Bobby Corps Outline

BOBBY’S CORPS OUTLINE I. Forming a Corporation A. Articles of Incorporation – filed with the Secretary of State 1. FIVE Mandatory Provision + ONE Discretionary a. Name b. Purpose i. General: For any lawful purpose; No Ultra Vires action can be brought ii. Specific: Limited purpose that the corp can engage in. c. Agent for Service of Process within State (name/full address) d. Capitalization a. Shares authorized for each class b. Par value e. Execution f. OPTIONAL: BOD is not subject to any “due care” causes of action B. Bylaws: internal procedures of the corp not filed with the Sec of State, and therefore easier to amend. C. Ultra Vires 1. Definition: Corp acting beyond the scope of its purpose clause 2. Can only be brought against a corp with a specific purpose clause. If there is a general purpose clause, then you must resort to other causes of actions: breach of duty of due case or the breach of duty of loyalty 3. Who can bring an UV action? a. SH can bring an action against the corp to enjoin or get out of a K that is Ultra Vires, and sue the BOD for damages b. Attorney General can sue for Ultra Vires if the corp has entered into illegal activity 4. Charitable Contributions a. Corporate charitable gift is allowed unless the Articles specifically express that charitable gifts are not permitted b. Standard: Reasonableness c. Challenging a charitable gift 1) Amount is unreasonable based on the financial status and the SH’s 2) If the gift benefits a director, then sue under breach of due care/loyalty II. Pre-incorporation Promoter Liability A. Definition: A promoter is a person who, acting alone or in conjunction with one or more persons, directly or indirectly takes initiative in founding or organizing the business or enterprise. B. Rule: There is a presumption that promoters are personally liable on a preincorporation K entered into on behalf of a corporation before it is formed. C. Who brings this COA? A 3rd party who enters into a K with a promoter and wants $ D. Avoiding Liability 1. Sign in agency capacity 1 2. Insert a clause that the 3rd party will look to the corporation and the promoter for payment. Or even a verbal agreement will suffice. It must be clear that the contracting party is looking to the corp. 3. If promoter does not do these two things to deflect liability, promoter can still avoid liability by: a. Getting a novation (this is full proof) (takes 3 parties) b. Corp adopts the K, but the corp is not obligated to adopt it i. Express Adoption: Certified resolution signed by the secretary ii. Implied Adoption: Adoption based on acquiesce III. Defective Incorporation A. At time of the K or tort, did a corp exist to deflect liability from the SH (Defendants) B. Jurisdictions 1. MBCA a. Defendants are only the ACTICE SH (in a Statutory Closely Held Corp, all SH are active) b. Rule: A company is either De Jure or too defective at the time of the K or tort in question. b. The date stamp on the Articles of Incorporation is conclusive of De Jure c. If K entered into prior to being stamped, then Active SH are liable 2. Non-MBCA a. Defendants are both ACTIVE and PASSIVE SH b. 3 SH Defenses 1) De Jure: Substantial compliance with all mandatory conditions precedent. This is the best defense because it is good against all 3rd parties 1. Articles filed and received by the Sec of State 2. Fees paid 2) De Facto: The next best defense because it is good against all 3rd parties except the Sec of State 1. Use of Corporate Privilege: sign contracts with corp name and use corp letterhead 2. Good faith attempt to comply with all mandatory conditions precedent 3) Estoppel: holding out of the corp form and reliance on the corp by the 3rd party. The corp must prove this as per each 3rd party plaintiff IV. Piercing the Corporate Veil A. Action in Equity – must prove that it is fair to pierce the corp veil. More likely to be fair in a tort action, and if the piercing goes after another corp 1. Parent/ Subsidiary Relationship – get to business assets 2. Stockholder/Corp Relationship – get to the assets of individuals 3. Enterprise Liability – separate companies run by same person B. Grounds 1. Lack of observance of corp formalities a. Is the corp a mere alter ego for an individual to conduct business for himself? 2 b. 4 positions must be filled (P, VP, Sec, Tres) c. Keep corporate books, financial records, ledger, SH Meetings, BOD meetings, corp bank acct, contracts signed in corp name 2. Lack of adequate capital a. Initial capital b. Continuing capital – Is there a siphoning off of funds and can the corp pay its bills and other reasonable business expenses c. Type of business (Manufacturing needs more; Service needs less) d. Forseeable risks – look for competition next door C. Tort v. Contract 1. Tort Claim – only need to prove one 2. Contract Claim – need to prove both D. Effect in Jurisdictions 1. MBCA: only active SH (not likely with common law close corp because the SH are usually passive, although they can wear multiple hats) 2. Non-MBCA: Every SH regardless of active or passive V. Capitalization: Lack of Adequate Consideration A. Plaintiff is SH (protect from dilution of interests) or creditors (protect because they are relying on the capital of the corp B. Defendant is the BOD C. Par Value v. Stated Value v. No Par Value v. No Par No Stated Value D. Tests 1. Qualitative Test: proper type of consideration a. Cash: Stock cannot be sold for less than par value b. Services Rendered: Must be fully rendered. A promoter renders services to the joint venture and not the corp because the corp has not been formed yet. A promoter can only get options. c. Property/Equipment: Real tangible property. Inventions are ok as long as patented. 2. Quantitative Test a. Amount of consideration must be equal to the # of shares issed X par value (or no par stated value) b. Good Faith Jurisdiction: Services rendered or property must be valued by BOD, and if they make a mistake in good faith, it will still pass the test. c. True Value Jurisdiction: If there is a mistake, then fails the test E. Name that stock 1. Bonus Stock – fails qualitative test, not valid type of consideration, all stock canceled 2. Discount Stock – fails quantitative test, not enough cash given 3. Watered Stock – fails quantitative test, not enough services/property rendered F. Remedies a. Cancel all stock or portion of stock issued for which adequate consideration was not given b. Force payment c. Sue BOD for damages if fail the true value test or the good faith test 3 VI. § 5 SEC Act of 1933 A. Rule: Requires the registration of all securities sold to public for the first time. This requires the full disclosure. To meet requirements at the time of stock sale, the company must either register or find an exemption. 1. Exception: if all the offerees have access to the same kind of information ( i.e. all offerees are key employees) B. Investment Contract 1. Elements a. Investment of money or some kind of legal consideration b. Two or more investors that are similarly situated c. Expectation of profit d. Rely on managerial efforts of others i. Passive investors need the protection of the SEC, whereas active investors have access to information 2. Remedies a. If you prove that it was an investment K, then you can force rescission of K under a violation of § 5 of the SEC Act of 1933, and force the return of your capital investment 3. Defense: Investors were ACTIVE and had some control over daily operations VII. Dividends A. Motion to Compel Dividend / Lack of Dividend Payout 1. Closely Held Corporation a. Usually the minority SH sue the BOD b. Bad Faith: policy of directors motivated by personal interests rather than corporate welfare i. Bad Faith = Intense Hostility – pattern over a long period ii. Majority SH were getting money from the corp in other ways such as high salaries, bonuses, and corporate loans 2. Public a. Lack of business purpose (any business purpose will suffice) VIII. Legality of Distribution (Dividend, Redemption, Repurchase) A. Stated Capital v. Paid in Surplus v. Earned Surplus B. Dividends 1. Proper Source – are the dividends being paid from the proper source a. Capital Surplus/Paid in Surplus – money from selling stock above par value b. Earned Surplus/Retained Surplus – Money from retained earnings 2. Solvency a. Balance Sheet Test: Assets > Liabilities b. Cash Flow Test: Is the corp paying debts as they come due C. Redemption: Must be express in the Articles 1. Proper Source – Are the dividends being paid from a proper source? a. Capital Surplus/Paid-in Surplus b. Earned Surplus/Retained Surplus 4 c. Stated Capital (GUTS) can be used to pass proper source test only to pay arrearages (cumulative dividends piling up) and the corp. is in financial hardship, and the SH won’t loan the corp money until the corp pays up. 2. Solvency a. Balance Sheet Test b. Cash Flow Test D. Repurchase: Discretionary event. Voluntary act on behalf of the corp and the SH. 1. Proper Source – no guts may be used 2. Solvency IX. Management: A. Statutory Closely Held Corporation (S Corp) v. Common Law 1. SH can manage 2. No need for BOD or Officers 3. Two additional provisions in the Articles a. “This is a close corporation” b. No more than 35 SH. If shares are restricted and a 36th SH gets in, his shares are void. If shares are not restricted and the 36th SH gets in, it is no longer a statutory close corp. 4. In a Common Law Closely Held Corporation, you need a separate BOD, who can also be SH. B. Shareholders Rights: no difference between common and preferred stock unless expressly stated in the articles 1. Voting a. Can only be taken away by express language in the Articles b. At least one class has to have voting rights c. Voting Shift – if dividends are not declared for a period of X years, then the preferred SH can vote 2. Dividend a. Basic right but declared at discretion of the BOD b. Cumulative Dividend Preference (Express in Articles) – dividend carried over to from year to year. Dividend in arrears must be paid before any other dividend is paid. c. Mandatory Dividend Preference (Express in Articles) – However, if the corp does not have enough to legally declare a dividend, it doesn’t have to. 3. Liquidation a. SH take after creditors b. Liquidation Preference: Take before other SH c. Cumulative Liquidation Preference: You get your stake even if the money is given to someone else C. Additional Optional Shareholder Rights – only if expressly stated in the Articles 1. Preemptive Rights: the right of existing SH’s to buy additional stock issued before it is offered to 3rd parties. Usually only in closely held corporations. Price of stock is the FMV, not par value. a. Katowitz Case: Freeze out technique if the existing shareholders cant afford to buy additional stock, then their rights are diluted because the other share 5 2. Redemption Rights: Corp has the right to repurchase stock from the SH. The question is at whose option? 3. Convertibility: The right to convert preferred stock to common stock 4. Indemnification: Protects the SH if the veil is pierced D. Shareholder Matters 1. Extraordinary Matters Only a. Voluntary Dissolution b. Appoint/Remove Board of Directors c. Amendment of Articles d. Mergers and Consolidations e. Vacancies f. Sale of substantially all corporate assets 2. Voting Types a. Straight: majority rules b. Classified: Each class gets to vote for a certain number of Directors. Can be classified staggered or classified straight. c. Cumulative: Ensures that minority gets at least on Director i. Mandatory or Discretionary ii. If a Director is voted on by cumulative voting and the BOD or the Majority SH want to kick him off, then they have to go back to the Minority SH and ask permission. The Minority SH are allowed to cumulatively vote against removal. d. Staggered: members of the BOD come up for election in different years 3. Valid Shareholder Vote a. Elements i. Notice of meeting and record date: not less than 10 and no more than 60 days ii. Quorum: majority of all outstanding voting shares in person or by proxy iii. Valid Vote: majority of those present, unless Articles demand super-majority iv. No substantial harm to another class b. Written Consent i. No SH meeting required ii. Unanimous written consent required c. Voting Agreements i. Pooling a. Must be for a proper purpose (i.e. extraordinary matters) b. Can be written or oral ii. Voting Trust: a Separation of legal tile from beneficial ownership b. Duration (No more than 10 years) c. Written and open for inspection at corporate offices d. Proper Purpose e. Trustee has a duty of loyalty and good faith to the beneficial SHs E. Share Restrictions (Corporation v. Transferee) 1. Conspicuous as to form and content 6 a. Form: rx enough to see, big enough, different type font, on front of stock certificate, directs you to the back. b. Content: Should be clear as to what the restrictions are, and the triggering events for those restrictions must be rx (sale, death, divorce, mental incapacity, bankruptcy) – Like a lockdown c. EXCPETION: The transferee as actual knowledge of the restriction F. Director Matters 1. Elements a. Notice (24-48 hours) or waiver of notice b. Quorum: Majority of the organizations authorized number of directors i. The exception is when there are so few Directors that it is not possible to make quorum, then the majority available must come together to vote (majority wins) on filling the vacancies on the BOD. No other actions can take place until all Directors vacancies are filled. c. Valid Vote: Majority of those Directors that are present 2. Written Consent: unanimous vote required 3. Telephonic Conference: Same requirements as a formal meeting 4.Michshaw Exception a. If one Director goes out and binds the corp without board approval, is that K valid? i. Only in a close corporation ii. All Directors approve with full actual knowledge iii. The K cannot harm the corp or the SH G. Officer Matters: Officers cannot bind the corp in extraordinary matters 1. Express Authority: An officer can get a certified board resolution from the secretary, signed and stamped 2. Implied Authority a. President: Implied authority for ordinary day to day actions (hiring/firing of employees, short term loans, etc.) b. VP, Secretary, Treasurer – have implied authority if president is incapacitated c. Must have all 4 positions filled by at least 2 people. Pres and Sec must be two different people. If not, then lack of adherence to corp formalities  Pierce Corp Veil H. Vacancies 1. Directors or stockholders can remove directors. Look to bylaws. 2. Can remove with cause (egregious conduct) or without cause. a. With cause is typically because of a loyalty problem b. If trying to remove a director that was voted in by cumulative voting without cause, then the minority shareholders have an opportunity to cumulate votes against removal. 3. If vacancy look to bylaws to see who fills. 4. If directors are trying to fill vacancy a. Director meeting with quorum b. No other matter may be decided at the meeting 7 X. Invalid Proxy 1. Valid Proxy: signed by the record owner and lists the name of the person voting 2. Proxy revocable upon: a. Notice of attendance of record owner at annual meeting, notice is given by going to the inspectors of the election letting them know you are there b. Notice of death (notice given to secretary or inspector of election) of record owner c. Notice of incapacity of record owner 3. Proxy not revocable if consideration given XI. 14(a) Causes of Action 1. Basic Elements a. Solicitation: request for a proxy b. By use of interstate commerce or mail c. Publicly Held Corporation i. Traded on a national exchange; or ii. 10 Million in assets and 500 or more shareholders in a voting class 14(a)(9) – (Shareholder(s) or SEC) v. (BOD or anyone who makes the statement) 1. Cause of Action=False or misleading statement in connection with a proxy solicitation a. Rule: False, misleading statement or omission must be material i. substantial likelihood that a rx person would find it important ii. We will only be tested on hard information b. Mental State: Simple Negligence c. Causation: Essential Link Test (replaced the traditional but-for test) i. Minority vote must be necessary to pass the action. ii. If control is in the hands of one person, the minority vote is not necessary, and there is no 14(a)(9) cause of action. 2. Remedies a. Damages, Injunction, Rescind b. If you don’t like the price you got for your shares in a merger, you can walk into state court and ask for an appraisal, only if you voted against the merger. c. If you voted for the merger, then you have to show the false statement or omission caused you to vote for the merger. 14(a)(8) – Shareholder(s) v. BOD 1. Cause of Action=Invalid rejection of SH proposal 2. Scenario: SH asks the BOD for a proposal to be voted on by the shareholders. BOD denies it without putting it to a SH vote. SH wants SEC to compel the BOD to include it. 3. SH must have standing a. SH is the record or beneficial owner of either 1% or $2,000 of the corporation’s voting stock; AND b. SH must have owned this amount for at least one year prior to the meeting 4. BOD has the authority to exclude proposals if they: a. Proposal relates to an ordinary matter, unless social policy is implicated b. Proposal relates to a matter that is contrary to one proposed by mgmt. c. Proposal is for new slate of directors to be voted on d. Proposal concerns a matter that is ultra vires 8  BOD is not required to exclude the proposal. Sometimes they allow the proposals to be voted on to keep the shareholders happy. But, if there are losses as a result, the BOD can be sued for lack of due care. XII. Breach of Due Care (Shareholders or Creditors v. BOD) 1. Business Judgment Rule: an evidentiary presumption that the BOD makes decisions with due care, good faith, and loyalty. 2. Full-proof defense: 6th provision in the Articles stating the BOD cannot be not liable for due care causes of actions. 3. Elements a. Duty: BOD must be fully informed and act as a reasonable prudent person in the same or similar circumstances. i. adequate deliberations ii. seek expert opinions iii. fairness opinions iv. ask questions vi. appoint committee of independent directors a) if not independent, then we have a loyalty issue b) if none appointed, then automatic gross negligence c. Breach: Gross Negligence d. Causation: Look for intervening factors as a BOD defense e. Damages: There must have been losses, either monetary or goodwill. 4. Defenses a. 6th Provision in the Articles b. Good faith reliance on the proper expert c. Individual director voted against, abstained, or was absent. XIII. Good Faith: The BOD of did not have adequate procedures to get information to them XIV. Loyalty (6 Separate Causes of Action) A. Self-Dealing (Shareholders v. Individual Interested Director) 1. Burden of proof on ind director because BJR only applies when BOD decision. 2. Individual director must prove one of the following: a. Impartial Board Approval with Full Knowledge – Interested director counts towards quorum, but cannot vote b. Impartial Stockholder Approval with Full Knowledge – Interested stockholder counts towards quorum, but cannot vote c. Transaction was intrinsically fair 3. Remedy: Transaction is voidable by SH, but no damages.  Watch out for unanimous written consent w/out a BOD meeting because this may not be a fully informed decision.  Compensation fits into this category director/officer is choosing his own salary B. Parent-Subsidiary Non-Merger Transaction (Minority SH of sub v. BOD of parent) 1. Parent as the majority SH owes a fiduciary duty to minority SH of sub 9 2. Initial Burden of Proof: Minority shareholders of the sub must show that parent received some benefit to the exclusion and detriment of the minority shareholders. a. If minority received any benefit then the C.O.A. is dead 3. Burden Shifts: The burden shifts to the BOD of parent to prove that deal was fair (i.e. there is a long term benefit to the sub) 4. BJR locks on. 5. Remedy: Damages from the parent BOD. C. Parent-Subsidiary Merger Transaction (Minority SH of sub v. BOD of parent) 1. Both parent and sub BOD and SH must approve the transaction – extraordinary matter a. Interested directors and SH count towards quorum, but cannot vote 2. Initial Burden of Proof: Minority shareholders must show: i. Lack of fair dealing a) Was there an independent M&A committee? b) Was there a true negotiation? ii. Lack of fair price 4. Burden Shifts: The burden shifts to the BOD of the parent to prove that the transaction was entirely fair. 5. BJR locks on 6. Remedy: Minority SH are paid the difference between what they were paid and what they should have been paid (appraisal).  A duty to auction can never arise in a parent-sub merger because the parent already has control. The point of the duty to auction is to protect target SH who don’t want to give up control. D. Usurpation of Corp Opportunity (Corp as SH Derivative or Creditors v. Director involved) 1. The director has the burden to show that it was not a corporate opportunity. 2. How? a. Impartial BOD vote with full knowledge prior to taking adavantage of opp b. Impartial BOD vote with full knowledge after the fact c. SH approval if the director is also a SH, and the matter is extraordinary d. Corp does not have the resources take advantage of the opportunity (weak) e. The opportunity was ultra vires -- not in the current or future expected line of business 3. Remedy: Constructive Trust + Damages 4. Defense: If the director can prove that in good faith he didn’t know it was a corporate opportunity, this will be a defense to only damages. E. Target Director Responsibility in a Takeover (Shareholders of target v. BOD of target) 1. If the BOD of a target corporation adopts defensive mechanisms/anti-takeover measures, it owes a fiduciary duty of loyalty to its stockholders to act in their best interest. In such cases, there arises a presumption that the board is acting in its own self interest (to save their own jobs). Therefore, the BOD decision is not protected by the BJR unless it can prove the following: a. There was an actual or perceived threat of a bust-up merger i. Actual: the acquiring company discloses this to you. ii. Perceived: there is a duty to do a rx, good-faith investigation. a) Does the target have cash lying around? 10 b) Does the acquiring company have a history of busting up companies? b. The defensive mechanisms/anti-takeover mechanisms were reasonable in relation to the threat posed. i. Poison Pill: Option for current target company SH to buy more stock at a reduced price. This is rx. ii. Golden Parachute: Lucrative compensation packages given to executive officers. This makes them more loyal to the target company and more expensive for the acquiring company. This is rx as long as they are not so excessive so as to be unreasonable. iii. Scorched Earth: The target company guts itself. This is not rx. iv. Porcupine Provisions: Any provisions in the articles that make takeover harder a) Implement super-majority vote: rx as long as under 85% or 90% b) Staggered Boards c) Get rid of cumulative voting v. Shark Repellant: BOD of target company goes to court to seek protection of state anti-takeover statutes. This is reasonable. vi. Pac-Man: The target company turns around and makes an offer for the acquiring company. This is reasonable depending on the terms. vii. Selling the Crown Jewel: This is never reasonable. viii. White Knight: Target seeks a different acquirer. This depends if the white knight takes you for a short ride, or into the castle. ix. Tin Parachutes: Target BOD gives all employees lucrative compensation packages. This is not reasonable. x. Self-Tender Offer: This depends on the price of the offer as long is it won’t financially drain the corp.  If the target BOD either decides to be taken over, or says “no” to a takeover but does not adopt any defense mechanisms, the appropriate cause of action is NOT Loyalty. If losses occur, the appropriate cause of action is Due Care 2. If target enters into friendly merger agreement, and decides to waive previously implemented poison pill against only the friendly party, but adopts defensive mechanisms against any interested 3rd party, and there is no sale of control or inevitable break up, the above stated Unocal-Moran test pertains to the defensive mechanism. Does only the defense mechanism have to be reasonable, or does the third party need to be a perceived/actual threat also? 3. If target enters into friendly merger agreement, and decides to waive previously implemented poison pill against only the friendly party, but adopts defensive mechanisms against any interested 3rd party, and there is a sale of control, then a duty to auction arises. F. Duty to Auction (Shareholders of target v. BOD of target) 1. Merger situation where one public company with widely dispersed ownership is being targeted by another company with primarily one controlling shareholder. 2. If the duty is triggered, the BOD of the target company must: a. Take away all defensive mechanisms in target b. Open up bidding process, give all bidders the same information, and consider all offers 11 c. Get the best value for the shareholders NOW, unless it can explain that there are long term benefits of another offer. XV. Insider Trading 10(b)(5) 1. 10(b)(5) prohibits false or misleading statements or omissions made in connection with the purchase or sale of a security. 2. Proper Plaintiff: Actual purchaser/seller of a security or the SEC 3. Classify your Defendant a. Self Trader i. Traditional insider (executive officer) ii. Constructive insider (someone in a position of trust or confidence) -Lawyers, Financial Institutions, Accountants, Engineers, Possibly blue collar employees: like janitors. Chiarella, Legal Printers. Security Guard (maybe if they find info the course and scope of their job) No Family b. Tipper i. Must be a traditional or constructive insider ii. Must derive a benefit (financial or personal) c. Tippee: must receive info from tipper and actually trade based on the info i. Tippees tipper must be an insider (traditional or constructive) ii. Tippees tipper must derive a benefit (financial or personal) iii. Tippee knew or should have known that the tipper was betraying a relationship of trust of confidence by telling the tippee. This element is very tough to meet if the tipper was a constructive insider. 5. An insider has a duty to disclose material information or refrain trading or tipping i. material: a substantial likelihood that a rx person would find the fact important 5. Scienter: Intent to defraud 6. Reliance: Presumed based on fraud on the market 7. Causation: Presumed as long as the defendant traded on the information 8. Defenses i. Full disclosure to a wide audience and the market had time to react (15 min) ii. No Scienter XVI. Misappropriation Theory: only use this cause of action if the defendant falls out of the traditional 10(b)(5) cause of action. 1. Breach of Fiduciary Duty: Someone in a position of trust or confidence who gains information through this confidential relationship and then uses it to trade a. Family relationship does not create this duty 2. Scienter: that person deceptively trades on the confidential information 3. Defense: Disclose to the person to whom you owe a duty that you are going to trade on that information 12