CORPORATIONS - Amazon S3s3.amazonaws.com/mythm-vids-prod/MI.Barnhizer.Corporations.pdf · CORPORATIONS PROFESSOR DANIEL D. BARNHIZER ... A Rule 10b-5 plaintiff must detrimentally

CORPORATIONS PROFESSOR DANIEL D. BARNHIZER

MICHIGAN STATE UNIVERSITY COLLEGE OF LAW

Editor's Note 1: Michigan corporation law is covered by the Michigan Business Corporation Act (“MBCA”). Mich. Comp. Laws §§ 450.1101 et seq.

CHAPTER 1: FORMATION

A. Pre-Incorporation Transactions

1. Promoters

o Promoters often must incur obligations on behalf of the corporation before the corporation comes into existence.

o General rule—promoters are _______________________________________ for all liabilities created on behalf of the yet-to-be-formed corporation.

Promoter’s liability is _____________________________________________________ with the corporation

Exam Tip 1: Under tort law, multiple promoters’ liability can also be joint and several with each other if the promoters were jointly engaged in the transactions at issue.

o Promoter is only released from liability for pre-incorporation acts in three situations:

____________________________—formed corporation and third-party agree to release promoter and enter a new contract that does not include the promoter

Express ____________________________ of pre-incorporation contract by corporation—may relieve promoter

Third party may agree with promoter to look only to corporation for performance

o Promoters are __________________________________________ to pre-incorporated entity and other promoters.

Liable for personal gain resulting from pre-incorporation transactions May seek, but has no right to ____________________________, reimbursement for

pre-incorporation expenses

• Corporation is not liable for pre-incorporation transactions, unless it makes an ____________________________ of those contracts.

• Promoter is not an ______________ of the corporation.

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2. Incorporators

o An incorporator is a person who ______________ and ______________ the articles of incorporation.

May also be a promoter Not liable for promoter’s contracts in capacity as incorporator

B. Incorporation

• Filing the articles of incorporation with the state and endorsement of the articles by the state initiates the existence of the corporation.

o The articles of incorporation are like the corporate constitution

Very basic, just the document that brings it into being

o The articles of incorporation must include:

Corporate ____________________________—must include certain terms, or abbreviations (e.g., Incorporated, Limited, Company, Corp.)

A statement of purpose—usually “to engage in ______________________________________________________________________”

o The articles of incorporation may include:

Allowances or limitations of corporate powers A specific duration—presumed perpetual

• Ultra Vires Actions—transaction by corporation with third-party that is outside the corporation’s __________________________________________________________________

o An ultra vires act can only be challenged by three parties:

Shareholders can ____________________________ ultra vires actions. Corporation may hold officers or directors _____________________________________

for the ultra vires action. The state can also enjoin the action or _______________________ the corporation.

• Proper formation grants shareholders limited liability.

o Once formed, the corporation (a “de jure” corporation) is a person that is separate and distinct from its shareholders, directors, officers, employees, incorporators, and promoters.

The corporation is not a natural person, but can be sued like a natural person.

o After formation, the corporation is liable for its actions and transactions.

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• Defective incorporation

o Failure to incorporate properly means that individuals falsely doing business as a corporation are ________________________________________________________ for acts on behalf of the alleged corporation unless one of the following doctrines applies:

o De facto corporations–no personal liability if the owner:

Makes unsuccessful but __________________________________________ effort to comply with incorporation requirements;

Under valid incorporation statute; and For ____________________________ purpose.

o Corporation by estoppel—party who deals with entity as if it is a corporation is estopped from denying its existence

C. Governance

1. Articles of Incorporation

o Articles of correction can be filed with the state to correct an inaccuracy in or defective execution of the articles of incorporation.

o Articles of amendment are filed to amend the articles of incorporation with any lawful provision that might have been contained in the original articles of incorporation.

Before first meeting of board—articles are easy to amend with ________________________________________________________ of incorporators

After first meeting of board—board may make limited (mostly ministerial) changes without shareholder approval, but all significant changes must be approved by __________________________________________.

• Shareholders may exercise __________________________________________ rights over some amendments.

To be effective, the amendments must be properly ____________________________ and a certificate of amendment must be filed with the state.

2. Bylaws

o Usually the provisions for managing the corporation business o Board of directors or shareholders may, by _______________________________________,

adopt, amend, or repeal bylaws unless articles or bylaws specify alternative requirement.

3. Organizational Meetings

o Held by __________________________________________ to:

Elect directors; Appoint officers; Adopt ____________________________ ; and


Approve or adopt ____________________________.

CHAPTER 2: STOCK AND OTHER CORPORATE SECURITIES

A. Types of Securities—(1) Stock; and (2) Debt

• Stock—an ____________________________ equitable ownership interest in the entity, usually with a right to ____________________________ on corporate governance

o May have different classes with different rights—e.g., voting, distribution/dividend preferences

• Debt securities—usually corporate ____________________________

o General order of precedence on bankruptcy—secured creditors and unsecured creditors (incl. bonds) generally take precedence on distribution over stock; then preferred stock holders, then common stock holders

B. Issuance of Stock

• The articles of incorporation must authorize the issuance of stock.

o Authorized but unissued stock has no real existence; can’t vote, no dividends, just sits there until the corporation sells it to an investor

o A corporation may authorize one class of shares (e.g., common stock) or two or more classes (e.g., common stock and ____________________________ stock).

• The board of directors usually authorizes issuance of stock to investor in exchange for __________________________________________ consideration.

o Board determines adequacy of consideration o Acceptable types of consideration include money (e.g., public or private offering), property,

or __________________________________________. o Investor who is issued stock ______________ pay the consideration promised for the

stock—corporation can sue to assess any unpaid consideration that is due and owing. o Par value stock—stock which the articles designate as having a

__________________________________________

• Stock subscriptions—investor subscribes to purchase stock when corporation comes into existence

o Unless otherwise provided, a subscription is irrevocable for ____________________________ unless all subscribers agree to revoke the subscription.

o Subscribing investors have an obligation to pay for the subscription amounts of stock.


C. Stock Rights, Options, and Warrants

1. Shareholder Preemptive Rights

o Common law recognized the shareholders’ right to maintain their __________________________________________ interest in the corporation upon issuance of new shares.

o The MBCA ____________________________ provide for preemption unless specifically provided in the articles or by an agreement between the corporation and one or more shareholders

2. Federal Securities Act of 1933

o A corporation may be required to register issued security with the U.S. Securities and Exchange Commission (“SEC”).

o In general, registration only required for public offerings. o Registration is not required for ____________________________ placements. o A buyer of an unregistered security that violates the Securities Act may sue specific classes

of parties associated with the registration statement:

To ____________________________ the transaction; and To get __________________________________________ damages for any material

misrepresentation or __________________________________________ in the registration statement.

D. Distributions

1. In General

o Distribution—transfer of ______________ or other property from corporation to one or more shareholders (e.g., dividend)

o Board of directors must authorize distributions.

Except in cases of __________________________________________ and __________________________________________, shareholders cannot compel the issuance of distributions.

2. Limitations on Distributions

o Distribution is not permitted if the corporation is ____________________________ or the distribution would make the corporation insolvent

o Insolvency tests:

____________________________ test: Corporation is insolvent if it cannot pay off its debts as they come due in the usual course of business (short term)

__________________________________________test: Corporation is insolvent if its total ____________________________ and liquidation preferences on senior securities exceed the total value of its ____________________ (long term)


o Test solvency on the date of __________________________________________ if payment is to be made within 120 days

If payment occurs after 120 days, test solvency on the date of ____________________________.

o Board of directors may determine the solvency of the corporation.

Board is entitled to rely on any ____________________________ valuation method, including properly prepared financial statements or fair valuation.

3. Directors’ Liability for Unlawful Distributions

o Directors who vote for or ____________________________ to unlawful distributions are ____________________________ liable for the excess distribution that rendered the corporation insolvent.

o Joint and several liability—directors may seek contribution from other liable directors and recoupment from shareholders who knowingly accepted the unlawful distribution

Editor's Note 2: ’The lecturer accidentally states that injured shareholders may seek contribution rather than directors. The rule is correct as stated above.

o Defense—director acted in __________________________________________, exercised the care of ordinary __________________________________________ person in similar circumstances, and reasonably believed the distribution was in the best interest of the corporation

Exam Tip 2: Look for reliance by directors on the reports of others, and situations where some directors know of the insolvency while others are acting in good faith. These directors may be protected from liability.

You may also see situations where directors who do not vote for the distribution also do not object to it after learning of it. These directors may be liable for assenting to an unlawful distribution.

E. Sale of Securities

• Two issues: (1) close corporations often ____________________________ sales of stock by shareholders, and (2) transactions may violate federal securities law.

1. Private Restrictions on Sale or Transfer—close corporations (i.e., corporations with only a few shareholders) can use restrictions on transfer to preserve ____________________________ arrangements between the shareholders

o Strictly enforceable, unless transferee took without ________________________________________________________ of restriction

o Restrictions must be conspicuously noted on the face of the security.


o Courts will support __________________________________________ restrictions on transfer

Complete prohibition on transfer or transfer only with the __________________________________________ of the corporation may or may not be reasonable, depending on the context.

Restrictions created by contract may be challenged under contract defenses, are ____________________________ interpreted, and may be ____________________________, abandoned, or subject to ____________________________.

2. Federal Securities Law

a. Rule 10b-5 (Federal cause of action under 1934 Exchange Act)

10b-5 cause of action requires:

• Purchase or ______________ of a security; • Involving ____________________________ commerce; • Where the defendant engaged in _________________________________________

or deceptive conduct related to ____________________________ information; • Made with _________________________ (i.e., with intent or recklessness); • Where the plaintiff __________________________________________ and

justifiably relied on the defendant’s conduct; • Causing damages.

Purchase or sale of any security—doing nothing does not give rise to liability Involving interstate commerce—use of public stock exchange, mails, telephone, or

internet will qualify; a face to face transaction probably does not qualify Fraudulent or deceptive conduct in relation to material information—material

misrepresentation or material omission

• Materiality means that a reasonable person would consider the misrepresented or omitted fact __________________________________________ in deciding whether to purchase or sell the security.

• Opinions—may be fraudulent if made without reasonable basis or in ____________________________

o If the defendant sufficiently cautions regarding the risks associated with the opinion, the bespeaks caution doctrine renders the opinion nonactionable.

• Nondisclosure and insider trading—an affected trader (insider, constructive insider, tippee, or misappropriator) who ______________ in a security while in possession of material ____________________________ information violates Rule 10b-5 if he


fails to ____________________________ that information to the buyer (a duty to abstain or disclose)

o Insiders—directors, officers, employees (e.g., a director who knows his company will announce record profits who immediately buys his company’s stock)

o Constructive insiders—lawyers, accountants, etc., who have access to nonpublic information (e.g., a lawyer working on corporate merger buys her client’s stock)

o Tippees—receive information from an ______________ (tipper) to trade the stock based on that information (e.g., a corporate president calls a corporate shareholder to inform her that the FDA had discontinued clinical trials of the company’s drug, and the shareholder sells her stock on the basis of that insider information)

o Misappropriators—uses confidential information to trade stock in violation of duty of confidentiality owed to corporation (e.g., a lawyer at a law firm who learns of a partner working on a significant merger cannot trade in the stock of those corporations)

Made with scienter—knowing intent to ____________________________, or ____________________________ with regard to the truth or falsity of the statement

A Rule 10b-5 plaintiff must detrimentally and justifiably rely on the material misrepresentation or omission, and the reliance must cause damages.

b. Section 16(b)—short swing profits

A corporate insider (director, officer) or shareholder holding more than ______________ of shares liable for “short swing profits.”

• Short swing profits arise where the insider or large shareholder both buy and sell the corporation’s stock within a ____________________________ period.

• Liable to the corporation for any profits made on the short swing sale.

Only applies to:

• Corporations trading on ____________________________ securities exchange; or • Corporations with more than ______________ shareholders and $10 million or

more in ____________________________.

3. State Causes of Action

o The primary state cause of action available to persons who have traded stock is the tort of fraud.

o Fraud requires a material misrepresentation or omission made with scienter, and reasonable and detrimental reliance causing damages.


4. Tender Offer

o A person who acquires more than ______________ of stock of a corporation must file a notice with the SEC regarding:

His ownership interest; The ____________________________ of his funding; and His ____________________________ in acquiring the stock.

CHAPTER 3: SHAREHOLDERS

A. Shareholder Meetings

• Annual meeting—must be specified in the ____________________________, and must be held for election of directors and for any other business subject to __________________________________________ control

o Must be held every year o Notice—at least ______________ days in advance of meeting and no more than

______________

Notice must include the time, date, ____________________________, and place of meeting.

o Any shareholder can seek a court order compelling the corporation to hold an annual meeting if no date for an annual meeting has been designated within ______________ months after (i) organization of the corporation or (ii) the last annual meeting.

• Special meetings—bylaws or articles may give either the shareholders or the directors a right to call special meetings

o The notice requirements are the same as for annual meetings; must provide between 10 and 60 days notice, and must specify time, date, purpose, and place of meeting.

o A circuit court may order a special meeting for ____________________________ shown on application of ______________ or more of all shares entitled to vote at a meeting.

• Notice of meetings—shareholders must be given ____________________________ notice of any shareholder meeting

o Written notice generally may be given personally, by mail, or by electronic transmission. o If a shareholder attends a meeting, the shareholder ____________________________ any

objections for lack of notice unless the objection is brought at the beginning of the meeting. o Shareholders may attend or be “present” at a meeting in person, by telephone, or

__________________________________________.

Editor's Note 3: A shareholder’s authorized representative (e.g., a proxy holder) is also considered “present” at a meeting by these same means, and


the representative’s presence, like the shareholder’s presence, will waive any objections to notice unless the objection is made at the beginning of the meeting.

• Action by unanimous written consent—shareholders may act by unanimous written consent instead of holding an actual meeting

B. Voting Requirements

1. Voting Eligibility

o When the board sets a meeting date, it also establishes a “__________________________________________” sometime before the meeting date.

o On the record date, the corporation creates a list of shareholders as of that date. o Persons who are shareholders on the record date are entitled to vote those shares at the

meeting, even if they ______________ their shares before the meeting date.

2. Shareholder Voting

o Shareholders are entitled to vote on the election of directors. o The articles and bylaws may reserve specific issues for approval by shareholders and specify

________________________________________________________ requirements for approval of specific issues.

o Shareholders are also entitled to vote on ________________________________________ corporate changes, such as __________________________________________ to the articles of incorporation.

Amending the articles of incorporation requires approval by a majority of the outstanding shares ______________________________________________________, rather than by a majority of the __________________________________________.

o In general, each share of stock gets ____________________________ but the articles of incorporation may authorize classes of stock with no vote, or with multiple votes.

a. Quorum requirement—for a vote at a shareholders’ meeting to be valid, there must a quorum of the shares eligible to vote present at the meeting

In general, a majority of shares ______________________________________________ must be present either in person or by ______________ to provide a quorum, although the articles or bylaws may specify a different percentage.

A share that is present for any purpose is present for quorum purposes.

Example 1: A shareholder shows up to a shareholder meeting to vote on one issue, but then leaves or refuses to participate in a vote on another issue. If both issues were properly noticed, then the quorum requirement is satisfied. If only one of the issues was properly noticed, and the new issue was not, then there is a quorum for the meeting, but a shareholder can properly object to


improper notice because the meeting raised an issue that was not included as a purpose of the meeting.

b. Special voting for directors

The corporation can allow election of directors by a ____________________________ vote, rather than a __________________________________________, vote.

Cumulative voting

• Device for giving ____________________________ shareholders a representative on the board of directors

• In voting on multiple directors, the number of votes a shareholder has equals the number of __________________________________________ multiplied be the number of director positions __________________________________________.

• If the minority shareholders own enough shares, the shareholders can __________________________________________ all of their votes and cast them for a single director.

Staggered terms

• This control device is adopted to defend against ___________________________________________________________________.

• Classes of directors are __________________________________________ so that each class stands for election every two or every three years.

• This means that the benefits of a hostile takeover are delayed because the acquirer will require additional time to ____________________________ a majority of directors to the board.

c. Proxy voting

Shareholders may vote by proxy instead of ____________________________ attending a meeting

A “proxy” essentially gives another person the right to ______________ the shareholder’s stock.

Editor's Note 4: A proxy, whether or not revocable, is presumed to be valid for three years unless otherwise specified.

Revocable proxy—may be revoked at any time up to the vote

• Any act __________________________________________ with giving the proxy (e.g., showing up at the meeting or giving a different proxy to another person) revokes the proxy.

Irrevocable proxy—must specifically state that it is irrevocable and must be “________________________________________________________”


• “Coupled with an interest” means the proxy holder has a __________________________________________ right in the shares or a ________________________________________________________.

Example 2: A lender who advances money to the corporation may take a security interest in the shares as collateral. The lender could also demand an irrevocable proxy to be able to vote the shares to protect its interest in being repaid by the company.

• This is because corporations don’t want irrevocable proxies in the hands of someone who doesn’t care whether the corporation succeeds.

d. Voting combinations

Voting pool—shareholders __________________________________________ promise to vote in a certain way (e.g., to elect or oust a particular director or officer).

• Shareholder retains ____________________________ ownership of the shares. • Voting pool agreements are __________________________________________

enforceable. • No requirement of filing with the corporation and no time limit on how long the

voting pool may last.

Example 3: The shareholder enters voting pool contract, but then attempts to vote her shares contrary to the agreement because of a falling out with the other pool members or a refusal to vote against the “victim” of the pool. If the pool is a valid ____________________________, then the court will specifically enforce it, and any attempts by the dissenting pool member to vote otherwise are legally irrelevant.

Voting trust

• In a voting trust, shareholders transfer _____________________________________ to their shares to a trustee, while retaining beneficial ownership of the shares.

• The trustee ____________________________ the shares and distributes distributions according to the terms of the trust.

• Must be in ____________________________ and must be filed with the __________________________________________

• Subject to a ______________ year limit, and may be renewed for an additional ______________ years in the last ______________ months of the original term


e. Management agreement

Shareholders may agree to alter fundamental aspects of corporate governance by agreement set forth in:

• The articles or bylaws and approved by all persons who are shareholders at time of agreement, or

• Written agreement signed by ______________ shareholders at the time of the agreement and made known to the corporation.

These agreements are unenforceable if the corporation is listed on a __________________________________________ securities exchange.

C. Inspection of Corporate Books and Records

• Shareholders are owners of the corporation, and as owners, they should have a right to ____________________________ their corporation to see how it is being managed by the directors they elected to manage it.

• General rule—shareholders have a right to inspect _____________________________________ of the books and records of the corporation upon a ____________________________ demand to the corporation for such inspection, provided that the demand states a ________________________________________________________ for the inspection.

o The written demand must be delivered to the corporation at its __________________________________________ office or principle place of business.

• This general rule has to be qualified.

o Idle ____________________________ wastes corporate time, resources, and money. o People with a ____________________________ against the company could impose costs by

filing repeated demands for inspection. o __________________________________________ would love to be able to access

corporate books and records by purchasing a single share of stock.

• Burden of proof regarding whether the shareholder has a proper purpose is based on the type of document sought.

o Shareholder lists

Access to shareholder lists is presumed to be necessary for corporate democracy because it allows communication between shareholders with respect to elections, bylaw and articles amendments, merger approval, and fundamental other corporate changes.

Burden is on the __________________________________________ to prove that the shareholder is not seeking the records for a ____________________________ purpose.

o All other books and records

Reasons for seeking access vary widely


Burden is on the __________________________________________ to prove proper purpose.

• Time and place of inspection

o Inspection must take place during ____________________________ business hours at corporation’s __________________________________________ place of business.

o Shareholder must give advance ____________________________.

• A proper purpose relates to shareholder’s interest in the corporation.

o Generally, ask whether the demanded records have information that will permit the shareholder to ____________________________ the value of their asset (the corporation) or to __________________________________________ in governance of the corporation.

o Examples of improper purposes:

__________________________________________ seeking client lists, contracts, etc. Disgruntled former employee seeking to harass the corporation and its officials Arbitrageur seeking inside information such as mergers Seller of luxury goods or charitable/political solicitor seeking

__________________________________________ lists to add to its mailing lists

o Examples of proper purposes:

Seeking shareholder list to communicate with shareholders about ____________________________ of directors, or amendments to bylaws or articles

Seeking __________________________________________ records regarding the performance of the corporation (must actually pertain to the performance of the company)

• Enforcing inspection rights

o The corporation has ______________ business days to respond to a shareholder’s demand for inspection.

o If the corporation fails to respond or places _______________________________________ conditions on inspection, the shareholder may petition the __________________________ court for an order compelling inspection.

o If the shareholder is entitled to inspection, the court has ____________________________ regarding the records to be inspected, along with conditions or limitations on the inspection.

o The winning shareholder may receive litigation costs unless the corporation can show a __________________________________________ basis for rejecting the request.


CHAPTER 4: SHAREHOLDER SUITS

A. Direct Actions

• Shareholder may bring direct actions to enforce the shareholder’s rights as shareholder

o Typical direct actions may be based on denial of voting rights, failure to declare a dividend, or failure to approve or approval of a ____________________________.

• Non-shareholder actions (i.e, actions not to enforce the shareholder’s rights as shareholder)

o A shareholder doesn’t give up the rest of his legal relations with the company by being a shareholder.

Example 4: If a shareholder contracts with the company and it breaches, the shareholder has a direct action against the corporation for breach of contract. Similarly, if the company van negligently runs over a shareholder in the street, the shareholder can bring a direct action against the corporation to recover under tort law.

B. Derivative Actions—shareholder suing to enforce a right held by the ____________________________, not by the ____________________________ individually

1. In General

o Most commonly, shareholders sue derivatively for a breach of ________________________________________________________ by a director.

Because directors are fiduciaries of the corporation, the party directly harmed when directors breach their fiduciary duties is the corporation, not the shareholders.

o The corporation cannot bring suit except through a decision of the ________________________________________________________.

o The derivative suit permits ____________________________ shareholders to sue on behalf of the corporation for the harm suffered by the ____________________________.

Example 5: Director Bob of Y Corp. embezzles $100,000 from the corporate checking account. This is an injury to the corporation. Shareholders suffer injury only in the sense that the value of the corporation is reduced by $100,000, and therefore the value of all shares is reduced slightly to reflect that loss.

Example 6: Director Jane of X Corp. owns a piece of land that has dropped significantly in value. Unbeknownst to her fellow directors, she forms a holding company for the land. That holding company offer the land to X Corp. at an inflated value. She then votes to have X Corp. buy the land at $100,000 more than its fair market value. This is an injury to the corporation. Shareholders are injured because the corporation is now worth less, but Jane essentially took money from the company. X Corp. has a cause of action against Jane.


Shareholders may only sue Jane indirectly, to enforce the rights of the corporation. Thus, shareholder rights in this case are entirely derivative of the corporation’s rights.

Breach of fiduciary duty by a director is ______________ a derivative claim. The usual practice is to name the beneficiary corporation as a party defendant in the

derivative action, even though the shareholder is suing on behalf of the corporation.

o Dissent requirement—a shareholder who votes for or ____________________________ in a decision cannot later challenge it in court

2. Standing in Derivative Actions

o Shareholder must have __________________________________________ ownership of shares in company.

Must own shares at time of wrongful act or omission; or Receive shares by __________________________________________ from one who

owned shares at the time of the wrongful act or omission (e.g., inheritance)

o Shareholder must continue to be a shareholder until the time of final __________________________________________.

o Shareholder must ____________________________ and ____________________________ represent the interests of the corporation.

3. Demand

o Universal demand requirement—because the action belongs to the corporation, the shareholder ______________ demand that the board take action to protect the corporation’s rights

o Shareholder may not file suit until:

Board specifically ____________________________ the demand in less than ______________ days (not common); or

Board does nothing for ______________ days (most common)

• Shareholder can reduce this waiting period by proving that delay would result in __________________________________________ injury to the corporation.

Editor's Note 5: There is no futility exception to the demand requirement under Michigan law.

Example 7: A corporation is about to engage in a major transaction in which a director has a personal interest in breach of duty of loyalty, and the transaction will irreparably damage the corporation’s assets. A qualifying shareholder need not wait 90 days after making a demand before filing a derivative action.


4. Recovery & Litigation Expenses

o Recovery goes to the corporation—the corporation suffered the ____________________________ , not the shareholder, so the corporation gets the money

o Litigation expenses to shareholder—successful shareholder plaintiff has given a benefit to the corporation and is entitled to recover ____________________________ litigation expenses

Where plaintiff shareholder has no reasonable cause to bring the action, or brings it for an improper purpose, court may require plaintiff to pay defendant’s litigation expenses

5. Liability

a. Limited liability and piercing the corporate veil

o Corporations have ____________________________ liability. o Shareholders are liable only to the extent of their

__________________________________________ in the corporation (including any unpaid subscriptions).

o Piercing the corporate veil—creditor of corporation seeks to get court to ignore corporation as a __________________________________________ entity and treat it as __________________________________________ to its shareholder(s)

Look to __________________________________________ of relationship between shareholder and corporation, not the ______________.

Courts in most jurisdictions examine this relationship under the three-factor “Totality of the Circumstances” test:

• Corporation was merely an alter ego, _____________________________________, or façade for the shareholder(s)

o Shareholder treated corporate assets as his/her own. o Corporation not treated as if it had a separate existence apart from its members o Factors to consider—no separate accounts, comingling funds between different

corporations, completely ignoring corporate formalities, self-dealing with corporation; milking the corporation of funds; total domination or control by a shareholder.

• Corporate form used to commit a wrong or ______________

o The Michigan Supreme Court has said that a plaintiff ______________ in some circumstances pierce the corporate veil ____________________________ showing fraud.

• Injury to plaintiff arising from ____________________________ of the corporate form.


o Need more than just a sloppily run corporation to pierce the veil. o Need some wrong, fraud, injury, or injustice in permitting the shareholder to

hide behind the corporate form and interfere with the __________________________________ right to recover from the corporation.

b. Fiduciary duties of controlling shareholder

General rule—shareholders do not owe each other fiduciary duties.

Editor's Note 6: When one shareholder—or a group of shareholders acting in concert—holds a high enough percentage of ownership in a company to enact changes at the highest level, the shareholder or group is a “controlling shareholder.”

Exceptions—particularly in close corporations, the ______________________________ shareholder may have fiduciary duties to the ___________________________________ shareholder(s) if:

• Controlling shareholder is selling their ____________________________ interest to an outsider.

o Essentially like inflicting a new partner on the minority.

• Controlling shareholder seeking to ____________________________ other shareholders from corporation.

o Not always wrongful

Example 8: In a short form merger, the controlling shareholder decides to eliminate a very small minority block by paying them off and making the company wholly owned. This is probably not a violation of the controlling shareholder’s fiduciary duties.

• Controlling shareholder receiving a ____________________________ denied to other shareholders.

o May be disguised as salary.

Duty of disclosure—controlling shareholder has a duty to disclose material information to minority shareholders

• Material—any information that it knew or should have known that a reasonable shareholder would consider ____________________________ in deciding how to ______________ on a transaction.

Duty of fair dealing—controlling shareholder must provide fair price and fair process when purchasing the interest of the minority shareholders


Shareholder oppression—minority shareholder may seek relief from __________________________________________ by the controlling shareholder to the minority shareholder

• Oppressive acts require __________________________________________ interference with shareholder rights.

• The oppressive acts must relate to the shareholder’s rights as a __________________________________________ (e.g., refusal to hold annual meetings, denial of the right to vote, etc.).

CHAPTER 5: BOARD OF DIRECTORS AND OFFICERS (PART 1)

A. In General

• Shareholders ______________ the corporation and elect a board of directors (“board”), which manages and directs the corporation.

• Board appoints the ____________________________ of the corporation who manage its ____________________________ affairs and exercise the powers of the corporation.

B. Composition and Selection of Board of Directors

• Number—at least ______________ director

o Number defined in articles o If articles or bylaws permit, board may ______________ the number of directors.

• Qualification—no __________________________________________ qualifications required by statute, but ______________ may impose qualifications

• Selection—elected by __________________________________________ at annual meeting. • Compensation—they can be paid for service

C. Term of Directors

• Annual terms more common than staggered terms:

o ____________________________ terms—all directors elected every year at annual meeting o ____________________________ terms—board divided into two or three classes of

directors

Each ______________ is elected to staggered two or three year terms. After the first year, only ____________________________ of directors will be elected

at any given annual meeting.

• Holdover directors—directors whose term has expired will serve until replacements are selected

• Resignation—directors may resign at ____________________________


• Removal—shareholders may remove director ________________________________________ cause, unless the articles provide otherwise

o Directors can only be removed at ____________________________ called for purpose of removing the director.

o Meeting ____________________________ must state removal of that director as a purpose of that meeting.

o Vote required:

If corporations separate their stock into ____________________________ and permit each class to elect a director, only the same class may vote to remove the director.

Straight voting system—____________________________ vote removes director Cumulative voting system—number of votes to remove must

___________________________________ the number required to elect that director

o Even without a vote, directors can also be removed by court proceedings.

• Replacement—either board or shareholders may elect replacement directors

D. Meetings of the Board

• The board of directors may hold regular or special meetings.

o Notice only required for ____________________________ meeting o Directors waive notice requirement by ____________________________ the meeting and

failing to object promptly to the lack of notice.

• Presence

o Physical presence not required; directors may be “present” by any means that allow each director to hear the other directors during the meeting

o Directors __________________________________________ vote by proxy and must be present for meetings.

• Directors may act without a meeting by __________________________________________ written __________________________________________.

E. Voting Requirements

• Quorum—for the board’s actions at a meeting to be valid, a quorum of directors must be present at the meeting

o A quorum is generally a ____________________________ of all directors (unless a higher or lower number is required by the articles or bylaws)

o Directors must actually be ____________________________ at meeting to be counted towards the quorum.

• Passage level—____________________________ vote controls, unless articles or bylaws require a higher level of approval


• Director dissent—directors can be liable for ____________________________ or improper board action at a meeting where the director is ____________________________, even if the director does not vote in favor of the action

o To avoid liability, the director must

____________________________from the action and ensure the dissent is __________________________________________ in the minutes, or

Deliver __________________________________________ of dissent to chair of meeting before it adjourns or immediately afterwards.

o If the director is absent from the meeting, the director is presumed to ____________________________ to the improper or illegal action unless he files a ____________________________ with the corporation in a reasonable time after learning of the action.

• Voting agreements between directors—directors cannot vote by ______________ or bind themselves to vote in a certain way

o This is because directors are required to use their ____________________________, informed, business judgment regarding managing the affairs of the corporation.

F. Committees

• In Michigan, the board of directors can act through committees of as few as ____________________________.

• Committee created by ____________________________ vote to create committee and appoint directors as members of the committee.

• Committee can exercise all powers of the board except ________________________________________________________ actions like:

o Declaring __________________________________________; o Authorizing issuance of shares; o Recommend actions requiring __________________________________________ approval; o Filling vacancies on board or its committees; o Adopting, amending or repealing bylaws, or amending articles.

• Types of committees

o Sarbanes-Oxley Act requires an ______________ committee in charge of selecting, monitoring, and __________________________________________ outside auditors.

o Other committees often include compensation committees (in charge of setting compensation for executives) and __________________________________________ committees.


G. Director Fiduciary Duties—Duty of Care and Duty of Loyalty

1. General

o Directors are expected to exercise informed, ______________________________________, independent business judgment in ____________________________ and in a manner the director reasonably believes to be in the best interests of the corporation.

o Directors have a duty to exercise _____________________ (be informed about the judgments they are making) and to refrain from ____________________________________ actions (put the corporation’s interests ahead of their own interests).

o Breach of fiduciary duty claims must be brought within ______________ years after the breach or ______________ years after discovery.

o Duties to creditors—generally, directors have no duty to creditors, except when corporation becomes __________________________________________.

The director’s duty to creditors may depend on the test used to determine insolvency:

• Short term insolvency (Equity test)—inability to pay debts as they become due (director still has a duty to corporation)

• Long term (Balance Sheet test)—value of corporation is less than what is owed to creditors (director may have duty to creditors of corporation)

2. Duty of Care

o Directors expected to act with care of an ordinarily ____________________________ person in like position and similar __________________________________________.

o Expected to use the ______________ and knowledge of ordinary prudent person plus any additional knowledge or special skills the ____________________________ possesses.

a. Reliance on others

Directors may have to rely on reports from other directors, committees of the board, officers, employees, and ____________________________ giving opinions within the field of their expertise.

Look for whether that reliance was __________________________________________ Reliance on others is reasonable when the director reasonably believes the person,

reports, information, and opinions to be ____________________________ and __________________________________________.

Look for situations where expert opining ______________________________________________________________________ or situations where the facts raise a red flag suggesting that report is not reliable.

• Where the other directors have no reason to know that the reporting person is unreliable, then they are still entitled to rely on that person’s report without breaching their __________________________________________.


b. Business Judgment Rule (BJR)

Exam Tip 3: The Business Judgment Rule is frequently tested on the Michigan Bar Exam.

Rebuttable __________________________________________ that directors acted with due care and reasonably believed their actions were in best interests of the corporation.

Apply Business Judgment Rule analysis when a director’s choice looks bad in hindsight. If it is only a bad business decision, then the BJR protects the director from liability for breach of the duty of care.

BJR does not apply where the plaintiff can show that the director was __________________________________________, not disinterested, not independent, or not in ____________________________.

• Bad faith actions—director taking action to hurt corporation or a particular __________________________________________ or class of shareholders is not protected by the BJR

• Director uninformed—director who just shows up at a meeting and rubber stamps a vote without any information is not protected by the BJR

• Director dominated or controlled by another (non-independence)—a board of close corporation dominated by a single individual who tells board members how to vote is not protected by the BJR

• Sustained neglect—director who fails over a sustained period to devote attention and oversight to affairs of corporation, regularly fails to attend board meetings, or does not familiarize self with operations and financial status of corporation is not protected by the BJR

• Failure to investigate red flags (significant ____________________________ concerns)—director who learns of facts suggesting a significant breach of loyalty by another director but who fails to _________________________________________ that breach further is not protected by the BJR

• Breach of duty of loyalty (self-interested transaction)—director who stole corporate opportunity, entered transaction with corporation on unfair terms and without disclosure, etc., is not protected by the BJR

c. Exculpatory provisions

Most corporations include a provision in their articles of incorporation that shields the director from liability for breaches of duty of ______________.

Exculpatory provisions cannot protect the director from liability for __________________________________________ actions or for breaches of duty of __________________________________________ (self-interested transaction or taking corporate opportunity).


CHAPTER 6: BOARD OF DIRECTORS AND OFFICERS (PART 2)

A. Duty of Loyalty

• Directors have a duty to put the corporation’s interests ahead of the directors’ personal interests.

o Three situations involving breach of duty of loyalty:

Self-interested transactions or transactions involving a conflict of interest—director engages in a transaction with his corporation where the director stands on ____________________________ of the deal (such as a director selling his own property to the corporation)

Taking a ____________________________ opportunity—director takes for his own ______________ a business opportunity that the corporation could exploit

Competition with corporation—director works for business that ____________________________ competes with the corporation

• The Business Judgment Rule ____________________________ apply to breach of duty of loyalty transactions.

1. Conflict of Interest Transactions (i.e., Self-Dealing)

o Watch for directors buying, selling, leasing, etc., in a transaction with the corporation, either from his / her own assets or from a company that the director controls.

Also watch for transactions between ____________________________ of a director and the corporation.

o Director involved in self-dealing will be liable for ____________________________.

Corporation may also get __________________________________________of the transaction, or the transaction may be ________________________________________.

o Safe harbors—in some cases, self-dealing is actually a good deal for the corporation; a director is not liable if any of the following “safe harbors” apply:

The transaction was approved by a ____________________________ of ____________________________ directors, provided that the interested director disclosed all ____________________________ facts to the board prior to the approval vote.

The transaction was approved by a majority of disinterested _______________________________________ provided that the interested director disclosed all material facts to the ______________________________________ prior to the vote.

The transaction was ______________ to the corporation at the time it was entered.


• The transaction is fair if it was within a range of fair values, and the burden is on the ________________________________________________________ to prove that the corporation received fair value (i.e., comparable value for what it gave up)

Exam Tip 4: Look for suggestions or claims that the corporation might have been able to get a better deal elsewhere.

o BJR Rule—a “safe harbor” vote by the fully informed, disinterested directors to approve the self-interested transaction is protected under the business judgment rule

2. Usurpation of Corporate Opportunity

o Paradigm case—director learns of a good business deal that is within the corporation’s line of business but that the director could also develop as a personal endeavor

If the director develops that opportunity personally without giving the corporation a chance to take it, the director is liable to the corporation for the ____________________________ the director receives from the endeavor.

o Tests for whether an opportunity belongs to the corporation:

Interest or expectancy test

• Corporation has a legal interest in the opportunity (e.g., corporation already has an option to buy);

• Corporation has an __________________________________________ arising out of existing legal right (e.g., option to purchase under a lease); or

• Corporation is ________________________________________________________ that type of opportunity (e.g., looking for suitable lots within a certain area for a corporate purpose).

Line of business test

• ____________________________ than the interest or expectancy test • Is the opportunity within the scope of what the corporation does generally?

Other factors—courts may also weigh how the director got the opportunity:

• If the opportunity came to the director because of the director’s ____________________________ with the person offering the opportunity and would not have gone to the corporation, this would weigh against it being a corporate opportunity.

• If the relation between the director and the corporation was such that the director expected to be able to develop opportunities acquired independently, this would weigh against it being a corporate opportunity.


o If the opportunity is a corporate opportunity:

Generally, the director must ______________ the corporate opportunity to the corporation first and may not develop it unless the corporation rejects the opportunity.

• Look for situations in which director only tells a ____________________________ of the opportunity and doesn’t specifically seek board approval; the board must actually reject the opportunity.

o Competition with corporation

Directors cannot work for direct __________________________________________. This is usually more of a problem with officers and employees, but applies to directors

as well.

B. Indemnification and Insurance

1. Mandatory Indemnification

o If a director is ____________________________ in defending against claims against the director, the corporation ______________ indemnify the director for reasonable expenses, including __________________________________________ and court costs.

o The corporation need not worry about indemnification for liability here because there is no liability to indemnify.

2. Prohibited Indemnification

o If the director ______________ a suit alleging breach of duty of ____________________________ where the director received an improper personal benefit, the corporation is __________________________________________ from indemnifying him for liability.

o The reason for this is that if the corporation indemnified the director in this instance, it would receive the payment from the director and immediately turn around and give it back to the director in indemnification.

3. Permissive Indemnification

o If the director ______________ in defending against the claims against that director, the corporation may indemnify the director in two instances:

The director acted with ______________________________ and with reasonable belief that his conduct was in the best interest of the corporation or was not __________________________________________ to the best interest of the corporation.

Criminal action only—the director did not have reasonable cause to believe that his conduct was ____________________________.


4. Advance of Expenses

o The corporation may ____________________________ litigation expenses to the director. o If the director is unsuccessful, the director must repay those advances if he would not be

entitled to indemnification for them.

5. Liability Insurance

o The corporation ______________ purchase directors and officers insurance that covers claims against them even though the corporation would not be entitled to __________________________________________ those claims.

o ____________________________ get indemnification on the same basis as directors.

6. Inspection Rights

• Directors have an absolute right to inspect ____________________________ records related to performance of the director’s duties as a director.

C. Officers and Employees

• Usually include a president, __________________________________________, and treasurer, each selected by board of directors.

• An officer is an ____________________________ of the corporation, and therefore have three types of authority:

o Actual authority—____________________________ grant of authority to an officer to undertake duties on behalf of the corporation

o Implied authority—authority to perform tasks that are necessary to carry out the duties laid out by the express grant of actual authority

Implied authority only applies in scope of _____________________________________; it does not cover __________________________________________ acts.

Look to economic magnitude of the transaction in relation to ordinary business, risk involved, time span, and cost of ____________________________ the action

o Apparent authority—corporation holds out officer to _______________________________ as having authority to bind the corporation.

An officer or employee may have apparent authority to do an act even if the corporation ____________________________ tells him or her not to do that act.

Look to the impact on third parties.

• Officers’ duties of care and of loyalty—same duty of care and duty of loyalty as directors • Additional officer duties under Sarbanes-Oxley

o CEO and CFO have to certify the accuracy of financial reports filed with SEC o May face ____________________________ penalties along with civil liability for violations


• Liability

o Officers are agents of the corporation and are not personally liable for acts done in performance of their duties for the corporation, unless engaging in ________________________________________________________.

o Officers acting in their ____________________________ capacity are liable to third parties.

• Indemnification and insurance—same as directors • Removal

o Officers may be removed __________________________________________ cause, regardless of any employment contract.

o Corporation is liable to officer if it removes without cause in breach of an employment contract permitting removal only for cause.

CHAPTER 7: MERGERS AND OTHER FUNDAMENTAL CHANGES

A. Mergers

• Merger defined—combination of two or more corporations into a single entity where only one survives and the other ceases to exist

o If a survivor corporation is created as a result of the merger and both of the original entities cease to exist this is called __________________________________________ rather than a merger.

• Procedure for merger—board of directors for ______________ corporation must approve the merger, and with two exceptions, shareholders of each corporation must approve the merger as well.

o Parent-subsidiary merger exception

Applies if parent corporation already owns ______________ of the subsidiary corporation

Merger will happen no matter what the minority wants, so neither subsidiary board approval nor approval from the minority shareholders of the subsidiary is required

No fundamental change to parent—if the merger will not cause a fundamental change to the parent corporation or ownership rights of the ____________________________ stockholders, no __________________________________________ vote is needed at the parent level either.

o Minnow-whale merger exception

Shareholders of small (“minnow”) corporation still get to vote. Shareholders of large (“whale”) corporation need not vote where:


• The merger won’t result in increase of more than ______________ in the voting power of the outstanding stock of the survivor;

• Articles of survivor won’t change from before the merger; and • Pre-merger __________________________________________ of survivor won’t be

otherwise affected by the merger.

B. Alternatives to Merger

1. Sale of Assets

o In a merger, Corp. A merges into Corp B, Corp A is dissolved, and Corp B continues as a survivor.

o In a sale of assets, Corp A sells all or __________________________________________ all of its assets to Corp B in exchange for cash, but both continue to exist as corporations with changed assets (unless it dissolves)

Definition—sale of all or __________________________________________ all of a corporation’s assets outside the usual and regular course of business constitutes a __________________________________________ change of the selling corporation.

Board of directors and the shareholders of _____________________________________ corporation must approve the fundamental corporate change.

Shareholders of the __________________________________________ corporation do not get to vote.

o Liabilities after a sale of assets

Transferee buyer only takes the assets of the transferor seller. Liabilities stay with transferor/seller, and transferor/seller must pay off liabilities, unless

the parties agree otherwise. Transferee is generally ____________________________ for debts of transferor.

2. Stock Acquisition

o A corporation may also secure control in another corporation by acquiring stock in the other corporation, most commonly by either

Paying cash (i.e., making a tender offer) or other property for the stock; or By exchanging its own stock for that stock.

Exam Tip 5: With respect to tender offers, recall that anyone who acquires more than five percent of any class of stock, including a corporation, must file a statement with the SEC that reveals his ownership interest, the source of his funding, and his purpose in acquiring the stock.


C. Dissenting Shareholder Right of Appraisal

• Shareholders who object to a proposed fundamental change may be able to dissent from the proposed action and demand that the corporation pay them “____________________________________” for their shares as determined by an appraisal.

Editor's Note 7: ’The lecturer slightly misstates this rule. The proposed fundamental change need not extinguish the shareholder’s ownership interest to permit the shareholder to demand an appraisal.

• Amendments to the articles of incorporation that ____________________________ and ____________________________ affect the rights of shareholders may also give dissenting shareholders a right to dissent and seek ____________________________.

1. Who Has Appraisal Rights

o Shareholder entitled to vote on ____________________________, acquisition, or amendment of articles has appraisal rights

Minority shareholder in short form merger (parent-subsidiary merger) ______________ dissent and demand appraisal even though they can’t vote.

o Efficient market exception—a shareholder has no appraisal rights where there is a ____________________________ and ____________________________ market for the shareholder’s stock, like a national stock exchange

This is because the market provides the opportunity to sell the stock at its fair value without requiring an appraisal.

2. Procedure

o Before the shareholder vote—shareholder must provide ____________________________ to corporation of intent to ____________________________ and seek appraisal

o At the shareholder vote—shareholder must ____________________________ or vote no o After the shareholder vote approving the corporate action—shareholder must make a

second written demand for ____________________________ of the fair value of the shares o Determining fair market value of stock

Determined based on value of corporation immediately _________________________ the corporate action

If the parties cannot agree on the value of the stock, the shareholder must bring an appraisal action in court to determine fair market value of shares.

o Exclusive remedy—shareholder seeking appraisal cannot challenge the corporate action on other grounds except for ______________________ or ____________________________.


D. Termination of Corporate Status

1. Voluntary Dissolution—incorporators or shareholders follow statutory procedure to end the existence of the corporation

a. Procedure

Before issuance of stock—majority of ________________________________________ or initial ____________________________ may voluntarily dissolve provided corporation has not commenced business and does not have and ______________ or liabilities.

After issuance of stock

• Board of directors must adopt a ____________________________ for dissolution of corporation; and

• A majority of shareholders must approve.

b. Effect of dissolution—winding up

Corporation must publish ____________________________ of dissolution and request that persons with claims against the __________________________________________ present them in accord with the notice

Corporation can only do a limited set of things during winding up:

• Collect ____________________________; • Dispose of or sell property; • Discharge ____________________________; or • Make final distributions to shareholders

Winding up cannot include things that look like carrying on business or that would interfere with the final __________________________________________ and __________________________________________, such as:

• Transferring ______________ to corporate property; • Preventing transfer of shares or securities; • Changing ____________________________ or voting requirements; • Terminating the authority of the registered ______________; or • Preventing commencement of proceeding by or against the corporation.

Winding up is a final accounting in which all claims against the corporation are settled and paid out, concluding in a final distribution to all _____________________________.

c. Distribution preferences on dissolution

Directors are liable for improper __________________________________________ on dissolution, just like regular distributions.


• Defense—director or officer acted in ____________________________ with care of ordinary __________________________________________ person in like position and in manner reasonably believed to be in the best interest of the corporation.

Distributions must be made in order of preference:

• ____________________________ get paid first.

o May include shareholders if they are bona fide creditors over and above their investment in the corporation.

Example 9: A majority shareholder, wanting to protect his interest in the corporation, loaned the corporation money to try to keep it going. Because the shareholder is a creditor with respect to this loan, the loan gets paid first. The shareholder may also participate in other distributions as a shareholder after the rest of the creditors have been repaid.

• Shareholders of stock with __________________________________________ preferences are paid next.

• Shareholders of other stock are paid last, and only if there are assets left over.

d. Corporate Survival Statute—claims against dissolved corporation

The goal of dissolution and wind-up is to resolve all claims against the corporation. At a certain point, we limit the ability of creditors with claims against the corporation to

____________________________ a corporation that has been dissolved and wound up. Dissolving corporation must publish a notice of ____________________________ and

request that all persons with ____________________________ against the corporation present them in accord with the notice.

• Claimants have ______________ year following publication to bring claims, but this can be extended if there is good cause and the corporation has not made a __________________________________________ distribution of assets.

Exam Tip 6: Look for situations in which the corporation makes final distribution of assets to shareholder(s) before the end of this one-year period, or situations in which it is not clear whether the corporation still has any assets.

CHAPTER 8: DISSOLUTION (CONTD.) AND OTHER INCORPORATED ENTITIES

A. Involuntary Dissolution

• Dissolution by creditor petition—a creditor ______________ petition a court for involuntary dissolution of a corporation if it is __________________________________________

• Dissolution by shareholder petition—shareholders may petition court for involuntary dissolution if the corporation is unable to ____________________________ effectively in best interests of its creditors and shareholders because of one of two situations:


o Directors are ____________________________, shareholders cannot break the deadlock, and the corporation may suffer an ____________________________injury; or

o Shareholders are deadlocked in voting power and have failed to ______________ successors to the directors whose terms have expired

• Upon involuntary dissolution, court has broad ____________________________ powers to dissolve, appoint a __________________________________________, enjoin corporate actions, and other acts to preserve the corporation’s ____________________________.

• Forfeiture or Administrative dissolution—state attorney general may bring dissolution action against corporation that:

o Procured organization through ____________________________; o Repeatedly and willfully exceeded ____________________ authority (e.g., ultra vires acts); o Repeatedly and willfully conducted business in unlawful manner; or

• Operators of corporations dissolved by Forfeiture or Administrative dissolution are subject to personal liability.

B. Special Types of Corporations

1. Closely Held and Close Corporations

o Close corporations characterized by few __________________________________________ o Relaxed governance—shareholders are often both directors and officers o Close corporations can raise many of the same issues as ordinary corporations, but closely

held corporations are particularly suitable for testing these issues:

Piercing the corporate veil Shareholder/director deadlock justifying dissolution Shareholder oppression Director liability for improper distributions Director liability for failing to exercise independent business judgment because board is

dominated by a single shareholder/director Dissolution and statute of repose issues

2. Other Specialized Types of Entities

Editor's Note 8: These types of entities are discussed in greater detail in your full Corporations outline.

• Foreign corporations—corporation incorporated in another state

o Generally must register with the state in order to ____________________________ within the state

o Other corporate functions not affected

• Professional corporation—purpose of corporation statutorily limited to practice of particular profession


o Big difference is that employees, even if they are also shareholders:

Are ____________________________ liable for their own malpractice; but Have only ____________________________ liability with respect to the malpractice of

other employees.

• S Corporation—federal tax status under which the corporation is taxed more like a partnership than like a corporation

o Most corporations pay taxes first on profits and again as shareholders on distributions received from the corporation.

o An S corporation avoids double taxation because the income and expenses of the corporation are passed through to its shareholders, who are then taxed on such items directly

C. Limited Liability Companies (LLCs)

• MJany of the same doctrines and principles dealing with corporate entities also apply here, but there are some differences.

• Taxation—LLC’s receive pass-through tax treatment, meaning that LLC profits are taxed only when distributed to members, and as ____________________________ income not ____________________________ income.

• Flexible governance structure—LLC governance requires far less in terms of formalities

o LLC’s file articles of __________________________________________ with the state, not articles of incorporation.

o LLC’s have Operating Agreements, not ______________.

• Membership—LLCs have ____________________________, not shareholders.

o All members must ____________________________ for another person to become a member of an LLC.

• Member managed or manager managed

o LLC’s may elect to be managed either by their ___________________________ (like a partnership) or by ____________________________ appointed for that purpose (like a corporation)

o Default is ____________________________ managed. o Management occurs through a majority vote. o If manager-managed, ____________________________must approve fundamental changes

Fundamental changes include merger, dissolution, amendment of articles of organization, and conversion of the LLC to a corporation.

o In manager-managed LLCs, managers are like directors

Can be removed by members with or without cause


Need not be members Decisions require majority vote of managers Agent of LLC—can bind LLC to acts within manager’s authority Managers owe ____________________________ duties just like directors.

• Members may owe fiduciary duties if they ____________________________ the LLC.

• Allocation of profits and losses

o Default is ______________ distributions to all members. o Articles of organization can specify different scheme.

• Transfer of membership rights

o Membership is not like stock—owning stock gives shareholder right to participate in governance of a corporation.

o Transfer of membership only gives the transferee the right to ______________ in the ______________ and losses of the LLC.

• Termination of membership

o Shareholders of corporation cease being shareholders just by selling their shares. o Members of an LLC can only withdraw as provided by the

_______________________________________________________.

• Merger & dissolution

o LLC may merge with another business entity. o LLC may dissolve:

• At a time or upon an event specified in the articles; • By __________________________________________ vote of members, or • By judicial dissolution.

[END OF HANDOUT]


Documents

CORPORATIONS - Amazon S3s3.amazonaws.com/mythm-vids-prod/MI.Barnhizer.Corporations.pdf · CORPORATIONS PROFESSOR DANIEL D. BARNHIZER ... A Rule 10b-5 plaintiff must detrimentally