I. Organizations of corporations
A. True business corp.
1. How formed?
a. People- incorporators (real people or entity sign and file articles)
b. Paper-articles of incorporation
1) Names and addresses
a) Corporate name need corporation, company, inc. or limited in name
b) Names and addresses of each
(i) Incorporator
(ii) Initial director and
(iii) Registered agent and office
c) Statement of duration
(i) Some states presumed perpetual
d) Statement of purpose (any)
(i) But if actual business goes past statement of purpose then
(ii) Ultra vires act
(1) = beyond scope of articles
(2) Effect; valid contract, but shareholders can seek injunction and hold responsible officers and directors liable to corp. for ultra vires losses.
e) Capital structure
(i) Stock
(ii) Authorized stock
(iii) Issues stock and numbers of shares per class and information on voting rights and preferences of each class
(iv) Outstanding stock (# issued and not reacquired)
c. Act
1) Deliver to secretary of state
2) Pay fees
3) Then Secretary of state accepts for filing
4) = conclusive proof of valid formation.
d. Then
1) Board of directors holds organizational meeting to select officers, adopt bylaws etc.
2. legal signifigance of formation (de jure)
a. internal affairs governed by state where incorporated (regardless of where do business)
b. corporation separate legal persons (can sue, own, pay taxes etc.)
c. officers, directors, shareholders are NOT generally liable for what entity does?
1) Instead limited liability for $ of stock
2) And corporation is liable.
3. what if incorporation fails?
a. Default is partnership
b. But can still be held to be a partnership IF Unaware of failure to form de jure corporation (but following doctrines Abolished in many states)
1) De facto corporation OR
a) NEED; relevant incorporation statute
b) Good faith colorable attempt to comply
c) Acting as though corp.
d) ≠ for action by state
2) Corporation by estoppel
a) One who treats business as corporation can’t deny that it is a corp.
(i) Contracts, not torts
B. By laws
1. not condition precedent to formation
2. govern internal acts (set meeting time, responsibilities, how notify)
3. amend or appeal?
a. Board or shareholders
4. conflict with articles?
a. Articles win
C. Pre-incorporation contracts
1. promoter = acting on behalf of corporation Not yet formed
2. promoter liability after formed?
a. Remains liable unless NOVATION (agreement by all parties that corp takes liability from promoter) or contract provides otherwise.
b. NOT relevant if corp adopts contract
3. corporation liability after formed?
a. NOT until adopts the contract (made pre formation)
1) Express or
2) Implied
a) If corp accepts benefit of contract
D. Foreign corp
1. foreign=out of state
2. transacting business in state must qualify and pay fees
3. transacting business= regular course of intra state business
4. qualify= certificate of authority by secretary of state (show articles, prove in good standing with incorp. State and have registered agent here)
5. IF NOT
a. Civil fine
b. Can’t sue instate (can be sued) until qualify
II. Issuance of stock
A. Only apply when issuance
1. when corp sells or trades OWN stock
B. kinds
1. subscription
a. what; written offers to buy stock from corp
b. pre-incorperated? Can’t revoke for 6 m. unless doc says otherwise or all agree
c. post incorp? Can’t revoke after acceptance (when board accepts offer)
d. treasury stock
1) previously issued, required and resold
2) watered stock
a) sold under par
b) directors liable if ok’d sale
c) buyers liable
d) subsequent buyer (not liable if good faith)
C. consideration
1. form;
a. ok $, property, past services for corp
b. Sometimes: promissory notes, future services (depends on jurisdiction)
2. amount
a. par = minimum issuance price (bd sets)
b. no par = no minimum (bd sets)
c. board determines value of consideration = conclusive if good faith
D. pre-emptive right
1. right for existing shareholder to maintain % of ownership by buying more stock whenever new issuance for $. (not property, services etc.)
2. not presumed and ONLY if articles provide
III. Directors and officers
A. Directors
1. adult and natural
2. set article and bylaws
3. initial- set by articles and
4. after elect by shareholders (each year or staggered board)
5. shareholders can remove by majority for any reason
6. vacancy
a. board appoints for rest of term unless shareholders created vacancy then shareholders
7. act?
a. Unanimous written consent (emails ok) to act w/o meeting or
b. Meeting (conference call ok)
c. IF not, void, unless later ratified by valid corporate act.
8. notice
a. set in bylaws
b. not for regular meetings
c. required for special meetings (can be waived expressly or implied by attending meeting and not objecting)
9. proxies- for director vote
a. NO
b. No voting agreement
10. quorum
a. majority of all directors Need for meeting.
b. Once there, only need majority of those present to vote.
c. Lost if people leave meeting early
11. role of directors
a. manage business of corp.
b. delegate
1) committee of 1 or more directors
2) not fill a board vacancy
3) not declare distributions
4) not recommend fundamental change to shareholders
5) Ok committee to recommend these to board.
12. duty of care
a. owed to corp (burden on P to show)
b. liable only if breach caused loss to corp.
c. good faith and as Prudent Person to own business
d. does nothing
1) nonfeasance (must show causation)
e. does something bad
1) malfeasance (causation clear)
f. defense
1) Not liable if business judgment rule
2) Rule; ct not 2nd guess business decision if good faith, informed rational basis. Factors;
a) does appropriate homework
b) Deliberates
c) Analyzes
13. duty of loyalty
a. burden on D to show
b. need good faith and reasonable belief that act is in corporation’s best interest.
c. Interested director transaction
1) Corp v. director or connected to director
2) Set aside unless
a) Fair when entered or
b) Conflict disclosed/knew and OK’d by majority of disinterested directors or majority of disinterested shares.
d. Ok for directors set own compensation
1) If good faith, reasonable. Excessive= corporate waste and breech
e. Competing ventures
1) Not compete directly with corporation
2) Remedy= constructive trust on profits
f. Corporate opportunity (expectancy)
g. Director can’t USURP corporate opportunity (something company has interest or expentancy in). something Director found on company time or with company resources.
1) UNLESS tell board and Waits for board to reject
2) NO defense that corporation has enough money.
3) Remedy- sell back to corp @ cost and if profit give profit to co.
h. Other
1) State law bases of director liability
a) Ultra vires acts
b) Improper distributions
c) Improper loans (ok if reasonably expected to benefit company
d) NOT loans to execs in large publicly traded corporations
i. Which directors liable?
1) Yes if concur with board action (presumed)
2) NO if absent or dissenting in writing (just before, during or just after meeting)
3) Exceptions;
a) Good faith reliance on information presented by officer, employee, committee, professional reasonably believed competent.
B. Officers
1. agents of corp.
2. same duty of loyalty and duty of care as directors
3. actions can bind corp. if authority to bind (president has inherent authority for contracts in the regular course of business).
4. OK if 1 person has multiple jobs.
5. appointed and removed by directors NOT Shareholders
C. indemnification of directors and officers
1. person sued as officer/director, reimbursement for costs?
2. NO
a. If adjudicated and held liable or held to received improper benefit.
3. MUST
a. If win jurisdictions split on (up to win or must win all)
4. OK/permissive
a. Anything not covered in Must or NO. “settlement” or if used good faith and reasonable belief in best interest of corp….
5. court can order indemnification of costs
6. articles can eliminate liability except for
a. intentional misconduct
b. usurping corp opp.
c. Unlawful distributions
d. Improper personal benefit.
IV. Shareholders
A. Shareholders can maage corp IF
1. Close corporation and few shareholders and not public
a. then Shareholders can authorize elimination of board and run.
b. Might be that shareholders have duty to not oppress others (because if not public hard to get out if don’t like deal)
2. must be unanimous by all shareholders in writing
3. then managing shareholders have duty of care and duty of loyalty.
B. Licensed professionals
1. need PC or PA in name
2. articles must state purpose “to practice in profession”
3. officers, directors, shareholders, must be licensesd
4. ok if employees aren’t professionals (as long as they aren’t doing professional services)
5. professionals still personally liable for malpractice
6. NOT liable for corporate obligations or other shareholder’s malpractice.
7. other corp. rules apply
C. shareholders liability?
1. no generally not liable for acts and debts of corp.
2. exception, personally liable if
a. ct pierces corporate veil
1) NEED
a) Abused privilege of incorporation
(i) Example; co mingling funds and creditors not paid
(ii) Sloppy administration not enough
b) Fairness requires holding them liable. (fraud etc.)
b. Or undercapitalization
1) If WHEN formed, dangerous/foreseeable and
2) Not enough money led to unfairness.
3) Ct more likely to do for tort then contract claimant
D. Shareholder’s derivative suits
1. shareholder is P, but suing to enforce corp’s claim (duty of loyalty, duty of care..)
2. effect; recovery usually goes to copr. Minus costs/attorney’s fees.
3. but P/shareholder liable to D for costs and attorney’s fees
a. if lose
4. require
a. stock ownership @ time claim arose (or by law from someone who did)
b. adequate representation of corps interest
c. written demand on corp, that corp bring suit (unless futile)
d. corp must be joined as D
e. NOT dismissal or settlement w/o court approval.
5. Corp. can move to dismiss upon showing that investigator (ind. director or ct appointed) showed suit was not in corporations best interest (low chance of success, high cost and low recovery).
a. ct looks only at if investigators are disinterested.
E. Shareholder voting
1. right if record shareholder (shown as owner in corporate records) as of record date (when determined)
2. exceptions
a. Corp reacquires on record date, NO vote for treasury stock.
b. Death of shareholder; ok for inheritance
c. Proxy-
1) In writing, signed, to secretary, authorizing another to vote shares
2) Good for 11 months
3) Revocable (even if says not) unless proxyholder has some interest in shares.
3. voting together
a. voting trust
1) written, copy to corp,
2) transfers legal title to trustee
3) original shareholder trust certificates and get other rights
4) 10 year max
b. Voting agreement
1) In writing, signed.
2) Specific enforcement? (states split)
4. Where? Usually at meetings (anywhere ) or unanimous consent signed by all
a. Meeting? Annual meeting is required, can have special meeting
b. Special meeting?
1) Called by board, president or owner(s) of 10% of stocks
2) Must be proper purpose
5. notice
a. written to every shareholder who can vote
b. any meeting
c. 10-60 days before
d. Need
1) Where, when, why (limits what you can do at meeting)
e. Consequence
1) Action @ meeting is void unless those ≠ sent notice waived (express or attend mtg without objection)
6. quorum
a. for meeting;
1) majority of # of shares
2) Not lost if people leave
b. For voting
1) Majority of votes cast
2) Cumulative;
a) Only for voting for directors, only if express
b) # of shares x # of directors to be elected
7. stock transfer restrictions
a. how restrict? Ok if reasonable under circumstances and
1) no undue restraint on alienation
2) 1st refusal OK
3) And NEED
a) Conspicuous on certificate or
b) Actual knowledge
8. right of shareholder to see books
a. also applies to records
b. written demand with what you want and proper purpose (related to role as shareholder)
c. Directors don’t need this process
d. consequences if don’t comply
1) court order and
2) P gets costs and attorney’s fees if win.
F. Distributions
1. types
a. dividend
b. repurchase shareholder’s stock
c. redeem stock (forced sale in articles)
2. no right until declared
3. who
a. common –divide equally
b. preferred = pay first
1) participating = pay again
2) cumulative = add them up since last dividend paid
a) # years x _($ preference)
4. what $ used?
a. YES earned surplus- generated by business activity
1) Earnings, loss, previous distributions
b. NO stated capital- by issuing stock
c. Par ?
1) All par value goes to state capital
2) Rest goes to Capital surplus
d. Non Par? Bd decides.
e. MAYBE ok capital surplus if inform shareholders
f. OK if lost money last year
g. NOT OK if insolvent or would make insolvent
h. directors are jointly and severably liable for improper distributions
i. shareholders liable if know improper
V. Fundamental corporate changes
A. Characteristics
1. extraordinary occurances so
a. merger/consolidation
b. transfer of substantially all assets and ≠ ordinary course of business
c. transfer of shares in share exchange
B. require
a. 1 board of director action
b. 2 approval of majority of shareholders
c. 3 (that are entitled to vote)
C. right of dissenting shareholders
1. right of appraisal
a. =forced sale at fair value (if parties can’t agree on the $, ct appoints)
b. ≠ when publicly traded or 2,000 or more shareholders.
c. To protect right
1) Before date, file written notice,
2) Vote against
3) Written demand to be bought out after
4) Give stock back.
D. Kinds
1. amendment of articles
a. if approved need 3 and file with secretary of state
b. no right of approval
2. mergers/consolidations
a. need 1 and 2
b. no need 3 if short form merger
1) if 90% or more owned subsidiary merged to parent
c. yes right of approval
d. effect surviving corp has all rights and liabilities of old corp (successor liability)
3. transfer of most business assets
a. rules for transferring company
1) NEED
a) Board of director act and notice shareholders
b) Majority Approval by transferring corp,. shareholders
c) File articles of exchange Not to states
b. Acquiring company
1) no votes needed by buying company
2) Acquiring company not liable for debts of selling company unless contract says or merely a continuation of successor liability.
4. dissolution
a. voluntary
1) by board of directors
2) approval by shareholders
3) notice intent
4) existence to wind down
5) notice to creditors
b. involuntary
1) by ct order (court can also just order buyout of offending director)
2) shareholder can petition
a) because of
(i) director abuse, waste of assets, misconducts
(ii) director deadlock and harming co.
(iii) shareholders failed @ 2 meetings to fill vacant board position
3) creditor can petition because
a) unsatisfied judgment or
b) company admits debts in writing.
c. Winding down?
1) Convert assets to cash, pay creditors
2) Distribut excess to shareholders (equally unless express preference)
VI. Federal securities
A. Securities are investments
1. debt or – rarely tested- loan mortgage bond
2. equity- stock or ownership interest
B. 10b-5 aimed at deceit
1. Unlawful if fraud, misrepresentation, nondisclosure in connection with purchase or sale of any security
2. NEED
a. Instrumentality of interstate commerce
b. Type
1) Misrepresentation
2) Trading on material information (when duty to disclose = relationship of trust and confidence with shareholders)
3) Tipping (for wrongful purpose)
4) Gift/enhancing rep (enough to satisfy benefit for tipping)
c. Materiality
d. Intent to deceive, manipulate or defraud- reckless counts too
e. Reliance (presumed in public misrepresentation and nondisclosure cases
3. parties
a. P = securities and exchange commission
b. Private by buyer or seller of securities
c. D = any person (company, buyer/seller, tippe/tipper-need tippe for tipper, insider trading).
C. 16B aimed at speculation by directors officers, + 10% of the shareholders
1. strict liability- no need intent.
a. recovery for copr for insiders buying and selling co. stock
b. when apply
1) reporting corp (listed on national exchange or 500 shareholders and 10 million dollars)
2) d’s director- when bought or sold
a) officer (when bought or sold)
b) shareholder owns 10% (when bought and sold)
c. to what
1) buying and selling within 6 m if profit (if bought within 6 m before or after of when sold).
d. What happens
1) All profits go to corp.
2)
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