1
Q
Business Judgment Rule
A
The BJR is a presumption that a director’s decision may not be challenged if the director
(i) acted in good faith
(ii) with the care that an ordinarily prudent person would exercise in a like position, and
(iii) in a manner the director reasonably believed to be in the best interest of the corporation
**corporate law allows directors to rely on opinions of experts and corporate insiders, but can’t do so if to rely would be without care that an ordinarily prudent person would exercise in a like position.
2
Q
Articles of Incorporation vs. By-Laws
A
If By-laws and Article of Incorporation conflict (say, for instance, on what vote is required to pass a proposal), the Articles of Incorporation win.
3
Q
Treasury Shares
A
These are shares that have been repurchased by the corporation. THEY MAY NOT BE VOTED. Only outstanding shares may be voted.
4
Q
Key Players
A
- Shareholders, or stockholders, are the owners of the corporation;
- The board of directors is the group in charge of management of the corporation; and
- Officers are agents of the corporation appointed to carry out the corporation’s policy
5
Q
Generally: limited liability for owners, directors, and officers
A
The shareholders generally are not personally liable for the obligations of the corporation; neither are the corporation’s directors or officers. Generally, only the corporation itself can be held liable for corporate obligations. The owners risk only the investment that they make in the business to purchase their ownership interests (“shares”).
6
Q
Taxation
A
C corporation: double taxation. When corporation makes distributions, taxed at corporate level (corp has paid taxes on profits) and as income.
- B corporations, corporations to benefit the public and environment, are taxed the same way
S corporation: not taxed at the corporate level, like a partnership.
7
Q
Formation of the corporation
A
- Created under statute. De jure corporation follows all the formalities of the law. If all corporate laws not followed, a de facto corporation will result, or corporation might be recognized through estoppel
- Person, Paper, Act
- Person: incorporators must comply with all applicable statutory requirements to form a corporation, and they must execute and deliver the articles of incorporation to the secretary of state. Incorporators may be a person or entity, and they don’t need to be a citizen of state of incorporation.
- Paper: AIC’s.
- MUST include (a) name of corporation (plus corp abbreviation at the end), (b) name and address of each incorporator, © registered agent, and the street address of the registered office, which MUST be in state of incorporation, (d) describe stock, including authorized stock (or amount they can sell), and including the different classes/series within a class if there are.
- MAY include whatever else isn’t inconsistent with law, as well as statement of business purpose (absent this, will be assumed that corporation is performed to conduct any lawful business).
- Act: incorporators have notarized articles delivered to the Secretary of State, and corporation exists upon this filing by the state.
8
Q
Narrow business purpose in AIC
A
Narrow business purpose: if AICs have narrow purpose, and company does something outside of that purpose, it might be an ultravires act.
At common law: would be void and unenforceable
under MBCA: ultra vires acts are enforceable, but the ultra vires nature can be raised in three situations:
- Shareholder can sue to enjoin
- Corporation can sue officer or director for damages for approving it
- state may bring action to dissolve corp.
9
Q
First Organizational Meeting
A
- If board named in AIC, then they hold meeting. Otherwise, incorporators hold. At meeting, adopt initial by laws and appoint officers.
10
Q
Internal Affairs Doctrine
A
Under the internal affairs doctrine, the internal affairs of a corporation are governed by the law of the state of incorporation.
11
Q
Benefit Corporation
A
A benefit corporation (B Corp.) is one formed for profit and also to pursue some benefit to a broader social policy cause. Things work as with a regular corporation, but the articles must say it’s a “benefit corporation.” The corporation also files an annual benefit report assessing how it pursued its stated social mission. Decisionmakers must consider the impact of decisions not only on shareholders, but also on the broader community or environment. Managers should not be liable for failing to maximize profits alone; the company has a broader purpose than that.
12
Q
De Facto Corporation (contract and torts)
A
Characteristics and Requirements
- Must be a relevant incorporation statute
- Parties made a good faith, colorable attempt to comply with the statute
- Can’t know that they failed to form a de jure corporation-if you did know, defense not available, and will be jointly severally liable.
- Exercise of corporate privilege, meaning the parties were acting as though they thought there was a corporation.
13
Q
Corporation by Estoppel (contract cases only)
A
Under the common law doctrine of corporation by estoppel, persons who have dealt with the entity as if it were a corporation will be estopped from denying the corporation’s existence.
The doctrine applies in contract to prevent the “corporate” entity, and parties who have dealt with the entity as if it were a corporation, from backing out of their contracts.
Correspondingly, it will prevent the improperly formed “corporation” from avoiding liability by saying it was not properly formed. Note well that corporation by estoppel applies only in contract cases. It does not apply to tort victims.
NO REQUIREMENT OF FOLLOWING CONTRACT PROVISIONS
14
Q
Pre-incorporation contract liability
A
- Generally, corp not liable on pre-incorporation Ks entered into by a promoter, UNLESS
- EXPRESS adoption: K can be reviewed by bd or officer and adopted through resolution, if done with knowledge of the material facts.
- IMPLIED adoption: by acquiescence or conduct normally constituting estoppel, such as accepting benefits of the contract if done with knowledge of the materials facts.
15
Q
Promoters
A
Definition: a promoter is a person who procures commitments for capital and instrumentalities on behalf of a corp to be formed.
Liability to each other: have fiduciary relationship with co-promoters, as if partners.
Liability on pre-incorporation contracts:
- generally personally liable on K’s they enter into on behalf of the corp to be formed.
- may have a right to reimbursement from corporation to extent corporation benefits from contract.
- Liability CONTINUES even after corporation is formed and even if the corporation also becomes liable on the K by adopting it.
- Will only be released if express or implied novation.
- EXCEPTION: promoter not liable on a reincorporation K if the agreement between the parties expressly indicates that the promoter is not to be bound. In such case, the “contract” is considered to be an offer to the proposed corporation.
Liability to the corporation: have fiduciary duties to the corporation–fair disclosure and good faith
- If profits by selling property to corporation may be liable for profit unless all material facts of transaction were disclosed.
- Independent board: If all disclosed to independent BoD and approved, met duty and will not be liable for profits
- If board not completely independent, won’t be liable if
- (1) subscribers knew of transaction at time they subscribed or
- (2) unanimously ratified transaction after full disclosure.
- **MUST BE DISCLOSED TO ALL WHO ARE CONTEMPLATED TO BE PART OF INITIAL FINANCING SCHEME
- If purchase all stock of corporation and then sell all shares to outsiders, cannot be held liable for profits from the sale of property to corp.
Liability to de-frauded plaintiffs:
- Promoters may always be liable if plaintiffs can show that they were damaged by the promoters’ fraudulent misrepresentations or fraudulent failure to disclose all material facts.
Note on relation to agency law: while agency law signing on behalf of a principal would release an agent from liability on a K that the agent entered into on behalf of a principal, you can’t act as an “agent” if the principal (corporation) doesn’t yet exist.
16
Q
Foreign Corporations
A
- Foreign corporations transacting business in a state must register and pay fees.
- Register with Sec of State in each state in which it wishes to transact. Must give info about AIC and prove good standing in its home state.
- Transacting business means the regular course of intrastate (not interstate) business activity. Not sporadic. Also doesn’t include simply owning property there.
17
Q
Debt Securities
A
Bond=when corporation borrows money, issues debt security or bond.
Holder is a CREDITOR, not owner.
Debt obligations can be paid to holder of bond (bearer or coupon bond) or owner registered on corp’s records (registered bond).
18
Q
Equity Securities
A
Stock=investor buys an ownership interest in corporation. Does not create a debt–become owner, not creditor.
19
Q
Equity Securities
A
Stock=investor buys an ownership interest in corporation. Does not create a debt–become owner, not creditor.
20
Q
Shares!
A
Authorized shares: in AIC, says how many shares can issue
Sold shares: issued and outstanding.
Repurchased or redeemed: authorized but unissued. Also called treasury shares.
Share options: right to purchase shares in the future under terms predetermined by BoD. Offer in exchange for any type of consideration.
21
Q
Subscriptions
A
Definition: written offers to buy stock from a corporation.
Preincorporation subscription: irrevocable for six months unless otherwise provided in terms of subscription agreement, OR unless all subscribers consent to revocation.
- Must pay upon demand! Can’t be made in discriminatory matter.
Postincorporation subscription: revocable until accepted by the corporation. Corporation and subscriber are obligated under a subscription agreement when the board accepts the offer-just like a regular contract.
22
Q
Consideration
A
Stock may be issued for any tangible or intangible property or benefit to the corporation.
- includes PAST AND FUTURE work performed, as well as discharge of debt.
- Board’s valuation of these services/benefits is conclusive if made in good faith.
Par: minimum issuance price.
- Traditionally, stock could not be issued by a corporation for less than stock’s stated par value.
- If no par, then no minimum issuance price–board can sell for whatever.
- MBCA generally has eliminated the concept of par and allows corporations to issue shares for whatever it wants.
Watered Stock: when par value stock is issued for less than its par value.
- If stock is issued below par value, shares will be treated as valid, but directors who authorized issuance can be held liable for breach of their fiduciary duty.
23
Q
Preemptive Rights
A
Right of an existing s/h of common stock to maintain her percentage of ownership in teh company by buying stock whenever there is a new issuance of stock for money.
AIC must explicitly allow for this right, or else it doesn’t exist.
LIMITS:
- Even if the articles do provide a preemptive right, shareholders generally have no preemptive right in shares issued: (1) for consideration other than cash (for example, for services of an employee), (2) within six months after incorporation, or (3) without voting rights but having a distribution preference.
24
Q
Board Members/Directors
A
Election: OG BoD listed in original AIC, voted for by incorporates at first meeting. Thereafter, s/hs pick. Entire BoD is selected each year unless staggered.
Amount: Must be one or more, set by AIC or bylaws
Removal: can be removed by s/h w/ or w/o cause. If staggered board, some states w/ cause only. If was voted in by cumulative voting, then if votes for no removal would be sufficient to elect via cumulative voting, can’t be removed.
Vacancies: BoD or s/h select new person.
25
Board Action
* **MUST ACT AS GROUP**: individual directors are not agents of corporation. Individual directors have no authority to speak for or bind corporation.
* unanimous agreement writing
* must satisfy quorum and voting req's
* **Ratification of defective corporate actions**: directors, incorporators, and officers may ratify defective corporate actions (that is, actions that are void or voidable due to a failure of authorization, such as those taken in the absence of the requisite board resolution or shareholder approval). To ratify such an action, the board of directors must (a) state the action to be ratified and (b) the nature of the failure of authorization, © approve the ratification, and (d) seek shareholder approval if necessary.
26
Meetings
Directors
1. **Regular meetings**: no notice required.
2. **Special meetings**: need at least two days' notice, time, and place of meeting.
1. Consequences: action taken could be void or voidable, UNLESS directors who weren't notified waive the notice defect by (1) in writing at any time, or (2) attending meeting w/o objecting at outset.
3. Directors can't give proxies or enter voting agreements for how they'll vote. Violates non-delegable FD.
4. **Quorum**: majority of all directors, unless by laws specify otherwise, but not less than ⅓
5. **Approving action**: if quorum, maj. of those present
6. **Broken quorum**: can be broken if directors leave. If broken, can't act.
7. **Unanimous written consent**: can take action without meeting.
Can delegate to committees chosen by BoD, but committees CANNOT (1) declare distribution, (2) fill a board vacancy, (3) recommend a fundamental change to s/h. But can recommend to full board.
27
Meetings
Directors
1. **Regular meetings**: no notice required.
2. **Special meetings**: need at least two days' notice, time, and place of meeting.
1. Consequences: action taken could be void or voidable, UNLESS directors who weren't notified waive the notice defect by (1) in writing at any time, or (2) attending meeting w/o objecting at outset.
3. Directors can't give proxies or enter voting agreements for how they'll vote. Violates non-delegable FD.
4. **Quorum**: majority of all directors, unless by laws specify otherwise, but not less than ⅓
5. **Approving action**: if quorum, maj. of those present
6. **Broken quorum**: can be broken if directors leave. If broken, can't act.
7. **Unanimous written consent**: can take action without meeting.
Can delegate to committees chosen by BoD, but committees CANNOT (1) declare distribution, (2) fill a board vacancy, (3) recommend a fundamental change to s/h. But can recommend to full board.
28
FD Owed to the Corporation
Duty of loyalty: director must discharge duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation.
* BJR DOES NOT APPLY
* Burden on defendant
* Common scenarios are (1) conflicting transactions, (2) competing ventures, (3) corporate opportunity doctrine, (4) common law insider trading--special circumstances rule. [see separate cards]
Duty of care: director must use the care that a person in like position would reasonably believe appropriate under the circumstances.
* BJR APPLIES: _a court will not second guess a business decision if it was made in good faith, was informed, and had a rational basis._
* Burden on challenger
* Misfeasance: did something wrong
* Nonfeasance: causation hard to prove by challenger anyway.
29
Who may a director rely upon in discharging duties? (related to duty of care)
In discharging her duties, a director is entitled to rely on information, opinions, reports, or statements (including financial statements), if prepared or presented by:
(1) **corporate officers or employees** whom the director reasonably believes to be reliable and competent;
(2) **legal counsel, accountants, or other persons** as to matters the director reasonably believes are within such person’s professional competence; or
(3) **a committee of the board of which the director is not a member,** if the director reasonably believes the committee merits confidence
30
Conflicting Transactions ("Self-Dealing")
Transaction between the corporation (on one side) and (1) one of its directors, or (2) that director's close relative, or (3) another business of the director's (on the other side).
31
Conflicting Transactions ("Self-Dealing")
Transaction between the corporation (on one side) and (1) one of its directors, or (2) that director's close relative, or (3) another business of the director's (on the other side).
\*\*corporation can make a loan to director if reasonable expected to benefit corporation.
32
Three ways to uphold a conflicting interest transaction
(1) It was approved by a majority (but at least two) of the disinterested directors (those without a conflicting interest).
- It is imperative, however, either that the director disclosed all material facts to the board or that they were known when the board approved the transaction. Quorom=majority of disinterred directors.
OR
(2) It was approved by a majority of votes entitled to be cast by disinterested shareholders (those without a conflicting interest)—again, after disclosure or the facts were known. Notice of the shareholders’ meeting must describe the transaction. Quorom= majority of votes entitled to be cast, excluding shares owned or controlled directly or beneficially by director w/ conflicting interest.
OR
(3) Judged by the circumstances at the time the corporation entered into the transaction, it was fair to the corporation.
* courts look to adequacy of consideration, corporate need to enter into transaction, financial position of corporation, available alternatives.
Formalities:
* interested director's presence at meeting irrelevant
Remedies:
* enjoining the transaction, setting transaction aside, damages, similar remedies.
33
Competing ventures
Directors may engage in unrelated businesses, but engaging in a directly competing business raises serious duty of loyalty problems.
34
Corporate Opportunity Doctrine
The directors’ fiduciary duties prohibit them from diverting a business opportunity from their corporation to themselves without first giving their corporation an opportunity to act. This is known as “usurpation of a corporate opportunity.”
If an opportunity does arise, director must:
* present opportunity to corporation, disclose all material facts, take advantage of opportunity personally only if they reject it.
Other:
* Corporation must have interest or expectancy in the business. (NB: could be something w/in line of business, could be something discovered on company time or with company resources).
* Lack of the corporations financial ability no defense
* Board decides whether to accept or reject opportunity
* Remedies: constructive trust, transfer of property to corporation, recovery of profit.
35
CL insider trading--special circumstances rule
A director has no common law duty to disclose all facts relevant to a securities transaction between the director and the other party to the transaction, unless a director knows of special circumstances (for example, an upcoming extraordinary dividend or a planned merger).
36
Duty to disclose
The directors also have a duty to disclose material corporate information to other members of the board.
37
Limitation of the Personal Liability of Directors (IMPORTANT!)
Articles may limit or eliminate directors' personal liability for money damages to the corporation or shareholders for actions taken or failure to take action. ONLY limited to duty of care--cannot waive duty of loyalty in the Articles via indemnification.
Articles, however, may not limit or eliminate liability for:
1. **financial benefits** received by the director to which she is **not entitled**,
2. an **intentionally inflicted harm** on the corporation or its shareholders
3. unlawful corporate **distributions**
4. an intentional violation of **criminal law**
\*\*acting negligently does not preclude directors from protection
38
Which directors are liable?
A director is presumed to concur with board action unless her dissent or abstention is noted in writing in the corporate records. In writing means (1) in the minutes, (2) delivered in writing to the presiding officer at the meeting, or (3) written dissent to the corporation immediately after the meeting.
\*oral dissent ineffective
\*director can't dissent if she voted for resolution at meeting.
\*director not liable if she was absent from meeting
39
Officers
Authority
* Officers are agents of the corporation
* Whether they can bind corporation depends on whether officer has (1) actual or (2) apparent authority
* Corporations bound by officers act w/in scope of authority, even if particular act not authorized
* Unauthorized actions can bind corporation because of (1) ratification, (2) adoption, or (3) estoppel
Roles
* Officers can serve in more than one position
Duties
* Fiduciary duties to corporation
* actual duties determined usually by bylaws
Selection/Removal
* Selected and removed by board
* Despite any contrary contractual term, officer can leave at any time (might be liable for damages if breach of contract)
* Corporation has power to remove any time **with or without cause** (might be liable for damages if breach of contract)
40
Indemnification of officers, directors, employees
THREE TYPES
1. **No indemnification**: cannot indemnify director who is (1) held liable to corporation, or (2) held to have received improper benefit
2. **Mandatory indemnification**: corporation must indemnify director or officer who was (1) successful in defending a proceeding on the merits or otherwise against the officer or director for reasonable expenses, including attorneys' fees incurred in cxn with proceeding
3. **Permissive Indemnification**: may indemnify a director for reasonable litigation expenses incurred in unsuccessfully defending a suit brought against the director on account of the director’s position if the director: (1) acted in **good faith**; and (2) believed that her conduct was in the **best interests of the corporation** (when the conduct at issue was within the director’s official capacity).
41
Close Corporations
* A few shareholders and stock is not publicly traded
* Shareholders can run directly if they so choose by setting up a _s/h management agreement_
* can set up in articles and approved by all s/h OR unanimous written s/h agreement
42
Fiduciary Duties in Close Corporations
There is a FD on shareholders to other shareholders in close corporations (which resemble a partnership)
* Controlling s/h to minority s/h
* Can't use power to benefit at expense of minority
* duty to disclose material information
* Can sue controlling s/h if being OPPRESSED--there is no market for their shares, so if they're being excluded from decision making, fired, refusal to declare dividends, can have a c/a
43
Professional Corporations
Licensed professionals, including lawyers, medical professionals, and CPAs, may incorporate as a “professional corporation” or “professional association.” The name must include one of those phrases or “P.C.” or “P.A.” The articles must state that the purpose is to practice in a particular profession. Generally, the rules governing regular corporations apply to the professional corporation.
* Employees: directors, shareholders, officers, usually must be licensed professionals
* Liability: professionals personally liable for malpractice, but not others' malpractice or corporate obligations.
44
Piercing the corporate veil (close corporations only)
**General elements:**
(1) s/h abused privilege of incorporating
(2) fairness requires holding them liable
**Alter Ego (Identity of Interests)**
* ignorance of corporate formalities such that corporation is alter ego of s/h, AND
* basic injustice results
* key signs: commingling, treating corporate assets as own, etc.
**Undercapitalization**
* corporation is inadequately capitalized so that at time of formation, there is not enough unencumbered capital to reasonable cover prospective liabilities.
**Fraud, Avoidance of Existing Obligations, Evasion of Statutory provisions.**
* fraud prevention
* to prevent individual s/h from avoiding **existing** personal obligations (not future)
**Who is liable:**
s/h who are active in operation of business. Joint + several
**Types of liability**
Tort: easily pierced, bc people don't know who will injure them
Contract: not easily pierced, bc people know who they decide to contract w/
45
Derivative Suits
* S/h sues to enforce corporations claim because BoD has not done anything to protect its rights.
* Corporation gets money if successful
* Corporation is joined as defendant
**Standing**: s/h at time of wrong, or got stock through transfer by operation of law from someone who did own stock at time claim arose (inheritance, divorce decree).
* s/h must fairly and adequately represent corporation's interest.
**Demand**
* usually must make written demand on corporation and wait until 90 days after making demand to sue unless (1) corp earlier rejected demand, or (2) irreparable harm to corp.
* demand excused/futile if would be futile. (as in, interested directors)
**Dismissal/settlement REQUIRES COURT APPROVAL**
* dismissed if not in corp's best interest
* based on independent director or panel investigation
* court must determine (1) those making dismissal were truly independent, and (2) they made a reasonable investigation.
46
Record date and voting
Only shareholders of record on the record date may vote at a shareholder's meeting.
Ex: Amy was shareholder on 50 shares on Dec. 30, corporations legal record date. On Dec. 31, she transferred her shares to Zach. Who can vote those shares at the annual January 30 shareholder meeting? Amy.
Exceptions:
* Treasury shares
* voting by proxy (record s/h can give proxy to person, or to person they transferred interest to).
47
Proxy's + Revocability of Proxy's
1. A s/h may vote her shares in person or by proxy executed in writing. A proxy is (1) a writing, (2) signed by the record s/h, (3) directed to the secretary of the corporation, (4) authorizing another to vote the shares.
2. Proxy's are _generally revocable_
1. Can revoke by a **subsequent instrument**.
2. Can revoke by **showing up and voting your shares**.
3. Proxy's are irrevocable if they:
1. say they are irrevocable, and
2. are **coupled with an interest**.
1. a proxy is coupled with an interest if the proxy holder essentially pays for the right to be a proxy, such as where the proxy holder has purchased the underlying shares from the owner of record.
48
Voting Trust
Definition:
(1) written agreement of shareholders
(2) which is filed with the corporation
(3) under which the **legal title** of all shares owned by the parties to the agreement are
(4) transferred to a trustee, who
(5) votes the shares and distributes the dividends in accordance with the provisions of the voting trust agreement.
\*\*all other s/h rights retained besides voting.
49
Voting Agreement
* Rather than a trust, can enter into voting/pooling agreements providing for how they'll vote their shares.
* must be IN WRITING AND SIGNED.
* need not be filed with corporation, and not subject to 10 year time limit like voting trust.
50
S/h meetings
Annual meetings: must be held within earlier of 6 months after end of corporations fiscal year or 15 months after its last annual meeting, or can petition court to order
Special meetings: called by BoD, the president, holders of at least 10 percent of the outstanding shares, or anyone else so authorized.
Notice:
* between 10 and 60 days.
* Notice must state date, time, place + purpose for special meetings (bc they can't do anything else)
* Failure to give proper notice = action is void or voidable, unless those who weren't sent notice waive.
* express waiver (in writing)
* implied waiver (they attend meeting w/o contest)
51
Shareholder Voting
* Vote on: director election/removal, fundamental corporate changes
* Quorum: majority of outstanding share entitled to vote. If people leave, won't ruin quorum like for directors.
* If quorum present, generally matter approved if votes cast in favor exceed votes cast against.
* Special voting #s:
* electing directors: plurality
* removing directs: majority of shares entitled to vote (traditional), majority of shares that actually vote on matter (modern)
* fundamental corporate change: majority of shares entitled to vote (traditional), majority of shares that actually vote on matter (modern)
* “other matter”: majority of shares that actually vote on matter
52
Direct Voting vs. Cumulative Voting
* Cumulative voting: gives minority s/h better chance to be represented in the board, because vote in one at large election.
* multiple # of shares x # of directors to be elected. Can divide however you want.
* Straight voting: separate election for each outstanding seat on the board (one vote per each outstanding share)
53
Stock Transfer Restrictions
* Default is that shares are freely transferable
* Restrictions are valid UNLESS undue restraint on alienation
* Rights of first refusal are not undue restraints on alienation
How to enforce a restriction against transferee:
(1) restriction must be valid
(2) the restriction must be conspicuously noted on the stock certificate (or contained in information statement required for uncertificated shares)
(3) transferee had **actual knowledge of the restriction** at time of purchase.
54
Shareholder's Inspection Rights
**Unqualified Right:**
Any s/h may inspect regardless of purpose:
(1) the corporation’s articles and bylaws,
(2) board resolutions regarding classification of shares,
(3) minutes of shareholders’ meetings from the past three years,
(4) communications sent by the corporation to shareholders over the past three years,
(5) a list of the names and business addresses of the corporation’s current directors and officers, and
(6) a copy of the corporation’s most recent annual report.
WRITTEN demand at least 5 days in advance.
**Qualified Right: \*more controversial things**
(1) excerpts of the minutes of board (in contrast to shareholder, referenced above) meetings,
(2) the corporation’s books, papers, and accounting records, and
(3) shareholder records
the shareholder must state a proper purpose for the demand=reasonably related to person's interest as sh
\*\*\*compare w/ directors' rights, who have unfettered access
55
Distributions
Types: dividends, redemptions of shares, repurchases of shares, distribution of assets upon liquidation
**General** Rights to Distributions:
* Declaration solely w/in board's discretion, subject to solvency limits
* S/hs no general right to compel a distribution. To win, **must make very strong showing of abuse of discretion.**
* Once a distribution is lawfully declared, **s/h are treated as creditors of the corporation** and their claim for the distribution is equal in priority to claims of other unsecured creditors.
* Distributions, if wrongfully made, can be enjoined or revoked from s/h.
**Contractual Rights** Regarding Distributions
* classes may have varying rights
* preferred paid before common
* cumulative v. non cumulative
* rights after declaration same as general creditor
**Limitations on Distributions**
* Articles can restrict board's right to declare distributions
* Share dividends are NOT subject to above limitations
56
Unlawful Distributions
Corporation cannot make a distribution if
1. **corporation would not be able to pay its debts as they become due** in the usual course of business (bankrupt); OR
2. **the corporation's total assets would be less than the sum of its total liabilities** plus the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights on dissolution of s/h whose preferential rights are superior to those receiving the distribution (insolvent in balance sheet sense).
Liability for unlawful distribution:
Directors: jointly and severally liable for improper distributions.
* Good faith defense for relying on people and statements they were entitled to rely upon
* Entitled to contribution from other directors who approved
* and each s/h for the amount she accepted knowing the distribution was improper.
S/h
* only liable if KNEW distribution was improper when received it.
57
Fundamental Corporate Changes
* Amending articles (*no s/h right of appraisal!*)
* housekeeping changes don't require s/h approval
* Merging or consolidating into another company
* Transferring substantially all assets (or share exchange)
* Converting to another form of business
* Dissolving (*no s/h right of appraisal!*)
General procedure:
1. board action adopting resolution
2. board submits proposal to s/hs with written notice
3. s/h approval by:
1. traditional: majority of shares entitled to vote
2. modern: majority of shares actually voting
58
Appraisal Rights (for dissenting s/h in regard to fundamental corporate change)
* Exists only in close corporations
* This is s/h exclusive remedy, absent fraud.
59
Mergers + Consolidations
* If no significant changes occur in surviving corporation, then the surviving corporation s/h DO NOT need to vote on the fundamental change.
* Short form merger of subsidiary: a parent owning at least 90% of outstanding shares of each class of a subsidiary corporation may merge the subsidiary into itself without approval of s/h or directors of the subsidiary.
* Successor liability: creditor of a merged corporation can go after the surviving corporation.
60
Transfer of all or substantially all assets + share exchange
* One company gobbling up assets or stock of another not in the ordinary course of business: usually at least 75%
* This is a fundamental change for the selling corporation only, so **only the selling company has to follow the following procedure:**
* Board action by both sides
* notice to selling company's shareholders
* approval by selling company's s/h's only
* Usually creditors can only go after the selling company (compare w/ mergers), because it still exists.
* exception to this is buying company is essentially run by the selling company.
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Conversion
* When converting itself into another type of company
* Board approval, notice to s/h, s/h vote. Delivery document to secretary of state.
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Dissolution
**Voluntary Dissolution**
* Dissolution by majority of incorporations or initial directs if shares have not yet been issued or business not yet commences
* Dissolution by corporate act (under fundamental procedure process)
Effect of dissolution:
* continues corporate existence but can't do any other business except for winding up, notifying creditors, liquidating.
Barring claims against corporation:
* claimants came come after even if claim arises after dissolution to the extend of corporations undistributed assets.
* If assets distributed to s/h claim can be asserted against him or her for pro rata share.
* Can cut short time for creditors to bring claims by giving them deadline.
Can revoke same way decided to dissolve.
**Involuntary Dissolution**
* Action by AG for fraudulently obtaining articles, or exceeding and abusing authority.
* Action by s/h for:
* director abuse, waste of assets, misconduct
* directors are deadlocked, irreparable injury to corporation results
* shareholder deadlock, failed to elect 1+ directors
* Action by creditors
* creditor has judgment and corporation is involvement
* corporation admitted claim is due IN WRITING and it's insolvent.
Administrative Dissolution
* state must give corporation written notice for failure
* has 60 days to correct or show grounds nonexistent
* if dissolved, has 2 years to apply for reinstatement. (has to show cured)
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Winding up
* Give written notice to known creditors and publish notice of dissolution
* gather all assets
* convert them to cash
* pay creditors
* distribute remaining money to s/h pro rata by share, unless there are liquidation preferences.
