BJR defense b) Declared dividend cant be revoked 2) Restrictions guidelines to follow when corp declaring dividend a) Corp must be solvent, assets exceeding liabilities & corp able to meet current obligations b) Proper sources for payment of dividends Cash dividends (capital or earned surplus) Prop dividends Stock dividends Paid-in-surplus: maj proper source, min not proper source Revaluation surplus: min permits Nimble dividends (net profit from current year) c) Unlawful sources cant impair stated capital (aggregate par value of all outstanding shares) 3) Remedies for unlawful dividends a) Dir personally liable for damages look for neg, BJR b) SH may have to return if corp insolvent upon distribution, but if corp solvent SH generally not liable XI. Redemption & repurchase A. Redemption corp acquires some or all of outstanding shares by paying stipulated redemption price to SHs who must then surrender their certificates, chief purpose is to retire shares w/ preference for benefit of common shares 1) Right usually belongs to corp a) Must be expressed in articles / bylaws b) If not expressed in articles or bylaws, corp cant require redemption, but SH & corp can still enter into consensual transaction 2) Generally right only applies to preferred shares 3) Call for redemption irrevocable SHs become creditors of corp 4) Corp must redeem for proper purpose cant harm SHs 5) Beware of breach of fid duty 6) Corp can redeem from surplus or stated capital, but cant impair corp surplus

B. Repurchase (considered inherent power) corp obligates itself to buy back shares at
option of SH
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1) Corp must be solvent 2) Dir can cause repurchase to thwart takeover if serving corp purpose, not personal purpose 3) Dir personally liable for improper repurchase must act in good faith 4) Source of funds for repurchase can only come from surplus 5) Minority SHs cant be excluded unless valid purpose exists beware of fid duty breach, corp trans excluding minority C. Caveat Rule 10b-5: fraud or nondisclosure of material facts by dir in repurchase or redemption can trigger 10b-5 violation XII. Fundamental Changes in Corp Structure A. Mergers & Consolidations 1) Merger 1 corp absorbed by another, survivor issues shares to transferor corp SHs, & they become SHs of survivor 2) Consolidation 2 or more existing corps combine to form wholly new corp 3) SH ratification requires 2/3 of outstanding shares or majority of outstanding shares to validate merger a) Exceptions: short-form mergers & small scale mergers no SH approval required 4) Effect of merger transferor corp ceases to exist & survivor corp succeeds by oper of law to all rights, assets, & liabilities of transferor

B. Appraisal Rights of Dissenting SHs in Fundamental Changes legal remedy for dissenting
SHs 1) Statutes in most jurisdictions provide SHs who dissent from fundamental change in corp, may require corp to purchase their shares at FMV 2) Issue is whether there is fund. change in corp structure of such nature that forcing SH to retain shares would be inequitable a) Merger b) Consolidation c) Sale of all corp assets, or amending articles to change purpose of corps business d) Procedure SH must file written notice of objection to change & stmt of intent to demand payment for shares before vote taken; if change approved SH has not voted in approval, must make demand for payment at FMV, if cant agree on FMV appraisal proceeding will be instituted Appraisal rights only applicable to authorized corp actions Funds for payment of appraisal rights - should be paid out of surplus only C. Acquisition of corp stock 1) Takeovers a) Requires purchasing of outstanding shares getting control of corp b) No SH approval required c) No appraisal rights attach 2) Tender offer public offer (of cash or sec) to target corp SHs to buy shares at special premium price over market value a) Fed Sec law regulation of tender offers (Williams Act); supplements & gives early warning of take over offer 3) Remedies a) Damages b) Injunction

D. Dissolution & Liquidation (partnership law) 1) Dissolution: termination of corp existence as legal entity; vol & invol
a) Vol dissolution: can be brought by incorporators prior to issuance, by SHs or by corp action Requires vote of board of dir recommending plan of dissolution; approval by majority or 2/3 of outstanding shares & filing of cert of dissolution in appropriate state office Exercise of right of majority to vol dissolve is limited by fid duty owed to minority, no unfairness
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b)

Invol dissolution: Action by state AG where corp exceeded or abused authority conferred to it by cert of incorp, court can order dissolution or suspension Action by SHs or dir can force dissolution by alleging fraud, oppression, deadlock & irreparable injury, waste, & illegal or fraudulent acts upon SHs Actions by creditors creditors can institute if can show judgment against corp exists for which corp is either unwilling or unable to satisfy 2) Liquidation: process of winding up of corp affairs - terminate corp business, liquidate corp assets, satisfy claims of creditors & distributing remainder to SHs a) Dissolution does not normally terminate corp business, corp can sue to collect corp assets & be used by creditors for up to 2 years after dissolution during which period corp retains rights & powers reasonably incident to liquidation process under mgmt of its board b) SHs have right to share equally in residue after creditors satisfied, preferred SHs have liquidation preference in form of cash, common SHs must accept secondary distribution in form of prop (or cash)

E. Amendment of Articles of Incorp may result in substantial change (material) or impair

rights 1) 2) 3) 4) 5) 6) 7) of SHs Requires board resolution & approval Notice to SHs SH approval by majority or 2/3 of outstanding shares Amendment must be filed w/ Sec of State In case of conflict, articles control over bylaws Dir can unilaterally change articles as long as get SH approval Every change in articles must be fundamentally fair to all SHs (maj relation to min)

F. Amendment of Bylaws dir can adopt or amend subject to SH approval

1) 2) Procedure requires board amendment by simple majority of voting shares SHs have right to call meeting & vote to appeal amendment

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