Corporations Outline

Report as inappropriate Your report has been received

Shared by: jennyyingdi

Tags

Stats

views:: 8
posted:: 5/6/2012
language:: English
pages:: 33

Public Domain

Document Sample

Corporations Outline

I. Corporation Entity Status
A. Considerations to choose entity
1. Tax:
2. Paperwork amnt:
a. Corp. must file articles of incorp.
b. Corp. may also have to comply with securities
3. Size of Business
4. Liability: Usually most concerned with this factor
B. Characteristics of Corporation Status:
1. Own Legal Entity
2. Limited Liability for SH owners
3. Centralized Management
4. Free Transferability of Ownership
5. Continuity of Life
6. Double Taxation
C. Corp. as Entity:
1. separateness of investors from business itself
2. corp. = own entity separate from SH
3. corp. has separate legal personality
4. MBCA §3.02: General Provisions for Corp.
a. rt. to sue & be sued
b. rt to purchase/acquire property
c. rt to K & incur liability
d. rt to do “any other act” that furthers business
e. rt to keep corp. name as own
D. Corp. Liability:
1. corp. responsible for own debts
2. flows from entity status = limited
3. SH liability limited to investment  make more pple willing to
invest
4. MBCA §6.22: Liability of SH
a. SH not personally liable BUT
b. May become liable for own acts IF
i. sign in individual capacity
ii. pierce corp. veil
c. SH liable to fullest extent of personal shares
i. will be obligated to pay portion of share they were
subscribed even if not fully bought yet
5. Limits to Liability:
a. Piercing Corporate Veil: based on policy of preventing
abuse of limited liability status
i. co-mingling of funds
ii. failure to maintain corporate formalities
iii. failure to adequately capitalize corp.
iv. Undercapitalization: not providing enough
resources for corp. to do business in reality
- heavily under-financed for expected risks
- aka “fraud on market”
- i.e. starting cab business w/$1.00
v. Instrumentality: type of agency theory
- individual investors behave as if corp. is
nothing more than agent to carry on business
- “Alter Ego” – SH liable when treat assets of
corp. as own
b. If either theory is proven – SH will be personally liable
c. Applies toward sibling corp. as well (i.e. 10 cab corp.)
E. Corporate Tax:
1. Corp. = Double Taxation (corp. itself + dividends)
2. Unless S-Corp.
a. only 1 class of stock
b. small corp.
c. flow-through taxation

II. Financial Structure of Corp.
A. MBCA §2.02: Articles of Incorp.
1. must set forth:
a. corporate name
b. number authorized shares
c. address of corp. registered office
d. name & address of each incorporator
2. may set forth:
a. names & addresses of directors
b. purpose for corp.
c. responsibility for managing business
d. regulation of powers
e. par value if req’d
B. MBCA §6.01: Authorized Shares
1. for more than 1 class of shares
2. must indicate in Articles how they are different
F. Capital Formation: ways investors make money or prop available to
corp.
1. Capital Structure: particular to each corp. capital formation
2. 2 Types Capital:
a. Debt Capital
b. Equity Capital
c. Hyrbid: mixture of both
d. Internal Debt: investor as both SH & creditor
i. lowers tax base b/c interest payments become
deductible but not dividends
ii. can be debt or equity
iii. debt repaid b/f dividends
iv. no tax paid on return of capital investment
G. Debt Capital: corp. not req’d to have debt but usually do
1. Private Loan: through financial institution
2. General Public Funds: publicly traded debt (bonds, notes, etc…)
a. Short-Term Instruments: maturity = 1 day – 5 years
i. promissory ntoes
ii. commercial paper (30 – 90 days)
b. Long-Term Instruments: maturity = 5 years +
i. Bonds: long-term Secured loan w/lien on corp.
- problem: supposed to be secure but if too
many pple. buy bonds then trying to seize
assets will be difficult
- solution: trust or trustee appointed to
represent interest of public bond-holders
when dealing w/corp.
ii. “Zeroes” Bonds: no interest rate attached at all –
only make money if corp. success
iii. Income Bonds: interest only paid if corp. earned
enough income to cover / int. rate fluxuates
iv. Participating Bonds: tied to corp. success &
earnings / no fixed rate interest
v. Junk Bonds: below investment grade debt
instrument – if op. does become successful = very
high rate of return / often used in mergers &
takeovers
vi. Debentures: long-term Unsecured loan
- would be placed behind secured creditors for
collection purposes
- modified powers for trustees: general rep. of
interest
- much higher interest rate b/c of riskiness of
unsecured transaction
vii. Subordinated Debentures: your interest is lowered
in priority of creditors even more
- may provide an even higher rate of return
- higher int. rate b/c compensating for low
priority
H. Equity Capital: total proprietary ownership in corp. (Stock)
1. MBCA §2.02: Articles of Incorp.: requires statement of no.
Authorized Shares
2. Common Shares: typical instrument that qualifies you to
participate in corp. – in every corp.
a. represents your individual interest in corp.
b. *A11-A13
3. Preferred Shares: differ in some way from Common –not req’d –
may only have Common
a. need to state in Articles how they differ
b. may be voting rights or dividend rights
c. different price depends on type you want
d. Why Preferred Shares:
i. concerned with relative safety of return
ii. no concern w/participation
iii. priority of payment
e. Series: subclassification of Preferred stock
4. Types of Preferred Shares:
a. Cumulative Preferred Shares: any time Board ready to
pay dividends – they must take care of present dividends
& arrearages (past dividends not paid)
- Bd. Responsible for dividends from past
unpaid
- BUT do reserve discretion to pay fully or
partially
- no interest paid unless says so in Articles
b. Non-Cumulative Preferred Shares: no arrearages paid
i. if dividends not paid for 5 yr. al lyou get in 6th yr. is
the dividends from that year
ii. Inducing Sale of Non-Cum. P.S.
- ask for rt to sell shares at any time (has to be
in Articles of Inc.)
- arrange for representation Board so they will
vote to pay dividends yearly
c. Fully Cumulative: entitlement which is postponed b/c not
realized until Bd. decides to issue
d. Partially Cumulative Preferred Shares: dividends are
paid only to extent that corp. has enough money to cover
dividends for that year
e. Participating Preferred Stock: allowed to participate in
returns / creates opportunity to participate in other returns
in corp. other than entitlement
f. Non-Participating Preferred Stock: still perceived as SH
but only right is to entitlement
g. *allowed to mix types of Preferred Shares
5. Dividend Creditor: equitable doctrine that increases your rights to
show that corp should pay dividends – that corp. has enough funds
just withholding to be “mean”
6. Convertible Shares: changing status of your shares (usually from
preferred to common)
a. common stock getting more return than preferred
b. participating preferred shares will probably NOT convert
c. value of common stock on market is higher that
conversion price of equivalent no. of preferred shares
d. want voting rights
e. Rate of Conversion = # of new ones you are buying
allotted to ones you hold
7. Treasury Shares: issued shares that are no longer outstanding b/c
of redemption – aka Authorized but Unissued
a. shares corp. hold in treasury that were once issued
b. MBCA does not recognize this
c. MBCA §6.31: Corp. Acquisition of Own Shares
i. no concept of treasury shares
ii. portion either redeemed now part of unissued shares
iii. can be either
- resold or
- cancelled if reissue prohibited
iv. A-13
8. Issued/Non-Issues Shares:
a. issued = no. shares actually sold by corp.
i. called “Outstanding” shares
b. non-issued = no. left to sell out of total authorized shares
9. Redeemable Shares: applies to both types (Common + Preferred)
a. MBCA §6.01(c)(2): lists lawful shares allowed to create
b. corp. may want to redeem shares it has given out
c. SH may not always have choice re redeemability
d. Why Redeemable Shares:
i. acquisition/merger: (b/c SH may oppose)
ii. preferred stock may be too expensive way to raise
capital so want to convert to all common shares
iii. public corp wants to go private
e. Redemption Price: what corp. will pay for shares
i. premium: higher price than mkt to reflect
compensation for forceable take-over of shares
f. PUT = SH right to sell shares b/c fed up with corp.
g. CALL = corp. rt to buy back shares
10. Value of Shares: determining price of shares
I. Valuation of Shares:
1. Deciding No. Authorized Shares:
a. many atty. “ beef up” figures to prevent problem later if
market picks up – don’t have to sell all shares
b. Equity Determination #1: divide total equity by no.
willing investors + add more shares to be safe
c. Equity Determination #2: divide total equity by
approximate value of shares
2. Authorized Share Capital = no authorized shares (x) value of ones
sold
3. General Practice: must have value for shares b/f go to mkt
a. does not have to be exact
b. could be par value
c. could only elude to value
d. beginning of dualism: actual selling price & nominal price
do not have to match
4. Actual Selling Price Considerations:
a. how much you need & no. pple likely to purchase
b. some guesswork but maybe compare your co. assets to
other similarly situated co.
c. opportunity cost: addresses Q of when potential SH
calculates lost return on investment w/known rate of return
i. concern for how investor will deal with an unsure
rate of return
ii. what investors lose by purchasing on unsure rate of
return as opposed to fixed rate return
5. Nominal Shares Value: price defined in Articles (may be different
than actual price – may be same as par value if in no par state
6. Par Value: price identified in articles that not allowed to sell any
share below that value UNLESS amend Articles
a. MBCA §2.02(b)(4): creation of PV is discretionary
b. PV tells management what cut-off point is & they may
move up but not allowed to go below
7. History of Dualism between Actual Value & Par Value
a. developed from “parity”: each person would have paid
same price for same type shares – prevented insider’s self-
dealing
b. Creditor’s Standpoint: use PV as basis for giving loan
c. Stated Capital: based on PV & based on no. issued & non-
issued shares
i. Stated Capital = PV (No. Issued & Outstanding Sh)
ii. basically minimum collectible amount
iii. viewed as trust account for creditors
d. Legal Capital: Stated Capital with legal attributes
i. cannot do certain things with this $
ii. also treated as type of trust account
8. Configuration of Par Value:
a. Low PV = lower liability to creditors
b. High PV = better for creditor b/c more $ available
c. No PV = no constraints on Bd. just don’t have PV
c. Stamp Duty: some states have tax based on value of shares
i. if High PV = higher tax
ii. if Low PV = lower tax
d. Advantages of High Par:
i. creditor more likely to lend
ii. corp. looks good to investment market
iii. keep corp. from being publicly traded
iv. Truth-In-Advertising: don’t have to deal w/dualism
b/c PV will also probably be actual value
e. Advantages of Low Par:
i. typically use Low Par
ii. looks better for SH
iii. usually better for corp.
f. Advantages of No Par:
i. avoid discrepancy between high & low
ii. no risk of pricing self out of market w/too high PV
iii. in a risky mkt = better to use no par
iv. frees Bd. from restrictions
9. Par Consequences:
a. makes difference for accounting purposes
b. Ohio (ORC 1701.30): mandates every corp to have Stated
Cap. whether they use PV or no PV
i. Stated Cap w/o PV = all accounts from purchased
shares go into 1 account & then Bd. decides how much
to go into Stated Cap.
ii. Other jd: do not mandate Stated Cap. Or may not
even refer to it so it really doesn’t matter if use PV
or Not
iii. A-30 Ex. 3
10. Watered Stock Liability: potential liability of any person who has
bought shares below PV stated in Articles
a. purchaser will have to pay difference eventually
b. Why: may use this to catch up with market
c. How: may result from setting PV too high
J. Capital Accounts: done differently depending on use of PV or no PV &
whether Stated Cap. is req’d by state
1. Stated Capital: type of SH equity
2. Capital Surplus: amount actually collected from sale of shares
a. A-30: Examples of consequences of PV
b. Low PV = higher capital surplus
c. High PV = no capital surplus b/c shares sold at PV
d. No PV = depends on Bd. determination of stated cap.
i. A-33: no PV but Bd. put all proceeds to std. cap
ii. A-35: capital surplus even though no PV
3. Earned Surplus: result of earning acquired by corp. w/in business
cycle
a. accumulated & retained earnings
b. b/c assets grew faster than liability
4. A-39: Designing Capital Structure of Corp.
K. Debt Implications: what it means to have leverage
1. Leverage: debt financing is part of capital structure
2. Sole-Equity Corp.: returns will be lower on total investment
3. Debt-Equity Mix Corp: rate return on equity portion will increase
more than if had only equity
a. total earning up  rate return on equity up
b. reason: interest payment is fixed
4. Higher Debt –Equity Ratio: much higher rate return on equity
investment
a. don’t want it too high (usual no more than 4:1)
b. higher debt equity ratio = higher rate return on equity
5. High-Debt: may have negative net earning if debt too high
L. Consequences of High Leverage:
1. Deep-Rock Doctrine / Subordination: ct will subordinate debt &
make it lower in rank
2. Re-Classification: IRS may change debt b/c it really is equity
a. for S-Corp: this could remove your S-Corp status b/c now
will have 2 types stock
3. Factors to Distinguish Debt v Equity: §4.33 (handout)
a. Payment Schedule: existence of payment schedule means
there is debt – never schedule for equity
b. Fixed or Fluctuating Rate:
i. Fixed = Debt
ii. Fluctuating = Equity
c. Payment Re Earnings: debt must be paid regardless of
earnings
d. Investors as Managers: outside debt investors more easy
to see as debt – ability to manage = more like equity
e. Thinly Capitalized Corp.: higher debt-ratio = higher
chance of re-classification

III. Securities
A. must follow rules closely
B. Equity
1. Primary Market: first time issue of shares
2. Secondary Market: trading or resell of shares
C. Debt
1. Money Market: 1 yr or less maturity
2. Capital Market: longer 1 yr maturity
D. A-49 – A-51:
E. Primary Market - Subscription Agreements:
1. MBCA §6.20: Pre-Incorp. Subscription
a. more likely for close corp
b. corp. formers will have contacted pple to find out interest
in corp. investment once formed
c. pre-corp. investment agreements
d. promise to take ip certain no. shares once corp formed
2. Issuance: after formation of corp.
a. MBCA §6.20: power to sue if pre-incorp. subscription
promises are not carried out
b. MBCA §6.21:
F. 1933/34 Fed. Securities Act:
1. Security Defined: 1933 §2(a)(1):
a. preorganization certficate subscription
b. implication: all complying rules apply
2. ’33: focus on primary mkt
a. after 1929 Crash – gov’t determined regulation
b. prior to 1933 – limited to fraud remedy
c. “New Deal” Era: theory that gov’t must intevene &
protect public b/c other remedy CL not enough
d. disclosure became req. to build trust in mkt
e. still heavy opposition to sec. reg.
3. Theories of Anti-Regulation: all on basis that gov’t req. for
disclosure is what a good co. would disclose anyway
a. Efficient Market Theory: what we should be aiming at is
creation of efficient mkt b/c if mkt is truly efficient then
investors would have all info available
i. so if investors are not receiving info = inefficient
mkt
ii. inefficient mkt should fix self w/o gov’t interfere
iii. basis: good will of corp. (Invisible Hand Theory)
b. Portfolio Theory: focus on individual affairs – if you really
want to discover range of sec. historically sold by corp. –
do research to see if quoted price is fair
i. won’t work for new corp.
ii. requires investor to be researcher
c. Theory of Firm: firm is self-interested in mkt & firm will
disclose what investors want out of own self-interest
i. no need for gov’t reg
ii. Basis: good will of pple & corp
5. Blue Sky Laws: when states have own securities laws
a. must 1st comply with all fed laws but if states have own law
then must comply with those as well
i. anything not preempted by fed. law = OK to be
regulated by Blue Sky law
ii. §18 (p.124): prohibits states from imposing more
req/ if “covered” security – only fed law applies
- express fed. pre-emption
iii. §18: maintains some power for states:
- anti-fraud authority left to states
- state can order distributor to file document
with own state inst. (even if already filed)
- state still has right to collect fees from part
of sec. coming from state
b. BSL apply to:
i. Intrastate Pure Commerce
ii. Interstate Administrative Functions
c. Merit Sys: require permission on basis of merit
i. allows leg. to come to conclusion that shares are too
risky to sell & refuse to allow
ii. Fed. Sec. Law does not have this req. – only
disclosure
G. Types of Issuance:
1. Private Offering:
a. Sale to Exisitng SH (Rights Issue)
b. Private Placement: to investors but not existing SH -
normally large investors
i. even w/ private public may have some access
2. Public Offering: most SEC laws apply here
a. Underwriters: like wholesalers who buy stock in bulk &
send out to brokers
b. Brokers: like retailers – sell actual stock to customer
3. Obligations of Underwriter in Public Offering:
a. “Best Efforts”: may make arrangements on commission
i. typically w/new corp.
ii. poor profile financially
iii. high expectations of very good shares
b. Firm Commitment Underwriting: underwriter picks up all
shares w/belief that they will be able to sell all shares
i. Why = Spread: difference btwn shares discounted to
underwriter to price which sell to investors
- source of profit
- downside = is shares sour UW is stuck
c. Stand-By Underwriting (Strict UW): investment banks do
not commit selves to buy/sell x no. shares
i. UW stands back & lets corp. sell shares
ii. whatever is left – UW req’d to buy
4. Buyer’s Concerns when purchasing Stock:
a. disclosure of info. from corp.
i. extensive degree disclosure req’d
ii. disclosure must be truth
b. Post-Investment: continuing disclosure
c. *decision to buy or not & keep or sell is based on info
5. Insider Trading: only benefits those w/in mngmt & involved
H. Required Documents:
1. Prospectus: goes to potential buyers - technically is supposed to go
to co. to tell about co. goals, etc…
a. Delivery:
i. with sale concurrently
ii. after sale but b/f physical delivery
b. info must be factually true
i. may be problem b/c certain info may be prediction
ii. can provide historical account but can’t make future
predictions – only use history as tool
iii. Adding predictive info:
- represent mngmnt GF judgment
- basis in fact (reasonable)
2. Registration Statement: goes to SEC – much more complicated
a. effective 20 days a/f filed unless changes need to be made
b. 15 USCA §77 + Schedule A = Required info for RS
c. Schedule A
i. corporate prop.
ii. capital structure
iii. corporate management
iv. how plan to use proceeds
v. any K between corp & hired to sell shares?
vi. perks received by mngmt
vii. balance sheet & financial info
d. Info in RS = public record & must be true
I. Threshold Q to determine if Securities Laws apply:
1. Is it a security?
a. Investment K = security
i. Investment K = Security – Factors to Determine
ii. investment for money
iii. in a common enterprise
iv. w/understanding that products will be “solely”
product of other pple. efforts
v. Turner: p. 153 – discussion of term “solely”
- held that investors may participate in mngmt
as long as not “significant”
- interpreted “solely” should not be read
strictly
- pple other than investors are major managers
vi. Aqua Sonics: p. 151 – “bundle of arrangements”
- court concluded yes = investment K
- “solely” determined by primarily
contributions of others
vii. case p. 151 – “solely” mean primarily work of
others or significantly work of others
b. Shares of Stock = security if has normal attributes of stock
c. Notes = Security
d. Family Resemblance Test (main test for notes)
i. Presumption  Security
- but then look to negative list to determine
family resemblence
- Neg. List in Reves p. 120 – if note not on
this list then presumed to be a security
ii. can we delineate category of so-called notes by
negative list (those that are not securities)?
iii. can we find family resemblance btwn note before
court & others in negative list?
2. Is it a sales transaction?
a. must be sale of securities or Act does not apply
b. Commercial Transaction Test:
i. Purpose of transaction
ii. Plan
iii. Expectation of Public
iv. Existence of Another Regulated Scheme
c. Bonus Stock: giving stock for larger purpose
i. see Ocran p. 903 §2(3)
ii. shares given freely in connection w/larger purchase
are considered securities
iii. as long as:
- part of larger purchase used to woo buyer
- AND not isolated gift transaction

K. Securities Rules:
1. Rule 1: 1933 Act §5(a)(2): not allowed to carry thru mail
securities if have not filed registration stmnt
a. cannot sell securities unless have mature Registration
Statement – filed & in effect
i. §8(a): amendment making RS effective 20 days
from filing unless returned to be amended
ii. SEC may give back & require changes prior to 20
day mark of maturity
iii. if no mention of changes – on day 20 = effective
b. forbids use of mail & any other interstate commerce means
c. virtually impossible to escape this rule b/c includes
telephone, e-mail maybe, etc…
d. Types Distribution that May Escape:
i. face to face
ii. door to door
2. Rule 2: if sale (using mail or interstate commerce) then must also
have Prospectus containing all info in §10
a. technically don’t need Prospectus unless you are going to
sell by using mail or interstate commerce
b. §5(a)(2): cannot use Prospectus or Respondeat Superior to
sell securities unless they are req’d effectively
c. §8(a): Def. of Effective Registration Statement: 20 days a/f
filing w/SEC allowed to ask for an earlier date if cannot
wait but then Rule 460 applies (under 1933 Act)
L. Role of SEC
1. Hierarchy of Governing Law – Mix
a. Statutory provision of Act - §6
b. Regulations – Reg. C
c. Rules – R.404, R.406, etc…
2. §6: Method of Registration
a. turned in triplicate
b. signature req’d
i. issuer
ii. principal exec. officer
iii. principal financial officer
iv. anyone else who produces part of report
3. §11(a): Registration Fee
a. sum equal to amount determined by rates in 3
b. makes registration very expensive
4. R. 400: Application of Reg C
a. rules following will govern every sec. in Act
5. Stnd SEC Review of Registration Process:
a. Deferred Review: so poorly done – take back & then
comments will be made
b. Cursory Review: comments to make but no official opinion
yet
c. Summary Review: written opinion on only certain aspects
d. Customary Review: upon 1st filing – full overview (new
corp)
e. No Review: recent development w/very established &
experienced corp. no serious review needed
6. Registration En Bloc:
a. aka Shelf Registration: register large blocks at a time even
though not ready to sell immediately – 2 yr time limit
b. R.415 Delayed/Continuous Offering: allowed w/conditions
imposed p. 138
c. R. 415: offerees must fit into req’d & must be used w/in 2
years
7. 1934 Act Registration Requirements:
a. in addition to 1933 provisions must also comply w/1934
§12 IF:
i. securities would be sold on national stock exchange
ii. corp. engaged in interstate commerce OR
iii. corp. involved in any type security that uses mail or
interstate commerce
iv. monetary req. = corp. of $10 million
b. Exemption from Registration here IF SH 300 or Less
c. Integrated Disclosure System: (IDS) recognition
that most info is duplicated so compliance w/’33 Act
should = compliance w/’34 Act
d. ’34 Act focuses more on Reporting Req.
i. Monthly Reporting Req.: §8-K
ii. Quarterly Req.: §10-Q
iii. Annual Report: §10-K
e. after satisfy ’33 & ’34 must also satisfy Internal Rules of
SE you will specifically be using (i.e. NYSE)
M. Securities Exemptions:
1. needed b/c compliance w/securities laws are very expensive
a. Registration Fees
b. Legal Fees
c. Continual Disclosure Req.
d. Underwriter’s Fees
2. 2 Types of Exemptions:
a. Exempted Securities: some sec. do not have to comply at
all
b. Exempted Transactions: some already registered corp. do
not have to comply w/certain transactions
c. A-55
3. §3 of 1933 Act: certain sec. are not covered by this Act
a. gov’t muni bonds
b. NFP org. (church, educ., philanthropic)
c. shares issued during corp. re-capitalization or re-organiz.
per court order
d. Intra-State: if all seek to do is distribute shares in one state
i. identified more clearly in R. 147 (p.189)
ii. Safe Harbor Rule
iii. Issuer: corp. registered & dba in State + resident
e. Small No. Issues: §3(b): only exempted from more
burdensome req. of registration – tricky b/c gives SEC
power to come up with necessary policy or pple who want
to offer small amount – NOT full exemption
i. refers basicly to public shares w/small no.
ii. $5 mill. maximum
iii. Reg. A/Reg. D: new SEC rules designed to deal w/
§3(b) type corp. shares (HANDOUT)
- Reg. A: Offering Statement: much more
succinct form than Articles
- Reg. D: exemption from §5
f. §4(2): Transactions Exemption: particular dealings are
exempted from SEC law
i. private offering = exempted (BOP on corp)
- Def. Private Offering: (Doran)
- no. offerees: lgr no. = public
- no. units offered: lgr no. = public
- size of offering: bigger amnt = more
like public
- manner of offering: advertising
- R.506: CL burden to show private offering –
do not need to go thru Doran factors as long
as meet req. & conditions = private offering
N. Liability of Issuer under Securities Law:
1. liability for failure to comply w/SEC laws
2. 1933 §11(a): lists who may become liable based on info. contained
in REGISTRATION STATEMENT
a. if any part of registration statement contains false stmnt of
Material Fact or omission of material fact then person
acquiring security may sue:
i. anyone who signed registration stmnt
ii. director or partner
iii. future directors named in reg. stmnt
iv. professionals: acc., eng., atty, appraiser, etc…
v. every underwriter
b. Material Fact: concern runs thru SEC law
i. something investors would be interested in knowing
ii. even though may not be sole clincher
iii. OR what a reasonable investor would expect to
know – many issuers escape liability here
3. b/f SEC CL fraud was only way to redress problems - §11 lower
stnd
4. §11(f): Joint & Several Liability: allowed to hold you liable all by
self or together with others
5. §11(g): Maximum Recovery = what shares were bought at – mkt
price
a. no puni damages
b. may get treble damages (not discussed)
6. Exemptions from Liability: §11(b): *p. 194 – break down
element
a. Due Diligence Defense: burden on you to prove = no
liability
i. 3rd Party Non-Expert Part: positive duty of
reasonable investigation
ii. Expert working on Part: positive duty of
reasonable investigation (usually part prep. by atty)
iii. 3rd part Expertised Part: NO positive duty to
reasonably investigate BUT if something is
suspicious = duty to check
7. Civil Liability: §12: for untrue false statement of material fact or
material omissions in PROSPECTUS
a. links §5 together with §12 b/c if violate 5 = 12 liability
i. §5(a)(1):
ii. §5(b)(1):
b. §12(b): misrepresentation in prospectus as separate from
reg. stmnt. of material fact
c. Liability = (p. 196)
i. recover consideration paid – income earned
(equitable remedy of Recission)
ii. OR damages if no longer own security
d. Policy: why treat prospectus violations more severely:
i. goes directly to public
ii. in attempt to motivate investment
iii. more concern for protection

IV. Distributions of Dividends: wide concept includes dividends PLUS
A. usually governance issues: fighting among SH b/c no req. by law to pay
B. Director’s Policy Q when determining dividend distrib:
1. can we satisfy expectations of many investors – financially & by
law?
2. would we want to distribute if we had money?
C. typical SH expects dividends (although not irrational if some do not)
D. A-59: Distribution of Corporate Earnings
1. Share dividends
2. loans/salaries
E. MBCA 1.40: Defining Distributions
1. direct/indirect transfer of money
2. occurrence of indebtness of corp.
3. excludes share dividends
F. Reacquisitions: repurchase usually higher than mkt value
1. voluntary or
2. automatic take-back
G. Uncompensated Dividends: dividend from earning NOT share dividends
H. Deferment of Distributions:
1. SH may want deferment
a. Tax consequences: may want to allow shares to grow
b. Capital Appreciation
2. Corp. may want deferment
a. Capital Improvement: may want to invest in bigger project
b. may not have funds
c. Future Earnings: source of future capital
d. Tax Consequences: not allowed to deduct distrib.
3. Close Corp: tend to disfavor distribution b/c can avoid tax & pay
out in other forms (salary)
I. Disposition NOT to pay Dividends: (can law force payment?)
1. Disguised Dividends: IRS concept – cannot disguise dividends –
IRS will re-characterize & you will have to pay
2. Accumulated Earnings Tax: (currently 28%) if corp. does not pay
dividends for long time  IRS will question whether scheme to
avoid tax
a. IRS §531: impose for each taxable year an acc. earnings tax
of 28% of the acc. earnings
b. IRS §532: applies to every corp. using earnings to avoid tax
for long period of time
c. IRS §533: fact that earning allowed to grow beyond reas.
needs of business = presumption that incentive is to avoid
tax unless corp. proves by C&C that motive was legitimate
business purpose
d. Consequence of Not Distributing: make it not attractive to
wait b/c going to be taxed very highly in end
3. Legal Pressures by Minority SH:
a. BJR: attitude of court re distribution that the opinion of
Board is highly regarded
b. Court intervenes IF:
i. Lack of GF by Board
ii. Oppressive to Minority SH
c. difference of opinion between Board & Court or SH does
not mean court will overrule Bd. decision – major
deference granted
4. Articles of Incorp. Dividend Conditions:
a. distribution subject to articles
b. MBCA §6.40: must follow distrib. as written in Articles
UNLESS:
i. corp. will not be able to pay dividends
ii. corp. total assets will be less than total liabilities if
corp. is dissolved at time
b. some courts are divided on this issue
J. Disposition to Pay: (can law prevent payment?)
1. MBCA§6.40: Distributions to SH
a. concern for creditors & preferred SH safety
b. must pay according to Article but see exceptions
2. A-61: Cash/Share Dividends:
a. giving shares as dividends
i. holding hand of SH from future
ii. ‘psychic’ income = makes them feel good
b. Consequences: may affect no. Authorized Shares in
Articles – so either make room initially or amend to
increase
K. Various Approaches to Distributions:
1. MBCA Approach: §6.40:
a. must pass BOTH tests to pay out
i. Equity Insolvency Test: must be able to pay debts
after pay dividends
ii. Balance Sheet Test: cannot pay out if total assets
would be less than total liabilities if were to
dissolve now
b. Liability Under MBCA: §8.33: Unlawful Distributions
i. Primary Liability = Director Liability: if director
votes in favor of distribution in violation of §6.40
- held J & S
- may ask for contrib. from other directors
- liable for amount that exceeded allowed
amnt under §6.40
- typical suit by trustee in bankruptcy proceed
ii. Secondary Liability = SH Liability: SH may be
liable to director if knowingly took money
w/knowledge that it would be in violation of §6.40
- NOT direct liability
- Director asking for contrib.
- usually in close-corp
- probably actual knowledge but stat is silent
c. Restrictions on 3rd party Liability:
i. Negative Covenants: creditor K w/corp. that
restricts corp. distrib. & gives priority to creditor for
payment 1st
- if breach  left w/ K remedy only
- no refer back to MBCA
2. Stated Capital Approaches: only in std. capital jd
a. Capital Surplus Test: can only use capital surplus to pay
dividends
i. need low PV to pay out dividends
ii. no payout if using Full PV
iii. Only OK to pay out using No PV IF set stated
capital low enough to meet
iv. capital surplus = any amount above stated capital
b. Earned Surplus Test: can only pay dividends from earned
surplus
i. earned surplus = accumulated & retained earnings
(basically a corp. doing very well)
ii. not every corp. will have this – i.e. probably not
new corp.
iii. earned surplus may become slush fund down road
c. Surplus Test: can only pay dividends from surplus
i. surplus = excess of net assets over stated cap.
d. Strategies to Get around Capital Approaches:
i. Set Low PV: reduces surplus
- set initially low in Articles or amend
- increases chance of surplus???
ii. Re-evaluation Surplus: if reasonable accounting
allows & assets given higher value (cannot reassess
w/o true accounting)
iii. Nimble (Swift) Dividends: must pay out dividends
very quickly
- 1 way certain stat. allow payment where
normally would not be allowed
- would allow corp. to pay w/o surplus but
only if other conditions are met
- i.e. Del. §170(a)
- allowed if particular year is so good even
though over all no surplus

V. Corporate Governance
A. typical 3-tier corp. government
1. SH
2. Board Directors
3. Officers
B. MBCA§7.32(a)(1): could have 2-tier but not norm
1. would eliminate Board
2. ability to distribute goes to either Officers or SH
3. must provide for some way to carry out Board functions
C. Division of Labor
1. SH: rights accoding to stat. but may not be actual
a. MBCA §8.03(d): right to appoint board directors
b. MBCA §8.08(a): right to remove directors
c. Right to decide fundamental issues
i. MBCA §10.03: amendments to articles
ii. MBCA §11.03: mergers
iii. MBCA §11.02: sell large no. shares
iv. MBCA §14.02: dissolution (MOST fundamental)
d. statutes clearly define but in real life SH duties may differ
i. i.e. in close-corp: may be mix between SH & Bd
ii. i.e. in public-corp: Sh may only ratify Bd – not elect
2. Directors:
a. MBCA §8.01(b): Role of Board
i. more like supervisors
ii. ability to exercise authority but no direct mngmt
iii. no mutual agency for bd. – work as group
- 1 individual director cannot bind as agent
- different from partnership ability to bind
b. statute & real life differences:
i. Outside director: owns full-time job outside corp
ii. Inside director: actually works w/in corp.
iii. outside dir. may not be able to have as much power
3. Officers:
a. MBCA §8.40 + §8.41: types & duties
b. MBCA vague  designates to corp. bylaws
D. Conflicts Between 3 Tiers:
1. SH v. Board
a. Sh trying to move into Bd. authority
i. i.e. distributions are at Bd. discretion
ii. SH may want to force distrib
b. SH take active interest in appointment senior officers
i. supposed to be Bd. duty
ii. SH would like to influence choice
c. Borrowing of Funds
i. SH know if corp is highly leverage = less chance
distributions
ii. SH may say no more borrowing but borrowing
sounds like management function – not SH
d. “Big Four”: small deviations from statute are OK
UNLESS “sterilize” Board by taking away too much power
i. Manson: SH agreement was illegal b/c vested all
mngmt authority in GMngr SH
ii. McQuade: SH agreement invalid that capped
salaries unless unanimous – basically ordering
Board
iii. Clark: SH agreement OK that req’d director to vote
a certain way in exchange for SH vote
iv. Long Park: SH agreement invalid b/c took away too
much Bd. power
2. Bd. v. Top Management Officers
a. may be deadlock at director level & cannot get rid of
officers
b. OR may be matter that Board feels officers should NOT
decide
E. Shareholders & Voting Rights
1. MBCA §7.01(a): Annual Meeting: voting right may be exercised at
meetings – regular annual or special
2. MBCA §7.04(a): Action W/O Meeting:
a. written consent of all SH
b. AND deliver to corp. to be put into minutes
c. unrealistic in large corp. b/c not all SH will respond
3. Forms of Voting
a. Regular
i. direct voting
ii. by proxy
- MBCA §7.22: introduces concept of voting
by proxy
- regulated by Fed. law extensively if corp.
involved in interstate comm. or traded
publicly
b. Scaled (aka Weighted)
i. Multiple (Fractional)
- direct
- proxy
ii. Cumulative
- direct
- proxy
4. Threshold Q Re Voting
a. How much weight should each vote get?
b. Whether that amount will be sustained for every issue?
5. MBCA §7.21(a): Voting Entitlement of Shares
a. Principle of Parity: presumption of equality & worth of 1
vote per share
b. Presumption of Straight Voting: whatever weight given to
share you cast – that amount will stay same
c. may be changed in articles
d. (b): stat may disqualify voting rights of some shares
6. Allocation of Voting Control: (how to frustrate majority vote)
a. Multiple/Fractional Voting: allow even minority SH to
have some substantial input
i. used for important decisions
ii. scales down voting impact of majority SH
b. Super Majority: for certain issues – not going to use typical
majority but require higher number
i. makes it less likely that majority SH will
unilaterally succeed
ii. MBCA §7.27(A): provide for super majority in
Articles – can specify either for certain matters or
all matters
- anything above 51%
c. Class Voting:
i. MBCA §7.26(B): provides for voting by more than
1 group of shares
ii. votes counted only if each group supports issue
iii. segment SH into group & each class must agree
d. Cumulative Voting: applies only when electing Bd. Dir. &
if allowed for in Articles
- some jd almost make cumulative voting
mandatory
- if theory of SH linkage works – SH will be
able to influence corp. by Directors chosen
i. MBCA§7.28(A): formula for election directors –
elected by SH on basis of plurality
ii. SH have meeting to elect Bd. & top votes = Board
iii. provides that even though may not be a majority a
plurality could win
- why limit electors of board to only SH?
- why don’t we allow 1 vote per share of SH?
- why would use straight voting?
iv. MBCA §7.28(C): Definition of Cumulative Process
- Formula = no. votes entitled to (X) no. dir.
to be elected = Product of Cumulated
- Options: cast product for 1 nominee
OR split product & cast for 2 or more diff.
nominees (may get more on Bd. this way)
v. A-87: Compare Straight Voting v. Cumulative
Voting:
- Straight: SH cast all votes for each favorite
candidate
- Cumulative: SH may cast all votes for 1
only or distribute between nominees until
exhausted
e. German Model Voting:
i. A-79 – A-85: 50% voted by SH & 50% voted by
Employers
ii. Supervisory Board & Management Board
iii. Corp. w/500 – 2000 employees: shift in power to
less employee control
- Work Council: informs on certain things
- Business Modifications
- Social
- Personal
iv. Conflicts w/Worker Participation:
- look at specific cases
- labor hired director will only see labor side
- labor/SH elected Dir. may not agree – may
take away certain powers from Board to
vote
- leaking of employee/SH secrets
F. Shareholder Litigation
1. Theories Behind Litigation:
a. Intra Corp: SH may feel the rights guaranteed in Articles
are being denied
i. voting rights
ii. corp. info rights
iii. rt to insist on compliance w/Articles
b. Corporate Waste: Bd/Mngmt. running corp. not in best
interest of corp.
i. i.e. mngmt decides to buy stock in bad environ. co.
ii. i.e. doing business w/poor image international co.
iii. i.e. signing K that is waste of corp. assets
2. 2 Types SH Suits:
a. Direct: based on deprivation of personal voting right
i. Individual
ii. Class Action
b. Derivative: mngmt failed to bring suit for corp.
3. Determining what Type of Suit: depends on who has been hurt?
a. if corporation one injured = Derivative
i. i.e. SH knows CEO uses co. cars improperly
ii. payment of dividends may be either one
b. if SH one injured = Direct
i. i.e. challenge for dilution of voting right
ii. payment of dividends may be either
4. Procedure of SH Litigation Derivative Suit
a. SH = Plaintiff (as champion for corp.)
b. Defendant = Corp. + maybe Board + maybe Officers
c. Res Judicata: decision is binding on all parties
d. Recovery: corp. receives from Bd. or Officers b/c corp. is
real victim
G. Derivative Suit
1. Profile of SH to Bring Suit:
a. Contemporaneous Ownership Req.: F.R. 23.1: must be
SH at time transaction that is subject of complaint was
committed unless shares devolved by operation of law
i. MBCA §7.41: Standing
- Contemporaneous ownership
- + must fairly & adequately represent interest
of corp.
ii. may be exceptions to contemporaneous ownership
if continuing effects in some jd. (i.e. Calif. p. 265)
b. Continuing Interest: requires current ownership +
continuing interest throughout suit
i. both federal & MBCA
2. Timing to Bring Suit:
a. Exhaustion of Intra-Corp. Remedies: SH must have at
least thought about raising issues w/Bd. UNLESS think it
would be futile attempt
b. Demand Req.: (pleading req.)
i. F.R. 23.1: show efforts, if any, made to talk with
Bd. & what the reaction was
- consult SH if necessary
- Policy for Demand: screening process for
corp. litigation
ii. MBCA §7.42: no discretionary demand  must
consult SH/Bd. & wait 90 days unless try to show
why waiting would be prejudicial
- NO excuse for not making demand
- Demand Req’d in ALL cases
iii. MBCA §7.43: moment corp. begins inquiry on
matters raised  any attempt to bring derivative
suit is put on hold
c. Excuse from Making Demand
i. Futile: means show why majority of Bd would not
agree there is a problem
- always want to argue futility
ii. NO excuse allowed in MBCA
d. Rejection of Demand Tests: Bd. rejects demand & SH files
i. Zapata I: Ct. should inquire into GF &
independence of investigating procedure/committee
- was there Due Process in decision?
- purely procedural analysis
ii. Zapata II: If Pass 1st  was substantive decision
fair?
- more judicial intervention
- easier for SH to pursue claim
iii. MBCA §7.44: deference given to BJR of Bd.
- majority decides to throw out case OR
- independent committee threw out
- must decide if truly independent
- burden probably on SH to show lack of GF
- ct may sometimes appoint panel
3. Expense of Litigation:
a. MBCA §7.46:
i. Successful SH = corp. must contribute to expenses
if receiving benefit
ii. Unsuccessful SH = Plaintiff must pay own cost +
Defendant cost if find case was frivolous
b. MBCA §8.51: directors sued directly & found innocent
i. personal expenses covered by corp. thru
indemnification
H. Duty of Care of Corporate Directors:
1. 3 Types of Director Liability:
a. Misfeasance = thoughtless & careless decision
b. Nonfeasance = failure to act at all
c. Malfeasance = director acted w/malice (knowingly violated
law)
i. does not have to be criminal violation
ii. could be knowing violation of fiduciary duty
iii. doesn’t matter if illegal act done on behalf corp.
2. MBCA §8.30: imposes duty on directors
a. Duty of Care:
b. Duty of Loyalty: work for corp. & not for own benefit
3. Duty of Inquiry: absent clear knowledge of illegal acts in corp.
director not req’d to affirmatively investigate UNLESS there is a
suspicion
a. policy: don’t want directors spying on corp.
b. Graham: directors relied on mgmt. reports = no liability
4. Enhanced Director Duty = positive duty to set up accurate
reporting system w/in corp. that is likely to uncover problems
a. Caremark: went beyond duty inquiry to require reporting
systems be in place
5. Duty of Loyalty: Specific Factors when looking for Self-Dealing
a. Avoidance of Conflict of Interest: expect directors to step
down from own self-interest
i. not realistic to forbid any K btwn corp. & Dir.
although that was old CL view
ii. MBCA§8.61: p. 394
iii. MBCA§8.60: Definition Conflict Interest
- party to transaction OR
- related to party OR
- benefit financially from K/deal
iv. MBCA§8.61: Judicial Action – court ability to
remedy conflict
- unless qualifies as conflict under §8.60 then
court no power to enjoin
- if really is conflict then court action OK
UNLESS:
- Dir. action in compliance w/voting
procedure of §8.62
- SH action in compliance w/§8.63
- transaction fair to corp.
- Remillard: read all these
factors together but according to stat.
language could be read disjunctively
v. Intrinsic Fairness Test: once impropriety shown
BOP on Bd. to show why it was fair transaction
- BOP in MBCA also on directors
b. Fairness to Corp. Factors:
i. adequate consideration
ii. market price v. actual price
iii. did corp. suffer deficit?
iv. did director personally benefit?
v. more factors on p. 360
c. Duty of Confidentiality
d. Diversion of Corp. Opportunity
i. 2 Ways to Divest Corp. Opp.:
- corp. has interest & dir. take away & uses
for self
- corp. interest adverse to dir. interest & dir.
pursues own interest anyway
ii. Line of Business Test:
- is corp. in line of business?
- did director rob corp. of opp. to participate?
- corp. has prior claim to opp. if in line of
business
- MBCA §3.02: corp. has power to do any
legal act
iii. Interest or Expectancy Interest Test:
- Expectant Interest: corp. not in business now
but wants to get into new business under
§3.02 power
- Burg: OK to pursue own interest even if in
same line of business if had always done so
unless agreement to contrary
iv. Fairness Test: look at totality of situation &
determine if it was fair
- usually linked to other tests
v. NOT considered Diversion IF:
- Board Rejection: offer opp. to corp &
expressly rejected
- Individual Opp.: opp. given to dir. in own
personal capacity
- Financial Incapability: corp. under such
financial stress would not be able to afford
opportunity (probably should disclose
anyway)
- Law Prohibits: corp. as matter of law
prohibited from taking advantage of opp.
6. Director’s Obligations under 1934 ACT: (p. 419/420)
a. §10(b) & Rule 10(b)(5):
i. unlawful to use scheme or artifice to defraud OR
ii. unlawful to make untrue stmnt of material fact or
omit material fact OR
iii. operate fraudulently…in connection w/sale of sec.
b. Rule 10(b)(5):
i. Insider Trading prohibited
ii. Required to disclose material info.
- still applies even if obtained 1933 exemption
- applies to public & close corp
- silence may be violation since omission of
material fact is also prohibited
c. §21(A): Insider Trading
d. §16(a) (b): short swing profit
7. Trading on Non-Public Info: “tipping” problem
a. TGS Rule: info must be widely disseminated before can
trade on it (Effective Disclosure)
b. Disclose or Abstain Doctrine: either disclose info. or do
not trade
i. info must be material: would a RP attach
importance in determining to invest?
ii. is it a fact a RP would at least want to consider?
iii. rationale: puts investors on equal footing
c. Damages = price when info. known – price when director
only knew
8. Short-Swing Profit Problem:
a. §16(a) (b): essentially reporting req. for owners w/more
than 10% & if corp. regulated under §12 (’34 Act)
i. §16(a): must file w/in 10 days of transaction
ii. §16(b): makes it profitless to engage in inside
trading
- 2 transactions (sale & purchase)
- w/in 6 mo. window
- SEC or Bd/ or SH may challenge as S-S
- A-98: calculating 6 mo. window
- A-99: Computation of Profit
b. Damages = pay back more than you earned (punitive)
i. detail all transactions w/in 6 mos.
ii. match highest sale price w/lowest purchase
iii. difference of sale price – purchase price
9. Insider Trading: duty to disclose only arises if fiduciary
relationship exists between one w/info & SH from co. purchased
shares from
a. duty to disclose does not arise merely from knowing non-
public info
b. Damages = Treble Damages allowed: basically punitive
money going to SEC at court discretion
c. Criminal Penalty: §32(a): for willful violation ’34 Act
i. individual fine = $1mill
ii. corp. fine = $2mill
iii. imprisonment possible
d. Defenses:
i. Ignorance of Law: so many rules hard to understand so
this rare defense is allowed

VI. Closely Held Corporation
A. Characteristics:
1. owned by small no. pple
2. no public market for shares
3. major SH involvement in management
B. Implications of Close-Corp.:
1. Lock-In: SH have no where to go when they want out unless SH
transfer provision b/c there is no market for shares
2. Director Liability: arising from conflicts of interest due to SH
participation in management
3. Dividends/Salary: may want to keep more dividends in corp. &
compensate by paying salary BUT some SH may want to force
payment of dividends
a. Freeze-Out: no financial benefits to non-director SH
b. Squeeze-Out: majority SH may not allow minority SH into
position of mgmt.
C. Piercing Corp. Veil: way to lose corp. status
1. concern in close-corp b/c if treat corp. too informally then it may
look like SH running alone
2. don’t skip annual meetings, etc…
D. Special Statutes: some states have special close-corp stats to govern
1. if so refer to general corp. stat for things not covered
2. even w/o special stat judiciary may treat differently b/c status
3. A-107: attributes by state
E. Triggs: SH agreement between father & 1 son circumvented authority of
Bd but court allowed it to happen b/c of close corp status
F. Protection Close Corp SH:
1. any special corp. stat?
2. fiduciary principles: argue BR duty
3. look at judge made law
4. provide for high voting req. in Articles
G. SH owe same fiduciary duties as owed in partnership (even minority SH)
1. GF Business Purpose: deference given to Bd
2. BOP on Bd. to show:
a. legitimate business purpose
b. particular arrangement arrived at was least harmful
H. Voting Arrangements to Protect Minority SH:
1. Supermajority: helps out minority for major issues
2. Class Voting: aka block voting – each class votes as 1 entity
3. Pooling Arrangement: OK to choose to vote bulk
4. Voting Trusts: appoint trustee & formally transfer all shares
I. Preemptive Rights to Protect Minority SH:
1. A-45:
2. whatever your share was in beginning – stays same
3. no stat. right in MBCA – must put in Articles
J. Buy-Out Agreements to Protect Minority SH
1. “since we can no longer agree, why don’t you buy my shares & do
what you want?”
2. problem b/c no market for shares – provide for in Articles
3. Difficulties in Drafting Buy-Out:
a. difficult to determine who will purchase & when
b. difficult to identify what event will trigger buy-out
c. determining price can be difficult
d. rt of SH to be bought out
4. Valuation: determining price
a. market value not helpful
b. Initial Value: book value = value of corp. at beginning –
value each share (tends to be lowest value)
c. Stated Price: difficult b/c inflation, etc…
i. add escalation clause = index to make value rise
ii. could be high or low value
d. Capitalization of Earnings: looks at immediate past
growth to determine value
i. A-109:
ii. past performance is critical factor
iii. Total Cap. Earnings divided by No. Outstanding
Shares = Per share value = price of buy out
e. Capitalized Market Value: looks at future earning potential
i. used most often for international co.
ii. take into account future earnings
iii. most likely to give highest value
K. Arbitration Clause in SH Agreement to Protect Minority SH
1. use in planning phase
2. MBCA §1434: court may actually mandate buy out even if not
provided for
L. Court Solutions
1. MBCA §1434: court ordered buy out
2. MBCA §1430: instead of dissolution – order buy out
M. Dissolution when deadlock prevents corp. running right:
1. Kemp: Def. Oppression: actions of corp. substantially defeats
reasonable expectations of SH
2. Involuntary dissolution not granted automatically even if finds
oppression there – may look for less drastic ways to help minority
SH
3. MBCA §1430: court dissolution at their discretion
VII. Struggle for Control in Public Corp.
A. Public Corp. Characteristics
1. may be more diverse SH
2. public corp. usually larger than close corp.
3. public SH not in mngmt like close corp – prevents “squeeze out”
4. public open mkt for shares – easier to leave – no “lock in”
5. no “freeze out” b/c typical to pay out dividends
B. §12 Corp: typical public corp
1. traded on NSE
2. involved interstate commerce
3. use mails for interstate transactions
4. *proxy solicitation only applies to §12 corp.
C. 2 Major Problems of Public Corp.
1. Deficit Corporate Decision Making: SH do not have as direct &
important input into corp. decision making process
2. Struggle Between Strong Minority: potential for constant conflic
btwn mngmt & certain SH
D. Strategies of Participation & Control in Public Corp
1. Indirect Participation & Control: SH proposals & proxy solicitation
2. Direct Power thru Acquiring More Shares: negotiation & tender
offers
E. SH Proposals:
1. established by securities rules
2. force corp. mngmt to include your proposals to other SH so that
they may vote on issue
3. policy: corp. belongs to SH & should be able to use corp.
machinery to inform other SH
4. Social Concern as Motivation: some SH proposals deal w/human
rights issues
5. ’34 Rule 14 A-8: Proposals of Security Holders
a. Eligibility to bring SH proposal:
i. current owner of at least 1 % of shares or $1,000.00
market value worth
ii. held security for at least 1 year
b. Briefness Required
i. don’t write long SH proposal
ii. no more than 500 words
c. Notice requirement
d. Timeliness
6. ’34 Rule 14 A-8: Omission of SH Proposal
a. may omit when:
i. mngmt shows proposal is asking for something
improper for SH to invade
ii. not proper area of concern for SH
iii. “mundane & ordinary day to day business” + does
not involve substantial policy or other considration
b. proposals must be significantly related to doing business
c. Economic Significance Required: proposals can be
excluded if topic does not account for at least 5 % of fiscal
sales for 1 year
d. Exception to Economic Significance Test: if ethical or
social significance is so important
7. “No Action Letters”: mgmt technique corporation uses when they
want to reject SH proposal – sent by SEC
F. Proxy Solicitation:
1. approach other SH to get their permission to allow you to vote for
them – basically borrowing right to vote
2. Proxy Fight/Contest: SH may not want total control but want
some OR SH may only want to be ones to decide specific issues
3. Routing for mngmt to ask for proxy
4. MBCA §7.22: Proxies: presumed to be revocable & if described as
irrevocable proxy  court will not take seriously unless you can
shoe it is a proxy coupled w/interest
5. ’34 §14(a): ***READ
6. Def. of Solicitation: whether the challenged communication seen
in the totality of circumstances is reasonably calculated to
influence the SH votes
a. determination of purpose of communication depends on
nature of communication & circumstances under which it was
distributed

VIII. Structural Changes
A. Statutory Merger: 2 separate legal entities merge & only 1 survives as
separate legal entity a/f merger (performed according to statutory corp.
provisions allowing merger)
1. designate which co. will survive
2. describe merger terms + conditions
3. describe conversion of shares
4. set forth any added amendments to Articles of surviving corp.
5. required to have majority vote by both corp. SH approving
a. SH votes not required if “small-scale merger”
b. “smale-scale”: if does not increase by more than 20 %
outstanding voting stock
6. upon merger – merged corp. immediately ceases to exist
a. debts become other corp. debts
b. assets transfer
c. shareholders rights transfer
B. Triangular Merger:
1. variant form of statutory merger
2. difference = essentially make up new corp. that is made up of both
of merging corp.
3. boards of both adopt & both SH vote
4. new corp will distribute shares of each corp. to opposite SH
C. Exchange of Shares:
1. boards must approve plan of exchange (just like in merger)
2. basically 2 corp. & only 1 remains & only 1 set of stock remains
3. i.e. T stock transferred to P & P stock no longer exists
D. Exchange of Stock for Assets:
1. use your stock to buy another stock of another corp.
2. selling corp. SH must approve terms of sale
E. Tender Offers:
1. offer to purchase shares directly from SH
2. approval comes by accepting offer
3. may take place in parts – acquire only part of corp. & then whole
F. MBCA §11.06: Effect of Merger or Share Exchange
1. all other corp. except continuing one cease to exist
2. all property titles vest in remaining corp.
3. all liabilities transfer to surviving corp.
4. any legal cases pending can also be represented by surviving corp.
5. amend Articles
6. shares are converted
7. Under Share Exchange: former holders of shares are entitled only
to exchange rights provided for
G. MBCA §11.02: Share Exchange
1. acquire all outstanding shares of another corp. if Bd. & SH
approve
2. Plan of Exchange must:
a. name both corp.
b. terms & conditions of exchange
c. manner & obligations
H. MBCA §14.01: Dissolution by Incorporators or Initial Directors
1. allowed to dissolve if have not issued any shares or commenced
any business
2. file with sec. state Articles of Dissolution
3. profess among other things that no debt has been acquired & assets
if any have been distributed
I. MBCA §14.02: Dissolution by Bd. Dir. & SH
1. Bd. proposes to SH
2. Bd. must recommend dissolution unless conflict of interest
3. SH must approve
4. must notify all SH
5. majority vote unless otherwise stated
J. MBCA §14.03: Articles of Dissolution – req’d to send to sec. state
K. Amendments to Articles – MBCA §10.01 – 10.05
L. MBCA §11.01: Merger
1. merger allowed
2. 1 or more corp. if Bd & SH approve merger plan
3. Plan of Merger must:
a. names of mergers
b. manner of converting shares
c. may provide any amendments & other provisions
M. MBCA §11.03: Action on Plan
1. Bd must recommend approval
2. SH must approve merger plan
N. MBCA §11.04: Merger of Subsidiary
1. parent corp. w/90% stock may merge w/o approval by SH
2. Bd. must still come up with plan
O. MBCA §12.02: Sale of Assets other than regular Business
P. Dissolution
1. MBCA §14.05: Effect of Dissolution
a. continues corporate existence but no business allowed
b. except for winding up
c. & liquidating assets (look at list)
2. MBCA §14.06: Known Claims Against Dissolved Corp.
a. notify claimants
b. give deadline for receiving claims
c. claim barred if not received before deadline given
3. MBCA §14.07: Unknown Claims Against Dissolved Corp.
a. publish notice of dissolution
b. claims barred if not brought 5 years after publication