Corporations Partnerships (3 types): Limited Partnership
o 2 types of partners Limited Partners Passive investors Own an investment contract o Investment contract- where the investor is passive, gives money over to someone who manages. Still considered a security. Protected from liability General Partners Manage In return, often receive a bigger share off the top Has more liability, but can also incorporate to avoid Pros Cons Controlled by SEC 2 or more people forming association for profit Manage equally Pros Easy to form Only 1 level of taxation (personal) Cons Partners not shielded from liability General partner has unlimited personal liability Way to fix is to incorporate. Pros Cons Only 1 level of taxation Get a membership- protects you from liability
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General Partnership
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Limited Liability Partnership (LLC)
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Joint Ventures- when 2 or more people come together for a single purpose.
Pros o o Cons o o o Not a lot of formality Easy to form
Once accomplished, then there’s no longer a joint venture Unlimited personal liability Ruled by agency law. Every joint venture is both the principal and the agent of the other. They are jointly liable, whether they signed or not. Can incorporate to protect themselves
Sole Proprietorships
Pros o Cons o o Simplest type of business association Personal liability, If something happens to the person, the business ends. Whereas, in a corporation, the business continues
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Corporations
Pros o As a member, you are protected from personal liability o Stockholders protected o People running corporation are monitored by SEC Cons o 2 levels of taxation o Once you have stock, you are monitored by SEC Publicly held v. closely held corporations
o Publicly held
Must have BOD and officers Pros Have ability to earn a lot of $ for founders Cons More closely regulated SH have v. little input Usually incorporated in Delaware Stock is held publicly Market sets price in a publicly held corp
o Closely held (2 types): Common law closely held corporations
Has BOD & officers o Many times mandated by statute that you have 4 positions filled Stock is not publicly traded SH can vote on extraordinary matters o Fundamental kinds of changes that are inherent in the corporation (mergers, consolidations, voluntary dissolutions, amendment of by laws, and election & removal of directors) o Only 2 of those where SH can’t vote w/o first having a director vote: Voting on directors Amendment of by laws o Ordinary matters, like the declaration of dividends can only be decided by BOD o Galler case said SHs could decide ordinary matters as long as no harm is done & it’s a closely held corp. SH’s usually passive, unless wearing multiple hats
Statutory closely held corporations (you elect to be)
Advantages over common law o Can elect to be an “S” corporation. A stat closely held corp is not the same as an s corp. S corp is a tax entity- means that the income of the corp slows down to the individual shs. There are req for the # of shs you can have. o Normally, they will have 1 level of taxation o Stockholders can manage directly o No BOD, no officers o Usually no more than 35 stockholders o In any other type of corporation, you have to have directors and officers. SHs are not only owners, but also managers
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If you want a say as a stockholder in a closely held corporation, speak up before given stock. It is possible to negotiate your own terms. Ex: voting rights, dividends, etc. Place of incorporation usually should be in state where they do business Must be in articles “this is a closely held corp, and there are no more than 35 stockholders” Directors set price of stock SHs can vote on extraordinary, ordinary, or all. (SH can vote on everything) SHs have unfettered power because they are running the corp. Place of incorporation o Publicly held- most incorporated in Delaware b/c of pro management laws o Closely held- usually incorporated in state where principal place of business is o Otherwise, Delaware is often chosen Reason: tax advantages, laws are pro-management Whereas, CA laws pro-SH o It is possible to incorporate in several states Very costly though BOD o 3 types: Straight- all members are elected each year If you want to take over BOD, this is best Staggered- some will be elected each year, but not all Go w/ if you want continuity Classified- each class is given a certain number of directors to vote for o Possible to have classified & staggered at the same time o Have power to remove directors & officers o Takeovers are harder w/ staggered or classified boards Articles of Incorporation= organizing document for proposed corporation. Public document. o 5 mandatory provisions. 1. Name Reserve first online (good for 30-60 days) Can’t be same or similar to name of another corp. 2. Purpose (more below) Can be specific or general o General allows you to conduct any legal business o Very few companies have specific purpose clause. More apt to see in a closely held corporation. Reason: they don’t want an ultra vires action. May be amended 3. Name & address for agent of service of process Usually the attorney 4. Capitalization provision Outlines the rights of the classes 3 major rights unless the articles say differently o Voting rights Possible for creditors to have o Right to partake in distribution (dividends) o Liquidation rights (after the creditors) 5. Execution provision Business, individual o Possible to have discretionary provisions Directors will not be liable for due care for damage actions Unlimited Bylaws- not filed with Sec. of state, like the articles o Express rights b/t managers and stockholders
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o If you want flexibility, put provision in bylaws vs. articles Amendments o Cl closely held corp, directors have the first right to amend, then the stockholders, but only if they have voting rights o Statutory closely held corp- just look to stockholders to amend Taxes o If you have 500,000 shares or more, you have to pay $ to Secretary of State o IRS- federal tax o Franchise tax- state tax Stock subscription agreement- k given to people who want to invest in a corp. Stockholder agreement- used only in a statutory closely held corp. Decides how stockholders will manage and who will manage
Ultra vires- look to purpose clause to determine if it can be brought
Definition: unauthorized; beyond the scope of power allowed or granted by a corporate charter or by law If there’s a general purpose clause SH may not bring an ultra vires action To avoid such actions, very few companies have specific purpose clauses Basically a dead action, as most companies have general purpose clauses SH can bring an action to enjoin the corporation from entering into that k. (But there has to be a specific clause). A corporation can’t. o SH can also bring an action against the officer or director that has done it The officer or director that entered into that k, can bring action Attorney general could also bring
Promoters
If you have more than 1 promoter, there’s a joint venture In contracting with promoters, there’s always the possibility that the corp. won’t be formed If you are contracting with a promoter, get in the contract who is liable. General rule is that a promoter is liable, unless the other party agreed to look to some other party or fund for payment. If you are a promoter, to protect yourself: o can incorporate o include “agent” in contract, after your name (vs. saying “to be formed”) o make it clear in the k that the promoter is not liable presently In a cl closely held corporation, the directors have the choice to adopt the k Promoter is not off the hook, even then, simply because 90% of corporations fail after the 1st year. Novation- written novation will be the only one the courts will recognize. Has to be adopted and written.
2 ways to get the stockholder:
Defective incorporation (argue first) Piercing the corporate veil (next) (to do otherwise, you admit there is a corporation)
Defective incorporation
Make sure that corporation is legally formed before any ks are made If not a corporation, then stockholders as individuals will be liable (b/c corporation veil protects SH from liability) o Stockholders will always be the Ds o Often, creditors will be the P, or it could be someone that has suffered personal injury 2 different jurisdictional approaches o MBCA Jurisdictions (CA)- Says a corporation is legally formed as of the stamp date on the articles of incorporation Stamp date shows valid, legal existence o Non-MBCA- 3 possible theories that a stockholder can bring to protect themselves
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That the corporation was de jure as of the contract date, as of the time of personal injury Date of incorporation means nothing here in this jurisdiction De jure= substantial compliance with all mandatory conditions precedent Look to articles of incorporation to see if there’s been compliance o Have to have those 5 mandatory provisions o If there’s a typo or something missing, you still have to assert that there’s substantial compliance (ex: missing zip code) o If a provision is missing, you can go to de facto o Secretary of State wants fee and has to be filed with De Facto (2 requirements) “can’t touch that”- you are safe Has to be good faith compliance with the requirements Good faith attempt to follow or have all the mandatory conditions precedent Could use where someone forgot to sign Use of corporate privilege Corporation has acted like a corporation Make sure that the corporation’s name is on the k, not your own Your attorney is your agent and you are responsible for how your agent acts. Wouldn’t be able to use de jure if your attorney forgot to file articles of incorporation Once you prove it against 1 P, that’s it Estoppel (D will estopp P from suing) 2 requirements You have to prove that there was a holding out of the corporate form o Corporation has acted like a corporation o Show that they have a separate bank account o Have board of directors o Other ways to show reliance on the corporate form by the P If you fail on all 3, SH’s are liable If you’re a SH and you are liable, is there still one thing you can argue? That you weren’t an active SH
In Sum, for Defective Incorporation
1. 2. 3. Corp. can’t pay has no money; go after SH’s Like the corporation never existed What jurisdiction are you in? a. MBCA or non-MBCA b. Want a MBCA jurisdiction b/c there is a brightline test i. If you conducted business before stamp date, then you are toast. Or when did the tort occur? Then, you can go after the stockholders. c. Non-MBCA jurisdiction (defendants argue) i. De facto 1. Use of corporate privilege 2. Good faith attempt to comply with requirements of incorporating ii. De jure- you are golden, you can’t be touched iii. Estoppel
Piercing the Corporate Veil
In bringing this action, you realize the corporation is valid Action in equity D is always going to be a creditor or someone that’s been harmed. Most common ground: fraud
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“Double piercing”- piercing to get to the parent and then piercing the parent to get to the SH’s o Where there are several corporations, try to put them all together. You want as many piercings as it takes to get you there. Do you have a k or a tort case? o K cases have 2 major grounds Lack of observance of corporate formalities No SH’s Lacking directors, officers No SH meetings No minutes from meetings No payment of dividends, if there are any No accounting records No corporate bank account Personal use of corporate property Corporation’s name should be on k, not someone else’s Parent/Sub situation--> have to show that they are operating as 1 entity FACTORS THAT NAIL LACK OF OBSERVANCE o NOT HAVING DIRECTORS OR OFFICERS o NOT HAVING MEETINGS o NOT KNOWING WHO SH’s ARE Lack of adequate capitalization (initial adequate capitalization and continuing capitalization) Look at type of business Rx expenses and Fx risks o Tort cases- easier to pierce corporate veil 2 grounds (but you only need to meet 1) Lack of observance of formalities or Lack of adequate capitalization o Parent Sub situation Operating as 1 entity will be enough to show lack of observance of corporate formalities Parent & sub sharing same office= ok Same directors=not a problem, but could be Parent & sub sharing same bank account= bad
To pierce the corporate veil:
1. 2. 3. 4. Choose whether you have a k or tort case Select your grounds Judge decides as to fairness How many piercings do you want? a. Defective incorporation (cause of action in law) i. Unless the facts are clear that it is a valid legal corporation b. Piercing the corporate veil
Capitalization o Stockholder Rights
o o o 3 major things you can give for stock Cash, property, services rendered 3 rights of common SH’s: Voting, dividends, & liquidation, unless articles say differently Things you can put in: Redemption Convertibility
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Preemptive rights- If there is an additional issuance of shares, entitles stockholders to purchase for price that its being sold at. Mandatory dividends Preferred SH’s: Rights are the same: voting, dividends, & liquidation Dividend rights, not preference Things you can put in: Mandatory dividend preference- gives you ability to not only take dividend, but also puts you first Cumulative dividend preference- must be paid out, and if it’s not paid out, then it accumulates for the next year If there is a BOD, gen rule is that SH cannot manage directly, unless also a director or an officer (wearing multiple hats) Passive stockholder Indirect management by voting for a director that will represent you If you want to be treated preferentially, you have to put language into articles. Some of the things you might want: Mandatory dividends (ex: 5% of the par value) Liquidation preference before common Can’t be ahead of creditors though b/c would be in conflict with fed bankruptcy law Redeemable Stock Will be at option of corporation Conversion to common stock Preemptive rights- right to buy more shares at the price they are being sold at (no discount) Could be to outside parties, or internally Exercisable at the additional offering price Preemptive rights only attach if the additional issuance is from newly authorized stock Will only attach when the stock is being sold for cash Person who is the majority stockholder has a control premium. Even though you are a stockholder, you may not qualify to vote. A requirement for voting is that you be a record owner, as of the record date. 2 types of ways you can own stock: Beneficial owner Record owner
o Issuance of Shares
o o Makes shares valid To issue more, you can amend 2 levels for amendment of articles Directors SH’s Issuance of more than 500,000--> more taxes Par value= minimum amount you can sell shares for Amount raised from par value= stated capital (for creditors) In CA, we don’t have to say par value. Can say stated value Articles would say no par value, with a stated value of $1.00 Stated value means that it is not in the articles Directors fix the stated value in the corporate books Cannot declare dividends out of stated capital Has to be preserved for the creditors Money over par value= surplus “Private offering exemption”- §42- you are offering to a small group of people who are insiders.
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If corporation wants to raise more money, does it have to be from additional issuances or can it be from the existing family of stockholders? “Assessing existing stockholders”.
o Inadequate Legal Consideration
o Qualitative Test- has the right type of consideration been given? Cash, Property, Services rendered If fail this testall stock is cancelled “Bonus stock” Quantitative Test- has enough consideration been given? # shares sold x par value must equal consideration given If fail this testappropriate amount stock is cancelled “Watered stock” 2 exceptions: If the corp is reissuing treasury stock o Stock that was once out there, and either repurchased or redeemed by corporation If corp is suffering financially, then they can bypass the quantitative test o Want to keep corp going, to pay back creditors Stock options- services must be rendered to receive If you see property or services rendered, and there’s been a mistake, ask if you are in a good faith jurisdiction or a true value jurisdiction Good Faith If directors made mistake in good faith, it will pass the quantitative test Bigger the mistake less good faith True Value Has to be absolutely equal to pass the quantitative test If either the qualitative test or quantitative test is not met invalid legal consideration has been given. (either wrong type consideration given or not enough)
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o Stock Markets
o o National Exchange market NYSE & AMEX OTC market Nasdaq & non-Nasdaq Exchange mkts have floors, whereas OTC mkts don’t
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Investment Ks
o o o o o o (1) Supposed to be an investment of some kind of legal consideration (2) In a common enterprise (2 or more people) (3) Expectation of profit (4) Relying on efforts of others (b/c you are passive investor) Relying on the managerial efforts of others To avoid securities laws, you need to make sure that you aren’t selling a security Have to register or find an exemption Registration requires many documents Exemption requires less disclosure §5 violation- SEC or private parties can bring this action If a security is offered, or sold, you have §5 issue. Stock has to be registered Helps you get your money back Says did you register or find an appropriate exemption?
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State blue sky laws define investment k as any time you put capital at risk. Most states are broad in their definition of investment ks.
Tiers of Investors
“dumb money”- family members putting in money Angels- people who help fund Venture capitalists- not really funding; put in own management Investment brokers
Ways to freeze out stockholders:
1. Declare additional stock a. Works if the other doesn’t have a preemptive right or has one, but can’t afford to exercise it b. Dilute Don’t declare dividends a. There are reasons not to declare (tax, build up facilities, etc.) b. Closely held corp- stockholder has to prove bad faith c. Non declaration of dividends in a closely held corp means that you have to be bought out d. Publicly held corp- have to show lack of business purpose to get dividends e. Many times the class that’s not getting paid, has no voting rights i. Voting shift- can be put in- if the directors don’t declare dividends for 3 consecutive years, you get voting power. Gives you the right to vote for a new board. ii. If the corporation doesn’t have the ability to declare dividends, then the voting shift doesn’t kick in Give excessive salaries to the majority stockholders, so there’s nothing left to be paid a. Compensation in publicly held corp- you can have more money going to CEO than company makes in an entire year Oppression- “freeze out cases”- some attempt by management to squeeze out minority shs.
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Illegal Dividends
P: SH’s, creditors Go after BOD, maybe even people who receive the dividends
2 requirements for legal dividends: o Have to have adequate surplus available and o Corporation must be solvent (Must satisfy both tests)
Balance sheet test- assets > liabilities Cash flow test- is the corp meeting their expenses? Stated capital reserved for creditors (par value x #shares sold) If you sell your stock for more than par value, “paid in surplus” or “capital surplus” “Earned surplus”- retained earnings Looking at the balance sheet, to find out if corp has ability to pay dividends, look for “paid in surplus”- tells you paid more than par for stock. Can also look to “earned surplus” Can use BOD for lack of due care for declaring illegal dividends, unless there’s the discretionary “not liable for due care” provision is in there 2 possible causes of action for dividends: o Not being declared What type of company do you have Closely heldhave to prove bad faith o Closer the people are, easier it is to prove hostility o To prove bad faith, use “Gottfried Factors” Intense hostility of the controlling faction against the minority
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Exclusion of the minority from employment High salaries, or bonuses or corporate loans made to the officers in control Fact that the majority group may be subject to high personal income taxes if substantial dividends are paid Existence of a desire by the controlling directors to acquire the minority stock interests as cheaply as possible (You are really proving some kind of hostility from 1 class to the other) Publicly heldlack of business purpose If they are being declared illegal dividends
BOD has 2 duties: due care & loyalty
Presumption that BOD acting in good faith, with due care, and within their authority BJR- business judgment rule o Presumption that we will not challenge director’s decisions Due care cause of action- not making decisions based on the welfare of the company Breach of fiduciary duty of loyalty o For Director to stay away from BOD meeting to avoid quorum
Redemption & Repurchases
Repurchase- discretionary event; corporation has the discretion as to whether to buy back the stock or not from the stockholder o Minority & majority stockholders are treated the same in a repurchase situation o At the option of the BOD Cts will not second guess the BOD in a repurchase situation Redemption- non-discretionary event. Look to articles of incorporation for provision to see whether its at option of the corporation or the stockholder o If it just says preferred stock is redeemable, it’s at the option of the corporation. o Articles would have to say redeemable at the option of the stockholder. o “sinking fund”- corporation will put away certain money to cover redemption when it comes; like a savings account
Mergers & Consolidations
Merger- A&B corporations come together & only 1 survives Consolidation- A&B corporations come together & C emerges
Cause of action to compel dividends
Dividends always at discretion of BOD Determine what type of corp you have. o Closely held stockholders have to show bad faith. o Publicly held stockholders have to show lack of business purpose.
SH can vote in 2 contexts:
o Formal Meetings o Valid? o Requirements for a valid SH meeting Must be notice Not less than 10 or more than 60 days from the date of the meeting Record date is the same time period (have to be legal owner as of record date) Lets people know who can come to the meeting & vote Quorum- majority of the outstanding voting shares
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Valid vote Majority, except if the articles say a supermajority is required
Make sure all 4 requirements are there for a stockholder meeting If 1 is missing, it’s like it never happened invalid! Written Consent o Valid? o Majority usually, unless voting on directors In which case, you want a unanimous vote for election of directors o
Requirements for valid BOD meeting
o o Must have notice, usually 24 hours Quorum- for directors, you count people. o Majority of the originally authorized number of directors. o Possible to have supermajority in director level Only exception to quorum is if the # of vacancies make it impossible to meet quorum. o In that situation, directors can come together and vote to fill the vacancies, but they can’t vote on any other matters
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Beneficial vs. Record Ownership
o o o Only the record owner votes Beneficial and record ownership can be split In a closely held corp- To sell your stock, just like a check, you endorse it to the new owner. Corporation generally doesn’t know about it. Secretary of corp marks stock certificate cancelled and makes out a new stock certificate. Becomes a record owner. Before corporation knew she was a stockholder, she was a beneficial owner. Publicly held corp- have to make sure that you are the record owner as of the record date. The beneficial owner has the right to fill it out as they want, and obtain the record owner’s signature.
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Voting- SH vote either straight or cumulative
o Straight o If you are a majority stockholder, you want straight voting- entitles you to elect all members of board. Cumulative o Gives the right to minority stockholders to elect at least one member of board. o If corporation thinks its going to be taken over, it would prefer to have cumulative voting. o If you’re in a mandatory jurisdiction where there has to be cumulative voting, you have to have more than 1 director coming up for election each year o Has to be in articles???? o Provision can be in by laws Majority of SHs can amend by laws o Although most jurisdictions say cumulative voting provision has to be in articles 100/(x+1) +1= % o x= number of directors to be elected o 100 is your constant Mandatory vs. discretionary jurisdictions o Mandatory corp has to offer cumulative voting Corp. must give right to SHs to cumulate their votes SHs don’t have to cumulate, but they have the option to CA is mandatory jurisdiction If mandatory, don’t stagger board down to 1 1 is not allowed o Discretionary up to the corp Corp. can give rt. to SHs, but don’t have to
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Delaware is a discretionary jurisdiction Present- vote by ballot Absent- vote by proxy o Proxies, in general, are revocable by: (need notice to secretary) Notice of incapacity Notice of death Notice of coming to a meeting o A proxy can be irrevocable if some sort of consideration is given in return
When looking at matters SH vote on, look at type of corporation
o o In a statutory closely held corp, the SHs can vote on anything Side document called the certificate of determination tells you what the rights, privileges, & preferences are of the SHs (“blank stock provision”) o “The rights, privileges, & preferences of the class shall be determined by the BOD in their discretion” o Has to be filed w/ Sec. Of State, along w/ articles of incorporation o Allows for flexibility o BOD cannot change the rights of outstanding stock. Have to use regular amendment process.
2 types voting agreements SH can enter into:
o Pooling agreement o SH pool their votes o Only req for validity is there has to be a proper purpose Look at what type company do you have? o Usually there is a provision that says disagreements will be resolved through alt dispute resolution. o For cl closely held corp- only extraordinary o Very loose agreement, don’t have to be written, allows for flexibility Voting trust agreement o Hard to break it o More requirements to make valid: Separation of Legal Title SHs have to have a trustee and only the trustee votes Trustee has to be record owner Has to be a separation of beneficial & record ownership Must be written & open for inspection at corporate headquarters Duration: no more than 10 years Valid vote- voting on a proper manner o If 1 of requirements is missing invalid o Trustee has a fiduciary duty of loyalty o In a voting trust agreement, should say that all dividends will be given to shs. o Ask whether the voting trust is valid If you see SH agreeing on how they vote, ask whether the SHs can vote those matters. Ask if SH are voting on a proper purpose o Can sh in this type of corp vote on these kinds of matters? If on an improper matter, it’s void
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Restrictions on Sale of Stock
o o Is your stock restricted? o If you are in a closely held corp., it probably is Whether stock restrictions are valid or not? o Have to be conspicuous as to form & content Exception: if the transferee knew that it was restricted o Has to be readable by a rx person If the share restrictions are valid, then the transfer is void. Events that would trigger transfer of stock: Death, divorce, incompetency, bankruptcy.
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Restrictions have to be conspicuous as to form & content on front of stock certificate. o Writing has to be rx size. o Should look different from other writing. o Content: have to be able to tell what the triggering events are- what causes the stock to be non-transferrable. Traditionally, it will be death, bankruptcy, divorce, incompetency, etc. Restrictions must be rx. Extremely important to SH Most jurisdictions require that there be notice in articles of incorporation. If either the conspicuous test or the rx test are not met, the transfer will be void On stock certificate, there are 2 officer signatures. Usually secretary and president. The same person cannot be both secretary and president.
Deadlock
o How many levels of possible deadlock could you have? o Director level o Not on officer level o Stockholder level Often, arbitration/dispute resolution will be put in laws in case of deadlock
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Dissolution
o o Dissolution is an extraordinary matter- affects creditors, shs. Grounds for dissolution drastic: o Director deadlock (can be enough by itself) Don’t have to prove irreparable harm o SH deadlock Has to cause irreparable harm Some kind of serious problem that financially hobbles the corp. o Even if you prove it, judge looks at financials for corporation. If somewhat healthy, judge will probably not allow dissolution. o Dissolution easier in a stat closely held corp- mainly b/c sh manage and also if it’s not doing well financially, that can be a ground o Oppressive Conduct Burdensome, harsh, & wrongful conuduct Can show: conspiracy, lack of dividends, or dividends going to the majority Even if you prove oppression, judge can still find corp is running financially. 2 types o Involuntary Brought in the ct Can be brought by SHs. o Voluntary When action is brought by SHs Directors vote first, and then the SHs If the directors vote no on the dissolution, then the shs can’t. Remedies short of dissolution o Buy Out If you ask for a buy out remedy, you should also ask for an independent valuation o Appointment of Provisional Director Provisional director answers to the court Ct can appoint people that don’t know much (impartial person), but problem is that they won’t have any knowledge of the company and won’t necessarily be making the best decisions. Provisional director only decides matters when the BOD is deadlocked. Judge decides when the provisional director is done No preset qualifications, so judge sets.
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Arbitration If a corp wants to go to arbitration, they should have it in its by laws If you dissolve corp & it’s financially ok, creditors are robbed. Even if as a sh, you prove a particular dissolution ground, judge will still ultimately determine. o
Stock Terms:
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Inspection of Corporate Records
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Microsmall: Stock from a company with a market cap of b/t 50,000,000 and 300,000,000 Small: 300,000,000 to 2,000,000,000 Mid: 2,000,000,000 to 10,000,000 Large: 10,000,000,000 +
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If you want to inspect records, usually have to have a proper purpose to inspect or be a sh.
Power of Officers to enter into agreements
Ask, can that action, bind the corpororation? Officers really have no power by themselves, get power from BOD. Look for certified resolutions o Resolutions are issued by BOD after each decision. o All resolutions, to be proper, have to be certified by the secretary of the corporation. o You want to ask for certified resolutions, signed, dated, etc. o Exception: if the 3rd party knows that the secretary is falsifying resolutions. Fire & Sue Directors o President Has express & implied power If acting outside authority, may be held accountable Wants certified board resolutions to give power o VP Only express power, unless something happens to expand power, like incapacity of president If president is incapacitated, VP would have implied power Wants certified board resolutions as well o Secretary Keeps non-financial books, stamps to cancel, etc. stock records Only has express power, unless president & vp are incapacitated o Treasurer Keeps control of financial books Has express power, unless President, VP, & Sec become incapacitated Shareholders o In a statutory closely held corp., they can bind. o In a cl closely held corp, very unlikely o How can shs act? Within a formal meeting. 4 requirements. Pub held- yes. Privately held- yes. Written consent. Diff b/t sh written consent & director written consent, is that there doesn’t have to be unanimous decision. Majority is ok. Exception: election of BOD has to be unanimous. Express & Implied Authority o Implied- to enter into ordinary ks- day to day kinds of transaction. Ordinary, not extraordinary (dissolution, mergers, etc.) kinds of actions. General ordinary business decisions: hiring and firing, ordering inventory, taking out a loan w/ some limitations, Normally can’t enter into a lt loan. If it’s too big, or too taxing on the corporation, probably can’t do.
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How are the ways that directors can act? 1. Can act after they have decided after a formal meeting a. Used to be only way directors could decide something was in a formal meeting i. Formal meeting requirements 1. Always ask, Was that meeting valid? Requirements: a. Rx Notice i. Usually 24 hrs b. Quorum c. Valid vote i. Usually a majority, unless articles stipulate differently 2. Telephonic conference meetings a. Same requirements as above b. Conference call, not a sequential call 3. Petition that’s circulated to the directors a. Unanimous Written consent i. All the directors have to sign it for it to pass (has to be unanimous) 4. Mick Shaw rule a. None of above done beforehand- can the director bind the corporation? i. Coca Cola director said that employees could go fight in war and still be paid b. Requirements i. Has to be a closely held corp. ii. OK as long as all other BODs know about the transaction and all acquiesce (with full knowledge after the fact) 1. Possible to have implied acquiescence iii. No material harm to anyone 1. SHs, creditors 2. Non sh constituencies a. Ex: Erin Brockovich i. People affected by pollution b. Movement towards protecting community 3. Only applies to closely held corporations, not publicly Look for BOD authority? If so was it valid? Unanimous written consent? Telephonic conference call? Look for Mick Shaw
Stockholder duty of rx investigation
o o o SH have duty of rx investigation When stock is sold, can cause fiduciary duty of due care & loyalty If you’re a controlling sh, there is a duty to investigate if there is a rx suspiction that a rx person would have that there will be a looting. o Controlling or majority shs owe a fiduciary duty to minority shs b/c they have the power to affect a corporation Duty stronger within the context of a closely held corp. Further duty to not sell if you find out. Should be some kind of initial investigation. Reasons for- A controlling sh can: o Dissolve corp. o Mergers o Amend articles & by laws o Control BOD, unless there’s cumulative voting If a majority/ controlling sh sells for a premium, they don’t have to share w/ the minority “Greenmail” laws- prohibit buying majority share of stock & threatening corp.
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Removal of Directors
o Can sh remove directors? Yes- extraordinary matter. There are 2 reasons to remove: o Removal for cause Director has done something egregious (like fraud) Breach of fiduciary duty of loyalty, not due care o Removal without cause Can be very capricious If a director is voted in by cumulative voting, and majority says that they want them out, then president will say to minority stockholders- do you still want person. There will be a second vote. If minority cum votes and had same amount of vote against removal as for, then no matter what the majority says, that person stays in
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