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CORPORATION ATTACK OUTLINE

I. ORGANIZATION AND FORMATION OF CORPORATION


A. Formation: People, Paper, and Act =de jure corporation
B. Improper formation:
1. De facto
2. Corporation by estoppel
C. Promoters
1. Liability on pre-incorporation contracts
2. Secret profit rule

II. CAPITAL STOCK STRUCTURE
A. Subscription Agreements (revocability)
B. Consideration for Stock
1. Money paid, labor done, property received but NOT future services and promissory notes
2. Watered stock
C. Preemptive Rights: right of existing shareholder to maintain % of ownership (only new issuance)
D. Stock Transfer Restrictions: upheld unless they are an undue restraint on alienation

III. OPERATION AND MANAGEMENT OF CORPORATION
A. Directors
1. Election: shareholders elect directors at annual meeting
2. Removal: with or without cause by a shareholders majority vote of shares entitled to vote
3. Replacing: either BOD or shareholders can select who fills the vacancy for remainder of term
4. Board Action: either unanimous written consent or notice and quorum requirements
5. Director Duties:
a. Duty of Care act in good faith and do what prudent business owner would do BJ R
b. Duty of Loyalty act in the best interest of the corporation
(1) Interested Director Transactions: showing of fairness or disclosure and approval
(2) Competing Ventures never allowed
(3) Corporate Opportunity (necessary, business line, interest or expectancy)
- Tell BOD and wait for rejection
6. Other Liabilities:
a. Ultra Vires Acts: liable for losses occurring for business outside corporate purpose
b. Improper Loans
c. Improper Distributions
7. Who is Liable? Presumed concurrence unless dissent in writing (minutes, writing, letter)
B. Officers (essentially the same duties owed as directors)
1. Selection/Removal: by the BOD
C. Indemnification: no (held liable or improper benefit), mandatory (wholly or to the extent
successful) or permissive (anything else with disinterested vote as long as acted in good faith).
D. Shareholders
1. Piercing the Corporate Veil
a. Alter Ego
b. Undercapitalization
2. Shareholder management of the corporation: closely held +unanimous vote
3. Shareholder derivative suits: suing on behalf of the corporation
a. Requirements
(1) Shareholder at time when claim arose and during entire suit
(2) Adequately represent corporations interests
(3) Prior demand on BOD unless this would be futile (good faith denial that is it!)
(4) Bond in some states
(5) Disinterested directors can vote to dismiss (can be scrutinized by court)
(6) Corporation joined as a defendant (because of decision not to sue)
(7) Dismissal or settlement only occurs with court approval +notice to others affected
b. If successful, recovery goes to corporation and individual is reimbursed for costs
4. Voting Rights
a. Meeting: unanimous written consent (no meeting required)
(1) annual meeting
(2) special meeting
b. Proxies
(1) Requirements: written and signed, directed to secretary, giving authorization
(2) Expiration: 11 months unless it says otherwise
(3) Revocation: easily revocable unless coupled with interest
c. Effective Shareholder Action: unanimous written consent or meeting with quorum/vote
(1) Quorum necessary majority of outstanding shares (not lost if someone leaves)
(2) Majority of quorum wins: Traditional (majority of shares present) Modern (majority
of shares that actually voted).
(3) Notice required: every SH +contents of meeting everything else invalid
(4) Cumulative voting (for directors only) number of shares x number of directors
d. Shareholder Agreements to Control Voting
(1) Pooling agreements
(2) Voting Trusts: writing, on file and expires in 10 years, transfer legal title, certificate
5. Inspection Rights: used to need standing, now anyone can as long as written proper purpose
6. Distributions (dividends, repurchases, redemptions): declared at BODs discretion, thus to
require a distribution there must be a very strong showing of abuse of discretion
a. Payable out of:
(1) Earned surplus always
(2) Stated capital never
(3) Capital surplus it depends
b. Dividends: Preferred stock (first out of the pot), Participating (pool again with common),
Cumulative (unpaid dividends accrue from year-to-year) and Common stock (pro rata
division of what is left).

IV. FUNDAMENTAL CORPORATE CHANGES
A. Appraisal Rights: right of dissenting shareholder to force a purchase of shares at fair value
1. Requirements: (1) Written objection before meeting +intent to demand payment, (2) Vote
against merger or abstain from voting; and (3) File written claim.
B. Amendment of Articles:
1. Corporation can amend articles. No appraisal rights.
2. BOD may amend or repeal bylaws unless articles exclusively reserve power to shareholders.
C. Mergers or Consolidations
1. Directors & shareholders of both corps must approve (latter by majority entitled to vote)
2. Short form merger does not require shareholder approval in parent (but required in subsidiary)
3. Appraisal rights of dissenting shareholder
4. Effect: surviving corp. succeeds to all rights and liabilities of constituent companies
D. Sales of Assets or Share Exchange
1. If sale, lease or exchange of substantially all assets is outside ordinary course of business, then
majority of directors and notice to shareholders of selling corp.
2. Approval by selling corps shareholders, and right of appraisal for dissenting
3. De facto merger: succeed to all rights and liabilities
E. Dissolution and Liquidation
1. Voluntary: Majority of directors & shares entitled to vote must approve
a. Some states allow for unanimous written SH consent (no BOD needed)
2. Involuntary: SH petition (1) director abuse, waste, misconduct, or (2) director/SH deadlock
a. Creditor can petition if insolvent and corp. admits debt in writing or unsatisfied judgment
2. If liquidation, pay outside creditors first.

V. STOCK TRANSACTION LIABILITY
A. Common Law Duty (owed existing shareholders and generally required privity as compared to
transactions carried out on stock exchanges).
1. Controlling SH: A controlling SH must refrain from using his control to obtain a special
advantage or cause corp. to take action that unfairly prejudices the minority SHs.
a. Sale of Controlling SH Interest: no sale to looters, disguised sale of corporate asset or
sale of a BOD position. Remedy is to disgorge profit.
2. Special Circumstances Rule (nondisclosure): if someone with inside knowledge fails to
disclose information to a person with whom they are dealing, then this will be a breach of a
fiduciary duty.
3. Fraud/Misrepresentation: material misrepresentation of fact, scienter, intent to defraud,
reliance, reasonable reliance. This permits recovery in the fraudulent sale of stock by a person
with inside knowledge.
B. Rule 10b-5 (Federal securities law misrepresentation action)
1. Three requirements
a. Interstate commerce
b. Fraudulent conduct
(1) May be overt act or omission to act
(2) Materiality
(3) Scienter
c. May be in connection with either purchase or sale (focus on plaintiff)
2. Insider trading abstain from trading or disclose the inside information
a. Fiduciary relationship required
b. Tippers must have an improper purpose
c. Tippees liable if tipper breached and tippee knew that tipper breached
d. Misappropriation theory brought by government against any trader who misappropriated
information from any source
C. Section 16(b)
1. This requires:
a. Large corp.: traded on national exchange, or 500+shareholders and $10 million in assets
b. Defendant is (1) officer, (2) director, or (3) 10% shareholder
c. Purchase and sale of stock within 6 months (highest sales matched with lowest recovery)
2. There are no defenses