Corporations Outline - DOC - DOC by kmaghakhani

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     A. General
           1. A corporation is a separate legal entity and its owners (shareholders) are generally not personally liable for the
                debts of the corporation
                    a. No limit on how much they will make but
                    b. Limited liability – the most risked is the amount paid for the shares of stock
                    c. can sue and be sued
                              i. Incorporators- sign art of incorp & deliver it to state
           2. 4 Primary Sources of Corporate law
                    a. State Statutes
                    b. Articles of Incorporation ;Bylaws & other agreements
                    c. Case law
                    d. Federal Statutes

              3. C Corporation
                      a. Share holders are the owners
                      b. owners are immune from personal liability
                      c. Liability liability for the owners
                               i. exception piercing the corporate veil
                      d. Tax consequences
                               i. Corporation is tax payer with double layer of taxation
                               ii. Dividends received by shareholders – must report as income – this is the second layer of
                                           1 Corp pays tax on income and when they pay out post tax income to shareholders they
                                             also pay
              4. S Corporation
                      a. Advantage of forming S corporation is its taxed as a partnership
                               i. So the shareholders pay taxes on their shares of the corp‟s income
                               ii. Restrictions – all owners have to be US citizens, must have 100 or fewer shareholders
       B. 3 Basic Financial Statements
              1. Balance Sheet – Snap-Shot in Time
                      a. As of particular time it gives up the: Assets, Liabilities and Owners equity ( if assets exceed liabilities)
                      b. Assets and Liabilities totals must balance
                               i. Most assets are valued at the lower of cost or value ex. Land purchased years ago will be
                                    determined to the amt paid for it at that time not what it‟s worth
              2. Income Statement – Movie ( covers a period of time yr or quarter)
                      a. During that period of time what were the Revenues & expenses – if rev‟s exceed exp have income /profit
              3. Cash Flow Statement
                      a. tries to reconcile the income statement to change in cash
                      b. needs to reconcile what investment activities were done during the year
                      c. starting line for Cash Flow Statement
                               i. Cash beginning of period
                                           1 Make adjustments from income statement to get to ↓
                               ii. Cash end of period

             1. Players/ actors
                    a. Promoters – someone acting on behalf of the corp that doesn‟t exist
                    b. Incorporators – people who sign and file the articles of incorp
                             i. Once task completed their task ended
                    c. Owners/ Shareholders/ Stockholders – ultimate owners of the co
                             i. Don‟t make the business decision
                             ii. Ownership is separated from control
                    d. Board of directors- people who make the important business decisions
                             i. Directors don‟t make all the decision
                    e. Employees/ officers – others working for the company making certain business decision and ofte times
                         bind the corp
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                               i. General agency laws apply
                     f.   Note: Can one person be all of these players
                               i. Usually not
                     g.   If closely held business then will have overlap between all the players

             2. Articles of incorporation must be field with the state govnt in order for corp to exist
                    a. MBCA §2.02(a) :
                              i. Must include name of corp: Co., Inc., something that indicates to the public that it is an
                              ii. State the Number of shares of authorized that the corp has, the number of shares that it could
                                   issue & the number it can have outstanding at each time
                              iii. Name and address of incorporators
                              iv. Name of resident agent & address of registered office so people suing w/know where to serve
                    b. MCBA 202(b) allows other things to be included
                              i. Purpose clause to state the purpose of the corp
                                          1 3.01 not required to state purpose but if don‟t state a purpose, you are impliedly
                                             deemed to have ANY purpose that corp could legally do
                                          2 Note: Some states require it but sufficient to say – the purpose of the corp is to engage
                                             in any and all lawful action that corporations may undertake
                                          3 If you put specific purpose in your articles and later you want to move to a different
                                             line of business then you are faced with ultra vires activies which means you would
                                             have to amend your articles of incorporation to engage in different line of business
                              ii. Common/preferred stock; limited to that.
                              iii. Provision limiting the monetary liability of a director to the corp or shareholders for any action
                                   or inaction outside of 4 egregious actions
                                          1 Amt of financial benefit not entitled to „
                                          2 Intentional infliction of harm/ criminal law
                                          3 Violation of 8.33
                    c. MBCA §2.03 Corp exists upon filing of articles of incorporation, once secretary of state files the articles
                         this is conclusive proof that incorporation has satisfied all conditions

             3. Bylaws – completely internal document not public so not filed with state unless you are publicly trade co and
                need to make them publicly available
                    a. Not required optional
                    b. Articles of incorporation trump any inconsistency in the bylaws. Bylaws trump state statute as to how to
                         run business.
                    c. MBCA §2.06(a) requires bylaws if the corporation is incorporated in a state that would follow the

                     d. MBCA §2.06(b) provides for detail contents of corporation‟s bylaws.
                            i. may contain any provision for managing business & regulating affairs of the corp that aren‟t
                                 inconsistent w/ laws or articles of incorporation
                            ii. Officers identified purpose of corporation. Calling shareholder meetings.
             4. Other Required (or Suggested) Actions
                    a. Must have an organizational meeting to adopt bylaws, and issue some stock.

     D. Stocks
            1. “Authorized Shares” – articles of incorporation determine the number of shares a corporation may issue
                  a. But it doesn‟t need to issue these authorized shares
                  b. Once the shares of stock have been issued for consideration then it‟s an outstanding share
                  c. Setting the number of authorized shares is really arbitrary unless those are actually owned by
                      shareholders and thus outstanding shares

             2. How to Issue Shares
                   a. Shares of stock are units of ownership in a corporation
                   b. Under MBCA 6.03
                            i. A corp issues its own stock
                                      1 Issuance -Corps sale of its own stock
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                               ii. Articles of incorporation determine the number of shares a corp may issue = authorized share
                               iii. Corp is not required to issue all its authorized shares
                                            1 “Outstanding shares”- those not issued are outstanding until they are reacquired,
                                              converted or canceled
                                            2 “Issued shares” – issued share that corp didn‟t reacquire
                               iv. Corp can have more than one type of class of stock
                      c.   MCBA 6.01
                               i. Articles of Incorp must authorize
                                            1 One or more classes of share together having unlimited voting rights
                                            2 One or more classes of share together are entitled to receive net assets of corp upon
                               ii. Articles of Incorp May authorize More than one type or class of stock that:
                                            1 Have special/conditional or limited voting rights or no right to vote to the extent
                                              prohibited by this act
                                            2 Are redeemable/convertible as specified in articles
                                                   i. At option of corp/shareholder/another person / on occurrence of event
                                                   ii. For cash, indebtness, securities or other property
                                                   iii. In designated amt or amt determined by formula or existing events
                      d.   §6.21: stock is a security so it will either have to register it, or find an exemption. Can be “sold” for any
                           tangible or intangible property or benefit to the corporation.
                               i. Adequate consideration: what does the market today think this stock is worth.

             3. Types of Stock
                   a. Common Stock
                            i. Every company has common stock
                            ii. Rights as owner of common stock
                                      1 You can vote on certain things , one share one vote
                                      2 you can freely transfer it unless agreed not to
                                            i. by will, sell or give away
                                      3 You get dividend
                                      4 Can‟t demand dividends whether or not to pay is a decision that board makes

                               iii. Rights you lack
                                          1 No preemptive rights unless in the articles: opportunity to buy stock to maintain
                                          2 No right to force the corporation to redeem the stock (buy it back) unless in articles or
                                                 i. If you want that right must negotiate for it in buy-sell agreement
                                          3 No right to conversion to preferred stock.
                                          4 No right to make business decisions.

                      b.   Preferred Stock
                               i. Articles stating that a class of stock is to be treated more favorably than other class of stock such
                                         1 Right to receive superior dividend
                                         2 Liquidation rights- right to receive assets upon dissolution of corp
                                                 i. Right to receive x amt before other classes get paid
                                         3 Right to have redemption by corp
                                         4 Right to convert stock into different class of stock
                      c.   Par Value
                               i. Minimum rice for which a corporation can issue its shares. Not really a big issue anymore

     E. Pre-incorporated Transactions ( Promoters)
            1. Promoters
                    a. You really don‟t want promoter to contract on behalf of the corporation
                    b. Usually promoter will come to you after the fact – after they have purchased some property & then
                        decide to form a corp
                    c. Person acting on behalf of a corp that has not yet been formed is a promoter
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                          d.   Promoter liability
                                    i. 2.04 Promoter is personally liable for any obligation created while acting knowing that there
                                         was no corporation
                          e.   You can contract around it when signing on behalf of the corporation
                                    i. You can say ex in the lease that the promoter is not liable on the lease that if the copr is not
                                         formed or is formed & does not adopt the lease then the promoter is not liable
                                    ii. If you are silent on it then the promoter is personally liable on the pre-incorporated contracts
                          f.   If the corporation is not formed , then the corp it can‟t become a party to the K
                          g.   If the corp is formed – the corp coming into existence does not automatically make it a prty to the K
                                    i. It can either expressly adopt the pre-incorporated K by director resolution OR
                                    ii. It could impliedly adopt the K by accepting the benefits or performance
                          h.   But the corp doesn‟t have to adopt the pre-incorporated K if they don‟t want to
                          i.   If corp adopts the pre-incorporated K what happens to the Promoter ?
                                    i. He remains a party to the pre-incorporated K
                                    ii. The 3rd party can look to the corporation or to the promoter for performance if the corp fails to

                 2. The “Secret Profit” Rule
                        a. Secret Profit rule – After corp is formed the promoter has a duty to disclose any profits he is making in
                           dealing with the corp
                        b. No secret profit liability for promoters pre-incorporation transactions , there is no fiduciary duty
                                i. Fiduciary duty attaches when corp exists
                                ii. even if profit made on deal w/corp , promoter is liable only if the profit was secret
                        c. Property acquired before becoming a promoter
                                i. Test for profit = Price paid by Corp – FMV of property
                        d. Property acquired while a promoter
                                i. Test for profit = Price paid by Corp – Price paid by promoter

        F. Choosing a State of Incorporation
               1. General
                       a. Can choose state of incorporation even if don‟t have any business activity there
                       b. State laws of incorporation govern internal affairs
                                i. Internal affairs:
                                            1 Procedure for corporate actions
                                            2 Rights & duties of directors, shareholders and officers
               2. Qualifying as a Foreign Corporation to transact business
                       a. To qualify:
                                i. Must get authorization from state agency
                                ii. Appoint registered agent in the state
                                            1 Individual resident or domestic corp, or foreign corp authorized to transact in that state
                                              whose business office is identical with the corp‟s registered office
                                iii. File annual statements in the state
                                iv. Pay fees & franchise taxes to the state
        G. Ultra Vires Acts
               1. Valid corp actions may not be challenged because the corp lacked power to act
                       a. Corps power to act may be challenged:
                                i. by shareholders challenging corporation to enjoin the act
                                ii. in a proceeding by the corporation against a former director, officer, employee or agent OR
                                iii. in a proceeding by the attorney general

       A. General rule
             1. Shareholder are not personally liable for the debts or obligation of the corp
                       a. If the corp goes bankrupt then shareholders walk away w/o having their personal assets at stake although
                          their stock won‟t be worth much so the extent of your loss is the value of your stock
             2. A corporation can be a shareholder of another corporation (subsidiary)
                       a. Subsidiary is a corp where the majority or all of the outstanding stock is owned by another corp (parent)
                       b. A parent corp is not liable for K‟s, torts & other obligations of subsidiary UNLESS there is a contractual
                          or judicial exception

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         B. “Piercing the Corporate Veil”: Judicially Created Doctrine
                1. Because shareholders could just create a corp just to take care of their debts and walk away from the corp w/o
                    having their personal finances affected , this doctrine was created
                        a. Courts have recognized that It is in the interest of justice to pierce through the liability shield of the corp
                             to impose liability on the shareholder
                        b. Typically Veil piercing only found in closely held corp – more than 10 shareholders will almost never be
                             able to pierce the shield
                        c. Courts more likely to pierce the veil with K creditor/P rather than a tort feasor

                 2. Factors to pierce corporate veil:
                          a. Court is looking for a concentration of ownership along with other factors with elements of injustice
                              &fundamental unfairness in order to pierce the corporate veil & impose liability on the shareholders
                                   i. Running company purposefully to be undercapitalized –so that company doesn‟t have sufficient
                                        funds to pay its debts & obligations instead paying the shareholders & thus leave the company
                                        with nothing
                                   ii. Not observing corporate formalities: No director or shareholder meetings.
                                   iii. Non-payment of dividends: probably not really that important
                                   iv. He made oral guarantee to creditor that he would be responsible for the money
                                   v. Co-mingling of assets – treating corp as your personal back – not separating personal bank acct
                                        from corp bank account
         C.   “Enterprise Liability” – Horizontal liability
                 1. corporations that are separate but commonly owned & engaged in one enterprise together should be treated as a
                     single level entity for liability purposes
                          a. they are treated as a single company for liability purposes
                 2. There is one company separated into 10 companies to limit the liability for one company – so the court would
                     allow enterprise liability Walkovvzsky pg 190 -Crt held the only reason this was done was to twart liability

        A. Shareholders vote on
               1. 8.03 They do vote on electing directors which is done annually unless have staggered board under 8.06
               2. 8.06 allows board to be divided into 2 or 3 classes or no staggered board
                      a. if not staggered board then all positions each year are up for re-election
                      b. if divided into 2 classes ex 300 directors so 150 would be re-elcted each year
                      c. if divded into 3 year 100 director positions would be up for re-newal
               3. Shareholders vote on Removing Directors 8.08
                      a. Unless Art requires cause you can remove directors w/o cause

         B. Shareholder approval required on “Fundamental Corp Changes”
                1. Electing & removing directors
                2. Amendment of articles of incorporation
                3. Dissolution
                4. Merger with another corp
                5. Sale of all or substantially all of the assets of the corp
                        a. Note: Different from voting on directors
                                  i. Supermajority vote may be required by corps code or articles
                                  ii. No cumulative voting on fundamental corp changes

         C. Voting for Director Elections MBCA 7.28
                1. Straight Voting
                        a. If articles of incorp are silent as to election of directors they vote by straight voting
                                 i. At a meeting to elect board directors, each shareholder gets to cast their number of shares
                                      anyway they want for each of the separate elections
                                 ii. So majority with outstanding shares can elect all the board members
                2. Cumulative Voting
                        a. When forming corp can have provision allowing cumulative voting
                                 i. ONLY applies to election or removal of directors
                        b. Don‟t need to show cause to remove a director
                                 i. 8.08(c) if you have enough shares to vote for Y then you have enough shares under cumulative
                                      voting to prevent Y from being removed

         D. To have shareholders act
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                   1. Could have unanimous consent resolution but not practical for large corp
                   2. Could call a Special meeting
                          a. must be proceeded by min amount of notice and max
                          b. cant give less than 10 days notice of the meeting and can‟t give them more than 60 days notice of the
                              meeting ( this applies to both annual & special meeting )
                          c. Must set a Record date for deciding which shareholders get to vote – ex if you own stock on X date you
                              get to vote
                                    i. 7.07 Record date can‟t be more than 70 days before the meeting –
                                               1 So as practical matter record date must be set some time before the notice date
                                               2 At least 10 days and no more than 70 days before the notice date
                                    ii. If you are a record owner on record date then you to vote
                                    iii. For both Special meeting & annual meeting
                                               1 Need date, time, and place
                                               2 For special meeting need purpose
                          d. Shareholder could vote in person or in proxy
                                    i. Even if it says its irrevocable it is revocable

         E. Other things that Shareholders vote on
                1. GR is must have shareholders meeting and must have quorum at the meeting – so majority of the outstanding
                    shares must be present to have a quorum
                        a. Most states including Delaware – once have a quorum need majority of the quorum to vote yes to have
                            action to be taken
                        b. Model acts only requires majority of the qururom votes Cast - to have more yes and no votes
                2. Person unavailable
                        a. Could communicate thru other means such as phone or conference so long as all are present – thus
                            deemed to have waived notice
                        b. Shareholder doesn‟t have to be present at annual or special metting to vote her shares
                                 i. Voting by Proxy is allowed – person entitled to vote authorizes another person to vote in his
                3. What if didn‟t have a meeting? Action w/o a meeting 8.21
                        a. Need all directors to agree to decision/ action by signing a consent form

                   4. 7.27 Supermajority Provision
                          a. Articles of incorp may provide for a supermajority provision to change the voting structure
                                 i. To have a greater quorum or voting requirement for the shareholders

         F.   Mechanics of Shareholder Voting
                 1. How often do we elect directors
                         a. At the first shareholder Annually meeting unless their terms are staggered 8.03
                                 i. ex 300 directors , so all 300 every year must elect 300 new ones to the board – the problem is
                                      that there is no continuity of decisions
                         b. Staggering
                                 i. 2 or 3 groups
                                             1 2 classes 150 per group they will have 2 year term
                                             2 3 they serve for 3 years
                         c. Most public companies have staggered board of 3 classes
                                 i. so most will lose in any year is 1/3 of the directors and it also makes hostile takeovers more time
                 2. How to remove directors
                         a. Shareholder may remove the directors w/o cause unless the articles say you must show cause
                                 i. this would be a good idea to place provision in article to allow removal for cause only – b/c
                                      otherwise you would alow an easy hostile takeover situation

       A. In General
              1. 8.01 all corporate affairs must be exercised by the board or directors subject to limitations in articles or agreement
                 authorized in 7.32
                     a. Board of directors is the ultimate decision making authority in a corporation
                     b. the business & affairs must be managed by or under direction of board
                     c. if there‟s is a decision that corp needs to make and the board makes the decision considered that decision
                           is made correctly
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                        Shareholders – ultimate owners select the board of directors , but don‟t make management decisions
                        Not all decision need to be made by the Board of directors however some fundamental decisions do need
                        to be made by the board
      B. Functions & Powers of Board of Directors
             1. Board of publicly held corp should perform these functions:
                    a. Selecting & determining pay for senior executives
                    b. Operations - Determines corporate policies, oversees the officers work,
                             i. Whether to close all 30 branches on holiday
                             ii. Only one store – lower level employee would determine this
                    c. Management Manages the corporation or supervises the mgm‟t of its affairs
                    d. Acquisitions – whether to acquire another company
             2. The more important the decision is in terms of dollar then more likely that board has to approve it
                    a. The more routine the decision is then officers or employees can make the decision
                    b. If there is any doubt as to whether board needs to approve decision then ask the client to get board
                        resolution in writing
             3. 8.40 & 8.41 allow every corp to designate in its bylaws what officers it will have & what their duties will be
                    a. Officers‟ duties are affected only by state corp law & corps bylaws & agency law
                    b. Officers are agents of the corp but the board isn‟t

      C. How does the board take action in getting things done
            1. 8.21 Unanimous written consent resolution
                    a. all directors sign paper saying they are taking a certain action and thus they don‟t have to have a meeting
                    b. If can‟t get all to sign can have a board meeting
            2. 2 types of board meetings
                    a. Regular meeting
                             i. Occurs in regular periodic intervals as stated in bylaws Or if not in bylaws it could be set by
                             ii. No notice requirement for regular board meetings
                    b. Special meeting – for big decision to be made immediately
                             i. 8.22 Must give directors a min of 2 days notice of the meeting and notice must contain the date,
                                  time and place but doesn‟t need to state the purpose
                             ii. Once have a meeting need min number of directors to be there in order ot have a quorum
                                         1 Quorum- majority of directors who have been in office but Art or Bylaws could
                                            increase or decrease the requirement but not below 1/3
                             iii. How are they present
                                         1 Being there
                                         2 Present through communications equip under 8.20(b) where all directors can
                                            simultaneously hear each other
                             iv. Once have quorum on board meeting to have action taken
                                         1 Need to have maj of director present when a quorum is present
                                                 i. ex 10 directors need 6 there and 4 out of the 6 to vote in order to have action
            3. What happens if the director didn’t receive proper notice?
                    a. A Director can waive notice either in writing or attend the meeting & object to the lack of meeting or
                        even after the meeting gets started could still object
            4. Who has to waive notice of get notice
                    a. Every single director must either get proper notice or waive proper notice
                             i. can waive improper notice after a meeting
                             ii. if don‟t waive improper notice and the others voted then the decisions at that meeting was not

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         A. Directors Can‟t agree in advance how they will vote
                 1. They cant bargain away their decision making ability because they won‟t be able to make good decisions & they
                     owe a fiduciary duties to the corp
         B. 7.31 2 or more shareholders can sign an agreement stating how they will vote
         C. 7.32 Allows shareholders to agree on how they will vote their shares eve if the agreement will be inconsistent with other
            provisions of MCBA. They could agree to :
                 1. eliminate the board of directors or restrict their powers
                 2. establish who will be the officers & what their terms are including salary
                 3. dividing voting power between shareholders & directors
                 4. establishing terms & agreement of transferring of property
                 5. transferring to one or more shareholders all/ part of authority to exercise corp power to manage the business
                 6. requiring dissolution of the corp at the request of one or more shareholder upon the happening of a contingency
                 7. (b) However the agreement authorized by this section must set forth in the articles or bylaws or must have every
                     single shareholder no matter how few shares they have agree to this arrangement
                          a. must be in writing
                          b. If you don‟t state how long this lasts it last for 10 years
                          c. Although as practical matter its used for closed corporations
                 8. If you have stock certificates out there must get all them back
                 9. 7.32(d) agreement is no longer valid once the corp becomes publicly traded

         D. Presumption on Directors voting
                1. 8.24 creates a presumption that if a director was at a meeting and didn‟t vote then they are deemed as having
                   assented to the decision unless they noted their objection on the record
                2. Directors are evaluated as a group
                       a. Can‟t overcome business judgment rule by claiming that not all voted a certain way b/c sufficient
                            conduct by majority of directors can overcome decision by minority

       A. Directors duty of care for Bad Decisions
              1. 8.30(a) when a director discharging any of their duties they must act in
                      a. good care and
                      b. in a manner that director reasonably believes is in the best interest of the corporation
              2. Standard of care:
                      a. Whether making a decision or exercising oversight you must exercise care that a person in a like position
                           would believe would be appropriate under similar circumstances
                               i. Won‟t be liable for ordinary negligence – looking for something worse to assert breach of duty
                                    of care
                               ii. Also the Business judgment rule shields director decision
              3. P must overcome to show Directors is liable for business decision that is not tainted by conflict of interest
                      a. 8.31 Plaintiff must establish that there is nothing in the articles that bar director liability
                               i.    Limitations on Liability for Violations of Duty of Care
                                           1 Art‟s of Inorp can limit or eliminate directors personal liability for money damages to
                                             the corp or shareholders for action/inaction except they will be held liable for
                                                  i. Money received by the director that he is not entitled to
                                                  ii. Intentionally inflicted harm on the copr or shareholders
                                                  iii. Unlawful corp distributions ie dividends or
                                                  iv. Intentional violation of criminal act

                          b.   Note: even if the business judgment rule didn‟t protect the director, this provision would
                          c.   Note: Most publicly traded companies have this type of provision and shareholders have agreed to it
                               because otherwise they wouldn‟t be able to get good people on the board of directors
                                    i. Even if director was reckless they would escape personal liability unless they inflict intentional
                                         harms on the company / criminal law
                          d.   If not such provision shielding the director P will have to show one of 3 grounds of liability
                          e.   8.31(b) P must still establish causation and damages

         B. Business Judgment rule ( judicially created doctrine)

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              1. Courts normally say that a business decision can‟t be attacked by a shareholder in a business decision because
                 they are the ones who elected the directors
                      a. judicial presumption that director decision is correct
              2. This only shields if the director made a decision not if they didn‟t act while something bad happened b/c no actual
                 decision made
              3. Since presumption that directors acted in good faith and in best interest of corp & reasonable under the
                 circumstances there is a way to overcome this
                      a. P can overcome the BJ in 3 ways
                               i. Lack of good faith
                                           1 Fraud, illegality or conflict of interest ie
                               ii. Show that directors weren‟t informed when they made the decision
                               iii. Show that decision that director made was irrational ( this is rare ) – decision was beyond the
                                    realm of reason – not regular bad decisions

              4. If overcome the business judgment rule if the directors cant show that the transaction was fair then you can
                 recover damages by showing causation if you can‟t directors escape liability and the decision stands

     C. Duty of Care
            1. (c) It is unreasonable to expect directors to make decisions based on their own investigations In some situations
                directors can delegate their duties to others such as:
                     a. Officers or employees believed to be reliable & competent or
                     b. Committee of the board of directors that they are not a member of
            2. (d) Allows a director to rely on reports or opinions of anyone from (e) including outside persons but must rely on
                persons reasonably believed with their particular expertise as long as your knowledge is not unwarranted
                     a. Corp officer or employee, Legal counsel, accountants, or other persons ,committee of the board the
                          director is NOT a member of
            3. Caremark
                     a. Part of duty of care or oversight must establish some sort of info gathering system to keep you informed
                          about the corporation

     D. Breach of Duty of Care by not making a Decision (asleep at the Switch)
            1. If the director would have been paying attention would they have been able to stop the wrong that was going on.
                SO the business judgment rule does not apply b/c no decision is being made

     E. Duty of Loyalty
            1. Directors owe fiduciary duties of loyalty to the corporation

              2. 3 ways of violating duty of loyalty
                     a. Competing with corp
                              i. If person competing with corp is Directors who are not agents
                                         1 ALI principles of corp governance 5.06
                                                i. Directors have a duty not to compete w/. corp unless their competing wont
                                                     cause any foreseeable harm or
                                                ii. Competition was authorized in advance by disinterested directors
                                                iii. Otherwise can argue for the court ot adopt ALI
                                         2 Other way to prevent directors from competing with corp is If you can show that they
                                           are using trade secrets or corp resources in furtherance of their competition ( this is an
                                           independent cause of action )
                                         3 If had them sign covenant not to compete so could sue to enforce it
                                                i. However courts won‟t enforce it unless its reasonable
                                                ii. Court will look to how long does it go on for , and what is the geographic
                                                     scope. The longer it goes on less reasonable & wider geographic area then less
                                                     likely to be reasonable
                              ii. If person who is competing with corp is also an employee can apply Restatement of agency
                                         1 Agents have duty not to compete with the principal w/ respect to the subject matter of
                                           the employer

                      b.   Usurping corp opp
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                               i.   Find out about opp with 3rd party & you take the opp w/o informing the corp about it .What
                                    body of law applies to fact pattern
                               ii. ALI Principle
                                            1 Was this a corporate opportunity? A copr opportunity is one that director or senior
                                              executive becomes aware of in connection with their job function OR in
                                              circumstances where it looks like the 3rd party expected t/b offered to the corp or you
                                              are using corp resources and the resulting opp w/ b or interest o the corp OR
                                            2 Applicable to Senior executives – corp pp is also present that is something that senior
                                              exe knows is closely related to the corp‟s line of business or a bus that corp expects to
                                            3 If determine that it is corp opp
                                                   i.     must offer it to the company
                                                   ii. company must reject the opportunity
                                                   iii. must show one of 3 things about the rejection
                                                              a. that it was done by disinterested directors (those who aren‟t interest
                                                                   in this opp) after full disclosure OR
                                                              b. that it was rejected by disinterested shareholders and is not a waste of
                                                                   corporate assets OR
                                                              c. the rejection was otherwise fair to the corporation
                               iii. Guth ( Delaware)
                                            1 Is this a corporate opportunity? Corp opp if 4 factors:
                                                   i. something corp is financially able to undertake
                                                   ii. Its in the corps line of bus
                                                   iii. corp has interest or expectancy in the opp and
                                                   iv. if you took opp you‟d be placing yourself in conflict with the copr
                                            2 SO this is a corporate opp and in breach of Duty of loyalty
                                            3 However if where opp came to you
                                                   i. in your individual capacity,
                                                   ii. its not essential to the corp,
                                                   iii. you haven‟t used corp resources to pursue the corp opp and
                                                   iv. the corp has no interest or exp in the opp then its not a copr opp so you can
                                                         take it for yourself
                               iv. If it is a corp opportunity then
                                            1 Under ALI corp could reject it & you could take it for yourself
                               v. If it is and you take it any way then damages could get. 2 types of Damages
                                            1 If opp is still on going then the court could order the usurper to transfer the opp to the
                                              company or
                                            2 If the opp is over with then court could order the wrongful usurper to remit any profits
                                              he made off the opp to the company

                             vi. Immunization
                                        1 If it is corporate opportunity, what do you need to do if you want to take advantage of
                                          it for yourself?
                                        2 Can you immunize yourself from the attack of usurpation?
                                                i. Fully disclose corporate opportunity & any conflict of interest to the board
                                                     before taking advantage of such opportunity
                                                          a. Must be done by disinterested directors after full disclosure Or
                                                          b. Disinterested shareholders after full disclosure and
                                                          c. Show that the transaction was fair
                                                                     i. Note: Fairness is most difficult to show
                                                ii. Board must formally reject the opportunity by a vote of disinterested directors
                                                     after full disclosure
             3. Directors interest transaction
                    a. Directors is engaging in a transaction with the company
                             i. Directly - Could be selling something you own to the company
                             ii. Indirectly- could be doing so through a related person
                                        1 In either case you are on both sides of the deal , so there is a conflict of interest and you
                                          can‟t be trusted to puruse the deal in the best interest of the corp
                    b. As corporate director must be looking out for the best interest of the corp
                             i. In common law directors were totally prohibited from transacting with the corp

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                           c.   8.61(a) If the transaction is not a directors conflicting interest transaction then you can‟t be held liable
                                for breach of duty of loyalty because the direcftor or related person has interest
                                     i. could still sue for breach of duty of care perhaps

                           d.   How to determine if Director conflicting interest transaction
                                   i. Regardless of which subsection will be applied both require that the director has such an interest
                                        in the transaction that if he voted on the transaction it would be reasonably expected to influence
                                        his vote
                                   ii. 8.60(1) Defining Conflicting Interest for all transactions must determine whether a director
                                        has an interest that would influence his vote or a related person have such an interest in the
                                        transaction that would influence the directors vote
                                   iii. 8.60(2) Something is of such character and significance that it would normally be brought in
                                        front of the board , for these big transaction must determine not only whether director ro related
                                        have interest but also others such as - these would be conflicting interested transaction
                                                1 spouse, parent, sibling, child grandchild
                                                2 individual w/ same home as director
                                                3 trust or estate of someone
                           e.   How to Sanitize the transaction
                                   i. 8.61(b) If there is a directors conflicting interest transaction can‟t be challenge if one of 3
                                        things happen
                                   ii. 8.62 Could get the other board of directors ( qualified ones w/ no interest in the transaction )
                                        after full disclosure to sanitize the transaction OR
                                                1 Must make required disclosure
                                                2 If it‟s a committee that‟s voting on it then all of its members must be qualified &
                                                   appointed by majority vote of the qualified directors

                                    iii. 8.63(2) Get the other disinterested shareholders to approve it OR
                                               1 Vote rule changes
                                                       i. Majority of the qualified shares(not interested/related) must vote in favor of
                                                           the transaction
                                                       ii. its not votes actually cast but the majority of votes entitled to be cast
                                               2 If can show that it was a wasteful transaction even with shareholder approval – court
                                                  won‟t approve it
                                    iv. Must demonstrate entire fairness of the transaction
                                               1 Burden is on the Director to show entire fairness
                                                       i. Fair Dealing
                                                                a. Must show that transaction was fairly negotiated
                                                                b. Conflict of Interest results in unfair dealing
                                                                c. Note: Fair dealing will outweigh unfair price
                                                       ii. Fair Price
                                                                a. Fair price may outweigh unfair dealing

                   4. Note: These rules apply not only to directors but also to employees or executives

          F. Compensation of Directors MCBA 8.11
                1. directors can set their own compensation unless the
                        a. if excessive compensation , they will need to prove it was approved by shareholders but waste doctrine
                            still applies or that the compensation was fair to the corporation
                2. courts are reluctant to overturn director compensation

        A. What is a Derivative Action
              1. 7.40 A suit being brought in the right of the corporation ie there has been harm to the corp
                       a. When a shareholder sues to vindicate the corporations claims.
              2. Normally the board makes big litigation decision – whether they should sue the wrongdoer
                       a. for some reason the board is not suing so the shareholdesr want to force the corp to sue
                       b. any recovery will go to the corp since the corp was the one who was harmed

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           B. Why go through litigation if recovery goes to corp?
                 1. Corp is benefited by the judgment thus the shareholders are benefited by the judgment
                 2. Successful in litigation nteh court may order the other party to pay your litigation & attorney fees, however even if
                     not successful the attorney took the case on contingency basis

           C. 1st Decide whether Derivative Actions, Direct Actions or Class Actions
                   1. Derivative Action – If the primary harm is to corp & shareholder is indirectly harmed it‟s a derivative action
                           a. Not enough for shareholder to claim stock is worth less after the harm

                    2. Direct Action – Where shareholder sues on behalf of himself & all other similarly situated, he is enforcing a right
                       common to all shareholders which run against the corp
                           a. Examples
                                     i. Shareholder being denied to look at the Corps books – this is direct action b/c shareholder is the
                                         person harmed not the corp
                                     ii. Directors usurped corp opp – this is derivative action since its harm to the corp by steeling opp
                                         that would have belonged to the corp
                    3. Class action – a class rep sues on behalf of a class of claimants who are similarly situated but the rep is also
                       asserting her own personal claim

         A. Joinder of the Corporation
                1. In a derivative suit corporation is a necessary party & must be joined as a nominal D since they haven‟t brought
                    the suit in their own name
                2. A shareholder brings a derivative suit because the corp has failed to assert its claims
                         a. So corp is joined as a nominal D in the case even though the suit is brought to enforce the corps claims
                              and also a P so recovery will go to the corp

           B. Plaintiff Standing Requirements 7.41
                   1. Shareholder must have been a shareholder at the time the harm occurred & while suit is pending
                                    i. If you cease to be a shareholder or proper representative at the pendency of lawsuit the case will
                                         be dismissed and will require some other P to re-file the suit - if proper at time of harm but
                                         during pendency part w/ stock – dismissed
                                    ii. they can‟t become shareholder for the purpose to sue for a harm that occurred in the past
                                                1 This is to avoid having people become professional P‟s
                           b. Exception: if you can show that you acquired your stock by operation of law by someone who was
                               shareholder at the tiem of harm : inheritance or as part of divorce settlement
                   2. Must fairly and adequately represent the interests of the corp in enforcing the right of the corp
                           a. Even though no limit on number of stock shares to qualify for shareholder P, however court will likely
                               state that holder of small shares doesn‟t adequately & fairly rep the interest of the corp

           C. Demand Requirement
                 1. NY requirement
                        a. Futility exception to the demand requirement
                                i. Must first make a demand on the board
                                ii. If you can show in complaint by alleging in particularity facts that show that a majoiryt of the
                                     board was interested in the challenged trans ( whether one director is controlled by other
                                     directors) OR
                                iii. Can allege with particularity that board didn‟t fully inform themselves to the extent reasonably
                                     appropriate under the circumstances
                                            1 ex breach of duty of care- grounds that thye didn‟t investigate a complaint
                                iv. TO show that the transaction was so egregious on its face that it couldn‟t have been the product
                                     of sound bus judgment of the directors
                                v. Can get demand excused if meet one of these three things
                 2. Delaware Requirement
                        a. Futility exception to the demand requirement
                                i. Must first make a demand on the board
                                ii. Can get demand excused if
                                            1 you can allege with particularity in complaint facts that give rise to reasonable doubt
                                              that a majority of the directors were not disinterested and independent t OR
                                            2 Can show that challenged transaction wasn‟t a valid exercise of business judgment
                                                   i. this is really a like part two & three of the NY test
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             3. 7.42 Universal Demand Requirement
                    a. Every time in every derivative action the derivative P can‟t file suit until they make a demand on the
                        board and demand that the board files suit on behalf of the corp
                             i. If board accepts demand & corp sues then P is no long required
                    b. Can‟t file lawsuit until after you make your demand & at leas 90 days have passed unless you had an
                        earlier rejection or if can show there will be some kind of irreparable harm to the corp by not allowing
                        you to file suit before the 90 days so in this case you need an injunction

             4. Board could Reject the Demand
                   a. Shareholder Declines to File Suit – if his demand is rejected the shareholder could choose to forget
                       about the whole thing
                   b. Shareholder Files Suit – If shareholder‟s demand has been rejected he must meet under 7.44(d) in his
                       complaint allege with particularity facts establishing either:
                            i. that a majority of the board didn‟t consist of independent directors in rejecting the demand OR
                            ii. they didn‟t make a good faith reasonable investigation in rejecting the demand

                      c.   If Shareholder meets 7.44(d) requirements case proceeds
                                i.    After the derivative suit h/b filed the board may appoint a “special litigation committee” which
                                     may move to dismiss
                                ii. If the SLC makes showing required by 7.44(a) the case would be dismissed
                                             1 A derivative suit must be dismissed by the court on motion by corp if
                                                    i. Court appointed independent panel OR
                                                    ii. Majority of independent directors by quorum vote OR
                                                    iii. Majority of independent directors consisting of at least 2 indep directors
                                             2 has determined in good faith after conducting a reasonable inquiry that the derivative
                                               action is not in the best interest of the corp
                                iii. If the SLC doesn‟t meet 7.44(a) the case would continue
                      d.   If Shareholder doesn’t make showing case is dismissed

             5. Board accepts the Demand – there would be no need for a derivative action. The corp would file suit in its own
                name against the wrongdoer

     D. Special Litigation Committees
            1. Here demand wasn‟t required or demand was made rejected & still brought lawsuit and its pending
            2. Board determines to come up with a Special litigation team to determine whether the lawsuit should continue
                     a. Board can delegate duties to another board
            3. NY Special Litigation Team requirements
                     a. Must show that people on the special litigation team are independent & they made a good faith
                         reasonable inquiry before they decided to dismiss the lawsuit
                             i. Here it doesn‟t matter it it‟s a bad decision or board doesn‟t agree with conclusion
                                        1 Whether good process used: Transcripts viewed, whether got outside counsel
                             ii. As long as the special lit team was independent

             4. Delaware Special Litigation Team Requirements [ only applies to demand excused case]
                    a. Must not only show that there was a good process that your special litigation committee consists of
                       independent people who went though a good process before deciding to move to dismiss But
                    b. Court will impose its own business judgment rule and determine whether the lawsuit should continue
                           i. Even though they went through a good process they can disagree with the conclusion that was
                                reached & thus deny the motion and allow the suit to continue
             5. MCBA closer to NY Law
                    a. 7.44(a) (b)(2) and (c) see above

             6. Reconciling the NY & Delaware cases
                   a. Auerbach (NY) - was a case with demand requested and rejected
                                        1 only 4 out of the 15 directors were being sued
                   b. Zapata (Delaware) – It was a demand excused case , all directors were D‟s in suit and had an interest in
                        the challenged transaction
                                        1 Court had more reason to distrust the directors than the NY court had
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       E. Other Rights with Derivative Action
              1. You have a right to a jury trial only if State law would give you such a right
              2. If the shareholder losses on the derivative suit, other shareholders are barred from vindicating the corporations
                 claims a second time
              3. Any settlements or dismissals with derivative action will requires court approval b/c derivative action has a res
                 judicata effect
                      a. If would allow the company to bribe the shareholder P to voluntarily dismiss the suit & also give it a res
                           judicata effect all other shareholder would be harmed by this
              4. Expense recovery 7.46 ( the heart driving derivative actions)
                      a. If the preceding results in a substantial benefit to the corp the court may order the corp to pay the P‟s
                           attorneys fees and expenses
                      b. If the court finds that the P brought or maintained the lawsuit w/o any reasonable cause or for any
                           improper purpose court could order the P to pay the D‟s expenses
              5. If the derivative action is successful & P wins the case under the underlying merits – recovery goes to the Corp
                      a. Derivative P gets indirect benefit of his stock price going up but does not directly receive any portion of
                           the recovery
                      b. Successful recovery goes to the corporation although courts allow successful shareholder to recover costs
                           from the losing litigant and attorneys fees from the corp
                      c. If shareholder losses can‟t recover from the corp/ directors but the case was most likely taken on a
                      d. If court finds shareholder sued w/o reasonable cause the court can required the shareholder to indemnify
                           the D‟s attorney fees

                                                   CLOSE CORPORATIONS

      A. What is a “Close Corporation”? 3 characteristics
            1. Small number of stockholders 10 or fewer
            2. Overlapping between different roles of directors shareholders and officers
            3. No ready market for the corp stock as consequences of having a small number of shareholders

       B. Why Buy Stock in a Close Corporation
             1. To have ownership in a business and earn salaries (primary reason) as officers or employees of the corp.
                Employment in corp is usually shareholders‟ sole source of income

       C. Ways the Majority Can Oppress the Minority –“Freeze –outs”
             1. Not re-elect minority director
             2. Can fire the minority director & thus take away his return – at will employment unless can show that corp has just
                     a. thus he is required to sell his stock at much less
             3. Dividend‟s could be cut out and keep the money in the corp ,so majority could increase their own salaries
             4. Stop passing along information
             5. Sell assets to themselves
             6. Enter into sweetheart deals with their other companies

       D. Primary ways minority shareholder can fight back:
              1. Fiduciary Law analysis: Common Law
                     a. In the unique circumstances of closely held corp those shareholder owe fiduciary duties to one another
                         same way that partners do in a partnership
                             i. Equal Opportunity rule that if controlling group is having their stock redeemed they must
                                 offer the same opportunity to the minority shareholders

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                      b.   Wilks Test
                               i. Court must allow majority of D to establish a legitimate business purpose for the action they
                                           1 ie that P is incompetent or drug user
                                           2 If D can‟t show this then minority should win the case
                               ii. If D makes the showing the burden of proof falls back to P to show that there were alternative
                                    means that still could have achieved the legitimate business purpose that are less harmful to my
                               iii. If both parties makes their showings courts will balance both showings
                                           1 What is the likelihood that these alt means that P has shown are going to advance the
                                             legitimate bus purpose shown by the D
                      c.   Hollis Showing
                               i. Must additionally show that you were harmed in your capacity as your shareholder
                                           1 whether shareholder owns a significant % of shares
                                           2 whether they were the founder
                                           3 whether shares received as comp for services
                                           4 whether shareholder expects value of shares to increase
                                           5 whether he made significant capital contribution
                                           6 otherwise demonstrated a reasonable expectation that returns from the investment w/b
                                             obtained thru continued employment
                               ii. Note: interest is not injured if the corp redeems the shares at a fair price or fair price determined
                                    by a prior contract

              2. Bring an action for Statutory Oppression to involuntarily dissolve the corporation [14.34]
                     a. Minority shareholder must show that directors or those in control have acted in illegal/ fraudulent or
                          oppressive manner can require the company to involuntarily dissolve Or Deadlock [where each side
                          owns 50% & nothing c/b resolved]
                     b. Under the statute the court may issue involuntary dissolution of the Corp under the following grounds:
                              i. Show that directors or those in control of the corp are acting in a manner that‟s oppressive
                                          1 Oppressive – Shareholder can show they were oppressed by showing that the majority
                                            of shareholder have substantially defeated your reasonable expectation
                                                 i. Reasonable expectation m/h/b formed at the time your joined the enterprise –
                                                      when you became shareholder,
                                                 ii. Also that expectations were objectively reasonable,
                                                 iii. they were central to your decision to become a shareholder, AND
                                                 iv. majority must have either known or should have known that these were your
                                          2 If can show that majority has substantially defeated your expectations & they can‟t
                                            show a adequate alternative remedy the court could order dissolution
                              ii. However if court does order dissolution they must condition it by allowing either
                                          1 The company or the other shareholders to buy out the P‟s shares foe fair value
                                          2 14.34 codifies the buy out of the company

              3. Not all cases of deadlock are subject to judicial dissolution if
                     a. Functions of the disputing interest are distinct & company can continue w/o involving the other
                     b. Dissolution w/b pointless b/c it will help accomplish the wrongful purpose of the D
                              i. Wollman one selling the other procuring

     E. Advance Planning Ideas for the Minority
           1. MCBA 7.32 Allows Shareholder agreements even if inconsistent w/other parts the MCBA
           2. Get a buy-sell agreement to obligate the copr to buy back your stock in certain events – even though the rule is
               that corp is normally not required to buy back stock
                    a. Doesn‟t need to be in the articles of incop
                    b. It‟s a separate agreement of the purchaser & the persons share to be sold
                             i. include what triggers the buy back
                             ii. who is the buyer
                             iii. how will you figure out the price

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                 3. Employment Agreement – if he gets fired he won‟t have to argue that hes been oppressed rather he could argue
                    that termination is in violation of the employment agreement , & if the K states employment period and salary-
                    then damages would be easily calculated
                         a. For cause employment agreement
                         b. to specify your salary, how long term of employment w/b including provision that you can only be
                             terminated for cause or for legitimate business reasons ie poor performance or co legitimately doesn‟t
                             need your services

                 4. Cumulative voting – if have min number of shares could keep yourself on the board
                       a. to ensure that you are at least on the board
                       b. if have enough shares to get to on the board you will also have enough to prevent their removal ie
                       c. However must alos state this in the articles of incorporation for cumulative voting to be effective
                 5. Super majority provision for certain types of actions to prevent the majority to raise their own salaries
                       a. Directors can‟t set officers salaries unless upon unanimous agreement of the directors
                       b. NO officer/directors or shareholder can engage in a transaction with the company unless upon unanimous

                 6. Preemptive rights
                         a. right to maintain your percentage ownership in the company incase they want to issue more stock in the
                         b. or have provision in articles of incorporation for Supermajority approval for certain types of transactions
                              – this w/give you veto powers
                 7. In their capacity as shareholder that they will agree to vote all three to the board of directors and use their best
                    efforts to ensure Jason remains President
                         a. 7.31 shareholder can agree how to votoe their shares
                         b. 7.32 states that as long as have unanimous shareholder agreement, they could agree that they will make
                              sure J stays as President

       A. Parent-Subsidiary Dealings
              1. Parent company owes a fiduciary duty to the subsidiary & b/c of this relationship in dealings with the subsidiary
                  the parent must meet the test for Intrinsic Fairness
                       a. Under this standard the burden is on the Parent company to prove that the transactions with the sub were
                           objectively fair.
              2. However, this standard is applied only when the Fiduciary Duty is accompanied by self-dealing
                       a. Self-Dealing = parent by virtue of its domination of the sub causes the sub to act in a way where the
                           parent receives something to exclusion & detriment of the minority stockholders of the sub
                       b. Where causing a partially owned sub not to recover from wholly owned there is self-dealing so the
                           intrinsic test would have to be applied & wouldn‟t win under this.
              3. If there is no Self-Dealing then the Business Judgment Rule applies
                       a. Sinclair Oil - Majority stock holder of Sniven paid excessive dividends thus crippling co. Crt applied BJ
                           rule not Intrinsic fairness b/c no self dealing involved

                                                             END GAMES

     A. To dissolve under 14.02 the board of directors must authorize it & submit to the shareholders that the company should be
             1. The shareholder must also approve the dissolution
             2. Must have a Special meeting or unanimous consent resolution
                     a. Special meeting of shareholders – need quorum before action can be taken – once have a quorum at the
                         meeting need majority of the votes cast “yes” to have proposal pass

        B. Going through winding up of liquidation of assets
               1. Corporation continues after dissolution for a the limited purpose of “winding up”T
                      a. Winding up activities: collecting & liquidating assets using proceeds to pay off creditors in full first then
                          whatever left over to shareholders

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                 2. Creditor recovery from Shareholder who aren’t paid during dissolution
                        a. Creditor must sue all the shareholders only for what is due to them
                        b. To get more than what is owed would have to argue veil piercing because you can‟t hold the shareholders
                             personally liable
                        c. The shareholders liability can‟t exceed more than what they would owe, & only up to what the got from
                                  i. so if one isn‟t subject to jurisdiction then the others will pay in proportionally they won‟t pay
                                      that other shareholders‟ portion
                 3. Creditor recovering from directors under 14.09 the amount they couldn‟t recover from the shareholders

        C. Notice of Dissolution
               1. Notice of dissolution must be filed in the same public records that contain the articles of incorp
               2. Written Notice must be provided to known claimants - under 14.06(a) a dissolved corp can dispose of known
                   claims against it after 120 days ,
                        a. creditor must submit a claim by 120 days or he will be barred
                        b. if the claim is rejected & doesn‟t file suit w/I 90days his claim is barred
               3. Notice by publication for to reach unknown claimants
                        a. To do so must publish a one time notice in newspaper of general circulation in place of principle business
                            notifying of the dissolving and stating that they have 3 years to file a claim
                        b. If no claim filed w/I 3 years claim is barred even if the person was out of state & couldn‟t have known
                            about this

      A. Structure of a Mergers
             1. Simple Merger
                      a. Target company merges with acquiring, T disappears
                             i. All assets & liabilities of T become those of Acquiring company‟s
                             ii. Unless merger agreement provides otherwise, Articles & Bylaws of the surviving company stay
                                  the same & officers remain the same
             2. Triangular Merger : way in which to prevent T’s liabilities from infecting Acquiring
                      a. Triangular Merger – Acquiring Co creates a subsidiary allowing the disappearing disappearing/T to
                         merger into the Sub ,so any liabilities of the company become liabilities of the sub not the parent
                         company. Sub must indepdenty operate
                             i. To hold Target liable would have to argue veil piercing

        B. Documenting the Merger
               1. Bare Min Code requires Merger agreement: 11.02
                       a. Name of domestic corporation merging & name of the surviving business
                       b. Terms & conditions of the merger
                       c. Include the manner & basis of converting the shares of each merging stock
                       d. Articles of Incorp or amendments to survivors articles or other provisions
               2. Beyond min what should be put in the merger agreement
                       a. Could have target make Representations & warranties – that they are in full compliance of employment
                          , immigration and environmental laws
                               i. If they weren‟t in fact in compliance of law then you still assume liablitie unless if T-
                                    shareholder were a few could agree to go after the few former shareholders of T
                       b. Parent company could do some due diligence checking their records & verifying reps & warranties or
                          can have Closing conditions that on the day of closing that all the reps & warranties are valid or else can
                          refuse to merge , can refuse or pay less
               3. Who determines the content of agreement
                       a. Board of Directors of the acquiring company decide what the merger agreement will say
               4. Filing Requirement
                       a. Must file with state Articles of Merger stating that Target no longer exists

        C. Board & Shareholder Approval
               1. How to Complete the Merger
                      a. 11.04(e) Presumption that Plan of merger must be adopted by both Corps Shareholders
                             i. There must be a meeting of the Shareholders where a quorum is present            (majority of
                                 outstanding shares). At the meeting for the plan of merger to be approved there would have be
                                 more “yes” votes than “no” votes 7.25(c)
                             ii. Other states must have a majority of outstanding shares vote
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                          b.   11.04 (b)&(g) Plan of merger does not need to approved by shareholders if 4
                                   i. Company will survive the merger
                                   ii. Surviving Co‟s articles of incorporation remain unchanged
                                   iii. Each shareholder of Surviving Co will continue to own the same number of shares, with the
                                        same rights, immediately after the merger, and
                                   iv. In the merger Surviving Co won‟t be issuing more than 20% of the number of outstanding
                                        shares that it had immediately before the merger

                          c.   11.05 If parent company owes at least 90% of the outstanding stock of a subsidiary company then the
                               parent can cause the subsidiary to merge w/o having shareholder approval of the subsidiary

         D. Shareholder Remedies
                1. If shareholders of T are unhappy with the merger they can
                        a. They could sue directors for breach of duty of care –that they didn‟t get enough money of their stock
                        b. They could vote against however if enough yes votes they would lose
                        c. They could Assert Dissenters rights
                        d. They could sue for breach of duty of loyalty if there was a Conflict of interest

         E. Shareholder Remedy: Dissenters Rights
                1. What happens with Dissenters Rights
                        a. A shareholder asserting dissenters right of appraisal is basically compelling the corp to pay them in cash
                           the fair value of the shares as determined by the court
                                i. Fair Value 13.01(4)
                                            1 Fair value means the value of the corps shares determined right before the merger
                                               happens – no discounts for lack of marketability or minority status
                                            2 Court looks at expert testimony & determines what is company worth
                        b. Shareholder will petition a court – if crt decides that fair value was higher than the merger prices, the
                           acquiring company must now pay the shareholder, however if the crt determine that the FV is much less
                           than the merging price, shareholder will get even less than the amount offered for the merger
                                i. Acquiring company could include provision in their agreement that they won‟t approve merger
                                     if majority of assert their dissenters rights

                  2. Determining dissenters rights
                         a. 13.02(a) List of transactions that will give you dissenters rights
                                 i. In a merger a shareholder have a right to vote on the plan of merger they get appraisal rights.
                                     But if the shares of stock remain outstanding after the merger the shareholders won‟t have
                                     dissenters rights.
                                             1 Subsidiaries do get to dissent

                          b.   13.02 (b)(1) Takes Away dissenters rights
                                   i. If target company is publicly or if not publicly traded but has 2000 shareholders with public
                                        float then they don‟t get dissenters rights
                                                1 Publicly Traded - listed on NY stock exchange or American stock exchange or on

                          c.   13.02 (b)(3) Restores dissenters rights if what your are getting is not cash & is not publicly traded stock
                               at the time the merger goes affective

        F. Shareholder Remedy: Sue for breach of Duty of Loyalty
               1. Weinberger
                       a. Directors owe a duty of loyalty to the shareholders. In dealing with a merger Shareholders are entitled to
                          Fair dealing and Fair price which must be viewed in entirety. Shareholders must have informed approval
                          as provided by the board
                       b. Fair Dealing Includes considerations of
                               i. The timing of the transaction , whether the transaction was hurried
                               ii. How it was initiated, structures & negotiated
                               iii. Disclosed to the directors – are directors on both board
                               iv. How approvals were obtained from shareholders & directors
                       c. Fair Price -The method of valuing the company is whatever is the state of the art method at that time
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         A. Structure of the Transaction
                1. Buyer pays consideration for the assets of the seller

         B. Effects of the Transaction
                1. Effects on Buying Corporation
                          a. Buyer acquiring all or substantially all of the companies assets then buyer has acquired the company but
                             not in a legal sense because the other company still exists
                          b. The advantage of asset purchased as opposed to the merger is that the buyer doesn’t take the liabilities of
                             the seller
                                  i. despite the general rule that assets purchaser is not liable , in some situations courts will impose
                                       successor liability

                           c.   Successor Liability : To impose liability P must show that at each transaction liability passed
                                    i. 4 ways to show liability
                                              1 Expressly assumed liabilities & obligations
                                              2 Transaction is a consolidation or merger
                                              3 Purchasing corp is a continuation of the selling corp OR
                                              4 Transaction is entered into to avoid liability or debts

                                    ii.  Importance between Asset sale & Merger in determining liability
                                               1 Paying adequate cash consideration enables the seller to pay its liabilities & thus this
                                                  is enough to keep the buyer from assuming liability
                                               2 Paying stock to the selling company & distributing to the shareholders doesn‟t allow
                                                  the company to pay off its debts so it seems like a merger thus liability is passed
                                    iii. Franklin
                                               1 WPS sold assets Con Cal – Con expressly assumed liability
                                               2 Con Cal sold assets to Con Del
                                               3 Con Del merged into USX (liability didn‟t flow b/c Con del paid adequate cash
                                                  consideration thus liability was broken in the link)

         C. Board & Shareholder Approval
                1. 12.01 Unless otherwise provided in the articles of incorp, shareholder approval is not need in order to sell any or
                   all assets in the usual & regular course of business

                  2. 12.02 Disposition/sale outside of the regular course of business requires shareholder approval if after the sale the
                     selling company will be left w/o a significant continuing business activity
                          a. If you retain continuous business activity – don‟t need shareholder approval
                          b. What is a significant business activity : Safe harbor don‟t need shareholder approval
                                  i. If after the deal you retain an activity that represents at least 25% of total assets AND
                                  ii. 25% before tax operating income OR
                                  iii. 25% of revenues thus you conclusively have continuing bus activity thus don‟t need shareholder
                          c. Note: If you don‟t fall w/I Safeharbor can take chances and not get shareholder approval
                                  i. If a point or two away from the 25 OI or 25 Rev then you may not need shareholder approval
                                       however this isn‟t 100%

      A. What is a Hostile Takeover
             1. Gaining control over a corporation over objections of that corporations board of directors

         B. How can it be accomplished
               1. If the target company is a public company the bidder makes a tender offer of cash, securities or both to the target
                   shareholders who tender their stock
                        a. By directly going to the shareholders interested party can bypass the board & avoid having to get their
                            approval to either buy assets or merge
                        b. If majority of shareholders tender their shares then the interested party can get rid of the Target company
                            board of directors
               2. Tender offer is typically conditioned on sufficient number of target shared being tendered to endure bidder gains
                   control of the target company

         C. Duty of Interested party & Disclosure requirement
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                  1. Can interested party start buying stock quietly w/intention that they will tender offer later
                        a. Yes, there is no insider trading issue & no duty to the target company yet

                  2. At what point will interested party have duty to Target?
                         a. If you buy stock in a publicly held company & buy more than 5% of the Corporations stock then you
                             must file SEC schedule 13(d) stating what you plan to do with the purchase & must disclose it w/I 10
                                  i. Can he buy more w/I 10 day waiting period – yes b/c 5% is the trigger for the reporting
                                       requirement not the cap b/c once you file the schedule 13(d) the price will go up
                         b. Once schedule 13(d) is filed the price of the stock will go up to whatever the market thinks the tender
                             offer will be , tender offer will have to pay sub premium over the market price

                          c.   Requirements of 13(d) Disclosure
                                  i. Background, citizenship
                                  ii. How many shares you have how you got it
                                  iii. Whether the purpose of the purchase is to acquires control of the business

                          d.   How does the market know that Schedule 13(d) is field with SEC
                                 i. All SEC‟s are filed through the SEC EDGAR system available on their web site accessible to
                                     companies in wall street who keep track of this

                  3. The Offer & Tender
                         a. Offer must be left open for 20 business days ie 4 weeks 14(d)(1)
                                 i. By tendering shares to buyer this means that shareholder is depositing the shares with the buyer
                                      but the transaction is not closed yet
                         b. Withdrawal - 14(d)(7)(A) Allows shareholder to withdraw his tender offer for a competing one, this is to
                             allow a bidding war & competition so that shareholders can get a better price
                                 i. withdrawal allowed as long as the tender offer is open w/i20 days
                                 ii. Can‟t exclude shareholders from participating
                         c. Best Price Rule – the highest price paid to any shareholder must be paid to all others
                         d. Can‟t exclude any shareholder offer must be open to all
                         e. If more shares tendered that you wanted to buy
                                 i. If you are making a tender offer for less than all the outstanding shares and great number of
                                      them are deposited then you must pay them pro rata - no first come first serve basis

     A. Takeover Defensive Measures
            1. Scorched earth defense - Target company can do self tender offer by offering debt in place of higher payment for
                existing stock thus loading up the company with debt so once the interested party takes over the company will be
                destroyed . Unocal
            2. 2 part test for whether the board will get benefit of the business judgment rule for defensive measure taken:
                     a. After a good faith reasonable investigation that there is a threat to business policy AND
                     b. Defensive measure must be reasonable to the perceived threat
                              i. Normally fiduciary duty is owed & treated equally but Delaware law is not static and thus in
                                  responding to a perceived harm a corp doesn‟t have to guarantee a benefit to a shareholder who
                                  is deliberately provoking the danger
     B. Duties of Board when the Corp is up for Sale
            1. When does Revlon apply or Revlon duties triggered & what does it require?
                     a. If there is a transaction that will result in a change of control OR
                     b. A break up of the corporate entity then the directors obligation is to seek the best value reasonably
                         available to the stockholders

       A. SEC act of 1933
             1. Anytime anybody wants to offer or sell a security either they have to
                      a. Register the security with the SEC or
                      b. can find an exemption for certain types of transactions or securities will be exempt from registration
             2. It regulates how got stock from securities to the public
       B. SEC of 1934
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                   1. Disclosure is required
                   2. Regulates after market trades
                           a. regulates stock exchange and imposes regulations on publicly traded companies
                   3. If publicly traded co need to solicit proxies 14(a)

        A. 10b-5 Insider Trading Its unlawful for any person directly or indirectly using any means or instrumentality of interstate
           commerce to use any device, scheme to defraud, to make a statement untrue of a material fact or omit to state a material,
           fact necessary to make a fact not misleading or To engage in any act that would be fraud or deceitful to any person

          B. Prior to 3 types of Insider Trading
                 1. Texas Gulf Sulphur
                          a. Disclose or Abstain Rule Anyone who is in possession of material non public info must either disclose
                               it or refrain from trading on that information
                                     i. However this is no longer the case that All who are in possession of such info can be liable
                          b. Materiality test Information is material if a reasonable investor would attach importance to the info in
                               deciding whether to buy or sell securities
                                     i. If the non public info is not material then there is no 10(b)(5) Problem

          C. 3 Types of Insider Trading
                 1. “Classic Insider Trading” Cady-Roberts
                          a. A person who is an Insider of the company who‟s securities are being traded , by virtue of their
                              relationship with the company has access to information that was only supposed to be used for corporate
                              purposes , So you have duty not to use material non public info to trade on
                                   i. As insider, it would be unfair to allow you to take advantage of the info for securities trading,
                                        you know about it because of your job - Duty arises from existence of a fiduciary duty
                          b. Insider is:
                                   i. An agent
                                   ii. Person w/prior dealings
                                   iii. Fiduciary who the T had placed confidence in him

                   2. Tippers & Tippees Dirk
                          a. Scenario: Where the Tipper has duty under Cady Roberts & passes non public information & he receives
                              a benefit directly or indirectly from his disclosure
                                  i. Tippee then take she info & buys or sells securities

                            b.   To have Tipper
                                     i. Person violates the Cady Roberts duty by making a tip and gaining personal benefit
                                               1 Benefits
                                                     i. Quid pro Quo, Financial benefit, Personal benefit ,
                                                     ii. Reputation benefit that will translate into future earnings
                                                     iii. When insider makes a gift of confidential info to a trading relative or friend

                            c.   To have a Tippee there must be a Tipper because the Tippee‟s duty derives from the Tipper
                                     i. Once there is a Tipper & must show that Tippee knew or should have known that Tipper was
                                         breaching his fiduciary duty to the company ie that tip was illegal
                                               1 Ex Derks had material non public info and passed it along but didn‟t get any benefit
                                                 from it

                3. Misappropriation O’Hagan – Outsider Trading Scenario
                      a. Someone who is not an insider of a company who‟s securities are being traded but has duty of trust or
                          loyalty to the source of the information,
                               i. They find out about the material non public info not because they are an insider but because
                                    they owed a duty of trust or confidence to the source of he info
                               ii. Then deceiving the source pretending they are obtaining the info only to further interest of the
                                    source but instead use it for their own trading purposes then there is deception which is a
                                    statutory requirement
                                           1 O’Hagan Breaching duty of trust/ confidence to the rouse of the information and
                                             secretly using the info trade is a 10b5 violation
                      b. SEC 10b5-2 when you have a duty of trust of confidence to the source of the information
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              1. Under 16(b) it doesn‟t matter whether you knew or didn‟t know that you were violating 10(b)(5)
                    a. If you are one of 3 groups of people you probably had material non public info
                              i. Someone who is more than 10% shareholder
                              ii. Director or
                              iii. Officer
                    b. If one of these people make 2 opposite way transactions w/I a 6 month period you must return the money
                         or else shareholders can bring derivative suit
                    c. Section only applies to publicly traded securities

              2. What is a Security
                   a. Statute section 2(a)(1)
                             i. Note, Stock, treasury stock, security future, bonds, evidence of indebtedness (certain types of
                                  trans ie home mortgage is not security, nor car laon) , certificate of interest or participation in
                                  any profit sharing agreement, collateral trust certificate, pre-organization certificate or
                                  subscription, transferable share, investment contract, voting-trust certificate, certificate of
                                  deposit for security…..
                             ii. Not Real estate

                      b.   What is an Investment Contract?

                                i.    Howie – for investment K‟s there is a 4 part test & thus it‟s a security
                                           1 Investment of money
                                           2 Common enterprise
                                           3 with the expectation of profits
                                           4 reasons for making profits is Solely from the effort of others

                                ii.   Supreme court held in SEC v Edwards that fixed rate of return doesn‟t take away from being
                                      security b/c they would be getting away with securities laws
                                             1 Looking at the profits of the scheme not whether there is a fixed or variable rate of

                                iii. Howie Case Orange grower offered service K to individuals so that they would pick & deliver
                                     the organs to the buyers
                                            1 Multiple people who had purchased the land & gone w/ the sevc K had departed with
                                              money, multiple investors, yes expectation of profits, and they were making money
                                              from the Howies who were taking care of the lands
                                            2 Supresme court held that the entire enterprise was a security & thus because they
                                              hadn‟t registered the security they had to pay all these people their money back

     E. SECTION 5 OF SEC OF 1933
           1. Any time anybody wants to offer or sell a security you either have to register it with the SEC or find an
                  a. Exempt security that is always exempt OR
                  b. Exempt transaction where you sell to limited number of sophisticated investor

              2. Offering process is divided into 3 different time periods
                     a. Pre filing period – they can‟t offer or sell during this period
                              i. File Registration Statement
                     b. Waiting period - can make some offers after filing registration, still no sales
                              i. When SEC declare the registration effective
                     c. Post-Effective Period – can sell now
                              i. Where SEC is satisfied with the disclosure rules & company can sell securities

              3. Note: Registered public offerings are closely scrutinized by the SEC so its difficult to do
                     a. Not allowed to offer sale during pre filing period because no disclosures are provided for the investors
                     b. Goal is not to have investors make up their minds before they get the disclosures or else would defeat the
                         entire purpose of the securities act

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             1. Section 4(1) Could offer or sell a security w/o having to register
                    a. Transactions by any person other than an issuer, underwriter, or dealer
             2. Section 4(2) Exempted transaction from registering
                    a. Transactions by an issuer not involving any public offering
                    b. To Qualify the purchaser
                             i. must be a sophisticated investor : have knowledge & experience to evaluate the risks & merits
                             ii. have access to type of info normally provided by disclosure
                             iii. agree not to resell/distribute the securities to the public
                    c. Rule 506 creates a “Safe Harbor” – objective criteria to meet this requierement

             3. The Intrastate Exemption
                    a. 3(a)(11) & Rule 147
                            i. Any security which is part of an issue offered & sold only to persons resident w/I a single State
                                or Territory where the issuer of such security is a person resident & doing business within or, if
                                a corporation, incorporated by and doing business within such state or territory
                                       1 Basically If you can keep securities offering completely w/I a single state then the Fed
                                         Govn‟t won‟t worry about it b/c the state will worry about it
                                              i. This is available if you do most of your business in a single state
                                              ii. And you can make sure that each & every offeree is a resident of that state
                                                        a. If offered to anyone not resident then all would have recession rights
                                                            would get their money back with interest
                                       2 If offer &sell only to home resident but one of those buyers sells the stock to outside
                                         residence w/I 9 months – would have recession rights

             4. Rule 147 Safe Harbor
                    a. IF meet 147 requirements they you have a proper Intra State exemption

             5. Regulation D : Establishes 3 exemptions fro SEC registration
                   a. Rule 504 Provides exemption for the offer & sale of
                            i. Dollar amount
                                        1 $1 mil in securities transactions in a 12 month period [the max amt of money that you
                                          can raise in securities transaction]
                                        2 can‟t use public solicitation or advertisement & purchasers receive “restricted”
                                          securities ie can‟t sel w/o registering or applyiny exemption
                            ii. Number of purchasers and
                                        1 No limit on the number of purchasers
                            iii. Do purchasers need to be sophisticated ie fend for themselves
                                        1 No, you can sell to anyone don‟t need to be sophisticated
                            iv. Can use this exemption for public offering & investors can freely trade if:
                                        1 You register offering exclusively in a state requiring publicly filed reg & deliver
                                          disclosure to investors
                                        2 Register & sell in a state requiring registration & disclosure & sell in a state w/o those
                                          requirements as long as you deliver disclosure documents required by state where you
                                          registered for all purchasers or
                                        3 Sell exclusively according to state law exemptions allowing general solicitation as long
                                          as you sell only to accredited investors

                     b.   Rule 505
                              i. Dollar limit
                                        1 Rule provides exemption for offers & sales of securities totaling 5 mil w/I 12 month
                              ii. Number of purchasers
                                        1 35 non accredited investors & an unlimited number of accredited investors
                                              i. purchasers must buy for investment only not resale
                                              ii. Issued securites are restricted ie must inform investors that they can‟t sell for
                                                   at least 1 yr w/o registering the transaction
                                              iii. Can‟t use general solicitation or adv to sell
                                        2 To be accredited investors – must have 1 mil net worth either jointly or alone or have
                                          income 200k for last two years & expectation to make that this year or 300k if with
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                                          3 Info given to accreditd investors you decide so long as not fraudulent
                                                 i. Info to non accredited same as thos of registered offerings
                                                 ii. Info provided to accredited m/b made avaial to non also
                                          4 Fin statement requirement look to 506
                               iii. Do purchasers need to be sophisticated - Yes for non accredited

                      c.   Rule 506 “ Safe Harbor” for Private offering exemption
                                          1 If company satifies rule 506 they are definitely w/I 4(2) exemption
                               ii. Dollar Limit
                                          1 can raise unlimited amount of capital
                                          2 can use general solicitation or adv to market secuirities
                               iii. Number of Purchasers
                                          1 Can sell to unlimited number of accredited investors
                                          2 Non accredited investors either alone or w/ purchaser rep must be sophisticated
                                                 i. Must have sufficient knowledge & experience in fin & bus matters to be able
                                                      to evaluate the merits & risks of the investment
                                          3 Info you give is up to you so long as not fraudulent
                                                 i. m/b avaialbe to answer questions of investor rep
                                          4 Fin statement requirements same as 505
                                                 i. Fin statement need to be certified by indepdnet public accountant
                                                 ii. If company is other than LLP & can‟t get audited fin statement w/o reasonable
                                                      exp/effort up to date balance sheet w/I 120 days of start of offering m/b
                                                 iii. LP unable to obatian fian statement can provide audited fin statmet prepared
                                                      under fed income laws
                               iv. Do purchasers need to be sophisticated
                                          1 Yes
                      d.   Could do you offering to claim exemption under 2 securities offering
                               i. Yes, because you‟ll have a back , so could structure a transaction as to meet one or more of the

     G. SEC Ralston
            1. SEC act 1933 section 4(2) exempts transactions by an issuer not involving a public offering
            2. Ralston was selling stock to its employees – discrete people who share common characteristic of being employees
               of the company
                    a. Company didn‟t register the stock with the SEC so they had to find an exemption
            3. They were arguing it wasn‟t public offering
            4. Court held that this was a public offering b/c of the type of people offered to: Artists, loading Forman, clerical
                              i. These individuals need protection by getting disclosure
            5. Court held if you were only offering to sophisticated people it would n‟t be public offering.
                    a. They must be able to “fend for themselves” in order to be considered protect investor ie the sophisticated
                              i. Court gives one example of persons able ot fend for themselves s& thus don‟t need the
                                   disclosure: executives/ directors b/c they already know – so no registration required
                    b. if offer to 100k people who are sophisticated & 1 non sophisticated then it ruins he entire deal & they are
                         entitled to get their money back – not just sell but offer
            6. If selling to sophisticated investor with high degree of education would probably meet this test to fend for
               themselves s

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