Corps 2 by vr1YSlE6

VIEWS: 5 PAGES: 100

									                                                      TABLE OF CONTENTS
I.     Generally ..................................................................................................................................................... 1
       A. KEY ATTRIBUTE OF CORPORATIONS........................................................................................................ 1
       B. ENTERPRISE ORGANIZATION................................................................................................................... 1

II.    Corporations under the U.S. Constitution. .................................................................................................. 2
       B. TWO COMPETING THEORIES OF THE NATURE OF CORPORATE EXISTENCE ................................................ 2
       C. 14TH AMENDMENT -- DUE PROCESS ...................................................................................................... 2
       D. 1ST AMENDMENT -- FREE SPEECH.......................................................................................................... 2

III.   Corporate and Organizational Form ........................................................................................................... 3
       A. GENERALLY ........................................................................................................................................... 3
       B. LIMITED LIABILITY ................................................................................................................................. 3
       C. MANAGEMENT STRUCTURE ................................................................................................................... 4
       D. CONTINUITY OF LIFE .............................................................................................................................. 4
       E. TRANSFERABILITY OF INTERESTS........................................................................................................... 5
       F. TAXABILITY AS AN ENTITY ..................................................................................................................... 5

IV.    Incorporation Process .................................................................................................................................. 6
           A. COUNSEL‟S ROLE .......................................................................................................................... 6
           B. FORMALITIES ................................................................................................................................ 7
           C. DEFECTIVE INCORPORATION ......................................................................................................... 8
           D. PRE-INCORPORATION TRANSACTIONS ........................................................................................... 9
           E. CHOICE OF STATE ......................................................................................................................... 9

V.     Capital Structure of the Corporation ......................................................................................................... 11
          A. SOURCES OF CORPORATE FINANCE ............................................................................................. 11
          B. EQUITY SECURITIES .................................................................................................................... 11
          C. Debt Financing ........................................................................................................................... 15

VI.    Dividends and Distributions ..................................................................................................................... 17
          A. DISTRIBUTIONS: .......................................................................................................................... 17
          B. DIVIDENDS .................................................................................................................................. 17
          C. LIMITATIONS ON DISTRIBUTIONS................................................................................................. 17
          D. WHEN MUST DIVIDENDS BE PAID? ............................................................................................... 21

VII.   Limited Liability -- Piercing The Corporate Veil. .................................................................................... 22
          A. THE GENERAL RULE, IS THE SHAREHOLDERS ARE NOT PERSONALLY
                LIABLE FOR THE DEBTS OF THE CORPORATION. ........................................................................... 22
          B. CHARACTER OF THE CORPORATION ............................................................................................ 22
          C. CHARACTER OF THE CREDITOR ................................................................................................... 22
          D. CHARACTER OF THE SHAREHOLDER ............................................................................................ 22
          E. CORPORATE FORMALITIES .......................................................................................................... 22
            F.       UNDERCAPITALIZATION & PURPOSEFUL INSOLVENCY ................................................................ 22
            G.       COMMINGLING OF ASSETS AND AFFAIRS..................................................................................... 23
            H.       ACTIVE PARTICIPATION............................................................................................................... 23
        VIII.        Operation of The Corporation -- Corporate Political Power...................................................... 24
            A.       AGENCY ...................................................................................................................................... 24
            B.       THE BOARD OF DIRECTORS -- THE CENTRAL
                     GOVERNING AUTHORITY............................................................................................................. 25
             C.      SHAREHOLDER ACTION ............................................................................................................... 26

IX.     Close Corporations -- Alteration of Corporate Norms.............................................................................. 32
           A. GENERALLY ................................................................................................................................ 32
           B. VOTING CONTROL DEVISES -- MODIFICATION
                OF MAJORITY RULE..................................................................................................................... 32
           C. RESTRICTIONS ON DISCRETION OF THE BOARD OF DIRECTORS .................................................... 36
           D. RESTRICTION ON TRANSFER OF SHARES ...................................................................................... 36
           E. OPPRESSION OF MINORITY SHAREHOLDERS,
                DEADLOCK, DISSOLUTION........................................................................................................... 39

X.      Regulation of Securities ............................................................................................................................ 41
           A. FEDERAL JURISDICTION............................................................................................................... 41
           B. 1993 ACT REGISTRATION PROCESS ............................................................................................. 42
           C. DEFINITION OF SECURITY ............................................................................................................ 44
           D. EXEMPTIONS FROM `33 ACT IPO REGISTRATION &
                 DISCLOSURE REQUIREMENTS ...................................................................................................... 44
           E. STATE BLUE SKY LAWS .............................................................................................................. 46

XI.     The Publicly Held Corporation ................................................................................................................. 47
           A. VOTING BY SHAREHOLDERS........................................................................................................ 47
           B. FEDERAL PROXY REGULATION UNDER THE `34 ACT. .................................................................. 47
           C. SHAREHOLDER PROPOSALS -- RULE 14a ..................................................................................... 47
           D. INSTITUTIONAL INVESTORS ......................................................................................................... 48
           E. OUTSIDE DIRECTORS ................................................................................................................... 48

XII.    Fiduciary Duties ........................................................................................................................................ 50
           A. DUTY OF CARE............................................................................................................................ 50
           B. DUTY TO MAXIMIZE PROFITS ..................................................................................................... 52
           C. DUTY OF LOYALTY ..................................................................................................................... 53

XIII.   Shareholders Derivative Suits ................................................................................................................... 62
           A. NATURE OF THE SUIT .................................................................................................................. 62
           B. SECURITY FOR EXPENSE REQUIREMENTS .................................................................................... 63
           C. JURISDICTION & VENUE............................................................................................................... 64
           D. DEMAND OF DIRECTORS AND SHAREHOLDERS ............................................................................ 64
           E. TERMINATION BY SPECIAL LITIGATION COMMITTEE..................................................................... 66
           F. ROLE OF COUNSEL ...................................................................................................................... 68
               G.       SETTLEMENT ............................................................................................................................... 69
               H.       INDEMNIFICATION AND INSURANCE ............................................................................................ 70

XIV.      Insider Trading .......................................................................................................................................... 73
              A. GENERALLY ................................................................................................................................ 73
              B. COMMON LAW LIABILITY ........................................................................................................... 73
              C. LIABILITY UNDER §16(B) OF THE SECURITIES EXCHANGE ACT ................................................... 74
              D. LIABILITY UNDER RULE 10b ........................................................................................................ 76
              E. CORPORATION‟S DUTY TO DISCLOSE UNDER 10B ........................................................................ 79

XV.       Corporate Combinations ........................................................................................................................... 81
             A. GENERALLY ................................................................................................................................ 81
             B. APPROVAL PROCEDURES AND DISSENTER‟S RIGHTS ................................................................... 81
             C. CASH-OUT MERGERS -- GOING PRIVATE .................................................................................... 83
             D. DISCLOSURE UNDER FEDERAL LAW ............................................................................................ 85

XVI.      Contests for Corporate Control ................................................................................................................. 87
             A. REGULATION OF CONTROL CONTESTS -- HOSTILE TAKEOVERS ................................................... 87
             B. PROTECTING CONTROL ............................................................................................................... 88
             C. CHANGES IN CONTROL ................................................................................................................ 90

XVII. FINANCIAL STATEMENTS .................................................................................................................. 91
         A. ASSETS........................................................................................................................................ 91
         B. LIABILITIES ................................................................................................................................. 93
         C. EQUITY ....................................................................................................................................... 94
         D. ANALYSIS OF A BALANCE SHEET (TESTS) ................................................................................... 94
         E. Income Statements ..................................................................................................................... 96
         F. Rights of Debt Holders vs. Preferred Stock Holders ................................................................. 96
Corporations Outline
                                     Corporations Outline
I   Generally
    A0 KEY ATTRIBUTE OF CORPORATIONS
       1 Corporation is an artificial creation which is largely treated as an individual.
       2 The law of corporation deals primarily with relations within the entity.
    B0 ENTERPRISE ORGANIZATION
       1 Sole Proprietorship
          a0 One person owns and operates entire concern.
          b0 Where proprietor hires another:
              (1) Agency relationship comes into existence.
                   (a) Agent is not free to act on his own behalf.
                   (b) Agent has a fiduciary duty to its principal or the concerns owner.
                   (c) Duty to third parties:
                        (i) Respondeat superior
                            (a) vicarious liability for principal for a negligent act of agent
                   (d) Agents ability to contract
                        (i) Authority
                            (a) Actual
                                 (b) express
                                 (c) implied
                            (d) Apparent
       2 Partnership
          a0 A partnership is a legal entity for some purposes and an association for others.
          b0 A quasi-agency relation exists as between partners -- all partners are personally liable for the
              debts of the partnership and all may participate equally in the business.
              (1) Limited partnership
                   (a) Cannot participate in the business but are relieved of any liability.
       3 Corporation
          a0 Majority Rule
          b0 Centralized Management
          c0 Free Transferability of Interests
          d0 Perpetual life.




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                                       Corporations Outline

II   Corporations under the U.S. Constitution.
     A0 Issue: Where do corporations fit in vis-à-vis Constitutional limitations upon state action?
     B0 TWO COMPETING THEORIES OF THE NATURE OF CORPORATE EXISTENCE
        1 Concession:
            a0 Corporations are concessions granted by the state to individuals to enable those parties to
               exercise and further state interests and functions.
        2 Inherence:
            a0 Corporate rights are the rights of the people which compose it
            b0 Corporate charter as a contract between the state and the corporate parties. (Predominant
               view)
     C0 14TH AMENDMENT -- DUE PROCESS
        1 Corporations are persons under the United States Constitution. Santa Clara
            a0 Corporations do have some measure of Constitutional protection but that protection is not the
               same as for people -- people.
        2 Corporations have right to
            a0 Equal protection under the law;
            b0 Freedom from depravation of Life, Liberty or Property without Due Process;
            c0 Freedom from Unreasonable Searches and Seizures.
               (1) Why?
                   (a) Look behind the corporation: The investors will be harmed by taking etc.
        3 Corporations do not have a constitutional privilege against self-incrimination.
            a0 No individual to be harmed?
     D0 1ST AMENDMENT -- FREE SPEECH
        1 The rules surrounding corporate speech are very uncertain.
            a0 Commercial Speech
               (1)
            b0 Non Commercial Speech
               (1) State cannot forbid a corporation from expressing its views on a state referendum -- even
                   if such referendum does not materially affect the corporation‟s business. Bellotti
               (2) Non-profit corporation formed for express purpose of promoting political ideas may not
                   be bared from independent campaign expenditures.
               (3) State was allowed to bar a non-profit corporation from running an advertisement in
                   support of a candidate. Austin
               (4) Contribution vs. Expenditure -- expenditure is expressive and receives greater protection.




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                                      Corporations Outline


III Corporate and Organizational Form


                               Corporation   Partnership   Limited       Limited Liability   Sub. Ch. S
                                                           Partnership   Co.                 Corporation
        Limited Liability      Yes           No            Yes           Yes                 Yes


        Centralized            Yes           No            Yes           Choice              Yes
        Management
        Continuity Of Life     Yes           No            Yes           Choice              Yes


        Free Transferability   Yes           No            Yes           Choice              Yes, but tax may
        Of Interests                                                                         req. < 35 s/h &
                                                                                             one class of Stock
        Taxable As An Entity   Yes           No            No            No if no more       No, if < 35 s/h and
                                                                         than two of above   one class of Stock


   A0 GENERALLY
      1 Once you move beyond the sole proprietorship you are faced with a choice of form.
      2 In their extreme form the partnership and the corporation are diametrically opposed. However, via
          contract and other means the line between the two forms becomes blurred -- more instructive to
          view this as more of a continuum.
      3 Partnership Defined:
          a0 An association of two or more persons to carry on as co-owners a business for profit.
   B0 LIMITED LIABILITY
      1 Corporation
          a0 Corporation is a separate legal entity which is responsible for its liabilities.
          b0 Shareholder liability is limited to his investment
              (1) Exceptions to limited liability
                   (a) Improper formation
                   (b) Unpaid capital contributions
                   (c) Veil Pierced
                   (d) Voluntary Personal Guarantees
      2 Subchapter S Corporation
          a0 Shareholders of the company are usually not personally liable beyond the amount of their
              investment -- creditors may only look to the corporation
      3 Partnership
          a0 General Partners are subject to unlimited liability for the obligations of the partnership. Each
              partner is an agent of the other
              (1) Joint and Several for Torts
              (2) Joint for Contract
          b0 Each General partner may bind the partnership, and hence other partners, provided binding act
              is within regular course of business



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    4 Limited Partnership
      a0 General Partner(s) subject to same liability as in partnership
      b0 Limited Partners have same limited liability as a corporate shareholder provided Limited
          Partner does not participate in the management of the company.
          (1) Participation in management:
               (a) Advising General partner and voting on critical matters are not participation.
               (b) §303 RUPA
                    (i) p. 691 supp.
      c0 General Partner may be a corporation.
   5 Limited Liability Company
      a0 Members and managers have limited liability, and may participate in management without
          restriction. Limited liability is subject to same exceptions as corporations
C0 MANAGEMENT STRUCTURE
   1 Corporation
      a0 Shareholders elect Board of Directors who oversee operation. Operation may be conducted by
          Officers or a CEO.
      b0 Directors elected by plurality of vote and voting is by share absent provisions to the contrary.
   2 Subchapter S Corporation
      a0 Same as Corp.
   3 Partnership
      a0 Management functions vested in all partners. Each partner has an equal voice, regardless of
          capital contribution. Majority vote of partners, except for major changes which require
          unanimous consent
   4 Limited Partnership
      a0 At least one general partner and unlimited number of limited partners.
      b0 May have a centralized management structure.
      c0 Limited partners loose protection of limited liability if they participate in business, hence
          general partners are responsible for managing the company.
   5 Limited Liability Company
      a0 May be member managed or manager managed (centralized), but there are tax considerations.
           Member‟s control dictated by proportion of capital contribution.
D0 CONTINUITY OF LIFE
   1 Corporation
      a0 Indefinite Life, absent provision to contrary or action to terminate it.
   2 S Corporation
      a0 Same as Corporation
   3 Partnership
      a0 Termination upon death, incapacity, bankruptcy, or withdrawal of partner.
          (1) Partnership agreement may provide for continued business absent a partner.
      b0 Partnership may be terminated with considerable ease -- even if limits are imposed the
          defecting partner may be liable for breach but the partnership will still be dissolved.
   4 Limited Partnership
      a0 Termination upon death, incapacity, bankruptcy, or withdrawal of General partner -- limited
          partner‟s problems do not effect the partnership.
      b0 If general partner is a corporation then there can be de facto continuity of life.
   5 Limited Liability Company

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      a0 LLC dissolves upon:
          (1) after statutory fixed period
          (2) unanimous agreement of members
          (3) withdrawal of a member.
               (a) Provisions may be modified in operating agreement, but remaining tax
                    considerations.
E0 TRANSFERABILITY OF INTERESTS
   1 Corporation
      a0 Corporate Stock is freely transferable without consent of other shareholders, absent provision
          to the contrary.
   2 S Corporation
      a0 To avoid being taxed as an entity there must be less than 35 s/h and 1 class of stock, so
          restrictions may be necessary.
   3 Partnership
      a0 Admission of a new partner requires unanimous consent of other partners.
      b0 Partner may freely assign right to receive profits, etc. from the partnership, but not a voice in
          management.
   4 Limited Partnership
      a0 Limited partners may freely assign their interests, but the assignee may only exercise the
          rights of a limited partner with the consent of all remaining partners.
   5 Limited Liability Company
      a0 Members may freely assign their interests, but the assignee may only exercise the rights of a
          Member with the consent of all remaining members. There are also tax considerations
F0 TAXABILITY AS AN ENTITY
   1 Corporation
      a0 Corporations are taxable as separate entities -- double taxation.
   2 S Corporation
      a0 Not taxable as an entity so long as there are less than 35 shareholders and only one class of
          stock. Do this and you get flow-though taxation.
   3 Partnership
      a0 Not separate entity for tax purposes -- flow through taxation.
      b0 Losses are offset, Profits taxed once.
   4 Limited Partnership
      a0 Not taxable as an entity, therefore flow through taxation applies.
      b0 Losses are offset, Profits taxed once.
   5 Limited Liability Company
      a0 So long as the company does not have more than two corporate characteristics:
          (1) Not taxable as an entity, therefore flow through taxation applies




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                                                Corporations Outline

     4.      Incorporation Process
             A. COUNSEL‟S ROLE
                  1. Conflict of Interest
                        1.   Rule
                             (1) Attorney not to represent client if such representation will be directly adverse to
                                   another client, unless:
                                   (1) Attorney reasonably believes representation will not adversely affect the
                                         relationship with the other client; and
                                   (2) Each client consents after consultation.
                             (2) Attorney not to represent client if such representation may be limited by attorneys
                                   responsibilities to another client or a third person, or by the attorneys own interest,
                                   unless:
                                   (1) Attorney reasonably believes representation will not be adversely affected; and
                                   (2) Each client consents after consultation.
                             (3) A lawyer may not represent multiple parties to a negotiation whose interests are
                                   fundamentally antagonistic, but common representation is permissible where clients
                                   are generally aligned in interest even though there is some difference in interest
                                   among them,
                        2.   Factors for determining potential for adverse effect on representation:
                             (1) Duration and intimacy of lawyer‟s relationship w/ client(s)
                             (2) Functions being performed by lawyer
                             (3) likelihood of actual conflict
                             (4) likely prejudice to client should such conflict arise.
                        3.   Multiple parties forming a corporation
                             (1) Adverse Interests?
                                   (1) Possible since corporate structure may be manipulated.
                             (2) Economic Concern
                                   (1) $$
                                   (2) Multiple Attorneys representing parties as cause of litigation and obstacle to
                                         business enterprise.
                                   (3) In a small deal there is no reason to get other lawyers involved -- but you have
                                         to be careful.
                  2. Confidentiality of Information
                        1.   Lawyer shall not reveal information relating to representation of a client absent consent
                             after consultation, except disclosures impliedly authorized to carry out representation.
                        2.   Lawyer may reveal information to extent lawyer reasonably believes necessary:
                             (1) to prevent client from committing criminal act which lawyer believes likely to result
                                   in imminent death or substantial bodily harm.
                             (2) To litigate as against client, or the world.
                        3.   “Hold-Out”
                             (1) Where one of multiple clients says “Hey, I do not want to tell the others, but here is
                                   what I am planning....” This will create a conflict.

                     3.      Organization as Client

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                             1.  A lawyer employed/retained by an organization represents the organization.
                             2.  Lawyer shall explain identity of client to organization‟s directors, officers, employees,
                                 shareholders, etc., when the organizations interest are adverse to the constituent with
                                 whom the lawyer is dealing.
                             3.  Lawyer may represent constituent within rule of multiple representation above. Consent
                                 may be obtained via official other than one sought to be represented.
                     4.      Conflicts
                             1.  Where there is a known conflict or an attempted hold out, the attorney must evaluate
                                 whether attorney can continue.
                             2.  When problems later arise, whom between corporation and the CEO do you represent?
                                 (1) Corporation, they pay....
             2.      FORMALITIES
                     1. Articles of Incorporation
                         1.   Filed with the secretary of state in most states (also with county of PPB in Delaware)
                         2.   Incorporation under the MBCA § 2.02
                              (1) Articles must contain:
                                    (1) Corporate name §4.01
                                          1) Must contain word „corporation‟ or „incorporated‟ or words indicating
                                                 its a corporation -- not misleading.
                                          2) Distinguishable on the records.
                                          3) Name different from all corporations registered or reserved.
                                          4) May not imply corp. is organized for illegal purpose.
                                          5) If Corporate name is available it may be reserved for 120 days -- non-
                                                 renewable §4.02.
                                          6) If corporation intends to expand to other states, the may wish to register
                                                 their name in other states under §4.03 so long as name to be registered is
                                                 distinguishable on the records.
                                    (2) Number of Shares the corporation is authorized to issue
                                          1) Key regarding capital structure, par value and possible franchise tax
                                                 implications.
                                    (3) Street address of corporation‟s initial registered office and the name of the
                                          initial registered agent at that office
                                          1) Since the corporation is an artificial entity, you have to know whom to
                                                 serve in order to sue it.
                                    (4) Name and address of each incorporator
                                          1) Some guy who signs the papers, (very short half-life) calls the
                                                 organizational meeting and turns power over to BOD.
                              (2) Articles may contain
                                    (1) Names & addresses of initial directors
                                          1) Any provision not inconsistent with the law concerning:
                                                 1) Management
                                                 2) Par value
                                                 3) Imposition of personal liability
                                                 4) Purposes and Powers of corporation, BOD, or shareholders

                                        (2)   Purpose: §3.01

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                                           1)     Corporation is incorporated for any lawful purpose unless more narrowly
                                                  defined.
                                      (3) Powers: §3.02
                                            1) Perpetual duration and the same powers of an individual including a
                                                  non-exclusive list of 15 specifics. (pgs. S20-21)
                          3.    Incorporation in Delaware
                                (1) Required to state the corporation‟s purpose.
                                      (1) But: it is sufficient to state that the purpose is to engage in any lawful
                                            business.
                                (2) Copy of articles of incorporation must be filed with recorder of country in which
                                      corp. has its registered office.
                     2. Organizational Meeting
                          1.    First meeting of corporation where by-laws are adopted.
                                (1) By-Laws contain
                                      (1) Seal, Designation of Offices, Appointment of Agent for Service.
                                (2) Shareholders:
                                      (1) Meetings and rules of order
                                      (2) Voting procedures.
                                (3) Board of directors
                                      (1) Powers
                                      (2) Number, tenure and Qualifications
                          2.    Regular meetings, etc.
                                (1) Officers
                                      (1) #, Election, removal, etc.
                                (2) Contracts, Loans, Checks, Deposits
                                (3) Stock & Dividends
                                (4) Since a corporation acts through the resolutions of the BOD the resolutions drafted
                                      must be clear.
                     3. Ultra Vires Doctrine
                          1.    Dead Issue
             3.      Defective incorporation
                     1. Common Law
                          1.    De Facto Corporation
                                (1) Confers limited liability on officer of defectively incorporated assoc.
                                (2) Requires elements:
                                      (1) Existence of law authorizing incorporation
                                      (2) good faith effort to incorporate under the law
                                      (3) use or exercise of corporate powers
                                (3) Old doctrine used when incorporation was very complex.
                          2.    Corporation by Estoppel
                                (1) Estoppel to deny corporate existence
                                (2) Employed where the person seeking to hold the officer personally liable has
                                      contracted or otherwise dealt with association in manner as to recognize and admit
                                      its existence as corporate body.
                                (3) Question becomes “With whom did this party believe they were conducting
                                      business?”

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                     2.    RMBCA §2.04
                           1.   All persons purporting to act as or on behalf of a corporation, knowing there was no
                                incorporation under this act, are jointly and severally liable for all liabilities created while
                                so acting.
                           2.   If steps have been taken to bring the corp. Into existence liability will not be imposed on
                                those who did not know the steps to incorporate were not completed.
                           3.   Estoppel is not foreclosed in situation where 3rd Party urges execution of contract in
                                corporate name knowing corp. does not exist
                                (1) Examples:
                                      (1) Honest, reasonable but erroneous belief in corp. Exist.
                                            1) No liability
                                      (2) Articles mailed and delayed or returned for technicality
                                            1) No liability
                                      (3) 3rd Party urges execution of contract in corporate name knowing corp. does
                                            not exist.
                                            1) No liability
                                      (4) “Do not start business until you incorporate” and promoter does so any way.
                                            1) No liability
                                      (5)  contracts in corporate name knowing no corp exists for one reason or
                                            another.
                                            1) Liability.
             4.      Pre-Incorporation transactions
                     1. Promoter contracts on behalf of corporation which does not yet exist.
                           1.   General Rule:
                                (1) Promoter makes a contract for the benefit of a contemplated but unorganized
                                      corporation, he is personally liable on it in the absence of an agreement to the
                                      contrary.
                                (2) Express agreement to contrary is best but implied agreement may be found by using
                                      following factors:
                                      (1) form of signature
                                      (2) action of seller
                                      (3) partial performance by promoter?
                                (3) Novation, act to discharge promoter.
                                      (1) A corporation may, once it exists, adopt and become liable on a contract
                                            executed before its formation.
                           2.   Four possible conceptual bases for result, each with problems:
                                (1) Ratification
                                      (1) ratify an act which arose before its existence?
                                (2) Adoption:
                                (3) Acceptance of continuing offer:
                                (4) Novation:
                                      (1) Probably best thought of as a sui generis.
             5.      Choice of State
                     1. Depends on
                           1.   Scope of Business
                                (1) If you‟re going to do business only in one state then that‟s the state to incorporate in

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                                       absent some other consideration.
                                       (1) Why? Tax, registration fees, etc.
                             2.   Law
                                  (1) Home state law may be unpalatable.
                             3.   California‟s §2115 -- „Pseudo--Foreign‟
                                  (1) A foreign corporation with:
                                       (1) Property, Payroll and Sales in excess of 50% in CA; and
                                       (2) CA residents hold more than 50% of outstanding voting securities.
                                  (2) is subject to several specific provisions of California law, notably provisions on
                                       cumulative voting.
                                  (3) Publicly held corporations (NYSE, NASDAQ) are not subject to §2115.
                                  (4) Constitutional Issue re: internal affairs doctrine -- due process, full faith and credit,
                                       etc.




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     5.      Capital Structure of the Corporation
             1.   Sources of Corporate Finance:
                  1. Equity  all securities which represent an ownership interest
                  2. Debt  that which must be repaid
                  3. Earnings
             2.   Equity Securities
                  1. Creation
                        1.    Articles must prescribe (§ 6.01 & 6.02 RMBCA):
                              (1) Number of shares authorized for each class (2.02)
                              (2) One or more classes of stock with unlimited voting rights; and
                              (3) One or more classes of shares that together are entitled to receive the net assets on
                                    dissolution.
                              (4) If more than one class of stock is prescribed then the articles must prescribe:
                                    (1) a distinguishing designation; and
                                    (2) preferences
                                    (3) limitations; and
                                    (4) relative rights of that class.
                              (5) All shares within a single class must be homogeneous regarding above.
                        2.    Authorized — Issued — Outstanding (RMBCA §6.03)
                              (1) Authorized: articles empower BOD to issue stock.
                              (2) Issued: sold to s/h.
                              (3) Outstanding: held by s/h.
                              (4) treasury stock  Stock Issued in accord with w/ Articles of Incorporation is validly
                                    issued, stock issued but no longer outstanding is commonly known as treasury
                                    stock. (Cf. RMBCA §6.31 eliminates term.).
                  2. Basic Features of Equity Securities:
                        1.    Dividends, right to
                              (1) Dividends are periodic payments to equity holders on apportionment of earnings.
                              (2) Dividends are paid on declaration of, and at the discretion of, the BOD.
                        2.    Dissolution/Liquidation Rights
                              (1) Right to Distribution of residual assets of corporation on dissolution.
                        3.    Voting Rights
                              (1) Right to vote on certain matters
                        4.    Conversion Rights
                              (1) Right to convert stock into another security of the corporation
                              (2) Option may be conditioned on certain events...
                        5.    Redemption Rights
                              (1) Right to force redemption by other s/h or repurchase by corporation.
                                    (1) Right may be made contingent on events
                              (2) Price of redemption may be specified.




                             6.   Preemptive Rights:

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                                  (1)Dilution
                                  (2)Absolute number of shares is irrelevant to control of corporation, the key is
                                     percentage of total number of shares.
                                     (1) Therefore: shareholders percentage of control could be eroded.
                                     (2) Extra authorized, but unissued shares can be issued by the BOD alone.
                                (3) rmbca 6.21(a)
                                     (1) Power to issue may be reserved to the s/h but that is still little help to the close
                                           corporation
                                (4) Preemptive Rights:
                                     (1) If a company issues additional shares they must first be offered to existing
                                           shareholders pro rata.
                                     (2) Preemptive right allow s/h to acquire stock when corporation issues new stock
                                           so new stock does not dilute s/h proportional interest (voting & ownership) in
                                           corporate stock issued & outstanding.
                                     (3) Requirements for Preemptive rights have largely been eliminated.
                                (5) New York § 622
                                     (1) Opt-out  Shareholders have preemptive rights but corporation may.
                                (6) RMBCA §6.30
                                     (1) Opt-in  Shareholder‟s do not have preemptive right except to extent articles
                                           of incorporation so provide.
                                (7) Del.
                                     (1) Does not explicitly address preemptive rights but corp. may issue rights to
                                           purchase (§157) which could include preemptive rights and provision
                                           requiring preemptive rights could be put in AIC (§102(b)(1)).
                                (8) Even if Preemptive rights are provided for there are exceptions (RMBCA §
                                     6.30(b)(3)), e.g.,
                                     (1) There are no preemptive rights with respect to:
                                           1) shares issued as compensation.
                                           2) shares issued as satisfaction for conversion or option.
                                           3) AIC authorized shares issued within 6 months of incorporation.
                                           4) Shares sold otherwise than for money (e.g., acquire another business).
                                (9) Preemptive rights alone often insufficient to protect minority shareholder‟s interest,
                                     e.g., where s/h does not have cash to purchase new stock if offered.
                                (10) Avoiding Preemptive rights — Combating Dilution
                                     (1) Have no Authorized but unissued stock
                                     (2) Super-majority or Unanimity requirements for amendments of AIC (often in
                                           combination with above)
                             7. Other rights
                                (1) Limits on Transferability, right to name directors, etc.
                     3.      Common Stock & Preferred Stock
                             1. Common Stock
                                (1) Has right to receive:
                                     (1) Residual interest in corporation on liquidation.
                                     (2) Dividends (when declared, at BOD discretion)

                                  (2)   Has Voting Rights

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                                        (1)   Common Stock may be divided onto classes, e.g., with special voting rights or
                                              dividends
                                        (2) BOD owes a fiduciary duty to c/s alone, other classes are protected in other
                                              ways.
                             2.    Preferred Stock
                                   (1) Hybrid between debt and common stock.
                                   (2) Earns fixed dividends & has fixed liquidation rights
                                   (3) Priority over common stock as to dividends and liquidation, but is still junior to
                                        creditors and debt holders.
                                   (4) Dividends also distributed to preferred stock at discretion of BOD.
                                   (5) Preference
                                        (1) Preferred stock is a hybrid between debt and equity — there is no right to
                                              repayment, rather a preference in order of payment on liquidation.
                     4.      Cumulative And Non-Cumulative Stock
                             1.    Cumulative:
                                   (1) BOD may decide not to pay dividends but corporation assumes continuing,
                                        accumulating obligation to pay unpaid dividends before it pays any other dividend
                                        in the future.
                             2.    Non-Cumulative:
                                   (1) Dividends are lost for year not paid.
                                   (2) Participation Rights
                                   (3) May have Right to participate in any dividends declared for common stock.
                             3.    Voting Rights
                                   (1) Generally, preferred stock does not have any voting rights, but its possible.
                                   (2) Sometimes, preferred stock has voting rights conferred by statute as to certain
                                        fundamental issues
                                   (3) Sometimes voting right is triggered on non-payment of dividends.
                             4.    Conversion Rights
                                   (1) Sometimes preferred stock is convertible to another security, on similar scheme as
                                        debenture or bond conversion
                             5.    Redemption Right
                                   (1) Preferred stock is usually redeemable by the company.
                                   (2) Call — corporation holds redemption right
                                   (3) Put — s/h holds redemption right
                                   (4) Often a „sinking fund‟ will be established to fund a s/h put.
                                   (5) Blank Check Preferred Stock [?]
                     5.      Issuing Equity Securities
                             1.    Amount of consideration -- Par vs. No-Par
                                   (1) Par Value is artificial value attached to stock and specified in AIC representing
                                        amount to be paid before stock is fully paid and nonassessable. (No relation to
                                        market value and, today, is usually set very low.)
                                        (1) Purpose of Par
                                              1) To Prevent insiders from issuing stock to themselves at price below what
                                                    outsider paid by setting floor value, i.e., called par value.

                                  (2)   Equity cushion provided by placing aggregate par value of stock [stated capital] out

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                                       of reach of shareholders.
                                       (1) Watered Stock
                                             1) Shares of stock issued for property which has overstated value.
                                             2) e.g., Promoters would buy an asset for $5k, transfer it to the corporation
                                                   for 100 shares of $100 par value stock and the company‟s balance sheet
                                                   would reflect assets of 10k.
                                             3) Where watered stock liability is found the s/h can be liable for ...
                                  (3) No-Par vs. Low-Par
                                       (1) Stock may be issued without a par value (see e.g., RMBCA §2.02(b)(2)(iv)).
                                       (2) Low par is also universally accepted.
                                       (3) No par valuation eliminates watered stock liability, but may effect limitations
                                             on distributions.
                                       (4) No Par
                                             1) Where stock is issued without par value a s/h is still liable to the
                                                   corporation (or creditor on liquidation) to the extent they have not paid
                                                   the consideration due for which the shares were authorized to be issued.
                             2.   Amount Of Consideration -- Rules
                                  (1) Generally, modern statutes have made BOD determination of valuation conclusive in
                                       absence of fraud.
                                       (1) Delaware §154
                                             1) Shares with par value shall be issued for consideration having value not
                                                   less than par value.
                                             2) Shares without par value shall be issued for such consideration as the
                                                   BOD, or S/H if AIC so provides, determines.
                                       (2) California §409
                                             1) In the absence of fraud in the transaction, the judgment o the directors as
                                                   to the value of the consideration is conclusive.
                                       (3) rmbca § 6.21
                                             1) Consideration must be determined to be adequate by the BOD and that
                                                   determination is conclusive as to whether shares are fully paid and
                                                   nonassessable.
                                             2) Does not address fraud...[??]
                             3.   Quality of Consideration
                                  (1) To be fully paid and non-assessable stock must be issued for proper kind of
                                       consideration.
                                       (1) Delaware §152
                                             1) Stock is fully paid and non-assessable if:
                                                   1) Entire amount in cash , services rendered, personal or real property,
                                                         leases of property or combination thereof is received; or
                                                   2) Not less than capital amount of price is paid and a binding
                                                         obligation for the remainder has been received by the corp.
                                             2) Key: Note alone is usually not proper consideration, nor are contracts
                                                   for future services.


                                       (2)   California §409

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                                           1) No par value, but consideration must consist of cash, etc..
                                           2) Consideration may not be in form of promissory note or future services.
                                     (3) rmbca 6.21
                                           1) Shares may be issued for any type of consideration, tangible, intangible,
                                                 including: cash , services rendered, personal or real property, leases of
                                                 property, promissory note and services to be performed.
                                           2) Consequences of Issuing stock for ineligible consideration
                                                 1) s/h may be assessed for short fall -- same as liability for watered
                                                      stock; or
                                                 2) Stock treated as voidable.
                     6. Warrants (options)
                          1.   Company may issue right to buy stock as opposed to issuing stock itself, i.e., a right to
                               purchase X stock at X price.
                          2.   May be used is place of conversion provisions
                          3.   Often used as compensation.
             3.      Debt Financing
                     1. Generally:
                          1.   Terminology
                               (1) Short Term Debt: Loans and Notes
                               (2) Long term Debt: Bonds, Debentures
                                     (1) Often freely transferable and more permanent.
                               (3) Bonds — secured by corp. Assets
                               (4) Debentures — unsecured
                                     (1) but often use of “bonds” refers to debentures too
                          2.   Creation:
                               (1) debt is created by a contract or indenture, note etc., but not in the articles.
                     2. Debt is a promise to pay, usually conferring a right to:
                          1.   Priority Repayment (over equity); and
                          2.   Receive Interest Income.
                     3. Debt usually does not have, but may include, a right to:
                          1.   Participation,
                          2.   Vote
                          3.   Conversion,
                               (1) Though debt often has provision allowing conversion to common stock.
                          4.   Redemption.
                     4. Leverage
                          1.   Generally:
                               (1) If an individual‟s entire investment is in common stock then any increase in the
                                     company‟s assets will equal the increase in value of investment that increase is the
                                     rate of return.
                               (2) A corporation will find it profitable to finance business activity with borrowed
                                     money whenever it can earn more income than it will pay in interest costs.
                                     (1) Whatever is earned in excess of interest costs will increase corporate income
                                           and benefit the shareholders.

                     5.      Upside: profits can be made very fast so long as income exceeds the cost of money -- interest.

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                     6.      Downside: if you do not make sufficient income the interest is still due leading to rapid losses
                             because the payments must still be made.
                     7.      Tax advantages to debt:
                             1.   Interest payments are deductible, dividends are not.
                             2.   Reclassification
                                  (1) Inside (Shareholder) debt:
                                        (1) Treating too much of shareholders‟ investments as debt to avoid taxation may
                                              cause IRS to reclassify debt held by shareholders as equity.
                                  (2) The standards below for bankruptcy subordination are essentially the same for IRS
                                        reclassification
                             3.   Bankruptcy
                                  (1) Court will subordinate inside debt if
                                        (1) Priority status would not be fair and the corporation has acted as a „pocket‟ for
                                              the s/h without regard for substance or form of corporate management and has
                                              treated company as his own; or
                                  (2) Inadequate Capitalization
                                  (3) Capitalization is inadequate if, at the time the money was advanced, an informed
                                        outside source would not have made loan to corporation.
                                  (4) At some point, especially with „shift & strip‟ capital structure, the IRS or the
                                        bankruptcy court will deem capitalization inadequate or priority unfair and
                                        reclassify or subordinate the debt.
                     8.      Debts Priority
                             1.   Debt has priority over all equity in payment, except where reclassified as equity or
                                  subordinated.
                     9.      Types of Debt — Details
                             1.   Debentures
                             2.   Bonds
                                  (1) Generally
                                        (1) Historically a bearer instrument
                                        (2) interest paid periodically
                                        (3) bearer “clipped” and presented interest coupons for payment
                                        (4) Today, bonds traded without having to issue an actual certificate  notation
                                              in broker‟s ledger, etc.
                                        (5) Redemption  allows corp. to call in bonds prior to maturity date
                                              1) most debt securities require
                                        (6) “Sinking Fund”/ Cash set-asides  some debts require corp. to set aside
                                              enough funds to be able to purchase the securities on the open market and
                                              retire them
                                        (7) Most may be converted into equity
                                  (2) Income Bonds  obligation to pay interest conditioned upon corp.‟s ability to pay
                                  (3) Performance Bonds  interest is tied to performance of corporate earnings
                                  (4) PIK (“Payment in Kind) Bonds  payment in form of promissory notes or more
                                        bonds rather than cash
                                        (1) only for set period  after period (e.g. 3 years), cash payment made
                                  (5) Reset Bonds  requires corp. to reset bond‟ int. rate if bond value drops below set
                                        rate.

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     6.      Dividends and Distributions
             1.      DISTRIBUTIONS:
                     1. A „distribution‟ is a distribution of corporate assets.
                     2. Form:
                          1.   Dividends
                          2.   Capital (liquidation) Dividends
                          3.   Stock Redemption
                          4.   Note: Stock dividend is not a distribution!
                          5.   Corporate Repurchase
             2.      DIVIDENDS
                     1. Dividends are periodic payment by corporation, usually made in relation to past or current
                          corporate earnings, made to s/h in proportion to s/h’s ownership interest.
                     2. Usually, the decision to declare dividends is solely within the BOD’s discretion.
                     3. Form of Dividends
                          1.   Stock dividend
                               (1) A pro rata distribution of additional shares -- no assets are transferred, equity is only
                                     divided into more portions, therefore not a distribution.
                               (2) RMBCA [?]
                               (3) Note: to have a stock dividend there must be an adequate number shares authorized
                                     in the articles.
                          2.   Cash Dividend
                               (1) Cash payment.
                     4. Capital Distribution
                          1.   [?]
                     5. Redemption & Repurchase
                          1.   Redemption
                               (1) A forced sale initiated by the corporation
                               (2) Is a s/h put a distribution [?]
                          2.   Repurchase
                               (1) Voluntary buy-sell agreement -- only those who wish to sell stock will.
             3.      LIMITATIONS ON DISTRIBUTIONS
                     1. Generally
                          1.   A distribution in any form transfers corporate assets to s/h potentially jeopardizing
                               creditor‟s claims.
                          2.   Creditors want to limit distributions -- shareholders want to maximized distributions --
                               both, for the same reason: to minimize risk.
                          3.   Creditor‟s position sucks -- the BOD, which is accountable to the s/h, has the discretion to
                               declare dividends.
                          4.   To protect creditor (and occasionally preferred s/h) who depend on assets for claim
                               satisfaction corporate statutes impose limits on distributions.
                     2. Equity Insolvency Test Limitations
                          1.   All Statutes forbid distributions which would render corporation unable to pay its
                               debts as they become due.
                               (1) California, Delaware, RMBCA



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                     3.      Balance Sheet Test Limitations
                             1.   Nearly all corporate statutes impose a system of accounting rules to decide whether
                                  distributions are authorized.
                             2.   Accounting entries on balance sheet are used to test whether specified accounts are
                                  sufficiently large to allow particular distribution to be made.
                                  (1) What the hell is a balance sheet any way?
                                        (1) Balance sheet is a snap-shot of corporate financial condition at a given time.
                                        (2) Balance Sheet lists:
                                              1) Assets; and
                                              2) Liabilities plus s/h equity
                                              3) Assets = liabilities + s/h equity
                                              4) or: s/h equity = assets - liabilities.
                                        (3) Whenever an item is entered on one side of sheet an equal amount must be
                                              entered on the other side of the balance sheet. e.g.:
                                              1) Assets increase because of new stock issue  s/h equity increases.
                                              2) Assets increase because of a loan  liabilities increase.
                                              3) Assets decrease because firm loses money  s/h equity decreases.
                                              4) Legal Capital Regimes use s/h equity account to show capital
                                                    contributions and corporate earnings
                             3.   Legal Capital Tests
                                  (1) Use a framework relying on Par Value
                             4.   Stated Capital
                                  (1) Equity capital contributions are allocated to Stated Capital Account
                                  (2) This amount = Aggregate Par Value of outstanding corporate securities.
                                  (3) If the stock is no par the BOD declares a „stated value‟.
                             5.   Capital Surplus
                                  (1) Amount paid for stock in excess of its par value -- reflected in capital surplus
                                        account
                                  (2) Earned Surplus — Accumulated Retained Earnings
                                        (1) Represents accumulations of earnings (or losses) from earlier periods less
                                              dividends or other distributions.

                             6.   Legal Capital Balance Sheet Limitations
                                  (1) Tests Limit Corporate distributions according to amounts in various s/h equity
                                        accounts.
                     4.      Delaware — Surplus or Capital Impairment Limitation:
                             1.   Distributions may be made from surplus.
                                  (1) Surplus:
                                        (1) The amount by which net assets (assets - liabilities) exceed capital stock
                                             (stated capital).
                                        (2) Surplus may be earned or capital in Del. [?]
                                             1) Del. §§ 154, 120, 160.
                     5.      Nimble Dividends
                             1.   Distributions may come from current earnings, even when surplus (capital or earned) is
                                  unavailable.
                                  (1) Del. § 120(a)

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                             2.  Earned Surplus -- Some States
                                 (1) Distributions only from Earned Surplus.
                                       (1) Purpose:
                                           1) keep corporate stated capital beyond the s/h reach on the assumption that
                                                  the creditors will look to Stated Capital as measure of how much has
                                                  been paid to corporate treasury post incorporation.
                     6.      Modern tests
                             1.  RMBCA §6.40 (c)(2)
                                 (1) After distributions assets must exceed:
                                       (1) liabilities, plus
                                       (2) total amount that would have to be paid to any senior preferred shares on
                                           liquidation.
                                 (2) Stated Alternatively:
                                       (1) Distribution may not be greater than s/h equity less any liquidation preference.
                                 (3) Determining the amount of assets under the RMBCA (§6.40(d)):
                                       (1) Use Financial Statements; or
                                       (2) A fair valuation.
                                 (4) Revaluation Surplus
                                       (1) Can a revaluation of an appreciating assets, e.g., land, constitute a surplus that
                                           dividends may be paid out of?
                                           1) Yes, so long as revaluation is in good faith.
                                 (5) Both the balance sheet and the equity insolvency test must be complied with under
                                       RMBCA.

                             2.    California §§ 500(b), 502
                                   (1) Dividends allowed if:
                                         (1) total assets exceed 125% of total liabilities (and current assets exceed current
                                               liabilities); and
                                         (2) payment does not endanger any liquidation preference.
                                         (3) Amount of assets determined in compliance with GAAP, Cal. §114  valuation
                                               becomes cost less depreciation.
                                   (2) Both the balance sheet and equity tests must be complied with in Cal.
                     7.      Distributions‟ effect on Balance Sheet
                             1.    Normally, distributions decrease both assets and s/h equity.
                     8.      Liability for Distributions in violation of applicable rule:
                             1.    All statutes impose personal liability on directors for declaring dividends
                     9.      Summary by jurisdiction of Limitations on distributions
                             1.    Delaware
                                   (1) BOD may declare and pay dividends out of
                                         (1) Surplus; or
                                               1) Capital Surplus -- amount paid in excess of par.
                                               2) Earned Surplus -- accumulated earnings
                                         (2) Net profits for fiscal year
                                               1)      „Nimble dividends‟




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                             2.   RMBCA §6.40 (c)
                                   Equity insolvency; and
                                  (1)
                                   (1) Balance Sheet (Ass. > (Liab. + liquidation pref.))
                             (2) Valuation
                         3.  California
                             (1) Equity Insolvency §501; and
                             (2) Balance Sheet Tests § 500
                                   (1) 500 (a) Retained Earnings -- Earned surplus.
                                   (2) 500 (b) Balance Sheet (Ass. > 125% liab., Cur. As. > Cur. Lb, No danger to lq. pref.)
                             (3) Valuation in California §114
                                   (1) GAAP cost less depreciation
                     10. Repurchase of Shares and Distribution
                         1.  Delaware §160
                             (1) Corporation may repurchase or redeem shares so long as:
                                   (1) Capital is not impaired; and
                                   (2) Purchase does not impair capital
                             (2) Same sort of test as for distributions.
                                   (1) Note: §242 Allows amendment of incorporation to change par value of stock.
                                        §244 Therefore you can reduce capital amount by moving money to surplus by
                                        change in par value.
                         2.  RMBCA & California
                             (1) Repurchase is another form of distribution  same tests.
                             (2) RMBCA Note or Installments for repurchase:
                                   (1) At what point in time are the numbers from the balance sheet taken for
                                        purposes of the tests?
                                        1) A distribution by redemption or repurchase the numbers are measured at
                                              the earlier of
                                              1) date money is transferred or debt incurred; or
                                              2) date s/h ceases to be a s/h with respect to acquired shares.
                             (3) RMBCA §6.40 (f)
                                   (1) Unless, debt incurred for repurchase provides by its terms that:
                                        1) payments of principal or interest can only be made if and to the extent
                                              that payment of distribution could then be made in compliance with rule
                                              above.
                                        2) Hence: each payment is evaluated for equity and balance sheet test at
                                              time of payment [?]
                             (4) RMBCA §6.40(g)
                         3.  What happens to reaquired shares?
                             (1) Del.
                                   (1) Reacquired shares become „treasury stock‟ and is not automatically retired.
                                   (2) May therefore be resold and boy is it a mess regarding the rules surrounding
                                        re-sale
                             (2) RMBCA & Cal.
                                   (1) Reacquired Shares revert to a status as authorized and unissued.




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             4.      WHEN MUST DIVIDENDS BE PAID?
                     1. Generally, the BOD has complete discretion regarding the declaration of dividends absent bad
                        faith.
                        1.     In a close corporation the problem usually manifests itself in a dispute between
                               participating and non-participating s/h.
                               (1) The participating s/h will just pay themselves big bonuses or salary boxing-out the
                                     non participating s/h.
                               (2) The best course is to draft an agreement regarding dividends in close corporation.
                               (3) Rare exception: Miller v. Magline
                                     (1) Where corporation paid a salary and a bonus court held that where bonus was
                                           equivalent to dividends as to participating s/h but excluded non-participating
                                           s/h dividends must be paid.
                               (4) Dividends in Public Corporation
                                     (1) [?]




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     7.      Limited Liability -- Piercing The Corporate Veil.
             1.   THE GENERAL RULE, IS THE SHAREHOLDERS ARE NOT PERSONALLY LIABLE FOR THE DEBTS OF THE
                  CORPORATION.
                  1. The Policy implications of veil piercing leads to an examination of the character of the
                        respective parties before determining the propriety of veil piercing:
                        1.    Character Of Creditor
                              (1) Contract  Militates Against Piercing
                              (2) Tort         Militates In Favor Of Piercing
                        2.    Character Of Corporation
                              (1) Close              Militates In Favor Of Piercing
                              (2) Public             Militates Against Piercing
                        3.    Character Of Share Holder
                              (1) Individual  Militates Against Piercing
                              (2) Corporate  Militates In Favor Of Piercing
                        4.    I agree with none of this.
             2.   CHARACTER OF THE CORPORATION
                  1. Close Corporation
                        1.    Close Corporation (one or a few s/h) may militate in favor of liability, though usually not
                              dispositive.
                        2.    There is no reported case of veil piercing of public corporation.
             3.   CHARACTER OF THE CREDITOR
                  1. Voluntary Creditor, e.g., contract creditor
                        1.    Can anticipate corporation‟s „non-recourse‟ structure and draft contract to protect
                              themselves.
                  2. Involuntary Creditor, e.g., victims and retail customers.
                        1.    Cannot protect themselves by contract, and often do not knowingly accept non-recourse
                              model -- militating in favor of liability.
             4.   CHARACTER OF THE SHAREHOLDER
                  1. Corporate Shareholder -- Enterprise Liability Doctrine
                        1.    Single Business incorporated as separate corporations to isolate business assets and risks.
                        2.    Involuntary Creditor
                              (1) Court will pool assets of corporations and treat them as one if the structure was
                                    designed solely to isolate risk.
                        3.    Voluntary Creditors
                              (1) Liability is less likely.
                        4.    The idea here is not imposing liability on an individual but on a corporate s/h
             5.   CORPORATE FORMALITIES
                  1. Failure to observe corporate formalities the court may view corporation as „alter ego‟ of
                        individual and impose liability.
             6.   UNDERCAPITALIZATION & PURPOSEFUL INSOLVENCY
                  1. Organizing business w/ little or no capital is insufficient alone, but where capital is minimal
                        when compared to what is ordinarily necessary for businesses engaged in this type of business
                        there may be liability.

             7.      COMMINGLING OF ASSETS AND AFFAIRS

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                     1.  Enough said.
                         1.    Siphoning off of assets may justify liability.
             8.      ACTIVE PARTICIPATION
                     1. Shareholder may also loose limited liability by active participation in the business....This has to
                         be in reference to Ltd. Partnerships.




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     8.         Operation of The Corporation -- Corporate Political Power
                1.   AGENCY
                     1. Defined
                           1.   Agency is a consensual relationship between to parties: principal and agent.
                                (1) The principal selects the agent who must agree to act on the principal‟s behalf.
                                (2) Principal has unilateral power to terminate agency relationship and dictates how
                                      agent will perform duties.
                           2.   Relationship between Agent and principal is fiduciary.
                     2. Confers power on Agent
                           1.   Agency relationship confers a legal power on the agent to create rights and liabilities in
                                favor of the principal.
                     3. Agents Power depends on Authority
                           1.   Actual Authority
                                (1) Power of the agent to affect the legal relations of the principal by acts done in
                                      accord with the principals manifestations to him.
                                (2) Creation of:
                                      (1) Actual Authority is created by written or spoken words or other conduct of
                                            the principal which reasonably interpreted causes the agent to believe that
                                            the principal desires him so to act on the principal‟s account.
                                            1) Note: depends on communications between P and A.
                                (3) Form of Actual Authority
                                      (1) Express
                                            1) Authority comes from the explicit words or conduct of the principal
                                                  granting agent power to do the act.
                                      (2) Implied
                                            1) Authority is implied from words or conduct taken in context of the
                                                  relations between the P and A.
                           2.   Apparent Authority
                                (1) Agent may bind P even if he lacks actual authority to do so if he has apparent
                                      authority.
                                (2) Creation of Apparent Authority
                                      (1) Created by written or spoken words or any other conduct which reasonably
                                            interpreted causes the third person to believe that the principal consents to
                                            have the act done on his behalf by the person purporting to act for her.
                                      (2) KEY: Most often the „conduct‟ is merely putting the agent in their position
                                            as agent, e.g., manager reasonably believed to be able to do manger stuff.
                           3.   Estoppel
                                (1) Estoppel is often used to impose liability upon principal where apparent authority
                                      might have been used. Estoppel, obviously, requires the 3rd party to change its
                                      position to its detriment.
                                (2) Note: depends on communication between P and 3rd party
                           4.   Inherent Agency Power
                                (1) P may be liable for those things which are reasonably expected to be done by
                                      agent even if done contrary to P instructions.

                                      (1)   e.g., respondiate superior liability for torts (P normally do not authorize A

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                                             to commit tort)
                             5.  Ratification
                                 (1) Principal may become liable to 3rd party by ratifying the act of another, who at the
                                       time of their act, lacked the power to bind the principal.
                             6.  Apparent v. Actual Authority
                                 (1) Obviously, both can create a binding contract but the agent will be liable for
                                       breach of fiduciary duty where only apparent authority exits.
                        4. Authority of the President of the corporation
                             1.  President only has authority to bind his company by acts arising in the usual and regular
                                 course of business but not for contracts extraordinary in nature.
                             2.  Authorization for Officer‟s action is best represented by :
                                 (1) Resolution, Minutes, or Corporate By-Laws (in order of preference) signed by the
                                       secretary of the corporation; accompanied by
                                 (2) Articles of Incorporation certified by the secretary of state.
                             3.  Questions to ask re: authorization:
                                 (1) Is there a corporation in existence?
                                       (1) Look to Articles certified by secretary of state.
                                 (2) Is this guy authorized to take this action?
                             4.  Line of Authority, all of which should be examined:
                                 (1) LAW of state
                                 (2) Articles of Incorporation
                                 (3) By-Laws
                                 (4) (Minutes)
                                 (5) Resolutions
                             5.  As far as officers go, the way to be sure of authority is authorization by the BOD.
                2.      THE BOARD OF DIRECTORS -- THE CENTRAL GOVERNING AUTHORITY
                        1. Generally
                             1.  All corporate powers are exercised by or under authority of, and the business affairs are
                                 managed under, the direction of the company‟s BOD.
                             2.  The BOD has authority to act only as a collective entity -- directors have no authority to
                                 act as individuals  the norm is for the BOD to meet, confer, and act
                        2. Normal Director Action
                             1.  Notice of Time Date and Place of Meeting (RMBCA §8.22):
                                 (1) Regular meetings
                                       (1) May be held without notice unless AIC or By-Law provide to contrary.
                                 (2) Special meetings of directors
                                       (1) Require 2 day notice unless AIC or by-laws vary that amount.
                             2.  Meeting RMBCA §8.20(a)
                                 (1) Board may hold regular or special meetings.
                             3.  Quorum RMBCA §8.24
                                 (1) Quorum consists of:
                                       (1) A majority of the fixed number of directors if BOD has fixed size; or
                                       (2) A majority of number of directors prescribed, or if no number prescribed the
                                             number in office immediately before meeting begins.

                        3.   Alternatives re: Director Action

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                             1.   Waiver of Notice RMBCA §8.23
                                  (1) Director may waive notice.
                                       (1) Waiver must be in writing, signed by director entitled to receive notice and
                                             filed with corp. Records or minutes.
                                       (2) Except:
                                             1) Director‟s attendance at or participation in a meeting waives any notice
                                                   unless director objects to meeting at beginning or on arrival and does
                                                   not thereafter vote for or assent to any action.
                             2.   Unanimous Consent RMBCA §8.21 -- Major departure from common law
                                  (1) Unless provided otherwise:
                                       (1) Action by board may be taken without a meeting if action is taken by all
                                             members of the board.
                                       (2) Action must be evidenced by signed written consent(s) and included in
                                             minutes or records.
                                       (3) Time of action taken pursuant hereto is time of last director‟s consent.
                             3.   Conference Call RMBCA §8.20(b)
                                  (1) Unless provided otherwise in articles or by-laws
                                       (1) may permit participation in regular or special meetings by any means of
                                             communication by which all directors may simultaneously hear each other
                                             during the meeting.
                             4.   Reduced Quorum RMBCA §8.24(b)
                                  (1) The articles or by-laws may authorize a quorum of BOD of no less than one-third
                                       the fixed or prescribed number of directors.
                             5.   Committees RMBCA §8.25
                                  (1) Unless provided otherwise
                                       (1) BOD may create committees.
                                       (2) Rules which govern meetings govern committees
                                       (3) Committee may exercise authority of the BOD
                                       (4) Committee may not
                                             1)     Authorize Distributions
                                             2)     Approve Or Propose S/H Action...
                                             3)     Fill Vacancies On BOD Or Committee
                                             4)     Amend Articles
                                             5)     Amend, Repeal Adopt By Laws
                                             6)     Approve Merger
                                             7)     Authorize Or Approve Requisition Of Shares
                                             8)     Authorize Or Approve Issuance Or Sale Of Shares
                        4.   Proxy
                             1.   Proxy may not be taken or given by director -- on theory BOD is a deliberative body/
                3.      SHAREHOLDER ACTION
                        1. Election of Directors RMBCA §8.03(d)
                            1.   Directors are elected at the first annual s/h meeting and at each annual meeting
                                 thereafter unless there terms are staggered.


                        2.   Removal of Directors RMBCA §8.08

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                             1.   S/h may remove one or more directors with or without cause unless articles provide that
                                  removal may be for cause only.
                             2.   If cumulative voting is authorized, director may not be removed if number of votes
                                  sufficient to elect him are voted against his removal.
                             3.   If you‟re gonna remove a director at a special meeting the notice of the meeting must
                                  say so.
                        3.   Amendment of the Articles of Incorporation RMBCA §10.03
                             1.   BOD may propose amendments to articles to the s/h, to be adopted:
                             2.   BOD must recommend, unless conflict of interest; and
                             3.   s/h entitled to vote approve amendment
                             4.   By a majority of votes entitled to be cast by any voting group.
                        4.   Amendment of the By-Laws RMBCA §10.20
                             1.   s/h may amend or repeal corporate bylaws even though directors may also do so.
                             2.   The ability to amend bylaws may be reserved to s/h in articles or the particular bylaw
                                  amended or repealed by s/h may provide that BOD may not amended or repeal it.
                        5.   Merger RMBCA §11.03
                             1.   For plan of merger to be approved:
                                  (1) BOD must recommend, unless conflict of interest; and
                                  (2) s/h entitled to vote approve amendment
                             2.   This is a complex provision
                        6.   Sale Of Assets Other Than In Regular Course RMBCA §12.02
                             1.   Corporation may dispose of all or substantial all of its assets if BOD proposes and s/h
                                  approve proposed transaction.
                             2.   For sale to be authorized:
                                  (1) bod must recommend, unless conflict of interest; and
                                  (2) s/h entitled to vote approve amendment
                        7.   Voluntary Dissolution RMBCA §14.02
                             1.   BOD may propose dissolution, for plan of dissolution to be adopted:
                             2.   BOD must recommend, unless conflict of interest; and
                             3.   s/h entitled to vote approve amendment
                        8.   Shareholders meetings RMBCA Ch. 7
                             1.   Annual Meeting RMBCA §7.01
                                  (1) Annual s/h meeting shall be held in accord with bylaws.
                                  (2) Failure to hold such a meeting d/n affect the validity of the corporation‟s actions.
                             2.   Special Meetings RMBCA §7.02
                                  (1) Shall be held
                                        (1) On call of BOD or persons authorized by articles to do so; or
                                        (2) On written demand of 10% of holders of all votes entitled to be cast on any
                                              issue proposed to be considered at special meeting.
                             3.   Notice of Meeting RMBCA §7.05
                                  (1) Notice of annual and special meeting shall be given not less than 10 nor more than
                                        60 days prior to such meeting.
                             4.   Record Date
                                  (1) Because stock it traded, a record date must be set -- the owners of record on that
                                        date are then entitled to vote.
                             5.   Quorum

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                                 (1) Quorum consists of a majority of the shares entitled to be cast on the matter.
                             6.  Voting requirements:
                                 (1) Once quorum is established, then only a majority of those shares present is
                                       required for there to be a „majority‟ for the purposes of the 7 big acts above.
                            7.   Proxy
                                 (1) Proxies may be given and received.
                        9. Shareholder Consent in lew of meeting:
                            1.   Usually unanimous consent - RMBCA & Cal.
                            2.   Delaware: holder of majority of shares may act without meeting.
                        10. Power To Call Meeting Of Shareholders
                            1.   RMBCA §7.02(a)
                                 (1) Special meeting Shall be held:
                                       (1) On call of BOD or persons authorized by articles to do so; or
                                       (2) On written demand of 10% of holders of all votes entitled to be cast on any
                                             issue proposed to be considered at special meeting.
                            2.   Delaware §211(d)
                                 (1) Special meetings of the stockholders may be called by BOD or by such persons
                                       authorized by the articles or bylaws.
                                 (2) S/h may be reamed if you do not draft RMBCA §7.02(a) into the articles or bylaws.
                                 (3) Cal. ___
                        11. Action Without Meeting
                            1.   RMBCA §7.04(a)(and most statutes)
                                 (1) Action may be taken by shareholders without a meeting if action is taken by all
                                       shareholders entitled to vote on action.
                                 (2) Action must be evidenced by one or more signed and filed written consents.
                            2.   Del. §228
                                 (1) Action may be taken by shareholders without a meeting if action is taken by
                                       majority of votes entitled to vote on the action.
                                 (2) Action must be evidenced by signed, filed written consents.
                                 (3) Note: if you hold more than 50% of the stock of a company you may act.
                            3.   Cal. §603
                        12. Actions At Meeting (or by consent)
                            1.   Requiring BOD Action
                                 (1) s/h may not require the BOD to take an action -- §8.01(b)
                                 (2) Basic Rule:
                                       (1) If this is a business decision, which law does not require to be submitted to
                                             the s/h, a s/h resolution directing the BOD to take an action is not a valid
                                             subject matter for s/h meeting.
                            2.   Recommending BOD Action
                                 (1) There is nothing invalid in recommending action to the directors whom they elect.
                                 (2) Basic rule:
                                       (1) You may recommend, but not require.
                                 (3) There are some limits:
                                       (1) see s/h proposal below SEC, not proper to make recommendation with
                                             regard to regular business operations...
                            3.   Removal Of Directors

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                                  (1)   rmbca §8.08
                                        (1) S/h may remove directors with or without cause unless articles provide
                                              otherwise.
                                  (2) Del. §141(k)
                                        (1) Any director or entire board may be removed with or without cause by
                                              holders of a majority of shares then entitled to vote.
                                        (2) Except:
                                              1) Unless articles provide otherwise, classified BOD may only be removed
                                                   for cause.
                                        (3) Cumulative voting
                                  (3) Cal. §
                                        (1) What constitutes Cause:
                                        (2) Not Cause:
                                              1) Directors‟ attempt to seize control of corporation.
                                              2) Lack of Cooperation
                                        (3) Cause
                                              1) A calculated plan of harassment to the detriment of the corporation.
                                              2) Proxy solicitation for director removal
                                        (4) Proxy must contain
                                              1) Reasons for Directors removal; and
                                        (5) Accused directors must be afforded an opportunity to present their case.
                                        (6) Does this apply where removal is okay without cause [??]
                             4.   Increase In BOD Size
                                  (1) RMBCA §8.03
                                        (1) If BOD has power to change the number of directors they may not increase or
                                              decrease the board‟s membership by more than 30%.
                                        (2) The shareholders may increase or decrease in any percentage.
                                              1) If Articles Specify number of directors — Amendment of Articles
                                                   1) RMBCA §10.03 is a usual provision, including Del., amendment
                                                          must be recommended by BOD and approved by s/h. Hence: if
                                                          the articles specify number of directors you may be in hard shape
                                                          as s/h.
                                              2) If Bylaws Specify number of directors
                                                   1) s/h may amend or repeal corporate bylaws even though directors
                                                          may also do so.
                                                   2) The ability to amend bylaws may be reserved to s/h in articles or
                                                          the particular bylaw amended or repealed by s/h may provide that
                                                          BOD may not amended or repeal it.
                                              3) Unspecified
                                                   1) To be determined by resolution of s/h action [??]
                                  (2) Del §109
                                        (1) Power to adopt, amend or repeal by-laws in stock holders, however, articles
                                              may confer power on BOD (so conferring does not divest s/h of there rights)


                             5.   Electing Replacements

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                                   (1)  Unless articles provide otherwise:
                                        (1) vacancy on the BOD, including vacancies created by increase in number of
                                             directors, may be filled by:
                                             1) s/h
                                             2) BOD; or
                                             3) by majority of all directors in office if remaining number of directors
                                                   less than quorum
                                        (2) If office was held by director elected by voting group only s/h of that group
                                             may fill vacancy if filled by s/h.
                        13. Solicitation Of Votes
                            1.    Use Of Corporate Funds
                                  (1) By BOD
                                        (1) BOD may use corporate funds to solicit votes on a policy issue, but may not
                                             use said funds solely for the purpose of maintaining there office.
                                  (2) By s/h
                                        (1) Insurgents may reimburse themselves only if they prevail
                            2.    Obtaining Information
                                  (1) To solicit votes, you need to know the names in numbers of s/h
                                  (2) RMBCA §16.01 and .02
                                        (1) Absolute right — s/h has absolute right to inspect and copy during regular
                                             business hours:
                                             1) Articles
                                             2) bylaws
                                             3) resolutions
                                             4) minutes
                                             5) all written communications to s/h for last 3 years
                                             6) names and address of current directors and officers
                                             7) most recent annual report
                                        (2) Conditional Right — §16.02
                                             1) Right conditioned on:
                                                   1) demand made in good faith & for proper purpose
                                                   2) purpose of requesting s/h and records described with reasonable
                                                         particularity
                                                   3) records directly connected to his purpose
                                             2) s/h has conditional right to inspect and copy during regular business
                                                   hours on 5 days notice:
                                                   1) Record of s/h
                                                   2) accounting records
                                                   3) Except from BOD records, e.g., minutes etc.
                                        (3) For purposes of information requests s/h includes beneficial owner whose
                                             shares are held in trust.
                                  (3) Del. §220
                                        (1) Only s/h of record may request information.
                                        (2) Contents of s/h lists:
                                        (3) Problem: most shares are held by large institutions, e.g., CEDE & Co.



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                                        (4) CEDE breakdown
                                            1) „no-bo‟ list: non objecting beneficial owner
                                            2) Del. ct. require corporation to give s/h both the s/h list, CEDE
                                                  breakdown and the „no-bo‟ list if in the possession of the corporation.
                        14. Bod Power To Obstruct shareholder action:
                            1.   There is no per se rule, but generally the BOD will have the burden of showing a
                                 compelling justification for an action which thwarts s/h vote.
                            2.   The BOD has the sole power to manage company and in some situations the s/h are
                                 reamed, but in other situations the BOD may have the legal ability to act but to do so
                                 would be inequitable:
                                 (1) e.g., BOD action to thwart the effectiveness of s/h vote will bring equitable
                                      considerations into play.




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     9.         Close Corporations -- Alteration of Corporate Norms
                1.   GENERALLY
                     1. Norms of Corporate Structure
                          1.    Majority rule at s/h and BOD levels
                          2.    Management by BOD -- centralized management with limited role for s/h
                          3.    Free Transferability of interests in corporation
                          4.    Perpetual Life
                          5.    The features above are necessary for large publicly held corporations, but are not
                                absolutely necessary or desirable in the close corporation.
                          6.    BOD may be cumbersome for close corporation, free transferability of interests may not
                                be desired, and perpetual life may not be desirable.
                          7.    The inherent contrast between corporations and partnership was limited liability driving
                                many who wanted that protection into close corp. Modern convention of the LLC may
                                mitigate this phenomena.
                          8.    U.S. corporation law was drafted largely for the massive public corporation and until
                                recently there were no provisions for close corporations.
                     2. Modern Provisions allowing for Variation of Corporate Norms, types:
                          1.    Change may be made to any corporation with applicability to close corp.
                          2.    Changes and provisions for close corporation only.
                          3.    Cal § 158, Del. § 342, RMBCA Close Corporation Supplement
                2.   VOTING CONTROL DEVISES -- MODIFICATION OF MAJORITY RULE
                     1. Straight Voting -- the norm
                          1.    1 vote per share per seat.
                                (1) Each share is entitled to one vote for each director to be elected, but a s/h is
                                      limited in the number of votes he may cast for any given director to the number of
                                      shares owned.
                                (2) Ergo: Any s/h or group of s/hs controlling more than 50% of the shares may elect
                                      entire board.
                     2. Cumulative Voting
                          1.    Each Share carries a number of votes equal to the number of directors to be elected.
                                (1) A s/h may cumulate his votes, i.e., multiply the number of votes he is entitled to
                                      cast by the number of directors for whom he may vote.
                          2.    The s/h may apportion his votes in any manner, including voting them all for one
                                director.
                                (1) The Formula:
                                      (1) The number of shares required to elect a director is 1 + (number of shares
                                            represented  the number of directors desired to be elected)  (total number
                                            of directors + 1) or:
                                            1) (S  d  D + 1) + 1 = X
                                            2) X = Number of Shares needed to elect a director
                                            3) S = Shares represented
                                            4) D = Total number of Directors to be elected
                                            5) d = Number of directors it is desired to elect.
                                      (2) Note: Each share carries one vote per director, i.e., if there are 6 directors to
                                            be elected each share has 6 votes  100 shares = 600 votes.

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                             3.   Purpose:
                                  (1) Cumulative voting is designed to allow s/h groups to elect directors in proportion
                                        to the shares held by the group and thus to guarantee minority s/h representation
                                        on the BOD.
                             4.   Law:
                                  (1) California §708
                                        (1) Cumulative Voting is mandated in California by §708, see also §2115
                                  (2) Del. §214
                                        (1) Cumulative Voting is an opt-in provision -- it does not exist unless specified.
                                  (3) RMBCA §7.28(d)
                                        (1) Cumulative Voting is an opt-in provision -- it does not exist unless specified.
                             5.   Undermining Cumulative voting
                                  (1) Staggering terms of board members.
                                        (1) By staggering terms there will be fewer vacancies per year and the total
                                              number of votes per s/h will thus be decreased -- as that number decreases
                                              the majority gains advantage moving process closer to straight voting.
                                  (2) Limits on BOD classification:
                                        (1) RMBCA § 8.06
                                        (2) Del. 141(D)
                                        (3) Decreasing total number of directors
                                              1) Frustrates cumulative voting by decreasing total number of votes a s/h
                                                    may cast and  increasing the percentage of stock necessary for
                                                    minority s/h to elect director.
                                        (4) Executive Committee and Special Decorative Committees
                                              1) Put the minority s/h‟s director on a useless committee or at least
                                                    insulate him from the executive committee
                        3.   Class Voting:
                             1.   The Capital Structure of the corporation can be designed to provide different classes of
                                  stock and those classes of stock may be given special voting rights with respect to
                                  election of directors.
                                  (1) e.g., there are three classes of shares -- A, B, and C. A class stock may elect
                                        directors 1, 2, and 3. B class stock may elect directors 4, 5, and 6. Class C stock
                                        may elect director 7.
                             2.   Class voting is often a useful way of dividing up rights within a close corporation.
                        4.   Voting Trusts
                             1.   Defined
                                  (1) S/h create a voting trust by conveying legal title to their stock to a voting trustee
                                        or a group of trustees pursuant to the terms of the trust agreement.
                                  (2) Control is separated from beneficial ownership -- sort of like non-voting shares.
                                  (3) What is then traded are the voting trust certificates.
                                  (4) Voting Trusts are often used to provide stable control of shares, e.g., Howard
                                        Hughes.



                             2.   Creation

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                                  (1)   RMBCA   §7.30
                                        (1) Written agreement
                                        (2) Transfer of shares to trust
                                        (3) Term not to exceed 10 years
                                  (2) Cal. § 706
                                  (3) Del. § 218
                             3.   Validity
                                  (1) Generally accepted as valid.
                                  (2) May not be kept secret -- must be on file with the corporation.
                             4.   Purposes
                                  (1) No need for specific enforcement by the court so you avoid that whole mess.
                             5.   De facto voting trusts
                                  (1) Litigants often argue that a control agreement which gives a 3rd party authority to
                                        make decisions is a de facto trust and invalid unless it complies with the duration
                                        and publicity requirements.
                                  (2) Statutes have responded:
                                        (1) Del. § 218
                                              1) Section regarding voting trusts not deemed to invalidate any voting
                                                    agreement or irrevocable proxy which is not otherwise illegal.
                                        (2) Cal. §706 (c)
                                              1) No agreement made pursuant to voting agreement provision is invalid
                                                    or unenforceable on grounds it is a voting trust which does not comply
                                                    with publicity and duration req.
                                        (3) RMBCA §7.31
                                              1) Voting agreement created under 7.31 is not subject to the provisions of
                                                    7.30 re: voting trusts
                        5.   Voting Agreement
                             1.   Defined:
                                  (1) An agreement to bind some or all of corporation‟s s/h to vote in a particular way
                                        or pursuant to a procedure on designated questions or all questions.
                             2.   Validity
                                  (1) Generally, Voting agreements are valid if they relate to a matter on which the
                                        shareholders may vote
                                  (2) May not restrict BOD discretion.
                                        (1) e.g., where agreements terms were to (1) to elect the parties to it to the BOD
                                              and (2) that once on the board the parties were to name each other as
                                              executives at certain salaries. The first provision is fine, the second is
                                              invalid.
                             3.   All applicable Statutes require that voting agreements are in writing.
                                  (1) RMBCA § 7.31
                                  (2) Del. § 218(c)
                                  (3) Cal. § 706
                             4.   Maximum Duration:
                                  (1) Cal. § 706 -- applicable to close corporations
                                        (1) 10 years
                                        (2) May be extended by agreement any time within 2 years of expiration for

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                                               another term not to exceed 10 years.
                                        (3)    Effectiveness is not affected by terms of agreement providing for longer
                                               term.
                                        (4) 706(a) authorizes agreement, but 706 applies to close corporation.... 706(d)
                                               says that it shall not invalidate agreements not otherwise illegal, e.g., statute
                                               not to invalidate agreements outside close corp.
                                   (2) Del. §218(c)
                                        (1) 10 years
                                        (2) Agreement is effective for maximum of 10 years.
                                        (3) May be extended by agreement any time within 2 years of expiration for
                                               another term not to exceed 10 years.
                                        (4) Effectiveness is not affected by terms of agreement providing for longer
                                               term.
                                   (3) RMBCA §7.31 & 7.32 (b)(3)
                                        (1) 10 years, etc. [?]
                             5.    Enforcement
                                   (1) Specific Enforcement provided by statute in Cal. & under RMBCA.
                                        (1) RMBCA §7.31(b), Cal. §
                                   (2) Delaware has no specific enforcement provision  an enforcement mechanism
                                        should be included in the agreement.
                        6.   Irrevocable Proxies
                             1.    Generally,
                                   (1) Proxies are a power to vote another‟s shares.
                                   (2) Irrevocable proxies coupled with an interest are valid.
                                        (1) RMBCA §7.22
                                        (2) Cal. §705
                                        (3) Del. §212
                             2.    Purpose
                                   (1) Self-executing mechanism.
                             3.    Creation -- What interest supports an irrevocable proxy?
                                   (1) Interest in stock
                                        (1) e.g., proxy holder has option to buy stock or lends money to s/h who pledges
                                               stock as collateral
                                        (2) RMBCA §7.22(d)(1),(2)
                                        (3) Cal. § 705(e)(1),(2)
                                   (2) Economic interest in corporation
                                        (1) Economic interest in corporation even if not in stock itself.
                                        (2) e.g., where proxy holder has agreed to lend money to corporation, or has
                                               been induced to become a s/h or employee in reliance on the grant of an
                                               irrevocable proxy.
                                        (3) RMBCA §7.22(d)(3),(4)
                                        (4) Cal. § 705(e)(3),(4)
                                   (3) Designation by s/h -- Party to s/h agreement
                                        (1) Where proxy holder has no direct interest in the corporation but has been
                                               designated by s/h to hold proxies pursuant to s/h agreement.



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                                         (2)   RMBCA §7.22(d)(5)
                                               1)    “Party to a shareholder agreement has sufficient interest”
                                               2)    If you want to avoid complaints in the future, provide for an
                                                     irrevocable proxy w/ a voting agreement.
                                          (3) Cal. § 705(e)(5)
                              4.   Extinguishing irrevocable proxy.
                                   (1) Proxy terminates or becomes revocable when qualifying interest is extinguished.
                                   (2) RMBCA §7.22(f)
                                   (3) Cal. § 705(e)
                3.      Restrictions on discretion of the Board of Directors
                        1. Restrictions by agreement of Shareholders
                              1.   In most jurisdictions you may restrict the board or in some cases even transfer power
                                   from the board to s/h.
                                   (1) Del. §351
                                   (2) RMBCA §7.32
                                   (3) Cal. §300
                        2. Restrictions in Articles of Incorporation
                              1.   [??]
                        3. Voting and Supermajority Requirements
                              1.   Generally, in a close corporation a s/h -- director may want the equivalent of veto
                                   power.
                              2.   The easiest way to create veto power is to provide for supermajority voting requirement.
                                   (e.g., an 80% vote req. = a unanimity requirement where there are 4 directors)
                                   (1) Court may invalidate where there is a possibility of deadlock, but most statutes
                                          authorize high voting requirements in articles or bylaws (RMBCA §7.25(c), 8.24(c)).
                              3.   High Quorum Requirement
                                   (1) Can accomplish same goals.
                        4. Employment Contracts for Executives
                              1.   Generally executive‟s employment contracts are not specifically enforceable.
                              2.   Employment contracts for officers have been held invalid:
                                   (1) In some jurisdictions:
                                          (1) Because the term of employment extended beyond the term of the board; or
                                   (2) In other jurisdictions:
                                          (1) Because the term of employment was unusually long.
                              3.   Solution: do not contract for employment as an officer but as a „manager‟ of some kind.
                                   (1) Note: difference between right to have job vs. right to be paid.
                4.      RESTRICTION ON TRANSFER OF SHARES
                        1. Generally,
                              1.   The corporate norm is for shares of stock to be freely transferable; in the close
                                   corporation, for various and sundry reasons, this norm may be less than desirable.
                              2.   The Framework of Analysis for Restrictions on Transferability:
                                   (1) What triggers the restriction?
                                   (2) Who has the right to buy back the stock the s/h or the corporation?
                                   (3) What is the right? Is it a right to repurchase?
                                   (4) What price?
                                   (5) How will a repurchase right be funded?

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                                 (6) Where will these restrictions be found?
                        2.   Normal Rule:
                             1.  Stock is freely transferable absent any restrictions.
                             2.  Restrictions Require:
                                 (1) Terms
                                 (2) Terms cannot make the stock completely non-transferable.
                             3.  Reasonable restrictions are valid
                        3.   What triggers Restrictions on Transfer?
                             1.  [I guess] it depends on the terms of restriction, but usually it is sale, gift, transfer,
                                 devise, inheritance, etc.
                                 (1) Note: in Vogel, a court read the terms of a restraint such that the failure to include
                                       the death of the s/h excluded the s/h‟s death as a trigger.
                        4.   Who has the right, the stockholders or the corporation?
                             1.  Because the exit of a s/h from a close corporation may change the balance in control of
                                 that corporation there are often drafting problems.
                             2.  There are a number of ways to construct the right but leaving ambiguity can be a huge
                                 problem.
                                 (1) Note: in Helmly the court read a repurchase restriction to require only an offer to all of the
                                         share holders. When less than all of the s/h accepted the offer the exiting s/h refused to
                                         sell. The court sustained the exiting s/h action because the principal purpose of the
                                         restriction was to preserve the balance of corporate power.
                        5.   What type of right is it?
                             1.  Buy-Sell
                                 (1) Such as: “On death the s/h shall sell and the corporation shall buy....”
                             2.  Right to First Refusal
                                 (1) Before s/h is free to sell his stock to a 3rd person it must first be offered to the
                                       corporation or to the remaining s/h (or both) at the same price on the same terms
                                       as offered to the outsider.
                                 (2) Obviously ineffective when dealing with death or gift transfers.
                             3.  Option Provision
                                 (1) An offer to the corporation or remaining s/h is made at a price and on terms fixed
                                       by the arrangement rather than by the exiting s/h‟s offer to or by an outsider.
                                 (2) RMBCA §6.27(d)(1)
                                 (3) Del. §202(c)(1)
                                 (4) Can be coupled with right of first refusal to cover non-sale transfers.
                             4.  Consent of BOD or s/h Provision
                                 (1) Transfer may be conditioned on the corporation‟s BOD or s/h consent to
                                       transaction.
                                 (2) Consent requirement must not be manifestly unreasonable.
                                 (3) Rmbca §6.27(d)(3)
                                 (4) Del. §202(c)(3)
                             5.  The basic statutory scheme for restrictions: RMBCA §6.27
                                 (1) Restrictions are authorized to maintain corporation‟s status when dependent on
                                       the number or identity of its s/h, to preserve exemption from securities law, or for
                                       any other reasonable purpose.

                                   (2)   Restriction may:

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                                        (1)   Obligate s/h to first offer to corp. or other persons....
                                        (2)   Obligate corp. or other persons to acquire shares....
                                        (3)   Require approval by remaining s/h or other person if not manifestly
                                              unreasonable.
                                        (4) Prohibit transfer to designated persons or classes or persons if not manifestly
                                              unreasonable.
                        6.   How Is the Price Determined?
                             1.  You have to dictate how price is going to be set, and there are a number of different
                                 ways — each with its own problems:
                                 (1) Book Value
                                        (1) Balance Sheet worth... is it an accurate reflection of equity value?
                                              1) NOTE: problem in Concord Auto where the annual review of price
                                                    was not done (where new book price was to be set by agreement),
                                                    leaving old price in effect until changed, the stock was undervalued on
                                                    the books at time of s/h death -- s/h‟s heirs were reamed on repurchase.
                                        (2) Suggested methods to set new price absent agreement:
                                              1) Arbitration.
                                              2) Mathematical formula.
                                 (2) Capitalized Earnings
                                        (1) Use of a mathematical formula to capitalize earnings, e.g., X multiplied by
                                              past average earnings divided by number of shares....
                                 (3) Right of First Refusal
                                        (1) The outside offer would set the price.
                                        (2) Problems:
                                              1) Is it an arms-length transaction?
                                                    1) Death and Gift?
                                 (4) Appraisal
                                 (5) Mutual Agreement
                        7.   How Is a Repurchase by Corporation Funded?
                             1.  Unless some means of funding is provided the s/h and the corporation may find
                                 themselves without the wherewithal to purchase shares; indeed corporation may be
                                 prohibited from repurchase by statute if it lacks necessary surplus.
                             2.  Insurance
                                 (1) Especially useful where right is triggered by an event, e.g., death of s/h
                             3.  Sinking Fund
                             4.  Promissory Notes or Installment obligations
                        8.   Where Are Restrictions To Be Found?
                             1.  Articles of Incorporation, Bylaws or by separate agreement may contain the restrictions.
                                 (1) Restrictions do not affect shares issued before the restriction was adopted unless
                                        s/h were parties to agreement.
                                 (2) Restriction must be conspicuously noted on the front or back of stock certificate
                                        to be enforceable against a transferee



                5.      OPPRESSION OF MINORITY SHAREHOLDERS, DEADLOCK, DISSOLUTION

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                        1.   Oppression:
                             1.   Defined:
                                  (1) Freeze-Out
                                        (1) Where majority can coerce minority shareholders to sell shares at a low
                                             price or buy at a high price; and
                                        (2) Where majority can force minority off the BOD, out of position as officer,
                                             deny salary, or impose no dividend policy.
                                  (2) Force-Out
                                        (1) Manipulation of Financial Structure of corporation to forcibly eliminate
                                             minority interest.
                                        (2) Defeating the reasonable expectations of the minority s/h.
                        2.   Deadlock
                             1.   50% -- 50%
                                  (1) Corporation cannot function, parties are intransigent
                                  (2) Functional equivalent can be achieved by super-majority requirements and a s/h or
                                        group of s/hs with a sufficient interest to block action.
                             2.   51% -- 49%
                                  (1) Majority rules absent protective provisions.
                        3.   Options for Oppressed Minority Shareholders:
                             1.   Action without the court:
                                  (1) Exit by Sale
                                        (1) By definition impossible in close corporation.
                                  (2) Dissolution (Voluntary)
                                        (1) RMBCA §14.02
                                             1) Proposed by BOD; and
                                             2) Majority of s/h approval.
                                  (3) Administrative Dissolution
                                        (1) RMBCA §14.20
                                             1) failure to meet requirements to remain incorporated.
                             2.   Action requiring court intervention:
                                  (1) Fiduciary Challenge
                                        (1) How courts deal with breakdowns in the relationship among participants in
                                             close corporations is largely a function of judicial concept of the relationship
                                             among the parties.
                                        (2) Partnership Approach to Relation among Shareholders:
                                             1) Where minority stockholders in close corporation assert a breach by
                                                   majority the majority‟s action will be upheld when:
                                                   1) Controlling Group had a legitimate business purpose for its
                                                         action; weighed against
                                                   2) The practicability of a less harmful alternative.
                                        (3) Contractual Approach to Relations (Delaware):
                                             1) If the corporation is seen as a „nexus of contracts‟ then the inquiry
                                                   turns upon the meaning of those contracts.
                                             2) Absent a provision to the contrary electing to purchase into a close
                                                   corporation binds you to the general norm of corporate governance.
                                             3) Some Courts: Parties expect that when they enter a corporate endeavor

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                                              that they will not be ousted absent a legitimate purpose.
                                        4)    Some Courts: It would do violence to the law to fashion ad hoc rulings
                                              which would result in an outcome for which they had not contracted.
                                   (4) Employee Stock Purchase Programs: Alternate Contract Approach.
                                        1) The problem with stock purchase programs and employees is the
                                              implied or incomplete contracts of employment.
                                        2) Look, this area is a mess.
                                        3) Some courts:
                                              1) Want to use an implied employment contract to either:
                                              2) Impose broader fiduciary duties; or
                                              3) use as vehicle for extrapolating the „contracting parties‟
                                                    expectations (i.e., no employee expects to be screwed, etc.) this is
                                                    implying terms in an implied contract.
                                        4) Other courts:
                                              1) Characterize the employee as at-will and that is that.
                                              2) The law is unclear and so am I.
                             (2)   Involuntary Dissolution
                                   (1) The norm is perpetual life.
                                   (2) RMBCA §14.30 Judicial Dissolution
                                        1) Court may dissolve corporation in a proceeding by a s/h if:
                                              1) BOD is deadlocked, s/h cannot break that deadlock, and
                                                    irreparable damage to corporation is threatened or being suffered
                                                    or corporation cannot be conducted to s/h advantage.
                                              2) shareholders are deadlocked
                                              3) illegal, oppressive, or fraudulent
                                              4) waste of assets of corporation
                                        2) Alternatives to Dissolution:
                                              1) (laundry list p. 528)
                                              2) Arbitration
                                              3) Custodian
                                              4) Provisional Director
                                   (3) RMBCA §14.32
                                   (4) Del. §352
                             (3)   Buy-Out Provisions & Dissolution
                                   (1) RMBCA §14.32
                                        1) Close corporation or its s/h may elect to purchase shares of s/h
                                              petitioning for judicial dissolution at fair value.
                                   (2) Del. §355
                                        1) Articles of incorporation can include a provision granting right to
                                              dissolve at will or on occurrence of event.
                                   (3) Cal. §1900
                                        1) 50% of s/h may elect to wind-up or dissolve corporation -- note that is
                                              50% not a majority.
                                        2) Planning ahead is key.




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     10.        Regulation of Securities
                1.   FEDERAL JURISDICTION
                     1. Securities Act of `33 (Obligations on sale by issuer, i.e., going public)
                          1.    Section 5 -- The Basic Provision (p.755 sup.)
                                (1) Sale of Securities to public:
                                      (1) Illegal unless a registration statement is in effect.
                                (2) Offer of Securities for sale:
                                      (1) Illegal unless a registration statement has been filed.
                          2.    Prospectus Provisions §5(b) [??]
                                (1) There are no exceptions to Section 5, it applies to any transaction in which an
                                      issuer sells to people. Where there is an initial sale to people look for a `33 Act
                                      problem -- look for exemption.
                     2. Securities Act of `34
                          1.    §§12, 13, 14, 16 (Generally, place a set of obligations on large publicly held companies.)
                                (1) § 12: Registration of securities under the `34 Act
                                      (1) Permanent registration of entire class of stock that is:
                                            1) Listed on any securities exchange (e.g., NYSE, ASE,); or
                                            2) Issuer has more than $5 million in assets and more than 500 s/h.
                                      (2) If § 12 applies then, §§13, 14, and 16 apply.
                                (2) § 13: Periodical and Other Reports
                                      (1) Company is required to file yearly (10-k) and quarterly (10-q) reports.
                                      (2) This is the ‘heart of disclosure requirements’.
                                (3) § 14: Proxies, Disclosure Requirements:
                                      (1) Solicitation of Proxy in connection with meeting must be done in accord
                                            with the rules governing disclosure in proxy statement.
                                (4) §16: Directors, Officers and Principal Stockholders, Disclosure requirements:
                                      (1) An Officer, Director, or 10%+ Stockholder must file a report when they
                                            trade in securities of the company.
                                      (2) Any profit made by such persons on sale and purchase or purchase and sale
                                                   of company stock within any period of less than 6 months is
                                                   recoverable by the company. (Insider Trading)
                                (5) § 10(b) & Rule 10(b)(5) (Applicable to anyone)
                                      (1) §10(b) Manipulative and Deceptive Devices:
                                            1) Catch-all provision regarding manipulative or deceptive practices,
                                                   given form by SEC Rules.
                                      (2) Rule 10(b)(5) Manipulative and Deceptive Devices
                                            1) The rule is an Anti-Fraud Provision:
                                            2) Unlawful to:
                                                   1) Employ any scheme or artifice to defraud.
                                                   2) Make any untrue statement of, or omit to state a, material fact.
                                                   3) Engage in course of business that operates as a fraud or deceit on
                                                        any person.
                                            3) Does not have any jurisdictional limitations -- it applies to any
                                                   company.
                                            4) Purchase or sale of anything called a security? Keep 10(b)(5) in mind.

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                                              5)    Liability
                                                    1) Liabilities under 10(b)(5) are discussed below in context of „33
                                                          act liabilities)
                2.      1993 Act Registration Process & I.P.O.s (Applicable to the initial public offering)
                        1. Underwriting
                             1.   Underwriting is done by securities firms but not in their capacity as brokers, usually a
                                  fixed price offering.
                             2.   Dual Process:
                                  (1) Contractual agreement to purchase and resell.
                                  (2) Comply with the SEC requirements, process of preparing the Registration
                                        statement.
                        2. Registration Statement §5
                             1.   Registration Statement or „Prospectus‟ containing a description of company.
                             2.   `33 Act, `33 Forms -- Lots of stuff in there.
                        3. Contents of Registration Statement
                             1.   Contents:
                                  (1) All information necessary to satisfy SEC established requirements; and
                                  (2) No material omissions.
                        4. Integrated Disclosure
                             1.   SEC has attempted to integrate disclosure under the `34 and `33 Acts.
                                  (1) Three Tired System -- Allowing incorporation by reference
                                        (1) Standard Reporting
                                              1) S-1
                                                    1) Long-Form standard registration.
                                        (2) Integrated incorporation
                                              1) S-2
                                                    1) Less detailed may be used by issuers having reported for more
                                                          than 3 years under the `34 act, some incorporation.
                                              2) S-3
                                                    1) Least detailed disclosure, fullest degree of incorporation by
                                                          reference.
                                              3) Such as: Terms of the offer, any new information and incorporate the
                                                    last annual report.
                             2.   Shelf Registration
                                  (1) All the registration work is done and it is shelved until the market is favorable.
                                        (1) Small Business Registration
                                              1) Disclosure forms for smaller companies which are supposed to
                                                    simpler.
                        5. Registration Process
                             1.   Preparation.  $
                             2.   File with the SEC
                             3.   Offerings may be made now.
                             4.   Letters of Comment - Defiance of...
                                  (1) Role of the SEC is simply to require disclosure, they have no power to stop you --
                                        though they have great power to hinder.
                                  (2) Letters of Comment are so-called „suggestions‟.

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                        6.   Civil Liabilities (§11 `33 Act)
                             1.    Material False Statement or Omission in Disclosure Statement:
                                   (1) Transferee may sue:
                                         (1) Every person who signed the disclosure statement
                                         (2) Every person who is a director or partner
                                         (3) Every person named, with consent, who is about to become a director
                                         (4) Every accountant, engineer, appraiser or person whose profession gives
                                                authority to a statement made by him....
                                         (5) Every underwriter
                                   (2) Materiality of falsehood or omission only must be proved
                                         (1) no reliance on part of transferee
                                         (2) nor scienter of liable party
                                         (3) Strict liability type statute.
                                   (3) Damages must be shown
                                         (1) limited to a maximum of:
                                                1) the price of initial offering, less the loss taken to maximum of offering
                                                      price.
                                         (2) EX > Offered at 10, goes up to 50, then information is revealed and price
                                                goes down to 5. The damages are the difference b/t 10 and 5 not 50 and 5.
                                   (4) 10(b)(5)
                                         (1) May also sue under 10(b)(5) which requires similar proofs.
                             2.    Due Diligence Defense (§11(b)(3))
                                   (1) A  under the `33 act may escape liability if they can show they exercised due
                                         diligence in regard to the disclosure statements.
                                   (2) Showing to be made, the standard:
                                         (1) Non-Expert Parts of Statement
                                                1) Affirmative Duty to Investigate.
                                                      1) “He had, after reasonable investigation, reasonable ground to
                                                             believe and did believe that statements were true and there [were
                                                             no material omissions]”
                                         (2) Expert Parts of Statement
                                                1) He had no reasonable ground to believe, and did not believe, that any
                                                      such part was untrue or contained material omission.
                                                2) Expert Parts -- What is expertized?
                                                3) Audited Financial Statement -- Accountants are experts
                                                4) Lawyers
                                                      1) mere participation of lawyer does not make it expertized; but
                                                      2) an Opinion by a lawyer on a relevant legal issue is an expert
                                                             opinion and would make such a part expertized.
                                                      3) §11 does not impose liability on lawyers per se, but (as in Bar
                                                             Cris) what constitutes due diligence depends on who you are and
                                                             your position in the company is,  since lawyers hold
                                                             themselves out to be smarter they must behave in that manner.




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                                   (3)   Note: Indemnity and D&O insurance.
                                         (1) Key to due diligence is that it colors the way the disclosure statement is
                                              prepared; the company‟s prospectus is not a selling document but a liability
                                              document.
                3.      DEFINITION OF SECURITY
                        1. Securities Laws do not apply to non-securities  one may avoid regulation if what your
                             trading is not a security.
                        2. Stocks & Notes
                             1.    Notes
                                   (1) Not consumer notes, but notes issued to business to do business.
                        3. Investment Contracts Test:
                             1.    Investment of money in a common enterprise expecting profits from another‟s effort is
                                   a security.
                                   (1) Most business opportunities may be securities -- almost any profit making
                                         scheme.
                                         (1) General Partnerships: every one participates  not investment contract
                                         (2) Limited Partnership Interests: security
                                         (3) LLC: no case on point.
                        4. Assuming its a security, then you‟re looking for exemptions.
                4.      EXEMPTIONS FROM `33 ACT IPO REGISTRATION & DISCLOSURE REQUIREMENTS
                        1. Non-Public Offering §4(2) & Reg. D (Rule 506)
                             1.    Securities may not be made to the public if you want the exemption.
                                   (1) The „public‟ are those in the class of persons who need protection.
                             2.    Securities  may be sold to investors with the requisite sophistication and access to
                                   information.
                        2. An offer to even one ‘unqualified’ investor (i.e., member of the public) will loose the
                             exemption.
                             1.    Regulation D
                                   (1) Rule 506 -- Private offerings subject to SEC safe-harbor under §4(a)
                                         (1) Companies, regardless of size may sell any amount of securities in any year.
                                         (2) No general advertising or solicitations may be used.
                                         (3) Offer may be made to unlimited number of accredited investors but to no
                                               more than 35 unaccredited.
                                               1) Unaccredited investors get specified written disclosure.
                                         (4) Securities sold under this exemption are ‘restricted securities’ and cannot be
                                               resold unless 502(d) is complied with.
                                               1) Cannot be resold without registration and must use care to insure
                                                     subsequent purchaser is not an underwriter.
                                         (5) Issuer must reasonably believe that non-accredited investor has:
                                               1) knowledge and experience in business and financial matters so he can
                                                     evaluate the merits and risks of investment.
                        3. Small Offering §3(b) & Reg. D (Rules 504 & 505)




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                                               Small Offering                                  Non-public
                                               3(b) Exemptions                                 (4)(2) Exemption

                                               504                     505                     506

                 OFFEREES                                   ___        < 35 Unacred.+          Either Unacred. but
                                                                       Unlimited Accred.       Sophisticated or Accred
                 METHOD OF OFFERING                         ___        502(c)                  502(c)
                                                                       No general advert.

                 AMOUNT                        $1 Million              $5 Million              $ Unlimited
                 TYPE OF PURCHASERS                         ___                   ___                506(b)(2)(ii)
                                                                                                  knowledge and exp.
                 INFORMATION REQUIRED                       ___                  502(b)                  502(b)

                 RESALES                                    ___                  502(d)                  502(d)
                                                                               restricted.              restricted
                 FILING                                503                    503                        503
                                                Form D W/in 15 days    Form D W/in 15 days        Form D w/in 15 days
                 LIABILITY                           12(l), Rule 508         12(l), Rule 508         12(l), Rule 508



                             1.   SEC may exempt offerings less than $5 million.
                                  (1) Regulation D
                                       (1) Rule 504 -- Small offerings subject to state blue-sky law under §3(b)
                                            1) Non-public companies can sell up to $1 million in securities per year.
                                                 1) To any type of investor
                                                 2) Using any form of advertisement of solicitations
                                                 3) Without restriction on resale
                                       (2) Rule 505 -- Medium Size offerings subject to SEC conditions under §3(b)
                                            1) Companies, regardless of size may sell up to $5 million in any year.
                                                 1) No general advertising or solicitations may be used.
                                            2) Offer may be made to unlimited number of accredited investors but to
                                                 no more than 35 unaccredited.
                                                 1) Unaccredited investors get specified written disclosure.
                                            3) Securities sold under this exemption are „restricted securities‟ and
                                                 cannot be resold unless 502(d) is complied with.
                                                 1) Cannot be resold without registration and must use care to insure
                                                      subsequent purchaser is not an underwriter.

                        4.   Accredited and unaccredited purchasers:
                             1.   Accredited:
                                  (1) Net worth in excess of $1,000,000; or
                                  (2) Annual income in excess of $200,000
                             2.   Generally:

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                                  (1)  Offering made and sold only to residents within a single state may be exempt.
                                       (1) Although, an intrastate offer can be de facto public.
                            3.   Issuer must reside in state.
                                 (1) Corporation resides in state of incorporation  that‟s the state where this
                                       exemption may work.
                            4.   Issuer must be Doing Business in that state.
                                 (1) „Doing business‟ means most of your business, i.e. 80%
                            5.   Sale to Persons Resident
                                 (1) Following rules of domicile
                            6.   Resales
                                 (1) Possible problem! Intrastate...
                        5. Note: None of these exemptions exempt you from 10(b)(5).
                5.      STATE BLUE SKY LAWS -- ALL STATES HAVE „EM EXCEPT NEVADA
                        1. Generally, states have the ability to regulate securities as well.
                        2. Disclosure
                        3. Merit Regulation
                            1.   Cal.
                                 (1) California requires that stock offering must be fair, just and equitable, or the
                                       commission may refuse to register the security
                        4. Coordination with Federal Regulation
                            1.   Cal. §25102 exceptions may not be the same as those for the SEC, but the SEC appears to
                                 be following California.
                                 (1) Proposed SEC Rule 1001:
                                       (1) If you comply with California exemptions then you are exempt under 3(b) --
                                             retains $5 million dollar cap.
                                       (2) California uses term „Qualified Purchaser‟ which is a person with $500k net
                                             worth or 100k annual income.




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     11.        The Publicly Held Corporation
                1.      VOTING BY SHAREHOLDERS
                        1. Shareholders act through their meetings where they:
                            1.    elect directors
                            2.    vote on actions requiring their approval; and
                            3.    Sometimes send a message to the BOD re: their desired actions.
                        2. With the public company, ownership and control are often completely severed, raising the
                            question of how to insure that the power of control is being exercised for the s/h benefit.
                        3. In public corporations the meeting is mostly fiction -- key to the public corporation Is the
                            solicitation of proxies.
                        4. Solicitation of Proxies is governed by the `34 Securities Act.
                2.      FEDERAL PROXY REGULATION UNDER THE `34 ACT.
                        1. Form of Proxy -- Rule14a-4
                            1.    Identify matters expected to be acted on at meeting; and
                            2.    Provide an opportunity to vote either way on each separate matter.
                        2. Proxy Statement Information -- Rule 14a-3
                            1.    Very Detailed stuff, like the `33 Act issuance disclosure requirements -- see Schedule
                                  14a
                            2.    Annual Meeting: requires annual report & financial statements etc. to accompany the
                                  proxy statement
                        3. Proxy Must Be Filed With The SEC -- Rule 14a-6
                        4. Prohibition On False And Misleading Statements -- Rule 14a-9
                            1.    False and misleading statements in proxy statement are prohibited.
                            2.    Courts have implied a private right of action here.
                        5. Proxy Contests -- Rule 14a-11
                        6. Process Of Discovery Of Beneficial Owners -- Rule 14a-13
                        7. Shareholder’s Affirmative Right To List Of Other Security Holders -- Rule 14a-7
                        8. Shareholder’s Affirmative Right To Make Proposal -- Rule 14a-8
                3.      SHAREHOLDER PROPOSALS -- RULE 14a-8
                        1. Any s/h who has owned (beneficially or of record) 1% or $1000 worth of a public
                            companies stock for at least one year may submit a proposal to management.
                        2. Proposal must be in form of a recommendation (resolution) or a proposed bylaw
                            amendment.
                        3. Because a material omission is prohibited by Rule 14a-9 the s/h’s proposal must be
                            included with a s/h statement in support distributed at the corporations expense, unless
                            there is an applicable ground for exclusion.
                        4. Grounds for Exclusion:
                            1.    Improper Purpose -- Not proper subject for s/h action.
                                  (1) SEC refers to state law.
                            2.    Relates to operations that = less than 5% of total assets for fiscal year and not
                                  significantly related to corporations business.
                                  (1) „Significantly related‟ is not limited to economic significance.
                                        (1)  Social Policy may be significantly related

                             3.    Ordinary Course of Business

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                                   (1)   Matters which are mundane in nature and does not involve social policy are
                                         matters which relate to the ordinary course.
                             4.    Election of Office
                                   (1) You may change the terms of the BOD, but the one thing you cannot do is
                                         nominate an outsider person to the BOD -- the BOD does that.
                4.      INSTITUTIONAL INVESTORS
                        1. Mutual Funds
                             1.    Stock Funds
                             2.    Bond Funds
                             3.    Money Market
                             4.    Balanced Funds
                             5.    Mutual Funds
                                   (1) Type of Corporation
                                   (2) Who is making decision?
                        2. Pension Funds
                             1.    Corporate
                                   (1) „engine Charlie‟
                             2.    ERISA
                             3.    Defined Benefit Plan
                                   (1) You will get X amount based on some formula -- company bears risk
                             4.    Defined Contribution
                                   (1) Company will contribute X amount, what you will get depends on the
                                         performance of fund -- you bear risk
                             5.    Who manages ?
                                   (1) Corporation
                                         (1) Farm out
                                         (2) In house
                                   (2) Union
                        3. Public
                             1.    evil.
                        4. Insurance Co.
                        5. Non-Profit
                             1.    Church, etc.
                        6. Index Funds
                             1.    Buy the Index, e.g., NYSE
                        7. Institutional investors own most (50%+) of stock. Look: institutional investors just wan to
                             make money and therefore have little interest in messing around with affecting changes in the
                             corporation. Some people would like them to exercise a greater voice. Government funds
                             are in a big hurry to mess around and play politics inside corporations.
                5.      OUTSIDE DIRECTORS
                        1. Q: Can they and do they direct?
                             1.    Limitations on outside directors:
                                   (1) Time
                                   (2) Expertise
                                   (3) Dependence on executives for information
                                   (4) Money?

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                             2.    May often themselves be in management of another company and  have pro
                                   management biases.
                        2.   In companies where some or all of the board may also be management -- management
                             directors have the ability to control information.
                        3.   There are proposals for reform, which include professional directors pr a limit on the
                             total number of directorships held.




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     12.        Fiduciary Duties
                1.   DUTY OF CARE
                     1. Generally
                           1.  The starting idea is the director‟s fiduciary duty to the s/h, what are their duties in this
                               regard?
                           2.  Traditionally, duty is divided into two concepts:
                               (1) Care
                                    (1) Sort of a negligence concept
                               (2)        Loyalty
                                    (1) More like a conflict of interest
                     2. Standard Of Care
                           1.  RMBCA §8.30(a)
                               (1) Directors must perform their actions:
                                    (1) In good faith,
                                    (2) In a manner reasonably believed to be in the corporation‟s best interest
                                    (3)   With care of ordinary prudent person in like circumstances
                               (2) Officers with director-like discretion are subject to same standard. RMBCA
                                    §8.42(a)
                           2.  „Like Circumstances‟
                               (1) Generally:
                                    (1) Standard of care is a variable standard, but the general standard sets a
                                          minimal level below which no director may fall.
                               (2) Complexity & Urgency:
                                    (1) Nature and extent of responsibilities will vary depending on:
                                          1) Size, complexity, urgency, and location of activities.
                               (3) Information:
                                    (1) Decisions must be made on the basis of information known to the director
                                          without the benefit of hindsight.
                               (4) Character of Director:
                                    (1) Special background, qualifications, and management responsibilities of
                                          director are relevant, but
                                    (2) No excuse for a director lacking business expertise or particular expertise
                                          from exercising the common sense, practical wisdom, and informed
                                          judgment of an ordinary prudent person.
                                          1)  May not assert “Hey, I am an idiot! You cannot blame me!”
                                          2)  Do not serve on a board unless you have the time an ability to
                                                perform as expected.
                     3. Duty Of Inquiry
                           1.  Del.
                               (1) Allis-Chalmers & Directors Oversight Role
                                    (1) A director is not liable for failure to exercise oversight absent something to
                                          put them on notice that something is wrong.
                                    (2) Absent cause for suspicion a director is under no duty to install an operate a
                                          system of corporate espionage to ferret out wrongdoing they have no reason
                                          to suspect exists.

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                             2.   Cal. §309(a)
                                  (1) Reasonable Inquiry is included as part of California‟s standard of care.
                                        (1) A director may not close his eyes; and
                                        (2) If he is put on notice by suspicious circumstances he may be required to make such
                                              reasonable inquiry as a prudent man in like circumstances would make.
                                  (2)   But: here is no duty to inquire regardless of circumstances, nor is there a separate
                                        requirement of inquiry apart from general duty.
                             3.         RMBCA §8.30(a) Comment
                                  (1) Director may rely on presumption of regularity absent knowledge or notice to
                                        contrary.
                             4.   Criminal Liability
                                  (1) A director may not be held criminally liable for corporate acts solely on the basis
                                        of his status as a corporate director.
                                  (2) Criminal Liability Requires  to be a “Responsible Corporate Agent”, i.e., a
                                        person who has:
                                        (1) A Responsible Relation to a danger to the thick fingered fools who call
                                              themselves the people; and
                                        (2) Authority and Responsibility to deal with the situation.
                        4.   Reliance of Director on Reports and Subordinates
                             1.   RMBCA §8.30(b)
                                  (1) Director may rely on information presented by
                                        (1) Officers,
                                              1) If reasonably believe to be reliable and competent.
                                        (2) Legal counsel
                                              1) If matter within professional competence.
                                        (3) A committee
                                              1) If reasonably believed to merit confidence.
                             2.   Cal. §309
                                  (1) Same as RMBCA.
                             3.   Del.
                        5.   Business Judgment Rule
                             1.   Generally:
                                  (1) Business Judgment Rule vs. The Business Judgment Doctrine
                                        (1) BJ RULE
                                              1) Protects directors against personal liability for transactions which have
                                                    occurred and are, ex post facto, being challenged.
                                        (2) BJ DOCTRINE
                                              1) Protects decisions of the board, e.g., where there is an attack on a
                                                    transaction and the attacking party seeks an injection. Sort of a
                                                    preemptive strike.
                                  (2) Relation between BJR and the duty of care:
                                        (1) The BJR, if satisfied, functions as a presumption that the duty of care is not
                                              breached. The BJR itself is a presumption -- which is very cool.
                                        (2) The BJR is not found in any statute, RMBCA §8.30  the BJR.
                                              1) Particularly in Del. Where the statute do not specify a duty of care the
                                                    BJR is key.
                                  (3) Purpose:
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                                           (1)   Shareholders voluntarily undertake the risk of bad judgment
                                           (2)   After-the-fact litigation is most imperfect devise to evaluate business
                                                 decisions
                                           (3)   Profit & Risk are related  it is unwise to discourage potentially profitable
                                                 risk taking.
                              2.    Rule
                                    (1) The BJR is a presumption that, in making a business decision, the BOD acted:
                                         (1) On an informed basis,
                                         (2) In good faith, and
                                         (3) In the honest belief that the action was in the best interests of the
                                             corporation.
                                    (2) Burden Is On The Challenging Party
                                         (1) Because this is a presumption, the burden is on the challenging party that the BOD did not
                                                 act on an informed basis, in good faith, and in the honest belief that the action was in the
                                                 best interests of the corporation.
                              3. Standard
                                 (1) Gross Negligence
                                       (1) There must be a showing by the challenging party of gross negligence on
                                            part of director to overcome presumption the BJR
                            4.   Informed Judgment
                                 (1) For a director to have exercised an informed judgment he must:
                                       (1) Inform himself of all relevant information reasonably available.
                                            1) i.e., No protection for uninformed or unadvised judgments.
                        6. Provisions limiting liability of Directors
                            1.   Del. §102(b)(7)
                                 (1) Provision limiting liability shall not eliminate or limit liability for:
                                       (1) breach of duty of loyalty
                                       (2) acts/omissions
                                            1) Not in good faith
                                            2) Intentional misconduct
                                            3) Illegal
                                       (3) improper personal benefit.
                            2.   RMBCA §2.02(b)(4) & Cal. §204(a)(10)
                                 (1) Same.
                2.      DUTY TO MAXIMIZE PROFITS
                        1. Generally:
                            1.   The question here is „what is the fundamental purpose of the corporation?‟
                                 (1) A1: The BOD‟s duty is to the s/h only and their function is to make profit and profit alone. Mr.
                                           Dood‟s view.
                                           (1) Dodge v. Ford
                                                  1) The corporation is not an eleemosynary institution.
                                    (2)    A2: Society has authorized corporations b/c it expects them to serve a function,  duty is to all
                                           those who are affected by the decisions of the corporation. Mr. Burley‟s view.



                              2.    In the `30s & `40s Dood‟s view prevailed, the view shifted to Burley‟s during the `50s & `60s, with the
                                    result of the undermining of American Economic Power, by the `70s and `80s American companies were
                                    pathetic.

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                        2.   Corporate Charitable Giving
                             1.   Permissibility
                                  (1) Corporations may make charitable donations absent statutory authority,
                                        (Theodora), although there is statutory authorization in most jurisdictions now,
                                        e.g., RMBCA §3.02.
                             2.   Limits
                                  (1) Reasonableness Test, Theodora
                                        (1) If the gift is reasonable then its permissible.
                                               1) Factors:
                                                     1) IRS, Revenue vs. Income
                                                     2) Legitimate Object of Corporate Charity
                                                     3) Personal or Corporate end.
                                  (2) Kahn and the BJR
                                        (1) The BJR is applied to charitable decisions, so as long as it is satisfied you are
                                               good.
                                        (2) If a director appears to be receiving a quid pro quo for the charitable gift use
                                               procedures which insure the independence of the BOD‟s decision, e.g., a
                                               special committee
                        3. Humanitarian Operation Of The Corporation
                             1.   If you make a decision, you had better justify it in business/economic terms.
                                  (1) By the way, you can‟t act to spite your workers either, you would have to justify
                                        allegedly „spiteful‟ decisions on an economic basis.
                3.      Duty of Loyalty
                        1. General Duty
                             1.   Rule in Brief:
                                  (1) Transaction between the corporation and director or an entity in which director
                                        has an interest cannot be voided solely on the directors interest in the action if:
                                        (1) Approved by the BOD; or
                                        (2) Approved by the s/h; or
                                        (3) Transaction was fair.
                             2.   RMBCA §8.31, Standard Formulation:
                                  (1) Conflict of interest transaction is not voidable by the corporation solely because of
                                        the directors interest, if any one of the following is true:
                                        (1) Material Facts of transaction disclosed or known to BOD and BOD approved
                                               the transaction;
                                               1) Note: approval here must be by disinterested directors.
                                                     1) Quorum: See below
                                                     2) Quorum:
                                                     3) A majority of disinterested directors may count for quorum but
                                                          more than one director must approve.
                                                     4) Del. requires only a majority of disinterested directors even if
                                                          they do not constitute quorum.
                                                     5) Presence of interested director at meeting does not vitiate it.
                                        (2) Material Facts of transaction disclosed or known to s/h and s/h authorized,
                                               approved, or ratified the transaction; or
                                               1) Note: shares of interested s/h are not counted in vote to authorize.

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                                                     1)  Quorum:
                                                     2)  RMBCA & Cal.
                                                              Shares of director with an interest may not be counted for
                                                               quorum.
                                                    3) Del.
                                                              Shares of director may be counted.
                                        (3) Transaction was fair to corporation.
                                              1) Substantive Fairness test:
                                                    1) The transaction by its terms replicates an arms length market
                                                         transaction.
                                                    2) i.e., Would the corporation have entered into this transaction, on
                                                         these terms had there not been a conflict?
                             3.   Interrelationship between provisions:
                                  (1) Unapproved Transaction that is fair:
                                        (1) An unapproved transaction that is fair will be upheld.
                                              1) Definitely in Del., Marciano
                                  (2) Approved Transaction that is unfair:
                                        (1) Approved transactions can be attacked if unfair.
                                              1) Definitely in Cal., Remillard
                                                    1) The problem came from the disjunctive nature of the statute, which because of the
                                                            unfairness to the minority s/h, the court would not read to allow an unfair transaction
                                                            to go ahead if disclosed and approved.
                             4.   Business Judgment Rule
                                  (1) The BJR does not shied the self-dealing director, nor the BOD‟s approval of the
                                       transaction.
                                  (2) The BJR may shield the disinterested directors from personal liability for
                                       approving a self-dealing transaction if they act in good faith. [??].
                             5.   Burden of Proof
                                  (1) Self-Dealing:
                                       (1) If  alleges that a director has a conflict:
                                             1) Interested director looses the BJR presumption and the burden shifts to
                                                  the  director to show either:
                                                  1) The fairness of transaction; or
                                                  2) If shown to be fair, the inquiry is over.
                                                  3) Approval by majority of disinterested directors or s/h.
                                                  4) If this is shown, then the burdened of proof shifts back to the 
                                                        to show the unfairness of the transaction.
                                                             In this situation the transaction is presumed fair and the 
                                                              bears a heavy burden.
                                  (2) No Self-Dealing:
                                       (1) Directors have the presumption of the BJR  burden is on challenging .


                             6.   Disinterested Directors
                                  (1) RMBCA, Del., Cal., are roughly the same
                                       (1) What the hell that means I do not know.
                                       (2) New RMBCA sub-f approach tightly defines interested parties and you must
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                                            be within a specific category of relationships to be subject to the rule.
                                  (2) A Director is interested if:
                                      (1) He is a party
                                      (2) He has a business, financial or familial relationship with a party to the
                                            transaction and that relationship would reasonably be expected to affect the
                                            directors judgment.
                                      (3) He, or a party above in (b), has a material pecuniary interest in the
                                            transaction and that interest would reasonably be expected to affect the
                                            directors judgment.
                                      (4) He is subject to a controlling influence by a party or person with material
                                            pecuniary interest. That is he is dominated.
                             7.  Procedural Questions
                                 (1) Committees
                                      (1) In cases of Serious conflict use committees.
                        2.   Corporate Opportunity -- another possible breach of duty of loyalty
                             1.  Generally
                                 (1) A corporate director cannot usurp corporate opportunities for his own benefit
                                      unless the corporation consents.
                                 (2) Man this is complex.
                             2.  Traditional Tests For Whether This Is An Opportunity Of The Corporation:
                                 (1) Interest Or Expectancy
                                      (1) Test:
                                            1) A corporate opportunity in which the corporation has an interest for a
                                                  valid and significant corporate purpose.
                                                  1) Though it need not be of the utmost importance.
                                            2) And the opportunity fits into:
                                                  1) The present activities of the corporation; or
                                                  2) An established corporate policy which acquisition of the
                                                        opportunity would forward.
                                      (2) Problems:
                                            1) Vague! Hard to Apply! Way too many factors!
                                            2) Does a corporation have a single purpose with the decline of ultra
                                                  vires?
                                 (2) Line Of Business
                                      (1) It is an opportunity of the corporation if it falls within the same line of
                                            business.
                                      (2) Berg
                                            1) The line of business test was applied in a manner which asked not
                                                  whether this was in the line of business, but whether this is what the
                                                  deal between the corporation and the parities was.
                                            2) Very Flexible and about as much help as the interest or expectancy
                                                  test.

                                  (3)   Fairness
                                        (1) Sometimes applied alone, sometimes in combination with other tests, e.g., in
                                             Minn. Where the first question in whether this is in the line of business and

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                                            the second question is whether this is fair.
                                       (2)  Factors used in determining whether fair:
                                            1) relationship to management and control
                                            2) whether opportunity was presented in official or individual capacity
                                            3) prior disclosure
                                            4) exploitation of corporate facilities in gaining opportunity
                                            5) harm or benefit to corporation
                                       (3) Multiple Corporations -- Conflicting Loyalties
                                            1) Problem here is that it is possible for a director who owes loyalty to
                                                  more than one corporation to accidentally create a bidding war on both
                                                  sides of a transaction to the benefit of no one.
                                       (4) CEO vs. Oustide directors
                                            1) Does a CEO have a greater obligation vis-a-vis the duty of loyalty?
                                                  1) Probably.
                             3.   Defenses Or Justifications For Appropriation Of Corporate Opportunity.
                                  (1) Financial Incapacity
                                       (1) A director may personally take an appertained if:
                                            1) The corporation is financially unable to take advantage of the
                                                  opportunity because of financial difficulty or lack of liquid assets.
                                       (2) Actual insolvency leaves director free to act.
                                       (3) Some jurisdictions require a director to use best efforts to secure financing
                                            in this situation, though none require a personal advance to the corp.
                                  (2) Rejection By BOD
                                       (1) Opportunity must be offered to and rejected by independent directors after
                                            full disclosure.
                                       (2) Dominance issues here, again.
                                  (3) Rejection By S/H
                                       (1) Opportunity presented to and rejected by the s/h after full disclosure
                                       (2) Approval by majority of minority
                                            1) i.e., those not tainted by participation in the usurpation.
                                            2) Note: not all act may be ratified, some courts do not allow ratification
                                                  of a breach or duty or fraud absent unanimous consent.
                                  (4) Opportunity Barred by state law or Articles of Incorporation
                                  (5) Third party refuses to deal with the corporation.
                             4.   New ALI Approach
                                  (1) Definition Of Opportunity
                                       (1) Any opportunity to engage in a business activity that:
                                            1) In case of inside and outside directors is communicated or made
                                                  available:
                                                  1) In connection with the performance of his obligations as a
                                                         director...
                                                  2) Under circumstances reasonably leading him to believe that
                                                         person offering expects to be offering to the company.
                                                  3) Through the use of corporate information or property...
                                            2) In case of inside directors only:
                                                  1) He knows or reasonably should know is closely related to the

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                                                          business the corporation is engaged in or may be expected to
                                                          engage.
                                        (2) Definition is simplified for outside director, but has pretty much the same
                                              problems for the inside director.
                                  (2) If it is an opportunity of the corporation, what is to be done to avoid liability?
                                        (1) Director may not take opportunity unless:
                                              1) The opportunity has been offered to the company after full disclosure;
                                                    and
                                              2) Rejected by disinterested directors acting in a manner consistent with
                                                    the BJR; or
                                              3) Rejected by disinterested s/h, and the rejection is not an equivalent to
                                                    waste of assets; or
                                              4) Rejection was the result of executive officer and the taking of the
                                                    opportunity was fair to the corporation.
                                  (3) Burden of Proof
                                        (1) Challenging party has the burden, unless the rejection was the result of
                                              executive action in which case the executive has the burden.
                                  (4) Remedy:
                                        (1) Constructive Trust.
                        3.   Duties Of Controlling Shareholders
                             1.   Who is a controlling shareholder?
                                  (1) A controlling s/h is a s/h, individual or a parent corporation, has enough shares to
                                        determine the outcome of s/h voting.
                                        (1) Close Corporation
                                              1) May require more than 50% s/h
                                        (2) Public Corporation
                                              1) may require as little as 20%, even possibly lower...
                             2.   Transactions Between Parent And Subsidiary
                                  (1) Between a parent and a wholly owned subsidiary
                                        (1) Parent has almost pretty much unfettered dissolution.
                                  (2) Between a parent and a partially owned subsidiary
                                        (1) Risks of Control Abuse
                                              1) Emaciating Dividend policy
                                              2) Issuance of shares at below market
                                  (3) Parent-Subsidiary Transactions
                                        (1) Usurpation of opportunities
                                              1) Ordinary Business Dealings
                                  (4) Parent subsidiary dealings in the ordinary course of business are subject to
                                        fairness review only if the minority shows the parent has preferred itself at their
                                        expense.
                                        (1) Preference Found:
                                              1) Burden of proof to show transaction was entirely fair


                                        (2)   No Preference
                                              1) BJR protects transaction, minority must carry the burden of a BJR

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                                                    challenge.
                                        (3)   Key: Whether minority s/h in subsidiary could show clear parental
                                              preference detrimental to subsidiary.
                                              1) Sinclair
                                                    1) Dividend Policy
                                                    2) Minority received proportionate share -- no preferential treatment
                                                          and  s/h have burden of overcoming BJR.
                                                    3) Allocation of projects to other affiliates
                                                    4) Projects were not corporate opportunities of subsidiary  parent
                                                          had no obligation to share them.
                                                    5) Failure to enforce contracts with other affiliates
                                                    6) This was a preference and therefore a problem.
                                  (5) Exclusion of Minority
                                        (1) The use of control in stock transaction to benefit controlling shareholder to
                                              exclusion of minority.
                                        (2) The burden of proof on controlling s/h to show that transaction which
                                              excluded minority s/h was justified by compelling business purpose.
                                        (3) Used to invalidate:
                                              1) Creation of market to exclusion of minority. [Ahmanson.]
                                              2) Stock redemptions and conversions which prefer controlling s/h
                                              3) Approval by disinterested s/h
                                              4) Informed approval by majority of disinterested s/h will insulate
                                                    transaction.
                        4.   Sale Of Office -- Sale of Control
                             1.   Where Is Control?
                                  (1) There are 3 possible levels of control within corporation:
                                        (1) Management‟s control over assets -- fiduciary duty to act in corporation‟s
                                              benefit
                                        (2) Directors also have fiduciary duties -- best interest of corporation or s/h
                                        (3) S/H do not begin with duty, may act in their own best interest
                                              1) Sale of Shares and Share voting power should have no problem, but, if
                                                    you have enough shares to select directors the question arises whether
                                                    that control is yours to sell or whether its an asset of corporation.
                                  (2) Spectrum of control:
                                        (1) Two extremes:
                                              1) 1 owner with substantial majority of shares (e.g. more than 50%), i.e.,
                                                    one guy with control; as opposed to:
                                              2) No significant stock owner -- 1-2% s/h is the largest investor.
                                        (2) Where is control? It cannot be the s/h, so it is probably in the management
                                              b/c of the control of proxy machinery.
                                        (3) Intermediate Case
                                              1) Party w/out majority control, but holding a significant block of stock
                                                    giving them means of control.

                             2.   Generally,
                                  (1) Sale of Office

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                                       (1)  Directors and officers are strictly prohibited from selling their offices for
                                            personal gain.
                                  (2) Limits on sale of controlling stock
                                  (3) Control premium:
                                       (1) The difference between the value of shares without any control rights (i.e.,
                                            shares at their individual price) and their value as a means to achieve voting
                                            control of a corporation is the control premium.
                                  (4) General rule
                                       (1) Shareholder may sell his shares at whatever price he can get including a
                                            premium price not available to other shareholders.
                                       (2) Controlling shareholder need not share premium that the control block
                                            of stock commands.
                                       (3) Proposed Equal Opportunity Rule -- Rejected by nearly all courts
                                            1) Some propose that all s/h should share pro rata in premium paid fro
                                                  control block, asserting that control is asset of corporation.
                                                  1) This rule is rejected by nearly all courts on rational it will
                                                        interfere with beneficial takeovers.
                                            2) Note: SEC `34 Act Impact: de facto equal opportunity rule for public
                                                  tender offers.
                                                  1) Tender offer for Public corporation must be open to all
                                                        shareholders, and each s/h must be paid highest price paid any
                                                        other tendering s/h.
                                       (4) `34 Act, Rule 14d-10(a)(1)&(2)
                                            1) evil.
                                            2) Exceptions to general rule of „no-sharing required‟:
                                                  1) A controlling s/h cannot sell in 3 situations:
                                                         Sale To Looters
                                                         Corporation acquired to bleed it of assets.
                                                         Sale Of Office
                                                                    Really paying a bribe to turn over corporate office.
                                       (5) Usurpation Of Corporate Opportunity
                                            1) Paying for right to do something which should be opportunity for
                                                  corporation
                                                  1) Inherent Unfairness.
                             3.   Looting
                                  (1) Rule:
                                       (1) A controlling s/h may not sell control if the seller has reason to suspect
                                            the buyer will use control to harm the corporation and remaining s/h.
                                            1) If control seller suspects buyer will loot corporation by steeling
                                                  corporate assets or engaging in unfair self-dealing transactions the
                                                  seller is liable for any damages caused by buyer -- recovery is not
                                                  limited to control premium.
                                       (2) Fact Intensive Analysis.
                                            1) Vast cash reserves alone has been held sufficient.
                                       (3) Key is indicia of situation where other party is suspected of not purchasing
                                            company for legitimate purpose.

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                                             1)    Price too good?, Buyer cannot afford the company -- may use aquired
                                                   company‟s earnings/assets to pay for purchase. Buyer dishonest, or
                                                   poor business reputation.
                             4.   Sale of Office
                                  (1) Generally
                                        (1) Seller of control block will promise a successive resignation (seriatim
                                              resignation) of his directors as part of a sale.
                                        (2) Seriatim replacement of directors works as follows:
                                              1) If the board consists of A, B, and C, who agree to elect X, Y, and Z in
                                                     their place, first A resigns and B and C elect X. Then B resigns and C
                                                     and X elect Y. C then resigns and X and Y elect Z.
                                              2) What you get is a change in directors without a s/h meeting.
                                              3) Power to effect seriatim replacement?
                                                     1) Sections such as §8.10 RMBCA
                                        (3) Seriatim Resignation Promise is a prohibited sale of office when:
                                              1) Buyer did not acquire working control and could not have elected his
                                                     own slate.; or
                                                     1) Burden on challenging party.
                                              2) The public corp. cases usually break at 10% line
                                                     1) Which is to say, that when less than 10% stock accompanies the
                                                            seriatim promise it looks more like an impermissible sale of
                                                            office
                                                     2) That would trigger the rule below 
                                                     3) Sales price exceeds premium the control block alone commands,
                                                            suggesting price paid included sale of office -- sale of office
                                                            prohibited.
                                  (2) SEC §14(f) -- Ratner‟s Baby -- he drafted it.
                                        (1) If corporation is subject to proxy provisions, if a seriatim promise and stock
                                              sale deal is put through then informational disclosure is required.
                                        (2) Ratner‟s phrasing of the rule:
                                              1) Sale of stock and agreement to transfer directorship at a premium price
                                                     is illegal unless it is accompanied by:
                                                     1) Actual control -- i.e., greater than 50% ownership; or
                                                     2) Percentage of Stock that is Tantamount to voting control.
                                        (3) The question is „does the person own enough shares such that premium is
                                              being paid for s/h capacity to control or is the interest being sold so small
                                              that control lies with company and premium being paid for control is
                                              illegitimate?‟
                             5.   Corporate Opportunity
                                  (1) Some cases hold that a controlling shareholder cannot convert an offer made to
                                        the corporation into one to the shareholder.
                                        (1) E.g., If control buyer offers to deal w/ all s/h on equal basis -- like a
                                              proposed merger or offer for all corp. Assets
                                  (2) Courts may focus on:
                                        (1) seller‟s failure to disclose to corporation; or
                                        (2) Manner of buyer‟s offer

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                             6.   Fairness
                                  (1) Ahmanson
                                       (1) Meanness is prohibited?
                                       (2) Where controlling s/h had a choice among alternatives and chose to select
                                           the option which harmed other s/h his action is judged on a inherent fairness
                                           standard
                                  (2) Perlman v. Feldman -- apparently a key case.
                                       (1) p. 1158 main text, 415 Little Brown




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     13.        Shareholders Derivative Suits
                1.   NATURE OF THE SUIT
                     1. Generally:
                          1.   The shareholders derivative action allows a s/h to enforce the duties owed by the BOD.
                          2.   Originally, the suit took the form of two proceedings:
                               (1) a suit in equity by the s/h against the corporation seeking to force the corporation
                                      to bring an action it enforce its rights.
                          3.   Now it is one action.
                     2. Jury Trial
                          1.   Because of the question surrounding whether the action is at law or equity there were
                               questions as to the right to a jury.
                          2.   Federal Court
                               (1) The right to a federal jury trial exists if the corporation would have been entitled
                                      to one had it brought the suit.
                               (2) State Court
                                      (1) The right to a jury trial in state court is a matter of state law.
                     3. Incentives for Bringing Action:
                          1.   In a derivative action any recovery goes to the corporation, though the s/h  is entitled
                               to expenses and attorney‟s fees on theory that s/h  conveyed a benefit on the
                               corporation for which he should be reimbursed.
                               (1) Effect: Bounty Hunting Attorneys drive the suit.
                          2.   The Attorney will obviously be concerned with maximizing his return as opposed to the
                               return to the corp. often leading to premature settlement.
                     4. Purpose of The Action:
                          1.   Competing rationales:
                               (1) Deterrence or Compensation
                     5. Direct, Derivative, or Class Action
                          1.   Direct Action
                               (1) A s/h may sue in his personal capacity to enforce his rights,  an injury to the s/h
                                      gets you a direct action -- direct action avoids the procedural prerequisites
                                      (1) Examples:
                                            1) Challenge To The Denial Or Dilution Of Voting Rights
                                            2) Compel Payment Of Dividend Declared But Not Distributed
                                            3) Enjoin Ultra Vires
                                            4) Challenge Fraud On S/H In Connection With Sale Etc. Of Voting
                                                  Securities.
                                            5) Compel Dissolution
                                            6) Compel Inspection Of S/H Lists
                                            7) Require S/H Meeting
                          2.   Derivative Action
                               (1) A s/h action is derivative where suit is for injury to the corporation.
                                      (1) Such as a breach of fiduciary duty
                               (2) Facts sometimes will support either, in which case the s/h „s choice on how to
                                      plead usually governs.
                          3.   Class Action

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                                  (1) That is another course.
                                  (2) Procedural Prerequisites -- an attempt to weed out strike suits.
                        6. FRCP 23.1 -- Derivative Action By Shareholders
                            1.    Complaint shall be verified and allege:
                                  (1)  was a shareholder at the time of the transaction (contemporaneous ownership)
                                  (2) Action is not collusive one to confer jurisdiction on court
                                  (3) Allege with particularity efforts to obtain action by the board (Demand)
                                  (4)  will fairly and adequately represent the interests of the shareholders.
                            2.    Adequate Representation of:
                                  (1) Shareholders; or Corporation under the RMBCA §7.41
                                        (1) Generally means no conflicting interest with other s/h.
                            3.    Status as a shareholder
                                  (1) Beneficial Owners or Owners of record under RMBCA and most states, though
                                        some states do restrict it to record owners
                                        (1) Convertible Debentures, sometimes
                                        (2) Creditors, rarely
                                        (3) Its Generally limited to s/h even though others may have an interest in the
                                              corporation. [Check to see if del. Limits to O.O.Rec. only]
                            4.    Contemporaneous Ownership
                                  (1)  is required to have owned the stock at the time of the action complained of.
                                        (1) Merger of Corporation out of existence?
                                              1) S/h of the surviving corporation can probably still sue.
                                        (2) Continuing Wrong
                                              1) Adopted by some courts, provides:
                                                    1) exception to contemporaneous ownership requirement where
                                                          plaintiff purchased shares during a continuing wrong by the
                                                          corporation, e.g. waste.
                                  (2) Cal. §800(b)(1)
                                        (1) Requires the plaintiff acquired the shares before there was disclosure to the
                                              public or to the plaintiff of the wrongdoing of which plaintiff complains; and
                                        (2) A strong prima facie case in favor of the claim asserted on corps. behalf
                        7. Prerequisite Rules in brief:
                            1.    Complaint must be verified in federal court, and in few state courts.
                            2.    The  must have standing which requires contemporaneous ownership of the stock at
                                  the time of the transaction.
                                  (1) Except where a continuing wrong exception applies; and
                                  (2) Except in California where a purchase before disclosure confers standing
                2.      SECURITY FOR EXPENSE REQUIREMENTS
                        1. Some jurisdictions require  to post a bond for the defendant‟s expenses of the suit.
                            1.    Cal. §800(c)-(f)
                                  (1) Allows a bond at the courts discretion on motion based on:
                                  (2) no reasonable possibility of the prosecution of the action will benefit the
                                        corporation or its s/h; or
                                  (3) moving party, other than corp., did not participate in transaction complained of
                                        any capacity;
                                  (4) Maximum Bond Amount = $50,000.

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                        2.   rmbca & Del. Have no provision for security for expenses

                3.      JURISDICTION & VENUE
                        1. Federal Court
                             1.   Diversity or Federal Question (e.g., violation of the securities laws)
                                  (1) A corporation is a citizen of its state of incorporation and where it has its principal
                                        place of business.
                                        (1) Note: in regard to diversity the corporation will almost always be realigned
                                              with the s so if you want into federal court pick a diverse .
                                  (2) Corporation should be aligned as a  if it is antagonistic to the  which is usually
                                        the case as evidenced by its refusal to bring the action on its own.
                             2.   Personal Jurisdiction
                                  (1) Alleging a Security violation: Suit under the „34 Act.
                                  (2)  may be served in any district where the defendant is found -- world wide
                                        service.
                             3.   Venue
                                  (1) Diversity jurisdiction: judicial district in which all  or s reside, or where the
                                        wrong occurred.
                             4.   Incentives for Federal Jurisdiction:
                                  (1) Jury Trial, and with a securities violation you get world wide service of process.
                        2. State Court
                             1.   Personal Jurisdiction
                                  (1) Long Arm Statute, or Secretary of State is Agent for Service
                                        (1) Del. §314
                                              1) Provides that non-resident directors of complained are deemed to have
                                                    consented to service.
                        3. Choice of Law
                             1.   State Court Action
                                  (1) Apply the substantive Law of state of incorporation, apply procedural law of
                                              forum state
                                  (2) Cal. §800 applies to foreign and domestic corporations.
                             2.   Federal
                                  (1) Apply the substantive law of the state of incorporation.
                                  (2) Apply federal procedural unless
                4.      DEMAND OF DIRECTORS AND SHAREHOLDERS
                        1. Demand on Shareholders
                             1.   Demand on s/h is not required except for Massachusetts and Ohio.
                        2. Demand on Directors
                             1.   Generally
                                  (1) Why should you care?
                                        (1) Delay
                                        (2) Business Judgement Doctrine
                                        (3) Steeling themselves against litigation
                                        (4) Another s/h could sue 1st and courts usually give lead counsel position to
                                              the s/h who is 1st in time.
                                  (2) Business Judgment and Derivative Action:

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                                       (1)  There are two potential times the BJR or doctrine can come into play:
                                            1) Original Transaction now subject of suit
                                                  1) The question is does the BJR apply?
                                            2) Decision not to purse suit
                                                  1) BJ Doctrine protection of decision not to sue.
                                                  2) If demand is required the board decides fate of the claim, subject
                                                       to review under BJR.
                             2.   When is demand required?
                                  (1) Demand is required unless it is FUTILE -- Del.  two Futility tests:
                                      (1) Where the board considering the demand made a decision which is being
                                            challenged in derivative suit:
                                            1) Demand is futile where under particularized facts alleged create a
                                                  reasonable doubt that
                                                  1)    THE [MAJORITY OF??] DIRECTORS ARE DISINTERESTED AND
                                                       INDEPENDENT; OR (i.e., dominated — beholden in some
                                                       manner, structural bias arguments have been rejected.)
                                                            Examined at the time of the original transaction.
                                                            Domination is what is required here, that the directors are somehow
                                                             beholden.
                                                            Structural Bias arguments have been rejected.
                                                            Merely being named as a director does not make a director non-
                                                             independent & disinterested.
                                                            Some self interest must be shown.
                                                            In Del. Follow the technical rules of disinterested action then the
                                                             directors are „disinterested‟ necessitating demand by the  s/h as well
                                                             as conferring protection of BJR.
                                                  2)    THE CHALLENGED TRANSACTION WAS OTHERWISE
                                                        THE PRODUCT OF THE BJR.


                                       (2)   Where board considering demand did not make a decision which is being
                                             challenged in derivative suit.
                                             1) Three principal situations:
                                                   1) Where a business decision was made by the board of the
                                                       company, but a majority of the directors making the decision has
                                                       been replaced.
                                                   2) Where the subject of the derivative suit is not a business decision
                                                       of the board.
                                                   3) Where decision was made by the board of a different corporation
                                                       -- Double Derivative Suits.
                                             2) In these situations the test is:
                                                   1) Whether BOD considering demand can impartially consider its
                                                       merits w/out being influenced by improper considerations
                                                            i.e., look at the board now, at the present time.
                                             3) Independence here can be frustrated:
                                                   1) Financial Benefit; or
                                                   2) Beholding for employment.
                                             4) Some distinction here between inside and outside directors.

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                        3.   Universal Demand -- RMBCA §7.42
                             1.   No s/h may commence a derivative action until:
                                  (1) Written demand made on corporation to take suitable action; and
                                  (2) 90 days have expired from date of demand
                                  (3) Except:
                                         (1)  has been notified earlier that demand has been rejected; or
                                         (2) Irreparable injury to the corporation would result by waiting for expiration
                                               of 90 days.
                             2.   If the directors reject demand, the  may then attack that decision (i.e., not to bring
                                  suit) as not within the BJR.
                             3.   Plaintiff‟s Proof of the Precise facts? Note:  is not entitled to discovery yet...
                             4.   Public sources, such as SEC Filings, the Media, and of course  has rights of
                                  inspection.
                             5.   Suit under Federal Law -- Demand Futility requirements of state law must be complied
                                  with.
                5.      TERMINATION BY SPECIAL LITIGATION COMMITTEE
                        1. Generally
                            1.   The spectrum of Rules in Brief:
                                 (1) Business Judgment Review
                                      (1) Applicable in Del. When demand is required.
                                 (2) Lack of Power
                                      (1) Very few courts.
                                      (2) Del. Has explicitly held that a disabled board may appoint a SLC
                                            1) A disabled board may not appoint a committee to do what the board
                                                 itself may not do.
                                 (3) Heightened Scrutiny — demand excused
                                      (1) Applicable solely in Del. when demand is excused — Zapata 2 part inquiry.
                                      (2) Heightened scrutiny — regardless of demand
                                      (3) Applicable in California
                                            1) Measured Scrutiny
                                      (4) Rmbca
                                            1) The issue here is where the corporation, director or committee cause
                                                 the action to be dismissed -- directors make decision that the action
                                                 should not proceed and petition court for dismissal -- can the action
                                                 continue?
                                            2) The Special Litigation Committee gained popularity in the `70s and
                                                 `80s. Typically the BOD will give the committee full power to make
                                                 litigation decisions for the corporation. The committee was composed
                                                 of directors who did not participate in challenged transaction. They
                                                 worked well for management.
                        2. Delaware:
                            1.   Demand Required
                                 (1) Where demand on the BOD is required, the decision of a SLC will be protected by

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                                        the Business Judgment Doctrine.
                                  (2)   The SLC must:
                                        (1) be disinterested; and
                                        (2) act on informed basis
                                  (3) If the Litigation committee meets the requirements of disinterestedness and
                                        informed judgment its decisions will be protected by the BJR.
                                  (4) Slc may act regardless of disability (Self-interested taint) of the BOD.
                                  (5) The Board that appoints the SLC may itself be disabled, i.e., interested, etc., but
                                        so long as the committee is not disabled you are in the clear.
                                  (6) Note: in Gall and Auerbach the committees also had former justices of the
                                        respective state supreme court as counsel.
                                  (7) The court in this context will examine:
                                        (1) selection procedures,
                                        (2) BUT NOT the substantive decision.
                             2.   Demand Excused
                                  (1) Zapata two part inquiry for SLC motion to dismiss:
                                        (1) Independence and good faith of the committee and the basis supporting its
                                               decision; and
                                               1) Corporation‟s burden.
                                        (2) Court should apply its own independent business judgment as to whether the
                                               suit should proceed.
                                        (3) Cost-Benefit analysis by the court of the suit.
                                        (4) Probabilities as to likely future benefit to the corporation...
                                        (5) May take into account distraction of personnel, and costs of negative
                                               publicity.
                                        (6) Committee does have authority to act even when BOD that appointed it is
                                               disabled.
                                  (2) Zapata is not the general rule...
                        3.   RMBCA §7.44
                             1.   A derivative proceeding shall be dismissed if a good faith determination; after
                                  reasonable inquiry, that maintenance of the derivative suit is not in the best interests of
                                  the corporation, is made by:
                                  (1) A majority of independent directors at a meeting of the BOD if the independent
                                        directors constitute a quorum; or
                                  (2) a majority vote of a committee consisting of 2 or more independent directors,
                                        whether or not quorum.
                             2.   If a majority of the board is not independent at time of decision
                                  (1) The corporation has burden of proving that the determination was in good faith
                                        after reasonable inquiry
                             3.   If a majority of the board is independent at time of decision
                                  (1) The plaintiff has burden of proving that the determination was in good faith after
                                        reasonable inquiry.
                        4.   California
                             1.   Regardless of any demand requirement:
                                  (1) The court will independently examine the suit‟s merits, giving some but not
                                        presumptive weight to the SLC recommendation.

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                             2.    Structural Bias Approach Accepted:
                                   (1) “A special litigation committee made up of outside directors has „inherent
                                         structural bias‟ that warrants judicial review of the committees independence and
                                         good faith in urging dismissal of derivative suit”
                6.      ROLE OF COUNSEL
                        1. Sanctions:
                            1.   Judicial Power
                                 (1) Courts have inherent power to impose sanctions on counsel for abuse of judicial
                                        process.
                            2.   FRCP
                                 (1) Rule 11 of FRCP requires attorneys to believe, after reasonable inquiry, that every
                                        pleading, motion, etc., file with the court be well grounded in fact, be based on a
                                        reasonable interpretation of law and not interposed for improper purpose such as
                                        harassment, delay, or needles increase in coast of litigation.
                            3.   State Bar rules
                                 (1) Also possible sanctions here as in Greenfield, where -Lawyer maintained a
                                        stable of s and was subject to sanctions for failing to explain matter to client to
                                        extent necessary to make informed decisions when it turned out that the client had
                                        a conflict of interest.
                        2. Conflicts of Interest -- who do you represent?
                            1.   May an attorney represent both the corporation and the  officers or directors?
                                 (1) No.
                                 (2) In a derivative action the corporation is adverse to  officer/director -- that is a
                                        clear conflict since the s/h is suing on behalf of corporation against the  director.
                            2.   Should Attorney continue to represent the corporation? An officer/director ?
                                 (1) Normally, the attorney will continue to represent the  officer/director because the
                                        attorney is really the individuals confidant.
                            3.   If all directors are sued, should the lawyer represent all directors, inside and outside?
                                 (1) No. Van Gorkom Standing together, tall, against THE MAN will get you
                                        hammered.
                                 (2) You probably want an other attorney for the inside or outside directors.
                                 (3) You will definitely need a new lawyer for the corporation.
                                 (4) Presumably a SLC could have its counsel continue to represent the corporation.
                        3. Attorney -- Client privileges
                            1.   Generally, the Attorney-Client privilege exists to protect client‟s confidential
                                 communications to Attorney.
                            2.   Corporate Client
                                 (1) Corporation is not barred from asserting it merely because those demanding
                                        information enjoy the status of stockholders.
                                        (1) Where corporation is in a suit against s/h on charges of acting inimically to
                                              s/h interest:
                                              1) Privilege is subject to s/h right to show cause that it should not be
                                                    invoked.
                                              2) Cause?
                                                    1) Number of s/h and the % of stock they represent.
                                                    2) Good faith

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                                                    3)    Whether communication sought relates to past or prospective
                                                          action.
                                              3) Past action -- stronger claim to cause
                                              4) Prospective action -- weaker claim...
                                        (2) It is very hard to maintain privilege where  officer is an officer of both
                                              Acquiring and Acquired corporations -- officer is fiduciary to both.
                                        (3) A person in a dual capacity, confidential communications between the two
                                              are not privileged in a dispute between the two.
                             3.    Can you depose counsel for the litigation committee?
                                   (1) Lawyer represents the committee, committee works for corporation, corporation
                                        works for the s/h, and s/h is the plaintiff... oh man
                                   (2) Who can waive privilege?
                                   (3) Note: Where the government is attempting to get information it is a different thing
                                        -- they will probably get „em...
                7.      SETTLEMENT
                        1. Judicial review required
                             1.  Settlement between s/h  and s may not be consummated without judicial approval.
                             2.  There are usually „notice and an opportunity to be heard‟ requirements to allow s/h to
                                 object -- also provides court with the benefit of an adversarial examination of the merits
                                 of the settlement.
                             3.  Questions: Notice to Whom? All s/h? Just the largest? Costs?
                        2. Settlement Preemption
                             1.  The corporation may settle with the s, preempting plaintiff (remember res judicata?).
                                 (1) How is this possible?
                                       (1) The claim is not between the s/h  and the ,but between the Corporation
                                              and the .
                             2.  The corporate decision to settle itself, however, is still subject to attack by the s/h.
                                 (1) What attacks?
                        3. Reasonableness of Settlement
                             1.  The reasonableness of the settlement is based on:
                                 (1) Benefits to the corporation; and
                                       (1) Considered in light of best possible recovery, the risks of establishing
                                              liability and proving damages, and the cost of prolonged litigation.
                                 (2) Reaction of the s/h
                                       (1) If a vast number of s/h freak, then you may have a problem.
                             2.  What you need for a successful challenge is a s/h with significant interests such that it
                                 can assert settlement is inadequate.
                                 (1) e.g., institutional investor.
                        4. Reasonable Attorneys Fees
                             1.  Contrary to the general American Rule, attorney‟s fees are recoverable in derivative
                                 action, on the theory that the s/h ‟s lawyer conferred a benefit upon the corporation
                                 and should be reimbursed.
                             2.  Of course, determining the extent of a benefit may be problematic, as were only
                                 changes are structural changes by corporation.
                                 (1) Calculation of Fees:
                                       (1) Lodestar Test

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                                              1)      Fees based on the hours reasonably expended, multiplied by a
                                                      reasonable hourly rate, adjusted up or down by contingent nature or by
                                                      extraordinarily good work.
                                               2) Problem: incentive to prolong litigation
                                         (2) Salvage Value
                                               1) Fee is a % of total recovery.  recovery =  fees.
                                               2) Problem: incentive to minimize time on case -- premature settlement.
                                         (3) 3rd Circ.
                                               1) 30%, period
                                               2) Competitive Bidding
                                                      1) yeah.
                8.      INDEMNIFICATION AND INSURANCE
                        1. Generally
                            1.    Indemnity is a corporations promise to reimburse officers and directors for litigation
                                  expenses and personal liabilities incurred in that capacity.
                            2.    Because indemnity can potentially frustrate policies that seek to deter some behavior
                                  the power of the corporation to indemnify depends on:
                            3.    Whether the director/officer was successful in defending the action; and
                            4.    Whether an unsuccessful director can justify his actions
                        2. Who is covered by indemnity?
                            1.    Everyone.
                        3. Mandatory Indemnification -- Successful Director
                            1.    If a director is sued and defends successfully, the corporation is obligated to indemnify
                                  the director for litigation expenses including attorney‟s fees
                                  (1) RMBCA §8.52 (unless limited by the articles of incorporation)
                                  (2) Cal. §317(b)
                                  (3) Del. §145(C)
                            2.    Successful Defense
                                  (1) Success on the merits = success demanding indemnity
                                         (1) RMBCA §8.52, Cal. 317(d), Del. §145(c)
                                  (2) Procedural Grounds, e.g., Statute of Limitations or  lacked standing also
                                         constitutes success.
                                         (1) RMBCA §8.52, Cal. 317(b), Del. §145(c)
                                  (3) Settlement out of court is not success.
                            3.    Partial Success
                                  (1) Del. §145(C) allows partial success -- „to extent successful‟ -- meaning that the
                                         director is entitle to indemnity as to those claims or charges defended successfully
                                  (2) Cal. §317 and RMBCA §8.52 Limit indemnity to defendants who where „wholly
                                         successful‟.
                        4. Permissive/Discretionary Indemnification -- Unsuccessful Defense
                            1.    Generally
                                  (1) Indemnification is not automatic where director is liable due to judgment,
                                         settlement, or fine.
                                  (2) The Director may be indemnified only if the corporation or court decides to do so
                                         subject to certain criteria


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                             2.  Permissive Indemnification in 3rd Party Actions -- Such as s/h direct action, or the EPA
                                 suit against the director.
                                 (1) Corporation may indemnify director for liability in 3rd party action if:
                                       (1) Director Acted in Good Faith -- Director did not know conduct was illegal
                                             and did not act for improper personal gain.
                                             1) RMBCA §8.51(a)(1), Cal. 317(b), Del. §145(a)
                                       (2) Director reasonably believed that actions were in or not opposed
                                             corporations best interest
                                             1) Del. §145(a),
                                             2) RMBCA §8.51(a)(2) (or, if in unofficial capacity, at least not opposed to),
                                             3) Cal. 317(B) (no provision for not opposed to).
                                       (3) The director in a criminal proceeding had no reasonable cause to believe his
                                             actions were unlawful -- beyond good faith.
                                             1) RMBCA §8.51(a)(3), Cal. 317(b), Del. §145(a)
                             3.  Permissive Indemnification in Derivative Actions -- Actions by or on behalf of
                                 corporation.
                                 (1) Adjudged Liable:
                                       (1) Corporation may not indemnify a director adjudged liable to the corporation
                                             if the action is brought by or on behalf of the corporation.
                                             1) This would be absurd: the corporation would be paying itself.
                                             2) RMBCA §8.51(d), Cal. 317(c)(1), Del. §145(b)
                                 (2) Settlement
                                       (1) Corporation may indemnify a director for litigation expenses (not amounts
                                             paid to corporation) who settles a suit by or on behalf of the corporation if
                                             he meets criteria for permissive indemnification: Good Faith, Best Interests,
                                             No reason to believe unlawful if criminal case.
                                             1) RMBCA §8.51(e), Del. 145(b)
                                 (3) Who decides when permissive indemnity will be granted?
                                       (1) Del. §145(D)
                                             1) Vote of disinterested Directors
                                             2) Independent legal counsel
                                             3) Vote of s/h
                                             4) Cal.
                                             5) RMBCA
                             4.  Court Ordered indemnification:
                                 (1) RMBCA §8.54
                                       (1) party may apply to court to order indemnity, which may be ordered if:
                                             1) Director is entitled to mandatory indemnity; OR
                                             2) director is fairly and reasonably entitled to indemnity under all
                                                    circumstances whether or not he met standard for permissive.
                                       (2) [Ask Ratner about this] Del. §145(D) last sentence...
                        5.   Advancement of Litigation Costs

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                             1.   Corporation may advance litigation expenses.
                                  (1) Del. and RMBCA require „an undertaking‟ to repay, but no bond or security is
                                       required of the director.

                        6.   Notice of Indemnity or Advances
                             1.   Disclosure is required under §16.21 RMBCA, but not in Del.
                        7.   Exclusivity of Statutory Indemnification
                             1.   RMBCA makes statutory indemnification exclusive -- therefore any provision in articles,
                                  bylaws, or agreement is only effective insofar far as consistent with the RMBCA.
                             2.   Cal.§317(g) and Del.§145(f) Explicitly permit extra-statutory indemnification.
                        8.   SEC violation:
                             1.   Where there is a violation of federal securities law, the SEC takes the position that such
                                  violations are void of public policy and ...[????]
                        9.   Insurance -- D&O Insurance
                             1.   D&O insurance is authorized by RMBCA, Cal. and Del.
                                  (1) It is authorized for insurance which covers liability the corporation could not
                                        indemnify (probable exception of criminal offenses).
                                  (2) It is almost impossible to obtain.
                             2.   Two Aspects:
                                  (1) Direct coverage of D&O
                                  (2) Coverage of corporation for any payments to D&O under indemnification
                                        procedures.




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     14.        Insider Trading
                1.    GENERALLY
                      1. Paradigm case:
                           1.   Corporate insider trades shares of the corporations stock using material non-public
                                information obtained through position as insider.
                           2.   Non-public information: information not available to other traders
                           3.   Material: likely to effect stock price once disclosed
                      2. Misappropriation:
                           1.   Where insider trades in shares of another company on the basis of material non-public
                                information regarding the actions of his company that will effect the price of another
                                company.
                           2.   Three Basic Questions in the area:
                                (1) What kind of transaction was this?
                                      (1) Direct or Anonymous?
                                (2) To whom, if liability is found, is it owed?
                                      (1) Other Traders, other party or the Corporation?
                                (3) What law are we dealing with?
                                      (1) State: almost nothing, or Federal: „34 Sec.Ex.Act.
                           3.   Policy:
                2.    COMMON LAW LIABILITY
                      1. Liability to the Shareholders
                           1.   Tort of Deceit
                                (1) Elements
                                      (1)  Justifiably Relied
                                      (2) To „S Determent
                                      (3) On A Misrepresentation of Material Fact
                                      (4) Made By The  With The Knowledge Of Its Falsity Or Reckless Disregard
                                            For Truth And
                                      (5) With The Intention That The  Rely
                                (2) Almost impossible...
                                (3) Causation -- impossible
                                (4) Reliance -- impossible; t is Caveat Emptor, baby
                           2.   „Majority Rule‟
                                (1) Purchase on an impersonal, public market: Insiders owe a fiduciary duty to the
                                      corporation only, and are under no affirmative obligation to disclose material
                                      nonpublic information when trading with others who are ignorant.
                                (2) EXCEPTION: Where  personally seeks a s/h for purpose of buying his (the
                                      s/h‟s) shares, then failure to disclose material nonpublic information will get close
                                      scrutiny -- relief probably will be granted.
                           3.   Special Facts
                                (1) Strong v. Repide, insider concealing identity by use of agent in transaction to
                                      purchase share from idiot who had no idea a lucrative contract had been secured.
                                (2) Note: agent approximated face-to-face dealing...

                             4.   Kansas/Strict Rule

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                                   (1)    Duty to disclose in any face to face transaction regardless of the presence of any
                                          „special facts‟
                              5.    The Bottom Line:
                                    (1) Direct dealing = liability
                                    (2) Anonymous Dealing = no liability
                                    (3) Generally C/L covers purchases only not sales by insiders on bad news.
                        2. Liability to the Corporation
                              1.    Insider can be liable to the corporation for insider trading on an agency theory:
                                    (1) An Agent who acquires confidential information in course of employment has
                                          duty to account to corporation for any profits made by his use of such information,
                                          regardless of harm to corporation.
                              2.    No harm need be shown
                                    (1) Inside information is an asset of the corporation even that the insider may not use
                                          for his personal benefit even if the corporation itself would also be precluded from
                                          using the same information the same way.
                3.      Liability under §16(b) of the Securities Exchange Act
                        1. To prevent the unfair use of information any profit realized by a covered person from any
                              purchase/sale or sale/purchase of security of covered company within a period of 6
                              months shall be recoverable by the issuer.
                              1.    Not a prohibition, but a liability statute it is only concerned with acts within a temporal
                                    window and nothing else.
                              2.    So: a transaction at which time of both the purchase and sale the person was subject to
                                    registration is not covered.
                        2. Companies covered:
                              1.    Any company with a class of stock subject to registration or reporting under § 12 of the
                                    `34 Act:
                                    (1) Listed on any securities exchange (e.g., NYSE, ASE,); or
                                    (2) Issuer has more than $5 million in assets and more than 500 s/h.
                        3. Persons covered:
                              1.    The following persons are required to file a statement with SEC at the time they
                                    become subject to the provision and at the end of any month in which they trade in the
                                    securities .
                                    (1) Any person who directly or indirectly owns more than 10% of any class of equity
                                          security which is registered under §12.
                                          (1) i.e., beneficial owners and that means, here only, voting power or a
                                                 pecuniary interest (wives, kids....)
                                    (2) Owners of Derivative Securities
                                          (1) Options, etc.
                                                 1) Considered the equivalent of the security into which it is convertible.
                              2.    Directors
                                    (1) Director -- Directors, and
                                    (2) Deputization
                                    (3) A partnership or corporation may be deemed a director if one of its members
                                          serves as a director of the corporation whose shares it trades.
                                    (4) Its a question of fact...
                              3.    Officers

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                                   (1) Rule 16a-1(f) Anyone with a policy making function...
                        4.   Timing of Purchase and sale
                             1.    Officer and Director
                                   (1) A person will be liable if they were and Officer or Director at the time of either a
                                         purchase or sale sought to be matched, but being and O or D at the time of both is
                                         not necessary.
                                   (2) Ratner‟s Take seems to conflict
                                   (3) THIS NEEDS HELP.
                             2.    10% Shareholders
                                   (1) A person will be liable if they were a 10% owner immediately before both
                                         transactions
                        5.   „Period of Less than 6 months‟
                             1.    Liability attaches for transactions within 6 months, i.e., exactly 6 months is not less than
                                   6 months so your fine.
                        6.   „Profit Realized‟
                             1.    Profits Calculated Punitively:
                                   (1) Match any transactions that produce a profit, regardless of temporal order
                                   (2) Do not offset losses.
                                   (3) Example:
                                         (1) Sale of 200 @ $50 ($10,000), Purchase of 100 @ $35 & 100 @ $40 ($35k
                                               + $4k = $7500)  short swing profit = 2500
                                         (2) Take the high sale and match with the low purchase, take care to match
                                               number of shares, continue with next highest sale and match, continue until
                                               all transactions are exhausted.
                        7.   Purchase and Sale
                             1.    Cash
                                   (1) No question.
                             2.    Merger
                                   (1) The question is whether the person was in a position to profit from it, and was it
                                         voluntary:
                                   (2) Where officers & directors of acquired company became officers and directors of
                                         the acquiring corp. post merger the exchange is a purchase.
                                   (3) Merger caused by bidder in tender offer in takeover contest is not matchable
                                         purchase or sale...[??]
                             3.    Employee Stock Option
                                   (1) Look at the time of the grant of the option, not whether the option was exercised...
                                         [what???]
                             4.    Conversion of Convertible Security  purchase or sale
                        8.   Enforcement.
                             1.    The rule is enforced by derivative or direct action,
                             2.    SEC only requires the filing of the reports and granting exemptions, but it does not
                                   enforce.
                             3.    Note: there is no contemporaneous ownership requirement[??]


                             4.   The Bottom line:

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                                   (1)   Very inexact and inefficient way to get at insider trading, widely condemned but
                                         politically appealing.
                4.      LIABILITY UNDER RULE 10b-5
                        1. Generally
                             1.    Text of the rule:
                                   (1) [Unlawful] for any person... to make any untrue statement of material fact or to
                                         omit to state a material fact... or... to engage in any act or practice... which
                                         operates... as a fraud or deciet upon any person... in connection with the purchase
                                         or sale of any security.
                             2.    10b-5 Applies to purchase or sale of any security not just those registered under the `34
                                   Act.
                             3.    A private right of action has been implied under 10b-5 on the restatement‟s theory that
                                   a person within the protected class may sue
                             4.    The obligations of 10b-5 rest on two rationales:
                                   (1) Relationship of access (harm to corporation)
                                   (2) Inherent unfairness (harm to the other side of the market)
                             5.    A number of people can benefit from trading on inside information
                                   (1) Insiders
                                         (1) Who obtain information b/c of their corporate position -- directors, officers,
                                               employees or controlling s/h
                                   (2) Constructive Insiders
                                         (1) Those retained temporarily -- Lawyers, accountants, investment bankers
                                   (3) Tippees
                                         (1) Those to whom the Insider reveals the information or a tippee in relation to a
                                               sub-tippee
                                   (4) Sub-Tippees
                                         (1) Those tipped by a tippee
                                   (5) Strangers
                                         (1) Who have no relationship to the insider or the corporation but who overhear
                                               the information
                             6.    Texas Gulf Sulfur
                                   (1) The basis for 10b-5 liability was fraud
                                         (1) fraud in this context is a fairness requirement requiring equal access to
                                               information
                                   (2) the duty is to abstain from trading or disclose.
                        2. Duty to Abstain or Disclose
                             1.    An insider has a duty to disclose material non-public (inside) information when the
                                   other party is entitled to disclosure b/c of some relationship of trust & confidence
                                   (1) a fiduciary duty.
                                   (2) Here a fiduciary to s/h is presumed in spite of the refusal of state courts to find it.




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                             2.   Material:
                                  (1) A fact that Reasonable investor would consider it relevant.
                                  (2) Materiality of Uncertain Events or Situation:
                                        (1) Balancing Test for materiality:
                                              1) The indicated probability of event, and against
                                              2) The anticipated magnitude of the event in light of totality of company
                                                    activity.
                                        (2) Major Factor:
                                              1) The importance attached to information by those who had it, and the
                                                    timing of the transaction -- materiality is usually demonstrated by the
                                                    acts of the ..
                        3.   Duty Analysis:
                             1.   Fiduciaries
                             2.   Insiders & Agents
                                  (1) Insiders & Agents have a duty to abstain from trading or disclose when in the
                                        possession of material non-public information obtained in a fiduciary position and
                                        in which the corporation has a confidentiality interest.
                             3.   Constructive Insiders
                                  (1) Same
                             4.   Temporary Insiders
                                  (1) It has been held by a California Court that trading on Inside information obtained
                                        in an arms length, non-fiduciary business relationship would still lead to liability.
                             5.   Tippers
                                  (1) Insiders who knowingly pass on improper tips are liable as participants in insider
                                        trading whether or not the insider personally traded in security;
                                  (2) If tipper is not an insider:
                                        (1) Tipper is liable for transmitting material non-public information if he knows
                                              (or should know) it is confidential and came from an insider who anticipated
                                              some direct or indirect personal benefit.
                                              1) Benefit: selling it, giving it to family, friends, or to another whom he
                                                    expects to return the favor.
                                  (3) Tipper Need not personally trade to be liable.
                             6.   Tippees and Sub-Tippees
                                  (1) Those without Fiduciary Duty to Corporation inherit the insiders abstain or
                                        disclose duty if they knowingly trade on improper tips -- duty is derivative...
                                        (1) (duty to abstain from trading or disclose when in the possession of material non-public
                                               information obtained in a fiduciary position and in which the corporation has a
                                               confidentiality interest)
                                        (2) Duty will be inherited where tip was breach of fiduciary duty.
                             7.    Strangers
                                   (1) A stranger with no fiduciary duty to a corporation or its shareholders has no duty
                                        to disclosure or abstain simply because he is in possession of material non-public
                                        information.



                        4.   Misappropriation of Information -- Outsider Trading
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                             1.    An insider misappropriates material non-public information and trades in another
                                   companies stock (i.e., where information relates to an action by the insider‟s company
                                   that will affect the other companies stock)
                                   (1) Most courts hold that a person can be held liable for a breach of duty on a
                                         misappropriation theory
                        5.   Satisfaction of Disclosure Requirement
                             1.    If subject to the abstain or disclose requirements you may trade after disclosure but you
                                   must wait long enough after disclosure for the information to be disseminated to the
                                   market -- (24-48 hrs.)
                        6.   Sanctions
                             1.    Governmental
                                   (1) Criminal Sanctions
                                   (2) Administrative
                                   (3) Civil Penalty §21(a) Treble penalty
                                         (1) Penalty of 3 times the profit realized or losses avoided by insider trade.
                                         (2) Penalty extends to those employers and others „control‟ insiders and tippers.
                                         (3) Penalty is the greater of
                                                1) 1,000,000; or
                                                2) 3 times insiders gain.
                                         (4) If controller knowingly or recklessly disregards likelihood of insider trading
                                                by persons under its control.
                             2.    Civil
                                   (1) Civil Liability to Contemporaneous Traders
                                         (1) Recovery limited to „s actual profits realized.
                                   (2) Civil Liability to Defrauded Parties -- Including the Corporation
                                         (1) Owner of confidential information can bring action under 10b-5 only if
                                                actually trading in the market.
                                   (3) Corp. May recover trading losses or any artificially increase in price.
                                   (4) Problem with establishing liability:
                                         (1) causation of damage
                        7.   California Securities Law
                             1.    §25402 Rule:
                                   (1) Insider, controlling person, or person whose relationship to corporation gives him
                                         access directly or indirectly to material non-public information cannot trade in
                                         security of corporation if:
                                         (1) At the time he knows the material information
                                                1) will significantly affect the market price of the security
                                                2) is not intended to be available to the public
                                         (2) Unless, he has reason to believe the person with whom he is dealing is also
                                                in possession of the information
                             2.    §25502 Damages:
                                   (1) Person in violation liable to the purchaser for damages equal to profits realized or
                                         losses avoided.
                                         (1) Unless  proves  knew the information or would have traded at that price
                                                even if disclosure had been made.
                             3.    §25502.5 More Damages:

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                                   (1) Person in violation (other than issuer) is liable to issuer for damages three times
                                       profits realized or losses avoided, less any amount paid the SEC.
                5.      CORPORATION‟S DUTY TO DISCLOSE UNDER 10B-5
                        1. Generally
                            1.   Duty of corporation to make disclosures under 10b-5, unlike insider trading, is not
                                 easily avoided.
                            2.   The corporations basic duties of disclosure:
                                 (1) §13 under `34 Act
                                       (1) Annual report, quarterly report, but
                                       (2) No duty to report significant or material developments
                                       (3) 10b-5 liability for public misstatements -- closely tracks c/l tort of deceit.
                            3.   Elements of 10b-5 Claim
                                 (1) Misrepresentation (non-disclosure w/ duty) of Material Fact
                                 (2) Intent (Scienter) -- reckless disregard of the truth
                                 (3) Standing
                                 (4) Reliance (Causation)
                                       (1) Reliance on something unsaid? Causation = materiality which is causation
                                             as well as first element.
                                 (5) Damages
                            4.   Text of the rule:
                                 (1) [Unlawful] for any person... to make any untrue statement of material fact or to
                                       omit to state a material fact... or... to engage in any act or practice [devise]...
                                       which operates... as a fraud or deceit upon any person... in connection with the
                                       purchase or sale of any security.
                        2. In Connection w/ sale or purchase of any Security.
                            1.   The company does not need to actually trade, it only need employ a devise of a sort that
                                 would cause a reasonable investors to rely...
                            2.   In Texas Gulf Sulfur the devise was a press release.
                                 (1) Ergo: a company potentially faces 10b-5 liability for all public statements
                        3. Material Misstatement
                            1.   Fact is material if there is a substantial likelihood that a reasonable investor would
                                 consider it altering the total mix of information in deciding whether to sell.
                            2.   Materiality of Uncertain Events or Situation:
                                 (1) Balancing Test for materiality:
                                       (1) The indicated probability of event, and against
                                       (2) The anticipated magnitude of the event in light of totality of company
                                             activity.
                                 (2) Major Factor:
                                       (1) The importance attached to information by those who had it, and the timing
                                             of the transaction -- materiality is usually demonstrated by the acts of the ..
                            3.   Misstatement
                                 (1) Even being too pessimistic may be misleading -- misleading is misleading to the
                                       reasonable inventor.
                        4. Failure to Disclose -- oh sweet silence...
                            1.   No liability absent a duty
                                 (1) Rumors

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                                        (1)   No duty to make statement correcting rumors absent attribution of rumors to
                                              company.
                                        (2) If company has been disseminating information selectively, it probably has a
                                              duty.
                                        (3) Is the Business Judgment Rule implicated?
                                              1) No. The BJR is only implicated where the BOD is alleged to have
                                                    harmed the corporation — 10b-5 is brought here by outsiders crying
                                                    about their lousy business decisions
                                  (2) Merger Negotiations -- If the exchange calls what do you do?
                                        (1) When are they material? Use uncertain balancing test above.
                                              1) Say Nothing, “No Comment” because, as above, non-disclosure absent
                                                    a duty  misstatement.
                                                    1) What is „no comment‟ is the equivalent of „merger discussions
                                                           are under way‟? So long as you say no comment in all situations
                                                           you will have problem.
                                                    2) In the final analysis: you had best keep your mouth shut tight and
                                                           say no comment all the time.
                        5.   Standing -- potential for civil liability & who will be suing you:
                             1.   Actual Purchasers and sellers have standing
                                  (1) If a company makes a misstatement, the time lapse between that misstatement and
                                        the truth, depending on optimism or pessimism of the misstatement will determine
                                        the standing of buyers or sellers
                                  (2)  class action will be the vehicle, i.e. common questions of law or fact
                                        predominate.
                             2.   Fraud on the market = standing if you were in the market.
                        6.   Reliance -- Causation
                             1.   Reliance must be presumed for a class action cqlorf requirement.
                                  (1) Why?
                                        (1) Market is distorted by making misstatement of information (fraud on the
                                              market theory) and people rely on price in market reflects accurate
                                              information  fraud on the market gives individuals standing.
                             2.   The bottom line is that once it is material its non-disclosure distorts the market and
                                  market distortion = standing.




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     15.        Corporate Combinations
                1.   GENERALLY
                     1. Four basic techniques for bringing multiple corporations under a one management:
                          1.  Merger (Statutory)
                          2.  Triangular Merger
                          3.  Statutory Share Exchange
                          4.  Acquisition of Assets
                              (1) Stock for Stock, or Cash for Stock -- tender offer.
                     2. Terminology:
                          1.  P = Parent, the principal surviving corporation.
                          2.  S = Subsidiary, of P
                          3.  T = Target, the corporation by be acquired.
                     3. Merger (statutory)
                          1.  P & T as separate entities agree to a plan of merger
                          2.  Key term: ratio of shares to be exchanged.
                          3.  Plan of merger submitted to s/h who must vote to approve it.
                          4.  Problems arise where T is already controlled in some part by P
                     4. Triangular Merger
                          1.  P establishes subsidiary S, P places its shares as assets in S, S then reaches agreement to
                              merge with T
                          2.  Purpose: Avoid unknown liabilities of P
                          3.  Reverse Triangular merger:
                              (1) S merges into T with T being the surviving corporation.
                                    (1) Why?
                                          1) Technical problems, e.g., T may have franchises or assets which are
                                                not easily transferred.
                     5. Stock For Assets
                          1.  P may authorize, or use authorized and unissued, additional shares to T in exchange for
                              T‟s assets. T then dissolves and issues, pro rata its sole asset = the stock of P
                     6. Stock for Stock
                          1.  P gives „P-shares‟ to T in exchange for „T-shares‟.
                          2.  Cash for Stock is the Tender offer discussed below
                          3.  If P acquires less than 100%, say 90-95% a second step merger may be used to
                              eliminate the minority s/h.
                     7. Statutory Share Exchange
                          1.  Cal. and the RMBCA allow by statute that once an agreement is reached on filing of plan
                              the s/h of T become s/h of P.
                2.   APPROVAL PROCEDURES AND DISSENTER‟S RIGHTS
                     1. Merger
                          1.  Agreement, Approval by both BOD
                              (1) Submitted to the s/h of both corporation, and approved by a majority of the shares
                                    outstanding entitled to vote -- Cal. & RMBCA, unlike Del. Require approval by
                                    non-voting stock as well.
                              (2) Exceptions to both P & T s/h vote of approval
                          2.  Small Scale Merger

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                                   (1)  If additional shares to be issued are less than 20% of P‟s issued and outstanding
                                        stock the P‟s s/h do not vote -- T‟s still do.
                                  (2) RMBCA, Cal. Del.
                             3.   Short Form
                                  (1) If P already owns at least 90% of T, then P can merge with T w/out any s/h
                                        approval.
                             4.   Dissenter‟s / Appraisal right
                                  (1) If a s/h opposes the merger the s/h has the right to have his shares valued and
                                        bought out for cash.
                                  (2) RMBCA & California
                                        (1) s/h of acquired corporation have dissenters rights in all corporations.
                                  (3) Del.
                                        (1) If acquired corporation is listed on an exchange, then the s/h of T has no
                                               appraisal and cash out right -- only close corporations have dissenters rights
                                               in Del.
                             5.   Triangular Merger
                                  (1) Same as to T, but S‟s only s/h is P and its BOD will decide not its s/h.
                        2.   Stock for Assets
                             1.   T (the seller) has to submit to vote of s/h if all or substantially all of the assets are being
                                  sold.
                                  (1) All or substantially all:
                                        (1) Del.: more than 51% Katz
                             2.   RMBCA: exactly what it says.
                                  (1) P (the purchaser) only will require a vote if the articles need to be amended to
                                        facilitate the issuance of additional shares. If the corporation has sufficient
                                        authorized but unissued shares then no vote is required.
                                  (2) But:
                                        (1) NYSE and NASDAQ require P to put the issue to a vote if the shares to be
                                               issued are at least 18.5% of the outstanding stock if you want those shares
                                               listed on the exchange
                        3.   Stock for Stock
                             1.   Non-Statutory
                                  (1) T‟s s/h do not have to vote, they decide as individuals whether to accept the stock
                                        or not.
                                  (2) P, as above, If the corporation has sufficient authorized but unissued shares then
                                        no vote is required.
                                  (3) But:
                                        (1) NYSE and NASDAQ require vote if the shares to be issued are at least 18.5%
                                               of the outstanding stock to list on the exchange
                             2.   Statutory
                                  (1) T‟s s/h would have to vote to approve plan of exchange.
                                  (2) P‟s s/h ?



                        4.   De facto Merger -- a trigger to dissenters rights.

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                             1.  Del.
                                 (1) A sale of assets, whether or not a de facto merger, does not entitle a s/h to voting
                                      or appraisal rights.
                                      (1) Triangular merger? No.
                            2.   Cal. & RMBCA
                                 (1) A transaction with the same effect as a merger entitles s/h to the rights they have
                                      in a merger
                3.      CASH-OUT MERGERS -- GOING PRIVATE
                        1. Generally
                            1.   Purpose of Going Private
                                 (1) To eliminate those pesky minority interests, avoid conflict of interests situations,
                                      and to avoid registration under the `34 Securities act by limiting the number of
                                      s/h.
                            2.   2 general Situations
                                 (1) Company decides to go public, selling 25% or so of its stock to the public, then
                                      later decides to repurchase its shares
                                 (2) Acquisition of one corporation by another in a cash for stock or stock for stock
                                      transaction -- at some point the acquiring corporation will have control and may
                                      want to eliminate the minority
                        2. Technique — How to force a sale of shares
                            1.   Merger or Triangular Merger
                                 (1) In a merger situation P & T can agree that the acquired companies shares can be
                                      paid for in cash,  the outside shares get dollars and go away.
                                      (1) If controlling s/h owns more than 90% of stock they may use a short form
                                             merger
                                      (2) If the controlling s/h owns less than 90% a normal merger must be affected,
                                             requiring vote of the share holder
                                 (2) Note: Del. 51% s/h Consent rule.
                        3. Protections for Minority Shareholders in a squeeze out
                            1.   Business purpose test
                                 (1) A legitimate business purpose is required to force out a minority s/h.
                                      (1) Legitimate Business Purpose:
                                             1) Avoid suits for conflict of interest
                                             2) Avoid disclosure requirements
                                      (2) Obviously not hard to find.
                                 (2) Abandoned in Del., still viable only in NY and Mass.
                            2.   Fairness test -- the same self-dealing test as usual
                                 (1) Procedural — Fair Dealing
                                      (1) Same protections as for engaging in any self-dealing transaction
                                      (2) Decision of Target should be made by independent/outside directors.
                                      (3) Attempt to replicate an arms length transaction




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                                        (4)   Weinberger
                                              1) If you want to withstand attack be careful to:
                                                    1) have work done on the P‟s side by persons who are solely
                                                           responsible to P
                                                                (not joint directors of P and its subsidiary-target of the
                                                                 squeeze out)
                                                    2) and approval on T (subsidiary) side must be done by Independent
                                                           directors.
                                  (2) Substantive — Fair Price
                                        (1) Valuation of Price
                                              1) Use any technique generally acceptable in the financial community or
                                                    and otherwise admissible -- examining all relevant factors excluding
                                                    only the speculative value of the accomplished merger.
                                              2) Delaware Block/weighted average technique -- abandoned in Del.
                        4.   Form of Proceeding to Attack going private.
                             1.   Exclusivity of appraisal
                                  (1) Del.
                                        (1) Appraisal procedure is generally exclusive remedy for price unfairness.
                                        (2) Fraud, Misrepresentation, Self-Dealing, Waste, Gross and palpable
                                              overreaching may make appraisal inadequate and entitle s/h to a different
                                              proceeding.
                                  (2) Cal.
                                        (1) Appraisal is the exclusive remedy.
                                        (2) The person who controls two or more parties to the action has the burden of
                                              proving the transaction is just and reasonable.
                                  (3) RMBCA §_____
                                        (1) Appraisal generally exclusive...
                                        (2) If s/h demands payment the company must immediately pay „fair value‟ and
                                              the s/h may fight over any inadequacy later
                        5.   Alternatives
                             1.   Rule 10b-5 Attack on cash-out merger
                                  (1) Can you defraud a corporation? Yes, but...
                                        (1) Fraud under 10b-5 means fraud but not unfair price.
                                  (2) S/h can only maintain a 10b-5 claim if the s/h could have enjoined the transaction
                                        under state law where a fraud on the corporation is asserted.
                                  (3) If no appraisal remedy is available, and an injunction possible, then depending on
                                        whether the jurisdiction requires probable success or not, the s/h will have a 10b-5
                                        claim. Santa Fe
                        6.   What the hell?
                             1.   Rule 13e-3
                                  (1) In going private transactions Rule 13e-3 requires a disclosure statement stating
                                        that the price is fair. A private right of action has been implied. Applies to
                                        Issuers and affiliates.


                4.      DISCLOSURE UNDER FEDERAL LAW

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                        1.   Proxies — 14a-9
                             1.   Generally,
                                  (1) If a company is registered under the `34 Act, and uses proxies to solicit votes to
                                        approve a merger must comply with Rule 14a-9
                                        (1) 14a-9
                                              1) basically, prohibits any false or misleading statement in any
                                                    communication in connection with proxy solicitation.
                             2.   Private Party Right Of Action
                                  (1) There is a private right of action.
                                  (2) There is a private right of action, though the rationale for it has been debased.
                                  (3) There is a 4 factor test on whether to imply a private right of action on page 841 of
                                              the main text.
                             3.   Materiality
                                  (1) Omitted statement
                                  (2) Substantial likelihood that disclosure would have been viewed as a significant
                                        alteration of the mix of information by the reasonable investor.
                                  (3) Materiality here is usually a qualitative, e.g., did you fully disclose the
                                        transactional atmosphere -- facts that would affect s/h judgment.
                             4.   Causation
                                  (1) Materiality is causation, So long as you show:
                                        (1) Some proxy votes are required to pass; or
                                        (2) you lost some other right which you could have exercised, e.g., a state law
                                              remedy
                                  (2) Note: even if votes are not necessary, 14c still requires an equivalent information
                                        statement.
                             5.   Relief
                                  (1) Both prospective and retrospective relieve if available if transaction was
                                        accomplished by misleading proxy.
                                        (1) Damages
                                              1) Generally, damages may be obtained, but unscrambling merger will
                                                    not work... its just too hard.
                                              2) Calculation? How fair was merger.
                                        (2) Loss Causation
                                              1) Some courts require in addition to transaction causation, loss causation
                                                    be proved.
                                              2) And that means that  must show the reason the loss suffered b/c of
                                                    that which was not disclosed.
                                        (3) Attorney‟s fees? Pretty much rejected.
                             6.   Scienter
                                  (1) No definitive answer.
                                  (2) Most courts hold no scienter is required, on idea that this is different from 10b-5




                        2.   Alternatives

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                             1.   If a company is not registered under the `34 act, and not subject to 14a-9:
                                  (1) Then Rule 10b-5
                                        (1) You have to use the weird 10b-5 private right of action analysis except with
                                              a with a misleading proxy.
                             2.   „33 Act Rule 145
                                  (1) Rule 145 imposes liabilities under §11 for sale by use of misleading registration
                                        statement.
                                  (2) Tender offer of shares has to be registered under `33 Act.




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     16.        Contests for Corporate Control
                1.   REGULATION OF CONTROL CONTESTS -- HOSTILE TAKEOVERS
                     1. The Competing Interests:
                           1.    Bidder v. Shareholders
                                 (1) Bidder wants a low price, and a speedy transaction
                                 (2) s/h wants a high price
                                 (3) Conflict is governed by the Williams Act.
                           2.    Target Management v. Bidder
                                 (1) Target Management wants to retain control
                                 (2) Bidder wants the company
                                 (3) Governed by State takeover law
                           3.    Target Management v. Target Shareholders
                                 (1) Target Management believes it can provide a better long term investment
                                 (2) Target Shareholders want $.
                                 (3) Governed by fiduciary duties -- Q: to whom is the duty owed, s/h or corp.?
                     2. The Bidder‟s Ideal Situation in a Tender Offer, How the bidder would structure his relation
                           with the Target Shareholders:
                           1.    Bidder needs to obtain a majority of the T‟s stock at the lowest price.
                           2.    Bidder buys as much a possible at the market rate -- to hedge his bet.
                           3.    Tender Offer
                                 (1) two-tier Offer:
                                       (1) Up to 50% = X price ($30)
                                       (2) After 50% is purchased = X less Y% price ($20)
                                 (2) Short amount of time to accept
                                       (1) reduced risk of competitive bids or management defense.
                                 (3) First Come, First Served Purchases
                                       (1) increase pressure to sell
                                 (4) Irrevocable tender
                     3. Williams Act, §13(d), 14(d) & (e)
                           1.    13(d) Initial Purchases
                                 (1) Acquisition of more than 5% of a company‟s stock must file a report w/in 10
                                       days disclosing:
                                       (1) Identity,
                                       (2) # of shares,
                                       (3) Source of $,
                                       (4) Any Agreements...
                                       (5) Intent regarding control and if so any plans for the future.
                                 (2) A group of people acting together are considered 1 person for §13(d) purposes, 
                                       (1) purchase by group members = 5%; or
                                       (2) members with shares decide to act together, date of decision = 5%
                           2.    14(d)
                                 (1) 14(d)(1) Disclosure -- Offer must be public
                                 (2) 14(d)(5) Shares Tendered are Revocable [for 7 to 60 days or at any time or
                                       what??]
                                 (3) 14(d)(6) If an offer is not for all shares at the same price, shares must be

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                                           purchased from tendered shares on a pro rata basis
                                  (4)      14(d)(7) If there is an increase in price offered, then the increased price must be
                                           paid to all s/h
                             3.  14(e)
                                 (1) 14(e)(1) Offer must be open for a minimum of 20 days
                        4. State Takeover Law -- Law passed at the behest of crybaby losers
                            1.   To be upheld, i.e., to avoid commerce clause issues, State Legislation must be:
                                 (1) Applicable to companies incorporated within that state; and
                                 (2) Directed toward traditional matters of state corporation law, such as voting, not
                                       toward manner of acquisition (that is preempted by Williams Act).
                                       (1) State purpose to screw -up the economy is irrelevant, bad ideas can be
                                            constitutional.
                            2.   Del. §203
                                 (1) No merger with plundered company for 3 years unless prior approval, or 85%
                                       ownership, or approval & authorization by 2/3 voting stock
                                       (1) Constitutionality not directly challenged, by similar statute upheld by 7th
                                            Circ.
                        5. Relation Between Target management and Target Shareholders in Defending against
                            Takeovers:
                            1.   see below:
                2.      PROTECTING CONTROL
                        1. Options of Management in Defense
                            1.   Make Takeover Difficult:
                                 (1) Stagger terms of BOD
                                 (2) Removal of Directors, replacement w/ nominees
                                 (3) Limit right of removal
                                 (4) Heightened Vote requirement for merger
                                       (1) similar to procedure in Del. § -- makes the second step difficult.
                                 (5) Issue shares to dilute power of bidder -- issued to friendly people
                                 (6) Issue only non-voting common shares to the public.
                                       (1) What do you do if all the shares on the market no can vote?
                                            1) Exchange offer, or reclassify stock so it loses some voting power on
                                                  transfer.
                                                  1) Problem: NYSE rules prohibit listing of non-voting or diluted vote
                                                         shares.
                            2.   Make Target Less Attractive
                                 (1) On asset side of balance sheet target can:
                                       (1) purchase assets which will result in anti-trust problems; or
                                       (2) purchase assets that bidder does not want; or
                                       (3) If bidder wants some particular asset sell it to someone else
                                 (2) On the liabilities side of the balance sheet the target can:
                                       (1) Restructure, offer debt in exchange for stock thereby reducing equity and
                                            increasing debt eliminating most public s/h -- basically take the company
                                            private by self-LBO.

                        2.   Poison Pill

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                             1.   Poison Pill grants to each shareholder a contingent right to purchase stock or other
                                  securities, the right is contingent on certain events. Until a triggering event occurs the
                                  rights are redeemable the BOD may redeem them for nominal payment.
                                  (1) Flip-Over Poison Pill
                                         (1) Grants right to purchase shares of merged entity at low price has effect of
                                               diluting value of bidders stock. Applies in 2nd step merger of tender offer, if
                                               no 2nd step -- bu-buy.
                                  (2) Flip-In Poison Pill
                                         (1) Grants right to purchase stock of target company at below market price
                                               increasing overall cost of takeover.
                             2.   Pill issued as a precaution
                                  (1) Will increase management‟s leverage in takeover attempt, basically it will give
                                         management the ability to allow or prevent takeover.
                                  (2) Just say no stance by BOD may be a problem, but where offer considered
                                         inadequate that‟s fine.
                        3.   Defensive Merger -- White Knight
                             1.   Run out and find a protector.
                        4.   Pac-Man
                             1.   Purchase shares by a tender offer of the bidder.
                             2.   The question will then become who can take over each other‟s company first to call off
                                  acquisition
                             3.   Note: SEC rules for time of offer, Rules for notice for meeting, rules for s/h consent
                                  action.
                        5.   Duties of Target Management
                             1.   It is established that the Target management has within its power the ability to make
                                  takeover nearly impossible, the question here is whether a BOD can adopt a defense to a
                                  takeover without violating fiduciary duties to its s/h. Because there is a conflict the BJR
                                  d/n apply.
                             2.   UNOCAL Test:
                                  (1) Was there a threat to the corporation or shareholders?
                                         (1) Threats under UNOCAL:
                                               1) Threat to corporation
                                                     1) change in our manner of business,
                                               2) Threats to s/h
                                                     1) coercive bid
                                                     2) non coercive under priced bid
                                                     3) bust-up that threatens s/h welfare
                                                     4) Ignorance & Confusion regarding long tern prospects
                                                     5) Anything inconsistent with s/h welfare: e.g., subordinated
                                                           securities offered in the exchange, greenmail.
                                  (2) Was the Defense reasonable in relation to the threat -- balance to come
                                        within the BJR
                                        (1)   Reasonableness is enhanced with approval by the outside directors.
                                        (2)   Note also: interplay with independent committee.

                             3.   Shareholder welfare is the paramount concern,
                                  (1) protection of the enterprise does not justify any defensive tactic
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                                   (2) Interests of other constituents (e.g., bond holders) are relevant only if the coincide
                                       with the maximization of shareholder interests
                            4.   Reasonableness of the defense
                                 (1) Management not required to abandon a long term plan...
                                 (2) Preemptive poison pill is reasonable, but a just say no policy regarding
                                       redemption is ... [unclear]
                                 (3) Self-tender offer excluding the hostile bidder is reasonable where threat to s/h was
                                       coercion into acceptance of subordinated debt securities.
                            5.   Revlon duty to seek best value when sale inevitable
                                 (1) If the corporation is deemed to be „up for sale‟ then, under Revlon, the BOD‟s duty
                                       shifts from defending the corporation to maximizing the value for the
                                       shareholders -- auctioneers duty.
                                       (1) Trigger To Revlon Duty:
                                              1) Transfer of Control; or
                                                    1) Note that in a take over of a publicly held corporation by another
                                                         corporation with a major (85%) controlling stock holder was held
                                                         to be a transfer of control b/c transfer of control was from a vast
                                                         number of s/h to an acquiring company controlled by one man.
                                                         In contrast where both companies were widely held on the
                                                         market ownership remained with public s/h and therefore there
                                                         was no change in control
                                              2) Bust-Up
                3.      CHANGES IN CONTROL
                        1. Revlon Duty
                            1.   When it becomes apparent that a change in control or break-up of the corporation is
                                 inevitable the duty of the BOD changes to a duty to maximize the corporation‟s value at
                                 a sale for the s/h benefit.
                            2.   The director‟s role changed from defenders of the corporate bastion to auctioneers.




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     17.     FINANCIAL STATEMENTS
              ASSETS                                                            LIABILITIES
                         Current Assets                                              Current Liabilities
                                 Cash                                                        Accounts Payable
                                 Accounts Receivable                                         Notes Payable
                                 Inventory           ___________                             Income taxes payable __________
                                                           TOTAL                                                       TOTAL
                                                        CURRENT                                                     CURRENT
                                                          ASSETS                                                   LIABILITIES

                         Fixed Assets (not to be sold right now)                     Long Term Debt
                                 Land                                                       5-year notes payable   __________
                                 Building                                                                               TOTAL
                                 Equipment                                                                          LIABILITIES
                                 Less Accumulated
                                   depreciation                    <       >
                                                                         NET
                                                                        FIXED
                                                                       ASSETS
                                                                                SHAREHOLDERS’ EQUITY
                         Intangibles
                                 Patents                       __________            Common Stock (par value x #
                                                                   TOTAL               shares authorized, issued and
                                                               INTANGIBLE                     outstanding)
                                                                   ASSETS            Paid-in capital in excess
                                                                                              of par value
                                                                                     Retained Earnings              ___________
                                                                                                                          TOTAL
                                                                                                                  SHAREHOLDERS‟
                                                                                                                         EQUITY


                                          _________________________                                  ______________________
                                                       TOTAL ASSETS                                        TOTAL LIABILITIES
                                                                                                         AND SHAREHOLDERS’
                                                                                                                     EQUITY


             1.      ASSETS
                     1. Current Assets
                         1.  cash
                         2.  accounts receivable
                             (1) Bad Debts Allowance
                                  (1) co. must anticipate that some of its A/R‟s will not be collected on
                                  (2) Thus, must also recognize this on its balance sheet
                                  (3) problem is that no way of knowing the actual amount
                                  (4) Therefore, an “account” is established with an allowance for bad debt
                                        1) Historical???
                         3.  Inventory
                             (1) Those items which are used in the process of the business

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                                  (2)  Valuation
                                       (1) historical acquisition cost
                                       (2) current market value
                                       (3) value in use
                                       (4) liquidation value
                                  (3) FIFO and LIFO (NOTE: don‟t need to know differences between the two, just the
                                       basic concept)
                                       (1) FIFO  “First in, first out”
                                             1) most recent purchase prices are deemed to represent the cost of the items
                                                  remaining
                                             2) ADVANTAGE: in times of rising prices, will result in inventory being
                                                  shown on the balance sheet at the highest possible amount
                                       (2) LIFO  “Last in, first out”
                                             1) cost of the ending inventory is deemed to be the cost of the items that
                                                  were purchased first
                             4.   Rule of Thumb  items that can be converted to cash readily
                                  (1) readily = within one year
                     2.      Fixed Assets
                             1. permanent property — more or less
                                  (1) land
                                  (2) buildings (even if they don‟t own the land)
                                  (3) Equipment
                                       (1) capital assets
                             2.   Rule of thumb  if it cannot be converted into cash readily
                                  (1) readily = within one year
                             3.   COST  general rule is that fixed assets are imputed at their cost
                                  (1) Adjustments to cost  taken as a set-off against total fixed assets
                                       (1) Depreciation
                                             1) depreciation taken annually also results in a lowering of basis
                                             2) to adequately reflect the true value of the asset accumulated depreciation
                                                  gets its own “account” and value
                                             3) SUBTRACTED from cost value of assets
                                             4) land is not depreciated
                                       (2) Amortization
                                             1) same concept as depreciation, only for intangible assets
                                                  1) patents
                                                  2) trademarks
                                       (3) Depletion
                                             1) Same concept as depreciation and amortization, only for “wasting
                                                  assets”
                                                  1) oil and gas fields
                                       (4) Method
                                             1) Straight-line
                                                  1) divide cost, less salvage value, by estimated useful life
                                             2) Double Declining balance (a type of accelerated method)
                                                  1) First Year  take twice the straight-line depreciation percentage

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                                                      rate and multiply it by the cost of the asset
                                                2)    Succeeding years  same calculation but using the basis balance as
                                                      depreciated
                                                   3) continues until a reasonable salvage value is reached
             2.      LIABILITIES
                     1. Current Liabilities
                          1.    Accounts Payable
                                (1) Question  is there any such thing as “long term accounts payable”????
                                       (1) would it be called a “future debt” even though it‟s not your typical debt????
                          2.    Notes Payable
                                (1) only those with a date payable >one year into the future
                                (2) MIXED notes  where partial payment due within a year and rest later on, that part
                                       of the payment due within a year is shown as a current liability
                                       (1) the rest is shown as a long term debt
                          3.    Income Taxes Payable
                     2. NOTE: for bankruptcy purposes, all debt ranks equally
                     3. Future (long-term) debt
                          1.    Notes
                          2.    Bonds?
             3.      EQUITY
                     1. Stated Capital
                          1.    defined  number of outstanding shares x par value of each share
                          2.    some states place limits on what a corporation can do with its stated capital figures
                                (1) malleable due to “no par” shares
                     2. Capital Surplus
                          1.    Defined  paid in capital in excess of par
                          2.    basically, the difference between what SHs paid the corp. for their stock and the par
                                value of the stock
                          3.    some states restrict what corp. can do with its capital surplus figures
                     3. Earned Surplus
                          1.    defined  total amount of profits and losses since formation, minus dividends paid
                                (1) losses shown as a negative
             4.      ANALYSIS OF A BALANCE SHEET (TESTS)
                     1. Net Working Capital
                          1. Use  measure of short-term stability to ascertain that current assets exceed current
                                liabilities
                          2.    Formula  [current assets - current liabilities]
                     2. Current Ratio
                          1.    Use  measure of the adequacy of working capital
                          2.    Formula  [current assets / current liabilities]
                          3.    Analysis  the smaller the inventory levels required and the more easily collectible the
                                A/R‟s, the lower the current ratio that is acceptable
                     3. Acid Test (net quick assets and quick assets ratio)
                          1. Use  Bankers and other creditors use to consider short-term loans to determine what
                                lender could get in an emergency
                          2.    Formulas

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                               (1) Quick Assets  [(Cash + marketable securities) - current receivables]
                                     (1)   NOTE: Quick assets are never greater than current assets
                                           1) (because, obviously, current assets include inventory, whereas quick
                                                 assets don‟t)
                                (2) Net Quick Assets  [Quick assets - current liabilities]
                                (3) Quick Assets Ratio (The “Acid Test”)  [Net Quick Assets / current liabilities]
                          3.    Analysis  Meaning of the Quick Asset Ratio
                                (1) 1.0 or greater  co. can meet current liabilities w/o liquidating inventory
                                (2) < 1.0  doesn‟t necessarily show problems, but not as stable
                                (3) DEPENDS on how quickly inventory turnover or liquidation can occur
                     4. Book Value
                          1.    Use  shows the value of shares calculated from the books of the company using the
                                value(s) shown on the books
                                (1) especially where no value set by market  shares of close corporations without
                                     ready market still have a “value”
                          2.    Formula  [(assets - liabilities) / number of shares]
                     5. Asset Coverage of Debt
                          1.    Use  measure of how secure holder of long term notes is
                          2.    Formula  [(total assets - current liabilities) / long-term debt]
                          3.    Analysis 
                                (1) no account taken of interests of common SHs
                                     (1) b/c long-term debt senior to common SH
                     6. Debt/Equity Ratio
                          1.    Use  gives picture of what proportion of co‟s permanent capital is borrowed ans what
                                proportion is contributed (internally generated)
                          2.    Formula  [long-term debt / total equity]
                          3.    Analysis
                                (1) “Equity Cushion” perspective
                                     (1) high ratio means there is little “cushion” to any fall
                                     (2) whereas small ratio gives a lender lots of “cushion” to any fall
                                (2) high ratio  heavily leveraged
                                     (1) borrowed capital has interest payments, which are mandatory
                                     (2) internal capital only has dividends, which are discretionary
                                (3) low ratio  thin corporation or thinly capitalized
             5.      Income Statements
                     1. Generally attached to Balance Sheet
                     2. Shows a more detailed version of the numbers listed on balance sheet
             6.      Rights of Debt Holders vs. Preferred Stock Holders




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                             Rights                         Debt                            Preferred Stock

                             Principal                                   Yes                      Preference

                             Income                                      Yes                      Preference

                             Conversion                             If Provided                   If Provided

                             Protection                        Covenants/Security                    Vote

                             Redemption                               Usually                      Usually

                     1.      Debt  generally superior to SHs
                     2.      Preferred Stock  not like common shares, but not true debt either




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