Outline - CORPORATIONS - Reviewed (2)

8/10/2019 Outline - CORPORATIONS - Reviewed (2)

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CORPORATIONS

Six Fact PatternsFACT PATTER 1 - ORGANIZATION OF CORPORATIONS

Formation Requirements: People, Paper, Acto People: Incorporators. Mst !a"e one or #ore$ #st %e a person or anot!er

corporate entit& Executes and fles the articles, mighthold an organizational meeting

o Paper: Articles o' Incorporation

Purposes o the Articles

Contract beteen corporations and shareholders

Contract beteen corporation and state

!normation in articles

"tatement that corporation is ormed under the #usiness Corporation $a o

%&''

(ames and addresses:

o Corporate name: must include Corporation (or Corp.), Company (or Co.),

Incorporated (or Inc.), Limited (or Ltd.), Association, Fund or Syndicateo !ncorporators )ma* also name initial #oard members+o Registered Agent and Address o Registered -ce

"tatement o duration . i not included, e presume perpetual existence

"tatement o Corporate Acti/it* . i not included, e presume corporation can do

all laul business

0ltra /ires acti/ities )utside scope o the purposes listed in articles+

E1: 2an3s articles indicate purpose is manuacturing machines4 5hen, sells cars6

ultra /ires acti/it*4o At C$, e /oided the ultra /ires 7 as outside corporation3s capacit*

o (8: ultra /ires 7 are /alid4

"hareholders can see9 an inunction Responsible o-cers and directors are liable to corporation or ultra

/ires losses

"toc9 )Capital "tructure+

Authorized stoc9: maximum number o shares corporation can sell

!ssued stoc9: number o shares corporation actuall* sells

utstanding stic9: shares that ha/e been issued and not reacquired b*

corporation

Articles must include

o Authorized "toc9o !normation on par /alue )i an* par shares+

o 2oting rights, and

o Preerences or each class o stoc9

o Act. must fle articles ith PA ;epartment o "tate and pa* required ee

! ;epartment accepts articles or fling, that is conclusi/e proo o /alid ormation

At that point, e ha/e de ure corporation )legal corporation+

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(ext step: board o directors holds organizational meeting to select o-cers,

adopt b*las, etc4

0nder the #C$, a corporation is gi/en the poer to exercise all poers necessar* or con/enientto e


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(EGA( SIGNIFICANCE OF FORMATION OF CORPORATION

!nternal aenerall*, people ho run corp )directors and o-cers+ are not liable or hat corp does

>enerall*, oners )shareholders+ are not liable or hat corporation does

o Principle o limited liabilit* . means shareholders are generall* onl* liable or price o

stoc9

5he Corporation as an entit* is liable or hat the corporation does

)E FACTO CORPORATION )OCTRINE * CORPORATION +, ESTOPPE(

8hen a de ure corporation has not been ormed )lea/ing them ith a partnership+ and theproprietors ner/ous about personal liabilit* or corporation4 $iable unless court applies de actocorp4 ;eenses or proprietors:

%4 ;e actor corporationa4 Created hen

i4 5here is a rele/ant incorporation statutesii4 5he parties made good aith, colorable attempt to compl* ith itiii4 "ome exercise o corporation pri/ileges

b4 ! so, treated as a corp or all purposes except in action b* state . being de acto asgood as being de ure

c4 E1: incorporators drat perect articles and mail to ;ept o "tate4 $ost in mail, but the*don3t 9no it4 !ncorporators acting in good aith execute business 74

i4 5he* are personall* liable on the 7 until the court applies de actor corporation

=4 Corporation b* Estoppel . one dealing ith business as a corporation ma* be stopped romden*ing the business3s corporate status4 ?a* be used to pre/ent comp rom a/oidingobligation b* asserting its on lac9 o corp ormation

a4 "top the plainti< rom suing the corporation as indi/iduals . the plainti< dealt ith thecorporation as a corporation, and can3t later act as though it asn3t a corporation

+,(AS not o'ten teste/0

Adoption o b*las not a condition precedent to orming corporation but nearl* e/er* corp

has themo 5he* are or internal go/ernance )meeting times, methods o notice, etc+

Can be adopted b* the #oard or the !ncorporators

Can be amended or repealed b* the "hareholders

o #oard can onl* do so i the b*las allos

! b*las con@ict ith articles, the articles control4

o #*las are internal, articles are fled ith a "tate agenc*4


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o #*las are binding on directors and o-cers but not outsiders, because ust internal

PRE-INCORPORATION CONTRACTS -- #ost teste/ topic

Promoter . person acting on behal o corporation not *et ormed

o ?ight enter into 7 on behal o not6*et ormed corporation

$iabilit* o the corporation . a corp is not liable on pre6incorporation contracts until it adopts

the contracto E1: n Ban %, Promoter leases business and signs lease as R Cars, !nc4 n Feb =,

corp is signed4 !s corp liableD es, i it adopted the contract

Adoption o Contract

o Express . board o director action adopting the contract

o !mplied . i corporation accepts a beneft o the contract )based on conduct+

$iabilit* o promoter . unless 7 sa*s otherise, promoter remains liable until there is a

no/ationo (o/ation: agreement o the promoter, the corporation, and other contracting part*

that corporation ill replace the promoter under the contract

o E1: 8ill P be liable on lease i R Cars, !nc4 isn3t ormedD

es4 5his is hea/il* tested area

o E1: 8ill P be liable on lea/e i R Cars is ormed and adopts the leaseD

es, liable until (2A5!(4

"o both the corporation and the promoter ould be liable

FOREIGN CORPORATION rarel& teste/0

Foreign corporations are an* hich are incorporated an*here other than PA4 ?ust quali*

pa* ees in PA

Transacting business means regular course o intrastate )not interstate+ business acti/it*4

o (ot ust occasional or sporadic acti/it*, and not simpl* oning propert* in PA

Foreign corps quali* b* getting certifcate o authorit* rom ;ept o "tate

o Applies b* gi/ing ino rom articles, pro/ing good standing in home state

o ?ust ha/e registered agent in PA

! oreign corp transacts business ithout quali*ing, to things happen:

o Ci/il fne

o Cannot sue intestate )but it can be sued and deend+

Goe/er, can3t e/en fle countersuit until qualifed

nce it pa*s bac9 fnes and ees, it can sue

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FACT PATTERN 2 3 ISS4ANCE OF STOC5 "er& rarel& teste/0

Issance: occrs 6!en corporation sells or tra/es its o6n stoc74 8a* to raise capital

S%scriptions: ritten o


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FACT PATTERN 9 3 )IRECTORS AN) OFFICERSStattor& Reire#ents - )irectors

(umber: one or more adult natural human peopleo ! articles silent about number, there are )can ha/e less, but articles must state so+

"election: initial directors can be named in articles or selected b* incorporators4

o

5hereater, elected b* shareholders at annual meetingo )5he entire board is elected each *ear unless there is a IclassifedJ board, hich is

di/ided b* %K= s or %Ks, ith hal )or one third+ elected each *ear terms cannotexceed H *ears+

"hareholders can remo/e directors beore term expires ith or ithout cause

o #ut i classifed #oard, shareholders can onl* remo/e ith cause

#oard can remo/e a director but onl* or cause4

o ! or mental incapacit*, must ha/e udicial declaration

o 2acanc* on #oard is generall* chosen b* maorit* /ote o remaining directors

#oard action . to a*s to acto 0nanimous ritten consent )including email+ to act ithout meeting, or

o ?eeting )held an*a*+ that satisfes quorum and /oting requirements

o ;irectors cannot agree to act through indi/idual con/ersations . it is /oid unless ratifed

b* /alid act Ex: the* all agree /erball* to do something4 0nless it is ritten, it is /oid

o Conerence calls counts as meeting, email counts as riting i printed and let in fle

(otice . method o hich is generall* set in b*las

o (ot required or regular meetings

o Required or special meetings, unless b*las sa* otherise )requirement is M da*sritten notice+

o Failure to gi/e notice can be ai/ed in riting or b* attending ithout obection

Prox* 2oting . no proxies or directors4 (eed directors3 independent udgment

Quorum or ;irectors3 ?eeting . must ha/e maorit* o all directors present )or di


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submit undamental corporate change to "G

Exa# !int: set p 'acts s!o6in8 no #eetin8$ %t t!at /irector !as entere/ intoextraor/inar& 5 6it! anot!er entit& on corporation;s %e!al'$ eit!er on !is o6n$ or 6it!t!e accor/*appro"al o' so#e or all /irectors 6!o 6ere calle/ in/i"i/all&. )IRECTOR)OES NOT


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to +oar/ or S


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o 2er* limited deense4 ;on3t allo a corporation to get out o a 7 ust because it3s

outside the stated purpose

!mproper distributions

8hich directors are liable or hatD

o >eneral Rule: director presumed to ha/e concurred ith #oard action unless dissent is

noted in riting !n the minutes

!n riting to corporate secretar* at meeting

!n riting to corporate secretar* ater meeting

o Exceptions:

Absent directors not liable

WWW>ood aith reliance on

#oo9 /alue o asset, or

Financial statements b* important parties, or

pinion o an EE, o-cer, proessional

OFFICERS o6e sa#e /ties o' care an/ lo&alt& as /irectors0

"tatus: o-cers are agents o corporation4 Can bind corp i the* ha/e authorit* to do so4

President has inherent authorit* to bind the corporation to a contract in the ordinar* court obusiness4 President also has actual authorit* gi/en her b* board and certifed b* secretar*

o ?ust ha/e a president, secretar*, and treasurer Ior persons ho act as suchJ

o Can also ha/e others4 ne person can hold multiple o-cers at once

"election and remo/al o o-cers

o "elects, monitors, and remo/es o-cers . the #oard

o 5he* also set o-cer compensation )beore or ater ser/ices rendered+

#oard also sets reasonable compensation or itsel, but usuall* beore ser/ices

renderedo #oard can gi/e option to bu* corporation3s stoc9 as proper compensation or o-cer

o ! sued or breach o 7 ater fring, plainti< can get L but ne/er ob bac9

Important: shareholders hire and re directors, but directors hire and re ocers.

Shareholders generall !" #"$ hire and re ocers

S!are!ol/ers !a"e no po6er to rn /a&-t-/a& acti"ities$ t!at po6er is "este/ in

+oar/ o' )irectors$ an/ S< !a"e po6er to elect t!e %oar/. +4T: i' t!ere arerelati"el& 'e6 s!are!ol/ers 9B or 'e6er0 t!e corporation can %e consi/ere/ aclose corporation$ an/ S< can 8enerall& rn a close corporation as t!e& 6ol/rn a partners!ip as lon8 as it /oesn;t pre>/ice p%lic$ cre/itors$ or #inorit&

s!are!ol/ers "arbanes6xle* Act )ederal+ generall* orbids loans to executi/es in large, public

corporations4o Requires the corp3s board to establish audit committee o/ersee or9 o registered

public accounting frmo CE and CFs must certi* accurac*

In/e#ni@cation o' )irectors an/ Ocers

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Person sued in her capacit* as o-cer or director ho has incurred costs, and ma*be

fnesKudgmentKsettlement see9s reimbursement rom corporationo (o indemnifcation is alloed hen she as held liable to the corporation

o ?andator* indemnifcation is required to the extent she ins on the merits or otherise

;oesn3t ha/e to in on E2ER claim to quali* or mandator* indemnifcation .

ust the one)s+ ono Permissi/e indemnifcation . corporation ma* indemni* hen mandator* or prohibited

situations don3t appl*4 For instance: settlement o case

?ust sho she acted in good aith and reasonabl* belie/ed her actions ere incorp3s best interest

;etermined b* disinterested directors, independent legal counsel in

ritten opinion, or "G

o 5GER8!"E:

Courts can order indemnifcation i ustifed in /ie o all circumstances4

8ould be or expenses and attorne*3s ees, onl* . not or a udgment

Corps can ad/ance litigation expenses )including attorne* ees+ as long as she

agrees to repa* them i later determined she is ineligible or indemnifcation Articles can pro/ide or limitation or elimination o director liabilit* or damages,

but not or breach o dut* o lo*alt*, rec9less or intentional misconduct, orrongul personal beneft

Corps can purchase liabilit* insurance to indemni* o-cers or directors

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FACT PATTERN D 3 S


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Classic Fact Pattern 3 Alter E8o I/entit& o' Interests0

E1: 1 are shareholders o Corp4 1 is also CE and commingles personal and corporate

unds, uses corp car as on, and uses corp credit card or personal things4 Can creditor ocorp ho has been unable to collect it rom corp collect rom either 1 or D

o "tart ith general rule )shareholders not liable or actsKdebts o corp+

o 5hen gi/e PC2 standard

o 5hen sa*, Icourt ?!>G5 PC2 i 13s ailure to respect separate corp entit* harmed

creditors4 "lopp* administration is not enough to PC2 but there is a strong argumentor it hereJ

o 5hen ma9e the argument

;id shareholder abuse corpD

es, treated assets as on

!t is unair to limit liabilit*D

Arguabl* *es4

ould not be aeneral Rule: shareholders not liable or corp obligations

o PC2 standard

o


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! shareholder loses deri/ati/e suits

"G cannot reco/er costs and ees

"G is liable to deendant he sued or ;3s costs and ees i " sued ithout reasonable cause

or in bad aith

ther shareholders cannot later due same deendants or same transaction . res udicata

"ix Requirements or bringing shareholder deri/ati/e suito "toc9 nership 6person bringing suit must ha/e oned stoc9 at time claim arose or ha/e

gotten it b* operation o la rom someone ho did )di/orce, inheritance+4 ?ust ha/e onstoc9 throughout litigation

o ?ust airl* and adequatel* represent interests o shareholders

o ?ust ma9e ritten demand on directors that corporation bring suit

;emand excused onl* i ould be utile to ma9e demand

5his means P$ ma9es specifc shoing that irreparable inur* to corp ould

result i demand made

r i directors ould be in/ol/ed in the case

o Plainti< must plead ith particularit* her e


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A prox* is

A riting )including ax or email+

"igned b* record shareholder )email treated as such+

;irected to secretar* o corp

Authorizing another to /ote the shares

2alid prox* is good or *ears unless it sa*s otherise

A prox* can be re/o9ed hen notice is gi/en to secretar* in riting or b*

electronic transmission

Can be re/o9ed e/en i the prox* states it3s irre/ocable

o !rre/ocable Prox*: onl* a* to ha/e one is i it is a Iprox* couples ith an interestJ

hich requires 5hat the prox* sa*s it3s irre/ocable, and

Prox*holder has some interest in the shares other than /oting

E1: " sells # shares ater record date but beore meeting4 " gi/es #

irre/ocable prox*4 " cannot re/o9e because this prox* is coupled ith aninterest . prox* onsthe shares

2oting trusts and /oting agreements )hen shareholders ith e shares oin together in bloc9

/oting+o 2oting 5rusts

Requirements or /oting trusts:

8ritten agreement controlling ho shares ill be /oted

Cop* to corporation

5ranser legal titles o shares to /oting trustee

riginal shareholders recei/e trust certifcates, retain all s6holder rights except

/oting (o time limit, but trust la might

% *ear limit on /oting trusts or ban9s, though

o 2oting Agreement )IpoolingJ+

Requirements or 2oting Agreements

"hareholders can enter into them

A contract is required

5he* are specifcall* enorceable

8GERE ; 5GE "GAREG$;ER" 25E D

5o a*s shareholder can ta9e /alid corporate act File ith corp unanimous ritten consent o holder o all /oting shares to act Kout meeting

) email print out o9+ A meeting that satisfes quorum and /oting rules

5o t*pes o meetings

Annual meeting: unless articles sa* otherise, must happen4

o ;ate usuall* in b*las

o ! not held ithin N months o that date, shareholder can call the meeting

o Elect directors at annual meeting

"pecial meeting . can be called b*

o 5he #oard

o Golders o at least =O o /oting shares, or

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o "omeone else as pro/ided in articles

?eetings can be on internet as long as people can hear or read and /ote

-cer must preside o/er meeting

"hareholders cannot call a special meeting or purpose o remo/ing o-cer . that is done b*#oard

(otice Requirements: ritten )includes axKemail printout+ to e/er* "G entitled to /ote, or allmeetings Contents o notice: must ala*s sa* hen and here4 Also states purpose o meeting

because hate/er is stated as the purpose is the onl* thing the meeting can co/er ! ail to gi/e proper notice, then action ta9en at meeting is /oid unless those not sent notice

ai/e the notice deect4 8ai/er happens i

Express . in riting and signed an* time, or

!mplied . the* attend meeting ithout obection

G8 ; "GAREG$;ER" 25ED

?ust be quorum represented at meeting4

Quorum determined b* number o shares represented, not number o shareholders

>enerall* quorum requires maorit* o outstanding shares

o E1: 1 Corp has %=, shares outstanding and U shareholders4

A quorum is N,% shares

Quorum not lost i people lea/e meeting

I' or# reire#ent is #et$ action reires #a>orit& o' shares actuall cast on

the particular issueo (ot necessaril* maorit* o all shares present

E1: 1 Corp has %=, shares outstanding4 N=, shares represented at

meeting4 nl* M, shares /ote on a particular proposal4

At least =M,% ?0"5 /ote or the proposal to be accepted . maorit* o

/otes

Cumulati/e 2oting . de/ice to gi/e shareholders a better chance o electing someone to

#oardo A/ailable onl* hen /oting or directors

o ?ultiple number o shares times number o directors to be elected

E1: ou on % shares in C Corp hich has & directorships open or election4

ant (; to be director4 ! can cast & /otes or him )% shares times &directorship spots+

o ! articles are silent as to hether shareholders can /ote cumulati/el*, the* can . onl*

can3t i the articles ta9e aa* the poer to do so

Stoc7 Trans'er Restrictions can %e esta%lis!e/ %& articles$ %&la6$ or s!are!ol/era8ree#ent0

Free transerabilit* o onership interest . can sell or gi/e stoc9 aa*

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! need to restrict, courts ill uphold restriction i reasonable under circumstances )no

undue restraint+o Right o frst reusal is o9a* i corp o


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Participating means paid again, so =, gets paid frst )preerred+ and

againo =, times L= X LH,

o $ea/es LN, di/ided b* %=, shares X L each

%, shares o common and =, shares o L= preerred that is cumulati/e

)and no di/idends paid in prior *ears+

Cumulati/e means add them up . cum di/idends accrue *ear to *ear

o Corp oes them *ears, plus this *ear hen di/idend declared "o H *ears orth o L= preerence

H *ears times L= X L'Kshare each

":

o =, shares times L' X L%N, paid frst )preerred+

o 5hen common 6 L=4HKshare

$imitations on an* distribution

Corps can ma9e distributions e/en i lost L last *ear, but can3t i insol/ent or distribution

ould ma9e it insol/ent, defned as:o 0nable to meet debts as the* are due )equit* test+, or

o 5otal assets are less than total liabilities )including preerential liquidation rights i

corporation dissol/es toda*+

;irectors personall* liable or unlaul distributions made intentionall* or in breach o care

o ;irector /otes or distribution hile ithholding rele/ant ino that ould

demonstrate it3s unlaul

"hareholders are onl* liable i 9ne it as unlaul hen the* recei/ed it

FACT PATTERN B 3 F4N)AMENTA( CORPORATE Cenerall*, must noti* PA ;ept o "tate

8atch or possibilit* o dissenting shareholder right o appraisal )"G3s right to orce corp to

bu* her shares Y F2+o 5he "G has this i the corporation is merging, consolidating, transerring all assets,

or being acquired in a share exchange

( right o appraisal i listed on a national exchange or has more than = shareholders

)because "G can sell share on mar9et and doesn3t need a right o appraisal+

! right o appraisal, shareholder perects it b*:

#eore "G /ote, fle corp ritten notice o obection and intent to demand pa*ment

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Abstain or /ote against proposed change, and

8ithin da*s ater notice that change as appro/ed, ma9e ritten demand to be bought

out

! the* cannot agree o air /alue, corp petitions court to determine air /alue

A#en/#ent o' Articles

#oard o director action )or petition b* at least %O o shares+ and notice to shareholders

"hareholder appro/al . at least maorit* o shares that /oted )H entitled, attend,=H /ote, need %=%+

! appro/ed, fle ith PA ;ept o "tate

5here is no right o appraisal or dissenting shareholders

Mer8ers or Consoli/ationsWWW

#oard o director action or both corps, A(; notice to shareholders

"hareholders appro/al, maorit* o shares that /ote

(o "G appro/al required i an 'O or more oned subsidiar* is merged into parent corp .

short orm merger

! appro/ed, fle articles o merger or consolidation ith PA ;ept o "tate

;!""E(5!(> "GAREG$;ER R!>G5 F APPRA!"A$ . exists or dissenting "G o both

companieso !n short6orm merger, right exists onl* or dissenting shareholders o subsidiar*

"uccessor liabilit* . sur/i/ing compan* succeeds to all rights and liabilities o constituent

companies

Trans'er o' All or S%stantiall& All o' Assets not in or/inar& corse o' %siness ors!are exc!an8e one corp acires stoc7 o' anot!er0

Fundamental corporate changes or the selling corporation onl*4

!t is not a transer o substantiall* all assets i the seller retains at least =MO o its assets,and at least =MO o all re/enue rom continuing operations

Requires:

o #oard o ;irector action )both corps+, and

o Appro/al b* transerring corp3s shareholders

%= shares o " Corp /ote on issue4 At least N% maorit* must appro/e

sale No "ote is reire/ 'ro# %&er;s s!are!ol/ers 3 onl& c!an8e 'or t!e

seller$ not %&er

;issenting shareholders ha/e right o appraisal or the transerring corp onl*4 )(ot bu*er,

again+

!n share exchange, transerring corporation fles articles o exchange ith PA ;ept o"tate4

o (o fling required or transer o assets

WWW >enerall*, bu*ing corp not liable or liabilities o other selling corp unless deal pro/idesotherise or unless compan* purchasing assets is merel* a continuation o the sellingcompan*, or i the transaction is raudulent4 )5his is because selling corp still exists so canstill be sued b* creditors+

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)issoltion

2oluntar* . board o directors, notice to shareholders, and appro/al b* maorit* o shares

/oting on issue

!n/oluntar* . court order

o S!are!ol/er or /irector can petition %ecase o' 'ra/$ ille8al oroppressi"e acts %& /irectors0$ 6aste o' assets$ or /ea/loc7 %& /irectorst!at !ar#s co#pan&

E/en i dissolution not arranted, court can appoint one or more custodians

to run corpo Creditor can petition or dissolution because corp is insol/ent and creditors has

unsatisfed udgment against corp, or corp admits debt in riting

Remains in existence, but onl* or inding up )liquidation+ to

o >ather assets

o Con/ert to cash

o Pa* creditors

o ;istribute remaining to shareholders

Ater ind up, president and secretar* execute /erifed articles o dissolution ith PA ;ept

"tate

FACT PATTERN 3 FE)ERA( SEC4RITIES (A

Secrities are In"est#ents

;ebt . in/estor lends capital to corp to be repaid

o "ecured b* corporate assets . mortgage bond

o 0nsecured . debenture

Equit* . in/estor bu*s stoc9 and has onership interest in corp4 Gas /arious rights

Rle 1%-B

Federal la that prohibits raud and misrepresentation )or nondisclosure+ in connection ithpurchase or sale o an* securit* )debt or equit*+

o !nstrumentalit* o interstate commerce )phone, mail+

o 5*pes o transactions

?isrepresenting material ino

5rading on material inside ino

"ee more details in PA5 outline, page =

5ipping )passing along material inside ino+

o ?aterialit* . misrepresentation or omission must concern Imaterial actJ

o Possible plainti


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o Could be b* ma9ing a git or enhancing reputation, or other benefts

5ippeeZtrades on tip and 9ne or should ha/e 9non that ino as

improperl* passed "omeone ho o/erhears a con/ersation is not a tipper

! there is no tipper, there is no tippee

o "cienter4 ; must ha/e an intent to decei/e, manipulate, deraud4 Rec9lessness ma*

be enough

o Reliance4 "aid to be separate element but is presumed in public misrepresentation

clases

Section 1+ 3 ai#e/ at speclation %& /irectors$ ocers$ an/ 1 s!are!ol/ers

"trict liabilit*4

Federal la that pro/ides or reco/er* b* the corporation )so it could be a deri/ati/e

suit+ o IproftsJ gained b* certain insiders rom bu*ing and selling compan*3s stoc9o #ad or mar9et confdence to ha/e these insiders doing this stu


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Documents

Outline - CORPORATIONS - Reviewed (2)