Académique Documents
Professionnel Documents
Culture Documents
A. Introduction
1. Corporations Generally
o
____________________________________________________________; and
Promote ____________________________________________________.
2. General Rule
o
3. Exception
o
o
o
CHAPTER 2:
A. Incorporation
1. Incorporators
o
o
2. Articles of Incorporation
o
o
o
Like a contract between the corporation and the shareholders - establishes their basic
rights.
Also like a contract between the state and the corporation
Must include:
If the corporation acts outside of its stated purpose, the acts will be held
unenforceable.
SHAREHOLDER
____________________________________________________
can sue to enjoin an
ultra vires action.
STATE
_________________________________
can initiate proceedings to enjoin such
actions.
SHARES
Authorized ______________________________________________.
Must state the maximum number of shares of each class of stock that the
corporation is authorized to issue
3. Timing of Incorporation
o
o
4. Bylaws
o
o
o
o
o
Issue: What if the corporation is not properly formed, but nevertheless enters into obligations
after it was supposedly formed?
De Facto Corporation:
o
Rule - Corporation will still be treated as a corporation, with limited liability, if the
organizers:
GOOD FAITH
Made a _____________________________________________________
effort to
comply with the incorporation process; and
ACTUAL KNOWLEDGE
Have no ______________________________________________________
of a defect
in the corporate status.
C. Veil Piercing
Exam Tip 1: Popular topic on the bar exam.
General Rule: Shareholders are NOT personally liable for the debts of a corporation, but only
liable for the amount invested into the corporation, except a court may "pierce the veil" of
FRAUD
limited liability to avoid ______________________________________________
or
UNFAIRNESS
___________________________________________________________________.
ALTER EGO
__________________________________________:
the investor or shareholder has failed
to observe any corporate formalities between the person and the corporation - treated the
company just like itself;
Example 1:
o
o
UNDER-CAPITALIZATION
____________________________________________________:
failure to maintain funds
sufficient to cover foreseeable liabilities; and
FRAUD
____________________________________________________:
the parties engaged in
fraud or fraud-like behavior.
Courts are more likely to pierce the veil in tort situations rather than contractual issues and
more likely in small, closely-held corporations.
CHAPTER 3:
3. Preferred Stock
Has preference over _______________________________________________ with respect to:
4. Classes of Stock
o
o
B. Issuance of Stock
Sale of stock from the corporation to the investing public
1. Four Concepts
a. ________________________________________________________ Shares
b. ________________________________________________________ Shares
Number of shares from the authorized pool that the directors have actually sold
c. _________________________________________________________ Shares
Shares that were once issued to shareholders and still remain in the possession of the
shareholders
NOT reacquired by corporation
d. __________________________________________________________ Shares
Stock previously issued to shareholders, but then reacquired by the corporation.
Note 3: Usually, only outstanding shares are voted.
Example 3:
shares of stock, and it has sold 400,000 shares to the public. Subsequently, the
corporation has reacquired 25,000 shares.
Authorized Shares: ____________________________________
Issued Shares: ________________________________________
Outstanding Shares: ___________________________________
A corporation may, but is not required to, issue stock at a par value.
If it does, it must sell the shares for at least the minimum par value amount.
Example 4:
20, 000
must it receive? At least $_____________________________________.
NOMINAL
If it is required, it will usually be set at a ______________________________
value.
3. Valuation of Consideration
o
o
Corporation can receive any valid consideration that the board of directors deems
adequate (e.g., labor, money, etc.).
Directors have discretion.
WATERED
4. _____________________________________________________
Stock
The corporation sets a par value amount and sells the stock for less than the stated amount.
Example 5:
SHAREHOLDERS
The _________________________________________________
who bought the below par
value stock (watered stock) are liable to the creditors of the corporation.
CHAPTER 4:
INVESTING IN THE CORPORATION (CONT'D) AND GETTING MONEY OUT OF THE
CORPORATION
A. Issuance of Stock (Cont'd)
1. Stock Subscriptions
o
o
Ask people to agree in advance to buy stock - before the corporation is formed.
Prior to incorporation - subscription agreements are irrevocable for
6 MONTHS
_____________________________________________.
2. Preemptive Rights
o
Right to acquire stock to maintain the percentage of ownership any time new shares are
issued
Example 6:
500 of the shares (25%). If the corporation wishes to make more money and
issue another 8,000 shares, preemptive rights allow you to buy a proportional
amount (2,000 additional shares) to maintain your percentage of ownership
(25%).
DIVIDEND
Board can declare a _________________________________________
(usually cash).
Board can buy back shares of the corporation.
INSOLVENT
If the corporation is ____________________________________________;
or
If, by issuing the dividend, the corporation would become insolvent.
Defense: A director will NOT be liable if he relied in good faith on financial statements.
3. Priority of Distribution
Example 7:
300,000
$_____________________________
to be divided among the 100,000 common
3
shares. Thus, each common share receives $_____________
dividend per share.
300,000
leaving $_________________________.
"Participating" means you collect as
preferred and then participate with the common shares. The common shares
and participating preferred shares are combined to equal 150,000 shares.
Third, the $300,000 is divided among those combined shares. Thus, the
2
common stock holders get $__________
per share, and the participating
2
preferred stock holders get $4 for the preferred dividend and $__________
per
to be divided among the common shares. Thus, each common share receives
1
$__________
per share.
CHAPTER 5:
A. In General
B. Meetings
1. Annual Meeting
Every corporation must hold an annual meeting to elect
BOARD OF DIRECTORS
_______________________________________________
and conduct other shareholder
business.
2. Special Meetings
o
3. Notice
o
o
o
o
Shareholders must be given notice of either type of meeting (annual or special) no fewer
10
60
than _____________________
days, but no more than _______________________
days,
before the meeting.
TIME
DATE
Must include the ___________________________,
_________________________,
and
PLACE
_______________________________________________
of the meeting.
PURPOSE
Special meeting - notice must include the __________________________________
of the
meeting.
Insufficient notice can allow a shareholder to challenge actions taken at the meeting.
4. Record Date
o
o
o
ONLY shareholders who actually own shares on the record date are entitled to vote.
Professor Birdthistle mistakenly says that the record date must be no more than 60 days before
the meeting, when the correct time period under the RMBCA is "not more than 70 days before
the meeting." RMBCA 7.07(b).
Example 8:
shareholder meeting. Three months ago, A sold her stock to B. One month ago,
B sold the stock to C. One week ago, C sold the stock to D, and D holds the stock
at the time of the meeting. Which shareholder is entitled to vote? Shareholder
B
____________
was the only shareholder who owned the shares on the record
date and is, therefore, the ONLY shareholder entitled to vote at the meeting.
5. Unanimous Consent
All shareholders may take any action without a meeting by unanimous
WRITTEN
________________________________________
consent.
6. Proxy
o
o
o
Allow large corporations to deal with meeting logistics - shareholders rarely attend the
meeting in person
Authorizes others to vote shares in accordance with the wishes of the shareholder
To be legally effective, a proxy must be:
In writing;
RECORD DATE
Signed by the shareholder as of _____________________________________________;
SECRETARY (AGENT)
Sent to the __________________________________________
of the corporation;
State that it authorizes another to vote the shareholders shares; and
11
Cannot be valid for more than ________________________,
unless otherwise specified.
C. Voting
1. Issues
Shareholders typically vote on:
o
o
Election of directors;
Mergers;
o
o
o
o
Share exchanges;
Amendments to the articles of incorporation;
Sales of all or substantially all of its assets; or
Dissolution.
2. Shareholder Approval
a. Quorum
the board has issued 7.5 million, and of those, 7.2 million are outstanding. 950
shareholders hold the outstanding shares. What constitutes a quorum?
3.6M + 1 SHARE (MAJORITY)
_____________________________________________
shares.
b. Necessary Vote
If a quorum is present, a shareholder vote is effective if the votes cast
IN FAVOR
________________________________
of the proposal exceed the votes cast
AGAINST
________________________________
the proposal.
Example 10: Earl Grey Corporation has 7.2 million outstanding shares. Four
million shares are present at the meeting, and only one million are voting on an
issue. How many shares must vote in favor for it to pass?
500k +1 (MAJORITY)
______________________________________
shares.
3. Cumulative Voting
o
o
o
o
Example 11: If you own 10,000 shares of a corporation and there are nine
director positions up for election, you will be able to cast
90K
__________________________
votes instead of 10,000 votes.
A shareholder may inspect the corporations records in person or through an agent as long as
PROPER PURPOSE
the shareholder states a ____________________________________________.
Must be a shareholder and have a proper purpose - related to the shareholder's financial
interest in the corporation.
CHAPTER 6:
A. Shareholder Litigation
1. Direct Lawsuits
o
o
Shareholder is suing in the shareholders own name for damages and damages go directly
to the shareholder.
A shareholder can sue directly if the shareholder has been harmed directly, including:
2. Derivative Lawsuits
o
o
o
o
a. Standing
b. Demand Requirement
The plaintiff shareholder is generally required to first demand that the board of
directors bring the lawsuit in the corporations name before the shareholder can bring
the suit.
FUTILITY
Demand _______________________________________________
- demand is not
required if it would be futile (e.g., directors have been named as the potential
defendants).
c. Recovery
A controlling shareholder may be liable for damages caused to other shareholders when
the controlling shareholder sells stock to an outsider if the stock was sold to an outsider
ELIMINATE
intent on ____________________________________________
or destroying the
company.
Classic red flags include: the looter had done this before or the looter had given some
indication that this is what they intended to do.
CHAPTER 7:
A. Board of Directors
1. In General
o
o
Appoint officers;
Oversee officers; and
Make high-level corporate decisions.
1
A corporation must have at least ________________________________________.
Directors must be natural persons.
Elected by shareholders
1 YEAR
Serve for a limited term - usually ________________________________________________
Staggered Board:
Classes of directors are elected at different times - e.g., nine directors: three elected
in year one, three elected in year two, and three elected in year three;
May only be removed for cause, only if the articles provide; and
Vacancy or size of the board has increased - new director(s) can be chosen by the
__________________________________________________ at a special meeting OR by the
____________________________________________________________________.
B. Board Meetings
C. Voting Requirements
1. Quorum
A majority of the total number of the directors, unless the
BY-LAWS
__________________________________________________
specify a higher or lower number.
2. Affirmative Vote
As long as a quorum is present, a resolution of the board will pass upon a majority vote of those
PRESENT DIRECTORS
___________________________________________________________.
Example 13: A corporation has 13 directors. To have a quorum, at least seven
directors must attend the meeting. If seven directors are present, how many
must vote in the affirmative to pass a resolution?
4
____________________________
directors.
To avoid potential liability for a board decision with which a director disagreed, the director
must dissent by:
o
o
o
E. Officers
CARE
LOYALTY
Duties: owe fiduciary duties of ________________________
and ________________________
F. Duty of Care
Directors and officers owe a fiduciary duty of care to the corporation.
BUSINESS JUDGMENT
1. __________________________________________________________
Rule
o
o
Directors and officers are protected from legal liability under the business judgment rule.
FRAUD
Rule: In the absence of ________________________________,
ILLEGALITY
___________________________________________________,
or
SELF-DEALING
___________________________________________________,
courts will not disturb goodfaith business decisions.
2. Standard of Care
o
o
Act with the care that a person in a like position would reasonably believe appropriate
under similar circumstances.
Special skills are expected to be used (i.e., accounting background, legal background).
3. Reliance Defense
A director or officer is entitled to rely on the expertise of officers and other employees, outside
experts, and ________________________________________________________ of the board.
G. Duty of Loyalty
1. General Rule
May not receive an unfair benefit to the detriment of the corporation without effective
________________________________________________ and ratification
2. _________________________________________________________ Transactions
A transaction in which the director, officer, or their relative receives a substantial benefit
directly from the corporation (e.g., a salary).
3. Corporate Opportunity Doctrine
Usurping or stealing a corporate opportunity
4. Insulation from Liability/Ratification
o
DIRECTORS
A majority of disinterested __________________________________________;
or
A majority of disinterested
SHAREHOLDERS
______________________________________________________.
Ratification doesn't always win the case - it might only shift the burden.
5. Fairness
If a director or officer can demonstrate that the transaction was fair, then they will win.
H. Indemnification
1. Definition
The practice of corporations paying for the costs of a directors or officers defense in litigation,
usually by purchasing insurance.
CHAPTER 8:
A. Required Approval
Merger: the combination of two or more corporations where one corporation survives and
ASSETS
assumes the ____________________________________
and the
LIABILITIES
______________________________________________ of the other corporation.
C. Dissolution
1. Definition
Existence of a corporation is extinguished either
VOLUNTARILY
_______________________________________________
by the shareholders and the directors
INVOLUNTARILY
or ______________________________________________ by disgruntled parties.
2. Involuntary Dissolution
o
o
D. Process
WRITTEN NOTICE
_________________________________________________
must be sent to the shareholders of
the special meeting; and
MAJORITY
A ________________________________________________
of the shareholders casting a vote
must vote in favor of the fundamental change.
If a shareholder does not wish to participate in a duly authorized merger, asset sale, share
exchange, or amendment of the articles, the shareholder is entitled to dissenters' or
appraisal rights.
Entitled to have their shares purchased from them by the corporation at a
FAIR VALUE (AS IF DECISION NOT TAKEN)
_________________________________________
determined by the court.
2. Procedural Requirements
To invoke dissenters rights:
WRITTEN NOTICE
The shareholder must send _________________________________________________
to the corporation prior to the vote of her intent to dissent;
ABSTAIN
At the meeting, the shareholder must __________________________________
or vote
NO
____________________ (dissent) at the meeting; and
The shareholder must make prompt
WRITTEN DEMAND
________________________________________________
for fair market value after
the action has been approved.
CHAPTER 9:
A. Close Corporations
1. Close corporation (or closely held corporation)
SH
Term used to describe a corporation with few _________________________________________
2. Characteristics
o
o
o
3. Voting Agreements
o
o
4. Preemptive Rights
o
B. S Corporation
An S Corp is really just a corporation for state corporate law purposes, but it gets special
treatment for tax purposes.
ONCE
Only taxed ___________________________________________________,
like a partnership
The LLC combines the limited liability of corporations with the tax treatment of a
partnership.
Generally no limitations on the number of shareholders, no residency requirements, and no
natural person requirements (more flexible than an S Corp).
2. Key Characteristics
o
o
o
An LLC files articles of organization and an operating agreement with the state.
The owners are called ________________________________________________, rather
than shareholders.
An LLC is presumed to be managed by ALL of its members.
3. Comparison to Corporations
o
o
CHAPTER 10:
A. Fiduciary Duties
1. Business Judgment Rule
In the absence of fraud, illegality, or self-dealing, a court will not disturb the good-faith
judgment of the directors or officers.
2. Duty of Care
o
o
o
Directors and officers must use the care a person in a like position would reasonably believe
appropriate under similar circumstances.
Did the officer or director have special skills? If so, she is obligated to use them.
An officer or director is entitled to rely on the expertise and the reports of:
3. Duty of Loyalty
o
o
o
o
Directors and officers cannot receive unfair benefits to the detriment of the corporation
unless they effectively disclose and obtain ratification of those benefits.
Self-dealing transaction: when the director or officer (or a relative) receives compensation
directly from the corporation.
Corporate opportunity: when the director or officer prevents money from coming into the
corporation.
Avoiding liability: (i) approval by the disinterested board members; (ii) approval by the
disinterested shareholders; or (iii) a court concludes the transaction was fair
B. Shareholder Voting
1. Annual Meetings
Every corporation is required to hold an annual meeting at which the shareholders elect
directors and conduct other shareholder business.
2. Special Meetings
A special meeting may be called to vote on fundamental corporate changes.
o
o
Anyone who attends the meeting or participates in the meeting waives the notice
requirement.
3. Record date
o
o
To determine which shareholders are eligible to vote, the directors fix a record date no
more than 70 days and no fewer than 10 days before the meeting.
Only the shareholders who actually hold the shares on that date are entitled to come to the
meeting, even if they subsequently sold their shares.
In writing;
Signed by the shareholder;
Sent to the secretary of the corporation;
An authorization by the shareholder to vote the shares; and
Valid for no more than 11 months, unless otherwise specified.
3. Liability
Directors who vote to authorize an unlawful dividend in violation of their fiduciary duties are
personally liable, jointly and severally, to the corporation in the amount in excess of the lawful
amount.
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