CORPORATIONS I. ORGANIZATION OF CORPORATIONS A. Formation Requirements = people + paper + act 1. Incorporators: a. may have one or more b. may be natural person or an entity c. sign and file the Articles, and call 1st shareholder meeting 2. Articles of Incorporation a. Purposes i. contract between corporation and shareholders ii. contract between corporation and state b. Information i. corporate name & address (A) corporate name must be distinguishable, and (B) corporate name must contain the words ―Incorporated,‖ ―Corporation,‖ or ―Limited‖ (or the abbreviations for those words) (C) names and addresses of incorporators (D) address of registered office and name of registered agent at the office ii. purpose & duration (A) Every corporation has the purpose of engaging in business unless some more limited purpose is stated. (B) duration may be perpetual (and will be unless stated otherwise) iii. capital structure (stock) (A) Number of authorized shares (the maximum number the corporation may sell) (B) Information on number, voting rights, and preferences if separate classes exist (C) MUST designate one or more classes with unlimited voting rights, and one more class entitled to receive assets on distribution. (D) NOTE: ―Issued stock‖ is the number the corporation actually sells, and ―outstanding stock‖ is the shares that have been issued and not reacquired by the corporation 3. Act a. File Articles with Secretary of State i. Acceptance by Secretary is conclusive proof of valid formation. ii. Corporate existence begins when Articles are filed. b. Next steps: i. Subscribers hold organizational meeting ii. Elect board of directors (BOD) iii. BOD selects officers & adopts bylaws B. Legal Significance of Corporation Formation 1. The Indiana Business Corporation Law (IBCL) governs the internal affairs of the corporation 2. Corporation = separate legal entity that can be sued, hold property, etc.
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3. The limited liability nature of a corporate entity protects officers, directors, and shareholders from liability for corporate debts or torts. 4. The corporation’s relationship with shareholders is contractual; governed by: a. Articles of Incorporation b. Bylaws c. Provisions of stock d. IBCL C. Alternative Means to Establishing Corporate Existence 1. De Jure corporate status is a corporation under the law (the corporation followed the formation procedures outlined above) 2. De Facto corporate status may be imputed IF: a. relevant incorporation statute, and b. parties made a bona fide attempt to comply with the statute, and c. there was some exercise of corporate power d. Once established, a de facto corporation is treated as a full corporation for all purposes except action by the state. 3. Corporation by Estoppel a. Third party who deals with the business as a corporation is estopped from later denying the business’s corporate status. b. A business that holds itself out as a corporation and deals as such, is estopped from avoiding an obligation by asserting its own lack of valid formation. c. Usually available in contract, not tort, cases 4. The IBCL states that all persons acting as a corporation while knowing that no corporation actually exists will be jointly and severally liable for all resulting liabilities. D. Bylaws 1. Every corporation has the power to adopt bylaws, but the adopting of bylaws is NOT a condition precedent to forming a corporation. 2. The Incorporators or the initial BOD adopts the initial bylaws. 3. Repeal or Amend: Only the BOD can appeal or amend bylaws, unless the bylaws state otherwise. 4. If the bylaws conflict with the Articles of Incorporation, the Articles control. 5. Bylaws may contain ANY provision not inconsistent with the Articles or IBCL. 6. Bylaws constitute part of the contract between the corporation and shareholders 7. Courts will not interfere with internal management contained in a corporation’s bylaws UNLESS personal liberty or property rights are jeopardized. E. Promoters & Pre-incorporation Contracts 1. Promoter—person acting on behalf of a not-yet-formed corporation who undertakes to bring about its existence 2. Liability a. Corporation is NOT liable on pre-incorporation contracts UNTIL it adopts or ratifies the contract through express or implied action b. Promoter IS liable, and remains liable on the contract UNTIL there is an agreement between the promoter, corporation, and contracting party by which the corporation replaces the promoter under the contract.
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3. Fiduciary Relationship of Promoter to Corporation AND Shareholders—no ―secret profits‖ are permitted on the creation of the corporation a. Sale to corporation of property acquired before becoming promoter = price paid by corporation – fair market value Example: Derrick Carter begins working as ABC’s promoter on June 1. He had purchased a collectible bottle of Black Velvet from Cutie McCleavage for $2,500 on January 1. On July 1, he sells that collectible bottle of Black Velvet to ABC for $5,000. i. If the fair market value (FMV) of the Black Velvet is $5,000, ABC cannot recover anything. ii. If the FMV is still just $2,500, then ABC can recover $2,500 from Derrick. b. Sale to corporation of property acquired after becoming promoter = price paid by corporation – price paid by promoter (IF the profit was SECRET!) Example: Mark Adams sells his Relax-a-lot Formula to Katie for $30,000 on March 28, exactly three months after Katie began working as promoter for MLB. On April 5, Katie sells Relax-a-Lot to MLB for $50,000. i. If the profit Katie got from that sale was secret, she is liable to MLB for $20,000. ii. If the profit was not secret, she is not liable to the corporation. 4. Compensation: Corporation is NOT liable to promoter for compensation unless it is express agreed to AFTER incorporation. F. Foreign Corporations (incorporated outside of Indiana) 1. To conduct business in Indiana, must: a. Obtain a certificate of authority from Secretary of State b. Appoint registered agent and maintain registered office in Indiana 2. ―Conducting business‖ is regular course of intrastate business 3. Foreign corp. conducting business without following the requirements face civil fines up to $10,000 and it cannot sue in-state (but can be sued). 4. Certificate of authority may be revoked after written notice, and may be appealed in a Superior or Circuit Court within 30 days. II. ISSUANCE OF STOCK A. Issuance: a means of raising capital; the corporation sells or trades its own stock B. Subscriptions 1. written offer to buy stock from corporation 2. Subscriber—person who agrees in writing to buy stock either before or after incorporation 3. The corporation and subscriber become obligated when the BOD accepts the subscription. 4. Revocability a. Pre-incorporation subscriptions are irrevocable for six months unless it states otherwise. b. Post-incorporation subscriptions are not discussed by the IBCL. The terms of the agreement will determine. C. Consideration (in exchange for stock) 1. Form
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a. BOD has broad discretion b. May exchange shares for any tangible property or benefit (including cash, note, services, other securities, etc.) c. If stock is issued for a promise to render services or a promissory note, it must be reported in writing to the shareholders. 2. Assessments Prohibited: Once shares are issued, they are ―fully paid and non assessable,‖ meaning that shareholders are liable only for the payment of any consideration. D. Preemptive Rights 1. The right of an existing shareholder to maintain his percentage of ownership of the corporation by buying stock whenever there is a new issuance of stock. 2. The shareholder may purchase whatever amount of the new issuance is necessary to maintain his percentage (not to increase it). 3. In Indiana, preemptive rights exists only if provided for in bylaws or some other agreement. There is no statutory preemptive right. E. Issuance of Certificates 1. Shares MAY be represented by certificates. 2. If there are no certificates, shareholders must be given written information stating the number, name, and class of their stock. 3. Corporation may issue fractional shares (voting)… 4. …or may issue ―scrip‖ (non-voting fractional shares) III. DIRECTORS AND OFFICERS A. Statutory Requirements for Directors 1. Existence a. Corporation of 50 or fewer shareholders need not have a BOD. b. Otherwise, corporations generally must have BOD. 2. Number a. One or more adult natural persons b. Number should be specified in or fixed according to Articles or Bylaws. 3. Election a. Shareholders elect directors at an annual meeting. b. Directors hold office until their term expires AND their successor is elected. c. Directors are elected by a plurality of the votes (unless otherwise specified). 4. Board Vacancies a. Filled by BOD unless otherwise stated in the Articles or Bylaws. b. If BOD has less than quorum, the replacement is determined by a majority of those holding office. 5. Articles MAY authorize staggered terms by dividing the directors into 2 or 3 groups. 6. Board Action a. Two Methods i. Unanimous written consent to act without a meeting, or ii. Meeting at which quorum is present b. Notice i. requirements generally set in bylaws.
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ii. At least 48 hours required for special meetings, but failure of notice can be waived in writing or by attending without objection c. Quorum i. Majority of all directors unless a different percentage is set in bylaws ii. May never be less than 1/3 iii. If a quorum is present, passing a resolution requires only a majority vote of those present. d. Directors may be removed with or without cause by the BOD, or as otherwise provided in Articles or Bylaws. B. Role of Directors 1. All corporate authority must be exercised by, or under the authority of, the BOD 2. Business & affairs of corporation must be managed by BOD 3. BOD may delegate substantial management functions to a committee, but may NOT delegate: a. amending Articles or Bylaws, b. filling vacancies c. declaring distributions d. recommending fundamental corporate changes e. issuing shares f. changing shareholder rights 4. BOD may fix its own compensation, but must be ―reasonably proportioned‖ to the services and corporation’s ability to pay. (Broad standard) C. Duty of Care 1. Burden of proof is on Plaintiff 2. Business Judgment Rule: ―Directors must discharge their duties in good faith, with the care an ordinarily prudent person would exercise under similar circumstances, and in a manner the director reasonably believes to be in the corporation’s best interest.‖ 3. The BJR insulates Director from liability for ay action taken (or failure to act) UNLESS: a. director failed to perform to the BJR standard, AND b. the failure constitutes willful misconduct or recklessness 4. Requires reasonable investigation, but may rely on information from officers, employees, legal counsel, accountants, and committees of the BOD. 5. ―Best Interests‖ is determined by considering effect on: a. shareholders b. employees c. suppliers d. customers e. communities where facilities are located f. any other pertinent factors D. Duty of Loyalty 1. If a Plaintiff shows that a Director acted in any one of the following three ways, the burden shifts to Defendant 2. Interested Director Transaction: deal between corporation and one of its directors (or between corporation and one of its directors’ businesses). Transaction is voidable UNLESS Director proves:
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a. Deal was fair to the corporation when entered, OR b. Director’s interest and the relevant facts were disclosed or known AND the deal was approved by either i. BOD or ii. Shareholders entitled to vote. c. NOTE: Interested directors count toward quorum. 3. Competing Ventures: remedy is a constructive trust against the Director on any profits he receives from his competing venture 4. Corporate Opportunity Doctrine a. Cannot usurp a corporate opportunity for personal profit b. Director cannot take corporate opportunity unless corporation is unwilling and unable to take it E. Other State Law Bases of Director Liability 1. Ultra Vires Act: responsible officers and directors are liable for ultra vires losses. 2. Improper Distribution 3. Determining Which Directors are Liable: a. Director is presumed to concur with Board action UNLESS: i. he objects at the beginning of the meeting, ii. enters dissent or abstention in the minutes, or iii. delivers written notice of dissent or abstention at the meeting b. EXCEPTIONS: i. absent directors are not liable ii. good faith reliance with a reasonable belief in the competence of the person providing information for: (A) book value of assets (B) opinion of competent employee, officer, professional, or committee of which the relying director was not a member, (C) financial statements by auditors. F. Officers 1. Owe same duties of Care and Loyalty as Directors 2. Status a. Agents of the corporation b. IBCL requires that corporation have at least one person serving as an officer c. Corp. must delegate to one of the officers the duties of secretary 3. Selection & Removal a. Selected and removed by BOD b. May resign at any time by delivering notice. G. Indemnification of Directors & Officers 1. No indemnification (corporation is prohibited from indemnifying): a. person is held liable to the corporation, or b. person received an improper benefit 2. Mandatory Indemnification a. person was wholly successful in defending the action 3. Permissive Indemnification: a. Any situation not falling within ―Prohibited‖ or ―Mandatory‖ indemnification b. Eligible if:
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i. shows he acted in good faith and with the reasonable belief that his actions were in the company’s best interest, or ii. shows he reasonably believed his criminal conduct was lawful c. Disinterested directors, or a disiniterested committee of 2 or more persons, or a special legal counsel, may determine whether to indemnify 4. Court may order indemnification any time if ―it is justified in view of all circumstances‖ 5. Corporation can (and should) purchase insurance for director and officer liability. IV. SHAREHOLDERS A. Piercing The Corporate Veil 1. Courts reluctant to disregard corporation existence 2. If corporate form is so ignored, controlled, or manipulated that it is the mere instrumentality of another, and that misuse constitutes fraud or promotes injustice, then the corporate veil may be pierced and the shareholders may be liable for acts or debts of the company. 3. Determining whether to Pierce: Mnemonic: PUFFICAP a. Public or close corporation? (Only close will be pierced) b. Undercapitalization (very important) c. Formalities disregarded d. Fraudulent misrepresentations e. Identity of shareholders, officers, and directors f. Comingling of funds g. Absence of corporate records h. Payment of individual obligations 4. Piercing allows a court to reach shareholders, officers, directors, parent or subsidiary corporations, and ―sister‖ corporations 5. Burden is on party seeking to pierce. B. Shareholder Management of Corporation 1. Shareholders in a close corporation (few shareholders, not publicly traded) may eliminate the BOD and run the business themselves. 2. Managing shareholders still owe the fiduciary duties of care and loyalty, and are held to the same fiduciary standard as officers and directors. 3. Majority shareholders have the right to manage, operate, and control the enterprise notwithstanding the fiduciary duties 4. Shareholder agreements may relate to management. C. Deriviative Suits 1. An injury to the corporation is addressed via a single derivative action, not via an action maintained in an individual shareholder’s name. 2. Shareholder sues to enforce the corporation’s claims. 3. Reasons for the Policy: a. Avoid multiple suits b. Protect creditors c. Protect all shareholders
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d. Adequately compensate shareholders by raising the value of everyone’s shareholders 4. Consequences of successful derivative suit: a. Recovery goes to corporation b. Shareholder who brought the suit receives costs and attorneys fees from the corporation 5. Consequences of unsuccessful derivative suit: a. Shareholder may NOT recover costs and attorneys fees b. Shareholder may be liable to the director or officer for costs and attorneys fees if there was no reasonable cause for bringing the suit c. Res judicata: other shareholders cannot later sue on the same transaction. 6. Requirements for bringing a derivative suit: Mnemonic: Alex Tells us to Vote Democratic a. Adequate Representation: shareholder must fairly and adequately represent interests of shareholders b. Time: person bringing suit must have owned stock at the time the claim arose OR have gotten it by operation of law by someone who did, AND the person bringing suit must own stock throughout the litigation c. Verified: person bringing suit must file a verified complaint d. Demand: person must make a written demand on directors that corporation bring suit (unless the demand would be futile) 7. Shareholder may be required to post security (bond) for costs 8. Directors may, upon demand being made, establish a committee of three or more disinterested directors to review whether the claim should be pursued by the corporation. a. Committee’s decision is binding UNLESS they were not disinterested OR the decision was not made in good faith. b. If suit is brought, it will be dismissed if the committee of disinterested directors had determined in good faith not to pursue it. 9. Litigation a. Corporation must be named as Δ b. Defenses i. substantive defenses that could have been raised against the corporation ii. plaintiff disqualification defenses iii. disinterested committee determination to not pursue suit c. No dismissal or settlement without court approval 10. The ―American Rule‖ a. recently adopted by Indiana b. States that direct rather than derivative actions may be brought by a shareholder in a close corporation. c. Direct action allowed IF court finds: i. will not expose the corporation to multiple suits, and ii. will not materially prejudice creditors, and iii. will not interfere with fair distribution among all parties D. Shareholder Voting 1. Generally rule: Shareholder as of record date has the right to vote.
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a. Record shareholder = person shown as owner in corporate records b. EXCEPTIONS: i. Death: Executor of estate may vote the shares ii. Proxies—Requirements: (A) writing (B) signed by record shareholder (C) directed to secretary of corporation (D) authorizing someone else to vote the shares c. Voting Trusts & Agreements i. Requirements for Voting Trusts: (A) written trust agreement stating how shares will be voted (B) copy sent to corporation with beneficiary list (C) transfer the legal title of all shares to the voting trustee (D) original shareholders receive trust certificates (instead of share certificates, which are held by the Trust) and retain all shareholder rights except for voting (E) generally irrevocable only for a maximum period of 10 years after the effective date UNLESS it is coupled with an interest. ii. Requirements for Vote Pooling Agreement (A) Written agreement (yup, that’s it!) (B) Vote Agreements are specifically enforceable. 2. When Do Shareholders Vote? a. Annual meeting at which Directors are elected. If no annual meeting is held, shareholder may petition the court to order one: i. after 6 months from the end of the fiscal year, or ii. 15 months after the last annual meeting b. Special meeting may be called by: i. the BOD, or ii. person designated in Articles/Bylaws, or iii. holders of at least 25% of the voting shares IF the corporation has no more than 50 shareholders c. Notice i. Written notice required for every shareholder entitled to vote for EVERY meeting, whether annual or special ii. Contents of Notice (A) When (B) Where (C) Purpose (if it is a special meeting, the purpose stated is the ONLY course of business permitted) iii. If no notice is given, any action taken at the meeting is VOID… UNLESS those who were not given notice waive: (A) expressly, in writing and signed at any time, or (B) impliedly, by attending the meeting and not objecting to the lack of notice. 3. Shareholders’ Actions: a. Two ways shareholders may take a valid corporate act: i. unanimous written consent of ALL voting shares, or
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ii. meeting at which quorum is present (A) Quorum is determined by examining the number of shares represented, NOT the number of shareholders. (B) Generally, quorum requires a majority of outstanding shares. (C) If quorum is present, an act by the majority of shares present binds the corporation (unless the bylaws or articles require a higher-than-majority vote) b. Cumulative Voting (Never been tested yet) i. Allows small shareholders more power in electing someone to the BOD ii. Only available in voting for directors iii. Indiana does not statutorily provide for cumulative voting, so it is available ONLY IF provided for in the Articles or Bylaws iv. Multiply (# shares owned) x (# directors to be elected) Example: Mike owns 2,500 shares of National Geographic Corp. National Geographic has six Director seats open, and Mike desperately wants to elect Mary Kate to one of the seats. Mike has 2,500 shares, so we multiply that by the number of Directors seats open (6), and we get 15,000. Thus, Mike can place a total of 15,000 votes for Mary Kate. Example 2: Same scenario as above, but Mike wants to elect both Mary Kate and Ashley to director seats. He could place 7,500 votes for each (for a total of 15,000 votes.) E. Stock Transfer Restrictions 1. May be in the Articles, the Bylaws, an Agreement among shareholders, or between the corporation and the shareholders. 2. Valid & enforceable IF: a. authorized, and b. its existence is conspicuously noted on the front or back of the stock certificate or information statement 3. What if the stock is sold in violation of a stock transfer restriction? a. Action against the selling shareholder i. Will succeed so long as the restriction is reasonable under the circumstances (not an undue restraint on alienation) b. Action against Buyer of the stock: i. Even if the restriction is reasonable (see above), it may ONLY be invoked against a Buyer IF it is conspicuously noted on the certificate OR the transferee had actual knowledge of the restriction F. Rights of Shareholders to Inspect & Copy Corporate Records 1. Records for which shareholders have the right to inspect and copy: a. Must be maintained at principal office & delivered upon request: Mnemonic: ABCDEF’S i. Articles & amendments to them ii. Bylaws & amendments to them iii. Communications to the shareholders for the last 3 years iv. Directors’ & Officers’ names and addresses v. Every shareholder minutes for the last 3 years & director minutes regarding stock rights
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vi. Financial statements for 3 years vii. Secretary of States’ biennial report b. Must be maintained at a ―reasonable place‖ & delivered IF request is in good faith WITH proper purpose: Mnemonic: ABCD’S i. Accounting records ii. Back shareholder minutes (ALL of them, even past 3 years) iii. Committee records iv. Director minutes (ALL of them, not just those dealing with stock rights) v. Shareholder list alphabetized by class 2. Request = written & delivered at least 5 days prior to inspection 3. Inspection = at the place where the records are kept 4. Proper Purpose = Valuation for estate tax purposes Improper Purpose = Competing with the company 5. If company fails to comply with proper request? Court may issue an Order for inspection and attorney fees. G. Distributions—any payment to shareholders EXCEPT salary 1. May be cash, stock dividend, stock redemption/forced purchase, any other transfer of property for the shareholders’ benefit 2. BOD has discretion over making distributions 3. An action to compel distribution requires showing: a. abuse of discretion AND b. bad faith OR illegal conduct OR oppressive conduct 4. Classes of Stock a. Preferred: get their dividends first b. Participating: get BOTH common and preferred dividends c. Cumulative: continue to accrue dividends year-to-year until paid off d. Common: the basic stock, no special rights, just get dividends divided equally after Preferred, Participating, and Cumulative have received their portions 5. Making Distributions: a. BOD may approve distributions IF i. corporation is financial sound, AND ii. solvency test: the corporation must still be able to pay its debts in due course after the distribution is made (A) If distributions are made in violation of the solvency rule, the directors who approved the distribution will be personally liable to the corporation, subject to the Business Judgment Rule b. Date of Distribution: BOD may fix a record date, declaration date, and payment date i. Record date is when the identity of eligible shareholders is determined ii. If no record date is set, it will be the date BOD authorizes the distribution c. Source & Nature of Distributions i. Dividends must be paid from unreserved and unrestricted earned surplus ii. The ONLY time dividends may come from capital is when corporation is dissolving.
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iii. Once dividends are declared, they are considered to be a corporate debt, on par with all other debts V. FUNDAMENTAL C ORPORATE C HANGES A. Characteristics of Fundamental Corporate Changes 1. Extraordinary occurrences generally requiring a. BOD Resolution AND b. Approval by majority of the shares entitled to vote 2. Dissenting Shareholder Right of Appraisal (―Dissenter’s Rights‖) a. Do not exist if the corporation’s shares are publicly traded on a national security exchange! b. Dissenter’s rights allows a dissenting shareholder to force the corporation to buy back his shares at a ―fair value‖ i. Fair value = value of shares immediately before the event occurs (or the highest price paid in a control share acquisition) ii. If the shareholder and corporation cannot agree on a fair value, then the corporation must petition for judicial appraisal within 60 days of the shareholder’s demand c. Triggered by: Mnemonic: A dissenter can SMEAR a corporation’s plans when… i. Sale of substantially all corporate assets, outside the ordinary course of business ii. Merger or consolidation iii. transfer of shares in a share Exchange IF all of the dissenter’s corporation’s shares, or all of a class of shares, is being acquired by another corporation iv. Acquisition IF acquirer is accorded voting rights AND owns a majority of shares v. any other transaction for which dissenter’s Rights are authorized in the Articles, Bylaws, or a BOD Resolution d. To use dissenter’s rights: i. Must be a shareholder entitled to vote on the event ii. Must file (BEFORE the vote) written notice of objection and an intent to demand payment iii. Must abstain or vote against the proposed change iv. After any approving vote, corporation must mail within 10 days notice to all objecting shareholders of their rights. After this notice is received, must make written demand to be bought out and deposit certificates as required by notice B. Mergers & Consolidations (Probably will NOT be a topic) Merger = A Corp. + B, Inc. form A Corp. Consolidation = A Corp. + B, Inc. form C. Corp. 1. BODs of both corporations must approve plan of merger and submit to the shareholders 2. Shareholders must approve (usually of both corporations) 3. No shareholder approval is required in a short-form merger a. a subsidiary whose parent owns 90% or more of its shares is merged into that parent, OR
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b. the surviving corporation’s shareholders will have the same proportionate ownership, and no more than 20% more issuable shares are created. 4. If the change is approved, must file Articles of Merger with Secretary of State. 5. Generally, shareholders of both corporations in a regular merger will have Dissenter’s Rights. 6. Effect of merger or consolidation: The surviving company succeeds to all rights AND liabilities of the constituent companies. C. Transfer of All or Substantially All Assets [not in the ordinary course of business] 1. Fundamental corporate change for the selling corporation ONLY. NOT a fundamental corporate change for the buying corporation. a. This means that there are dissenter’s rights ONLY for the selling corporation’s shareholders! 2. Requirements: a. BOD Resolution from both corporations b. Submitting to the selling corporation’s shareholders for approval along with a plan of share exchange c. File Articles of Exchange in a share exchange (a transfer of assets generally requires no filing) d. Acquiring company is NOT generally liable for the debts of the acquired company UNLESS the deal says otherwise, OR the company purchasing assets is merely a continuation of the selling corporation. D. Control Share Acquisition (Not likely to be tested) 1. Indiana Control Share Acquisition Act (ICSAA) meant to provide protection from hostile takeovers for large-corporation shareholders 2. Applies ONLY to: a. Corporations that are NOT publicly traded, AND b. that have at least 100 shareholders, AND c. with principal office or substantial assets in Indiana, AND d. Either i. More than 10% of shareholders in Indiana, or ii. More than 10% of shares in Indiana, or iii. 10,000 shareholders in Indiana 3. Control Shares: Those shares acquired within any 90-day period by a shareholder that would put the shareholder over 1/5, 1/3, or 1/2 ownership interest. a. Control shares are statutorily stripped of voting rights UNLESS they are restored by a vote of disinterested shareholders b. If voting rights are restored and the acquirer has majority control of the corporation, any shareholder who voted against the restoration has Dissenter’s Rights. i. The ―fair value‖ for the Dissenter’s shares will be the highest price paid for shares during the control share acquisition. E. Business Combinations 1. Meant to prevent ―two-tier‖ or ―bust-up‖ takeovers of publicly-traded corporations 2. Applies to Indiana corporations with over 100 shareholders that own a class of voting shares registered with the Securities Exchange Commission
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3. ―Business Combination‖ = any kind of transaction which would allow a potential acquirer to use the corporation’s assets to finance an acquisition (mortgage, merger, issuance of stock, dissolution plan, etc.) 4. Resident domestic corporation MAY NOT engage in any ―business combination‖ with any ―interested shareholder‖ for a period of 5 years UNLESS the business combination is approved BEFORE the interested shareholder’s shares were acquired. a. A shareholder owning at least 10% of the company is presumed to be interested. 5. There are no Dissenter’s Rights under the Business Combinations Act. F. Amendment of Articles 1. In Indiana, the right to amend the Articles of Incorporation generally lies with shareholders. 2. Unless the Articles provide otherwise, the BOD may amend the Articles without shareholder approval to: a. extend duration of the corporation b. delete the initial directors c. delete the initial registered agent or office d. make minor changes e. cancel treasury shares f. increase common shares if the percentage ownership remains the same 3. If no shares have been issued, the BOD or the incorporators may make any Article amendment. 4. The BOD may make amendment recommendations and submit them for shareholder approval. a. If shareholders approve, BOD files the amended Articles with the Secretary of State. b. There are NOT Dissenter’s Rights for article amendments. c. Class Voting: If the amendment harms a class of stock, it must be approved by the shares of that class, AND by the overall majority of all voting shares. G. Dissolution 1. Methods of Dissolution a. Voluntary i. If business has NOT commenced, then a majority of incorporators or BOD may dissolve. ii. Once business commences, corporation may dissolve upon BOD recommendation AND a majority vote of the shareholders. iii. After dissolution (regardless of whether business had commenced), Articles of Dissolution must be filed with the Secretary of State, and notice must be given to creditors. b. Involuntary—by court order i. Shareholder may petition if: (A) there is director deadlock that harms the company OR prevents the conduct of business, or (B) there is shareholder deadlock and failure for at least 2 annual meetings to fill a vacant board position. ii. Creditor may petition if: (A) Corporation is insolvent, AND
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(B) Creditor either has an unsatisfied judgment against the corporation, OR the corporation admitted its debt in writing c. Attorney General may petition if i. it establishes the corporation received its Articles through fraud or abused its authority. d. Administrative Dissolution—Secretary of State may dissolve a corporation i. for failure to deliver biennial report, or ii. for failure to pay taxes or penalties 2. Post-Dissolution: Winding Up a. Gather all assets b. Convert them to cash c. Pay creditors i. For known claims, corporation must provide written notice to the creditor stating the amount of the claim. If the creditor objects, he may sue within 90 days of the deadline. If he does not object, the claim is ―fixed.‖ ii. For unknown claims, corporation must publish notice in a general circulation paper. Claims are barred 2 years from the publication date. d. Distribute any remainder to shareholders pro-rata by share UNLESS there is a dissolution or liquidation preference. i. FIRST, pay secured creditors ii. SECOND, pay unsecured creditors (including unpaid but already-declared shareholders’ dividends) iii. THIRD, pay Preferred Shareholders iv. FOURTH, pay Common Shareholders Limited Liability Companies is not covered, as lecturer said they have not been tested.
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