CORPORATIONS

Six Fact Patterns

FACT PATTER 1 - ORGANIZATION OF CORPORATIONS
Formation Requirements: People, Paper, Act
o People: Incorporators. Must have one or more, must be a person or another
corporate entity
Executes and files the articles, might hold an organizational meeting
o

Paper: Articles of Incorporation

Purposes of the Articles
Contract between corporations and shareholders
Contract between corporation and state
Information in articles
Statement that corporation is formed under the Business Corporation Law of
1988
Names and addresses:
o Corporate name: must include Corporation (or Corp.), Company (or Co.),
Incorporated (or Inc.), Limited (or Ltd.), Association, Fund or Syndicate
o Incorporators (may also name initial Board members)
o Registered Agent and Address of Registered Office
Statement of duration if not included, we presume perpetual existence
Statement of Corporate Activity if not included, we presume corporation can do
all lawful business

Ultra vires activities (Outside scope of the purposes listed in articles)

EX: Vans articles indicate purpose is manufacturing machines. Then, sells carsultra vires activity.
o At CL, we voided the ultra vires K as outside corporations capacity
o NOW: ultra vires K are valid.
Shareholders can seek an injunction
Responsible officers and directors are liable to corporation for ultra
vires losses

Stock

(Capital Structure)
Authorized stock: maximum number of shares corporation can sell
Issued stock: number of shares corporation actually sells
Outstanding stick: shares that have been issued and not reacquired by
corporation
Articles must include
o Authorized Stock
o Information on par value (if any par shares)
o Voting rights, and
o Preferences for each class of stock

Act must file articles with PA Department of State and pay required fee
If Department accepts articles for filing, that is conclusive proof of valid formation
At that point, we have de jure corporation (legal corporation)
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Next step: board of directors holds organizational meeting to select officers,

adopt bylaws, etc.

Under the BCL, a corporation is given the power to exercise all powers necessary or convenient
to effect its purposes, and a corporate may be formed for any lawful purpose. Combined, these
provisions provide authority for a corporation to do almost anything that is rationally related to a
business purpose. Unless an exam question restricts a corps purpose, you should usually find
corporate acts to be within the corporations powers

LEGAL SIGNIFICANCE OF FORMATION OF CORPORATION

Internal affairs of a PA corporation are governed by PA law.

o True even if corporation only does business in Alaska (but formed corporation in PA)

Corp is separate legal person. Can be sued, hold property, etc

Generally, people who run corp (directors and officers) are not liable for what corp does

Generally, owners (shareholders) are not liable for what corporation does
o Principle of limited liability means shareholders are generally only liable for price of
stock

The Corporation as an entity is liable for what the corporation does

DE FACTO CORPORATION DOCTRINE / CORPORATION BY ESTOPPEL

When a de jure corporation has not been formed (leaving them with a partnership) and the
proprietors nervous about personal liability for corporation. Liable unless court applies de facto
corp. Defenses for proprietors:
1. De factor corporation
a. Created when
i. There is a relevant incorporation statutes
ii. The parties made good faith, colorable attempt to comply with it
iii. Some exercise of corporation privileges
b. If so, treated as a corp for all purposes except in action by state being de facto as
good as being de jure
c. EX: incorporators draft perfect articles and mail to Dept of State. Lost in mail, but they
dont know it. Incorporators acting in good faith execute business K.
i. They are personally liable on the K until the court applies de factor corporation
2. Corporation by Estoppel one dealing with business as a corporation may be stopped from
denying the businesss corporate status. May be used to prevent comp from avoiding
obligation by asserting its own lack of corp formation
a. Stop the plaintiff from suing the corporation as individuals the plaintiff dealt with the
corporation as a corporation, and cant later act as though it wasnt a corporation
BYLAWS (not often tested)

Adoption of bylaws not a condition precedent to forming corporation but nearly every corp
has them
o They are for internal governance (meeting times, methods of notice, etc)

Can be adopted by the Board or the Incorporators

Can be amended or repealed by the Shareholders

o Board can only do so if the bylaws allows

If bylaws conflict with articles, the articles control.

o Bylaws are internal, articles are filed with a State agency.
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Bylaws are binding on directors and officers but not outsiders, because just internal

PRE-INCORPORATION CONTRACTS -- *** most tested topic

Promoter person acting on behalf of corporation not yet formed

o Might enter into K on behalf of not-yet formed corporation

Liability of the corporation a corp is not liable on pre-incorporation contracts until it adopts
the contract
o EX: On Jan 10, Promoter leases business and signs lease as OR Cars, Inc. On Feb 20,
corp is signed.
Is corp liable? Yes, if it adopted the contract

Adoption of Contract
o Express board of director action adopting the contract
o Implied if corporation accepts a benefit of the contract (based on conduct)

Liability of promoter unless K says otherwise, promoter remains liable until there is a
novation
o Novation: agreement of the promoter, the corporation, and other contracting party
that corporation will replace the promoter under the contract
o
o

EX: Will P be liable on lease if OR Cars, Inc. isnt formed?

Yes. This is heavily tested area
EX: Will P be liable on leave if OR Cars is formed and adopts the lease?
Yes, liable until NOVATION.
So both the corporation and the promoter would be liable

FOREIGN CORPORATION (rarely tested)

Foreign corporations are any which are incorporated anywhere other than PA. Must qualify
& pay fees in PA

Transacting business means regular course of intrastate (not interstate) business activity.
o Not just occasional or sporadic activity, and not simply owning property in PA

Foreign corps qualify by getting certificate of authority from Dept of State

o Applies by giving info from articles, proving good standing in home state
o Must have registered agent in PA

If foreign corp transacts business without qualifying, two things happen:

o Civil fine
o Cannot sue intestate (but it can be sued and defend)
However, cant even file countersuit until qualified

Once it pays back fines and fees, it can sue

FACT PATTERN 2 ISSUANCE OF STOCK (very rarely tested)

Issuance: occurs when corporation sells or trades its own stock. Way to raise capital
Subscriptions: written offers to buy stock from corporation
Subscriptions are revocable any time before the corporation accepts
When Board accepts the offers, corp and subscriber are obligated under subscription
agreement
Consideration: (not heavily tested) what corporation must receive when it issues stock
1. Form of Consideration
a. Permitted: any tangible or intangible property or benefit to corporation includes
money, tangible/intangible property, services done for corp, release of obligations,
future services, promissory notes
b. Prohibited: (result is unpaid stock) anything else. Pa so liberal, almost all permitted
2. Amount of Consideration
a. Board has full discretion to determine whether amount of consideration is adequate
i. True even if articles provide for par value. Concept of par has no relevance as to
validity of issuance
b. PAR means minimum issuance price.
i. EX: Corp sells 10,000 shares of $3 par stock. Under traditional par rules, must
get at least $30,000.
1. BUT if Board determines that $22,000 was adequate, the issuance would
be valid
ii. No Par means no minimum issuance price Board sets a price
iii. Treasury Stock stock previously issued and reacquired by corp which can then
resell at any price the Board sets
Preemptive Rights - rights of existing shareholder to maintain percentage of ownership by
buying stock when there is a new issuance of stock
EX: S owns 1000 share of C Corp. There are 5000 shares outstanding. Corp plans to issue
another 3000 shares.
o If S has preemptive rights, S has right to buy 600 shares (she owned 20% before,
gets to keep 20% again)

Preemptive rights apply only if the articles provide for them. If not in fact pattern, not
there
o Exception: in a statutory close corporation preemptive rights exist unless articles
provide otherwise (never tested before)

FACT PATTERN 3 DIRECTORS AND OFFICERS

Statutory Requirements - Directors

Number: one or more adult natural human people

o If articles silent about number, there are 3 (can have less, but articles must state so)

Selection: initial directors can be named in articles or selected by incorporators.

o Thereafter, elected by shareholders at annual meeting
o (The entire board is elected each year unless there is a classified board, which is
divided by 1/2 s or 1/3s, with half (or one third) elected each year; terms cannot
exceed 4 years)

Shareholders can remove directors before term expires with or without cause
o But if classified Board, shareholders can only remove with cause

Board can remove a director but only for cause.

o If for mental incapacity, must have judicial declaration
o Vacancy on Board is generally chosen by majority vote of remaining directors

Board action two ways to act

o Unanimous written consent (including email) to act without meeting, or
o Meeting (held anyway) that satisfies quorum and voting requirements
o

Directors cannot agree to act through individual conversations it is void unless ratified
by valid act
Ex: they all agree verbally to do something. Unless it is written, it is void
Conference calls counts as meeting, email counts as writing if printed and left in file

Notice method of which is generally set in bylaws

o Not required for regular meetings
o Required for special meetings, unless bylaws say otherwise (requirement is 5 days
written notice)
o Failure to give notice can be waived in writing or by attending without objection

Proxy Voting no proxies for directors. Need directors independent judgment

Quorum for Directors Meeting must have majority of all directors present (or different % if
specified in bylaws)
o If quorum is present, need a majority note of those present
EX: 9 directors, so at least 5 must attend meeting, and at least 3 must vote for
resolution
If one of the 5 leaves, there is no longer quorum and cannot vote

Role of Directors
Generally Board of Directors manages business of corp
Can delegate substantial management functions to a committee consisting of 1 or more
directors
o But committees cannot:
amend bylaws
fill board vacancy
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 submit fundamental corporate change to SH

Exam hint: set up facts showing no meeting, but that director has entered into
extraordinary K with another entity on corporations behalf, either on his own, or with
the accord/approval of some or all directors who were called individually. DIRECTOR
DOES NOT HAVE POWER TO BIND corp on extraordinary K unless actual authority to
act. Can have actual authority only if: (1) proper notice of directors meeting, (2)
quorum present, (3) majority of the directors approved
Duty of Care (Burden on Plaintiff) Most important topic
Standard: A director must discharge her duties in good faith and with a reasonable belief that
what shes doing is in corporations best interest (duty of loyalty). She must act with that degree
of care a prudent person would use with regard to her own business. (duty of care) In doing so,
a director is not required to consider the interest of any particular group as controlling. [know
this inside and out]
Problems and how to address on exam
Nonfeasance (Director does nothing)
EX: JT is director of Corp. Never attends board of directors meetings or others to keep
abreast of corps business. Is he liable for breach of duty of care?
o State the standard, always in full
A director must discharge her duties in good faith repeat ALL THREE LINES
Then, answers as: a director would attend some meetings and JT never did. So
he breached duty of care. But he is liable only if his breach caused a loss to the
corp
This is tough to do hard to win nonfeasance groups

Misfeasance (board does something that hurts the corporation)

o EX: Directors of H Hot Tubs vote to start new line with built in wine coolers and video
cameras. Corp loses lots of money. Are directors liable for breach of duty of care?
State the standard, always in full (all three lines)
o Then, answer as: here the directors decision caused corp to lose money.
o BUT a director is not liable if she meets the business
judgment rule. The duty of care requires that the actor do
what a prudent person should do. Prudent people do
homework. Did the board research, analyze and deliberate
before making this decision? If not, then liable. If so, then acting
as prudent person
o Business Judgment Rule court will not second-guess a decision
if made in good faith, was informed, and had a rational basis.
A director is not a guarantor of success
Duty of Loyalty (Burden on Defendant) Heavily Tested

Standard: A director must discharge her duties in good faith and with a reasonable belief that
what shes doing is in corporations best interest (duty of loyalty). She must act with that degree
of care a prudent person would use with regard to her own business. (duty of care) In doing so,
a director is not required to consider the interest of any particular group as controlling. [know
this inside and out]
Interested Director Transaction any deal between the corporation and one of its directors (or a
directors relative, close enough to affect judgment, or another business of the Directors. If
director will benefit from transaction her corp is about to enter into, must disclosure
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to Board or SH. Disinterested directors (or SH) must then approve the transaction. If
no disclosure, transaction can be set aside unless it is fair to the corp. Corp can
recover damages equal to the directors profit.
EX: Martha is director of XYZ. Sells wraths to the corp. This is an interest director
transaction
Way to respond on essay:
o State all three sentences of the standard
o Then- interested director transaction will be set aside unless the director shows:
The deal was fair to the corporation when entered, or
Material facts and her interest were known, and the deal was approved of either:
Majority of disinterested directors, or
Majority of shares in good faith (dont have to be disinterested)
EX: XYZ Corp has 7 directors. Four of them (W, X, Y, Z) are interested in the transaction
being considered. Three of them (A, B, C) are disinterested. We want approval by a majority
of the three disinterred directors. Support A, B, C, Z show up at the meeting. Is there a
quorum?
Yes. Interested directors count towards the quorum. Need 4 to be a quorum.
The vote of the interested party wont count, but presence does towards the
quorum
Competing Ventures director cannot compete unfairly with her corporation.
o A remedy for this breach: Constructive trust on profits (so corporation can recover any profit
she made competing)
o EX: Sharon is director of O Music Co. Also serves on board of directors at Home Depot (no
competition). Can she open her own music company?
First, state full three sentences of standard
Then state she cannot unfairly compete
Corporate Opportunity something necessary to the company, or in its business line, or in which
it has an interest or expectancy
o EX: D is director of C Realty Corp which develops condo projects. D learns of some land that
has been zoned for condos and buys it for himself as investment. What are Cs rights against
D?
State all of standard
Then, director cannot USURP a corporate opportunity. That means he cannot take it
until:
He tells the boards, and
Waits for the board to reject the opportunity
It is not a valid defense to say corporation could not have afforded to make the
purchase
o Remedy: if D still has it, must sell it to C Corp at his cost. If he has sold it for a profit, the
corporation gets the profit. (Constructive trust: court will make her account for her profit)

Other self-dealing can breach standard (stealing $ from corp, accepting $ to resign from board,
etc)

Board can set its and officers compensation, but must be reasonable. If excessive, waste of
corporate assets and breach of duty of loyalty
OTHER STATE LAW BASES OF DIRECTOR LIABILITY

Ultra vires acts responsible officers and directors are liable for ultra vires losses
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Very limited defense. Dont allow a corporation to get out of a K just because its
outside the stated purpose
Improper distributions
Which directors are liable for what?
o General Rule: director presumed to have concurred with Board action unless dissent is
noted in writing
In the minutes
In writing to corporate secretary at meeting
In writing to corporate secretary after meeting
o Exceptions:
Absent directors not liable
***Good faith reliance on
Book value of asset, or
Financial statements by important parties, or
Opinion of an EE, officer, professional
o

OFFICERS (owe same duties of care and loyalty as directors)

Status: officers are agents of corporation. Can bind corp if they have authority to do so.
President has inherent authority to bind the corporation to a contract in the ordinary court of
business. President also has actual authority given her by board and certified by secretary
o Must have a president, secretary, and treasurer or persons who act as such
o Can also have others. One person can hold multiple officers at once

Selection and removal of officers

o Selects, monitors, and removes officers the Board
o They also set officer compensation (before or after services rendered)
Board also sets reasonable compensation for itself, but usually before services
rendered
o Board can give option to buy corporations stock as proper compensation for officer
o If sued for breach of K after firing, plaintiff can get $ but never job back

Important: shareholders hire and fire directors, but directors hire and fire officers.
Shareholders generally DO NOT hire and fire officers
Shareholders have no power to run day-t0-day activities, that power is vested in
Board of Directors, and SH have power to elect the board. BUT: if there are
relatively few shareholders (35 or fewer) the corporation can be considered a
close corporation, and SH can generally run a close corporation as they would
run a partnership as long as it doesnt prejudice public, creditors, or minority
shareholders
Sarbanes-Oxley Act (federal) generally forbids loans to executives in large, public
corporations.
o Requires the corps board to establish audit committee & oversee work of registered
public accounting firm
o CEO and CFOs must certify accuracy
Indemnification of Directors and Officers
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Person sued in her capacity as officer or director who has incurred costs, and maybe
fines/judgment/settlement seeks reimbursement from corporation
o No indemnification is allowed when she was held liable to the corporation
o Mandatory indemnification is required to the extent she wins on the merits or otherwise
Doesnt have to win on EVERY claim to qualify for mandatory indemnification
just the one(s) won
o Permissive indemnification corporation may indemnify when mandatory or prohibited
situations dont apply. For instance: settlement of case
Must show she acted in good faith and reasonably believed her actions were in
corps best interest
Determined by disinterested directors, independent legal counsel in
written opinion, or SH
o

OTHERWISE:
Courts can order indemnification if justified in view of all circumstances.
Would be for expenses and attorneys fees, only not for a judgment
Corps can advance litigation expenses (including attorney fees) as long as she
agrees to repay them if later determined she is ineligible for indemnification
Articles can provide for limitation or elimination of director liability for damages,
but not for breach of duty of loyalty, reckless or intentional misconduct, or
wrongful personal benefit
Corps can purchase liability insurance to indemnify officers or directors

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FACT PATTERN 4 SHAREHOLDERS

Shareholders do not get to manage the corporation because the BOARD manages
Shareholders can manage in a close corporation
Close Corporation (most are close corps)
Characteristics
o No more than 30 shareholders
o Stock is not publically traded
o Statutory Close Corporation meets specific legislative definition

Can have a board of directors, or shareholders can eliminate board and run the corporation
o Do this by shareholder bylaws or in the articles

Duties
o If eliminated, the duties of care and loyalty are owed to corporation by those who run it
(shareholders)
o Shareholders also owe fiduciary duties to each other
Can be liable for oppressive acts toward minority shareholders
Ex: selling control to someone who loots corp. (not having properly
investigated the buyer)
Prevents big guys sticking it to the little guys
o EX: A, B, C own 1/3 each of stock of C. Corp, close corp. All have jobs with C Corp. A
and B fire C from his job, kick him off premises, refuse to pay him, and have C Corp buy
stock in another corp A & B own.
Breached duty to minority shareholder

Professional Corporation only licensed professionals are shareholders. Can hire nonprofessionals for other services
o Liable for own malpractice
o Not liable for other members malpractice
o Rules of operations generally same as that for a general corporation
Shareholder liability for acts or debts of corporations
Shareholders generally not liable because corporation is liable for what it does
o Even if only 1 shareholder
But can be liable for corporate acts/debts if court pierces corporate veil
because it ignores corporation and holds shareholders liable
This only happens in closed corporations

Piercing Corporate Veil a court might do this only if

o Shareholders have abused privilege of incorporating, and
o Fairness requires they be held liable
o (must always discuss both in essay questions)
o (strong presumption against this PA courts only do it to avoid fraud or unfairness)

Remember (and always say this): Courts may be more willing to PCV for a tort victim
than for a K claimant.
Also PCV can operate in related corporation situation (where parent company forms subsidiary
to escape liability)
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Classic Fact Pattern Alter Ego (Identity of Interests)

EX: X & Y are shareholders of Corp. X is also CEO and commingles personal and corporate
funds, uses corp car as own, and uses corp credit card for personal things. Can creditor of
corp who has been unable to collect it from corp collect from either X or Y?
o Start with general rule (shareholders not liable for acts/debts of corp)
o Then give PCV standard
o Then say, court MIGHT PCV if Xs failure to respect separate corp entity harmed
creditors. Sloppy administration is not enough to PCV but there is a strong argument
for it here
o Then make the argument
Did shareholder abuse corp?
Yes, treated assets as own
It is unfair to limit liability?
Arguably yes.
Y would not be affected did nothing wrong
Classic Fact Pattern Undercapitalization
S is shareholder of G Corp which disposes of nuclear waste. G doesnt have insurance. G
has initial capitalization of $1K. V is injured when one of Gs trucks melts down. Can V
sue S?
o General Rule: shareholders not liable for corp obligations
o PCV standard
o Here court might PCV because corp was undercapitalized when formed
Shareholders failed to invest enough to cover prospective liabilities
Remember (and always say this): Courts may be more willing to PCV for a tort
victim than for a K claimant.

Shareholder Derivative Suits (Shareholder as Plaintiff)

Derivative Suits shareholder suing to enforce the corporations claim not own personal claim
Always ask: could corp have brought this suit?
o If so, probably derivative suit
EX: S sues board of directors of C Corp for issuing new stock w/out honoring her
preemptive rights.
o This is NOT a derivative suit this is direct suit to vindicate Ss personal claim
EX: S sues other two shareholders, A & B, for oppressive acts against C.
o This is NOT derivative. Its direct. Its about duty owed to a shareholder, not
corporation
EX: S sues board of directors of C Corp for usurping corp opportunities.
o This IS a derivative suit - breach of duty owed to corp. Duties of care and loyalty
are owed to corp
If shareholder wines the derivative suit, the corporation gets the money from the judgment
Shareholder plaintiff receives costs, attorneys fees (usually from the corp), but only if
court finds case conferred a substantial benefit on corp
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If shareholder loses derivative suits

SH cannot recover costs and fees
SH is liable to defendant he sued for Ds costs and fees if S sued without reasonable cause
or in bad faith
Other shareholders cannot later due same defendants for same transaction res judicata
Six Requirements for bringing shareholder derivative suit
o Stock Ownership -person bringing suit must have owned stock at time claim arose or have
gotten it by operation of law from someone who did (divorce, inheritance). Must have own
stock throughout litigation
o

Must fairly and adequately represent interests of shareholders

Must make written demand on directors that corporation bring suit

Demand excused only if would be futile to make demand
This means PL makes specific showing that irreparable injury to corp would
result if demand made
Or if directors would be involved in the case

Plaintiff must plead with particularity her efforts to get corporation to sue, or why demand
futile

If shareholder bring suit owns less than 5% of any class of stock, corp can demand she post
security for costs (unless stock has FMV of more than $200K)

Corp must be joined as defendant even though its the corporations claim, because it did not
bring the suit itself

No dismissal or settlement without court approval.

Motion is based upon investigation by disinterested directors. Court will dismiss if
these directors determined in good faith that there are legitimate business reasons for
not suing
But court will scrutinize decision carefully, consider various factors like whether
board was disinterested, whether assisted by counsel, conducted adequate
investigation, etc.

Shareholder Voting
WHO VOTES
General rule is that record shareholder as of record date has the right to vote
Record Shareholder is person shown as owner in corporate records.
o Record date is voter eligibility cut-off, not more than 90 days before the meeting
EX: C Corp sets annual meeting 7/7, and record date as 6/6. S sells B her C Corp
stock on 6/25. S is entitled to vote because owned stock on the record date
Exceptions:
o Corp reacquires some of its stock before record date
This is treasury stock
It does not vote this stock
o Death of shareholder Ss executor can vote
o

Proxies
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A proxy is
A writing (including fax or email)
Signed by record shareholder (email treated as such)
Directed to secretary of corp
Authorizing another to vote the shares
Valid proxy is good for 3 years unless it says otherwise
A proxy can be revoked when notice is given to secretary in writing or by
electronic transmission
Can be revoked even if the proxy states its irrevocable

Irrevocable Proxy: only way to have one is if it is a proxy couples with an interest
which requires
That the proxy says its irrevocable, and
Proxyholder has some interest in the shares other than voting
EX: S sells B shares after record date but before meeting. S gives B
irrevocable proxy. S cannot revoke because this proxy is coupled with an
interest proxy owns the shares

Voting trusts and voting agreements (when shareholders with few shares join together in block
voting)
o Voting Trusts
Requirements for voting trusts:
Written agreement controlling how shares will be voted
Copy to corporation
Transfer legal titles of shares to voting trustee
Original shareholders receive trust certificates, retain all s-holder rights except
voting
No time limit, but trust law might
10 year limit on voting trusts for banks, though
o

Voting Agreement (pooling)

Requirements for Voting Agreements
Shareholders can enter into them
A contract is required
They are specifically enforceable

WHERE DO THE SHAREHOLDERS VOTE?

Two ways shareholder can take valid corporate act
File with corp unanimous written consent of holder of all voting shares to act w/out meeting
( email print out ok)
A meeting that satisfies quorum and voting rules
Two types of meetings
Annual meeting: unless articles say otherwise, must happen.
o Date usually in bylaws
o If not held within 6 months of that date, shareholder can call the meeting
o Elect directors at annual meeting
Special meeting can be called by
o The Board
o Holders of at least 20% of voting shares, or
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Someone else as provided in articles

Meetings can be on internet as long as people can hear or read and vote
Officer must preside over meeting
Shareholders cannot call a special meeting for purpose of removing officer that is done by
Board
Notice Requirements: written (includes fax/email printout) to every SH entitled to vote, for all
meetings
Contents of notice: must always say when and where. Also states purpose of meeting
because whatever is stated as the purpose is the only thing the meeting can cover
If fail to give proper notice, then action taken at meeting is void unless those not sent notice
waive the notice defect. Waiver happens if
Express in writing and signed any time, or
Implied they attend meeting without objection

HOW DO SHAREHOLDERS VOTE?

Must be quorum represented at meeting.
Quorum determined by number of shares represented, not number of shareholders
Generally quorum requires majority of outstanding shares
o EX: X Corp has 120,000 shares outstanding and 700 shareholders.
A quorum is 60,001 shares
Quorum not lost if people leave meeting
If quorum requirement is met, action requires majority of shares actually cast on
the particular issue
o Not necessarily majority of all shares present
EX: X Corp has 120,000 shares outstanding. 62,000 shares represented at
meeting. Only 50,000 shares vote on a particular proposal.
At least 25,001 MUST vote for the proposal to be accepted majority of
votes

Cumulative Voting device to give shareholders a better chance of electing someone to

Board
o Available only when voting for directors
o Multiple number of shares times number of directors to be elected
EX: You own 1000 shares in C Corp which has 9 directorships open for election. I
want ND to be director. I can cast 9000 votes for him (1000 shares times 9
directorship spots)
o If articles are silent as to whether shareholders can vote cumulatively, they can only
cant if the articles take away the power to do so

Stock Transfer Restrictions (can be established by articles, bylaw, or shareholder

agreement)
Free transferability of ownership interest can sell or give stock away
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If need to restrict, courts will uphold restriction if reasonable under circumstances (no
undue restraint)
o Right of first refusal is okay if corp offers a reasonable price
Even if reasonable, cannot be invoked against transferee unless either
o It is conspicuously noted on stock certificate, or
o The transferee had actual knowledge of the restriction

Right of Shareholder to Inspect and Copy the Books and Records of Corporation
Standing: Any shareholder can demand access during regular business hours to books (also Also
has CL right to inspect)
Procedure: verified written demand stating proper purpose reasonably related to interest as a
shareholder

If corp doesnt allow inspection, shareholder can seek court order to allow inspection and
recover costs and fees
o Burden is on corp to show shareholders purpose is improper
Each shareholder has right to inspect bylaws without making any showing
Directors have right of access to all books and records

Distributions (payments to shareholders as dividend or repurchase of shareholders stock)

Boards discretion
Action to compel distribution is difficult to win can win only on very strong showing of abuse of
discretion (like if Corp keeps making profits and Board just gives themselves bonuses every year)

Which shareholders get dividends?

o Board of Corp decides to declare dividends totaling $400K. Who receives if outstanding
stock is:

100,000 shares of common stock

$4/share

100,000 shares of common stock and 20,000 shares of preferred with $2

dividend preference
Preferred gets paid first, so:
o $40,000 to preferred
o $360,000 balance goes to common shares, so each gets $3.60

100,000 shares of common and 20,000 shares of $2 preferred that is

participating
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Participating means paid again, so 20,000 gets paid first (preferred) and
again
o 20,000 times $2 = $40,000
o Leaves $360,000 divided by 120,000 shares = $3 each

100,000 shares of common and 20,000 shares of $2 preferred that is cumulative

(and no dividends paid in 3 prior years)
Cumulative means add them up cum dividends accrue year to year
o Corp owes them 3 years, plus this year when dividend declared
So 4 years worth of $2 preference
4 years times $2 = $8/share each
SO:
o 20,000 shares times $8 = $160,000 paid first (preferred)
o Then common - $2.40/share

Limitations on any distribution

Corps can make distributions even if lost $ last year, but cant if insolvent or distribution
would make it insolvent, defined as:
o Unable to meet debts as they are due (equity test), or
o Total assets are less than total liabilities (including preferential liquidation rights if
corporation dissolves today)
Directors personally liable for unlawful distributions made intentionally or in breach of care
o Director votes for distribution while withholding relevant info that would
demonstrate its unlawful
Shareholders are only liable if knew it was unlawful when they received it

FACT PATTERN 5 FUNDAMENTAL CORPORATE CHANGES

Characteristics of Fundamental Corporate Change
Unusual occurrences, so they require Board action AND notice to shareholders AND
Approval by a majority of shares actual cast on the issue
Generally, must notify PA Dept of State
Watch for possibility of dissenting shareholder right of appraisal (SHs right to force corp to
buy her shares @ FV)
o The SH has this if the corporation is merging, consolidating, transferring all assets,
or being acquired in a share exchange
NO right of appraisal if listed on a national exchange or has more than 2000 shareholders
(because SH can sell share on market and doesnt need a right of appraisal)
If right of appraisal, shareholder perfects it by:
Before SH vote, file corp written notice of objection and intent to demand payment
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Abstain or vote against proposed change, and

Within 30 days after notice that change was approved, make written demand to be bought
out

If they cannot agree of fair value, corp petitions court to determine fair value
Amendment of Articles
Board of director action (or petition by at least 10% of shares) and notice to shareholders

Shareholder approval at least majority of shares that voted (4000 entitled, 3000 attend,
2400 vote, need 1201)

If approved, file with PA Dept of State

There is no right of appraisal for dissenting shareholders

Mergers or Consolidations ***

Board of director action for both corps, AND notice to shareholders
Shareholders approval, majority of shares that vote
No SH approval required if an 80% or more owned subsidiary is merged into parent corp
short form merger
If approved, file articles of merger or consolidation with PA Dept of State
DISSENTING SHAREHOLDER RIGHT OF APPRAISAL exists for dissenting SH of both
companies
o In short-form merger, right exists only for dissenting shareholders of subsidiary
Successor liability surviving company succeeds to all rights and liabilities of constituent
companies
Transfer of All or Substantially All of Assets not in ordinary course of business or
share exchange (one corp acquires stock of another)
Fundamental corporate changes for the selling corporation only.
It is not a transfer of substantially all assets if the seller retains at least 25% of its assets,
and at least 25% of all revenue from continuing operations
Requires:
o Board of Director action (both corps), and
o Approval by transferring corps shareholders
12000 shares of S Corp vote on issue. At least 6001 majority must approve
sale
No vote is required from buyers shareholders only change for the
seller, not buyer
Dissenting shareholders have right of appraisal for the transferring corp only. (Not buyer,
again)
In share exchange, transferring corporation files articles of exchange with PA Dept of
State.
o No filing required for transfer of assets

*** Generally, buying corp not liable for liabilities of other selling corp unless deal provides
otherwise or unless company purchasing assets is merely a continuation of the selling
company, or if the transaction is fraudulent. (This is because selling corp still exists so can
still be sued by creditors)
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Dissolution
Voluntary board of directors, notice to shareholders, and approval by majority of shares
voting on issue
Involuntary court order
o *** Shareholder or director can petition because of fraud, illegal or
oppressive acts by director(s), waste of assets, or deadlock by directors
that harms company
Even if dissolution not warranted, court can appoint one or more custodians
to run corp
o Creditor can petition for dissolution because corp is insolvent and creditors has
unsatisfied judgment against corp, or corp admits debt in writing
Remains in existence, but only for winding up (liquidation) to
o Gather assets
o Convert to cash
o Pay creditors
o Distribute remaining to shareholders
After wind up, president and secretary execute verified articles of dissolution with PA Dept
State
FACT PATTERN 6 FEDERAL SECURITIES LAW
Securities are Investments
Debt investor lends capital to corp to be repaid
o Secured by corporate assets mortgage bond
o Unsecured debenture
Equity investor buys stock and has ownership interest in corp. Has various rights
Rule 10b-5
Federal law that prohibits fraud and misrepresentation (or nondisclosure) in connection with
purchase or sale of any security (debt or equity)
o Instrumentality of interstate commerce (phone, mail)
o

Types of transactions
Misrepresenting material info
Trading on material inside info
See more details in PAT outline, page 32
Tipping (passing along material inside info)
Materiality misrepresentation or omission must concern material fact

Possible plaintiffs very limited

SEC
Private action for damages by buyer or seller MUST have bought or sold to
have cause of action

Possible defendants any person

Company that issues misleading press release
Buyer or seller of securities who misrepresents material info
Buyer or seller who trades on inside info - insider trading
Tipper or Tippee
Tipper passes along material inside info in breach of duty, and she
benefited
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o Could be by making a gift or enhancing reputation, or other benefits

Tippeetrades on tip and knew or should have known that info was
improperly passed
Someone who overhears a conversation is not a tipper
If there is no tipper, there is no tippee

Scienter. D must have an intent to deceive, manipulate, defraud. Recklessness may

be enough

Reliance. Said to be separate element but is presumed in public misrepresentation

clases

Section 16B aimed at speculation by directors, officers, and 10% shareholders

Strict liability.
Federal law that provides for recovery by the corporation (so it could be a derivative
suit) of profits gained by certain insiders from buying and selling companys stock
o Bad for market confidence to have these insiders doing this stuff
When does 16b apply?
Reporting corporation that is (1) listed on national exchange or (2) at least 500 SH and
$10m in assets
Type of defendant:
o Director (either when bought or sold)
o Officer (either when bought or sold)
o SH who owned more than 10% (BOTH when bought or sold)
Type of Transaction buying and selling stock within single 6 month period (short-swing
trading)
Fraud is not required
What happens when 16b applies?
All profits from such short-swing trading are recoverable by corporation
o If within 6 months before or after sale, there was a purchase at lower price,
there is a profit
EX: D is director at A Corp, which is reporting corp. In 2006, she buys 700 shares of A
Corp stock for $10/share. In Jan 2009, she sells them for $6/share. In March 2009, she
buys 200 for $1/share.
o She owes corporation $1000 HOW??
Focus on the SALE
Sale was in January 2009 at $6/share
Ask these questions
Did she buy at less than $6 within 6 months before sale in Jan
2009?
o NO.
Did she buy at less than $6 within 6 months after sale in Jan 2009?
o Yes 200 shares in March at $1/share.
Multiply $5 profit times 200 shares
o Do 200 because largest number of shares she both bought
and sold within 6 months.
Sold 700, bought 200. 200 is largest common number
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