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pre-incorporation: a promoter acts on behalf of corporation not yet formed. what does corporation have to do to become liable?
- 1) express board resolution
- 2) implied ratification through a) knowledge and b) acceptance of benefits
is a promoter liable for pre-incorporation contracts?
yes, unless there is a novation releasing him from liability
does promoter owe fiduciary duties to corporation?
What if a director/officer does an ultra vires act?
- 1) ultra vires act can be enjoined
- 2) corporation can recover losses from the D/O
what is a de facto corporation?
- 1) corporation is not validly formed
- 2) organizers made a good faith, colorable attempt to comply with corporate formalities
- 3) no knowledge of the lack of corporate status
what is piercing the corporate veil?
- when shareholders are personally liable for corporate debts
- results in joint and several liability!
when is the corporate veil pierced?
- 1) alter ego: shareholders treat the assets of the corporation as their own, fail to observe sufficient corporate formalities
- 2) fraud: avoiding personal liability through corporate formation operates as a fraud on creditors
- 3) undercapitalization: failure to maintain sufficient funds to cover foreseeable liabilities
- *must be some basic injustice that equity requires that the individual shareholders be held responsible for the damage they caused
what are requirements for effective board action?
- 1) board meeting [quorum, majority vote of those present], or
- 2) unanimous written consents
- 1) duty of care
- 2) duty of loyalty
- 3) duty not to waste corporate assets
- 4) duty to disclose (material corporate information to other members of the board)
duty of care
- directors must act in:
- 1) good faith
- 2) best interest of the corporation
- 3) due care of an ordinarily prudent person
What is the BJR?
presumption that directors manage the corporation in good faith and in the best interests of the corporation and its shareholders
duty of loyalty
- director may not receive an unfair benefit to the detriment of the corporation or shareholders unless there has been:
- 1) material disclosure
- 2) independent ratification
self-dealing/interested director transaction?
- director who receives an unfair benefit to herself (or relative, or another business of hers) in a transaction with her own corporation
- 1) ok if fair, or if independent ratification after full disclosure
- 2) remedy is recission
corporate opporutnity doctrine
- director receives an unfair benefit by usurping an opportunity which the corporation would have pursued
- 1) remedies are damages, constructive trust, or corporation gets the opportunity at cost
what is independent ratification?
- 1) majority vote of independent directors
- 2) majority vote of a committee of at least 2 independent directors
- 3) majority vote of independent shareholders
requirements for shareholder derivative suit?
- 1) contemporaneous stock ownership - when claim arose, and throughout the litigation
- 2) demand must be made (and rejected), or excused because futile
director indemnification - when?
- 1) mandatory indemnification if director is successful in defending the suit
- if director loses the suit, then indemnification depends on the nature of the suit
- 2) if director loses a derivative suit for wrongdoing, indemnification generally not allowed
- 3) suit is settled, some states allow indemnification
shareholder pooling agreements
- written agreement to vote shares as required in the agmt
- 1) binding and enforceable
- 2) no time limit
- formal written agreement delgating voting power to a trustee
- 1) on file
- 2) expires in 10 years
stock transfer restriction agreements - what requirements?
must be reasonable
what is valid consideration for stock?
- 1) stock must be suppored by consideration
- 2) exchange of property for stock, the board must assess the adequacy of the consideration (duty of care & loyalty)
- 3) future services are not consideration
- 4) promissory notes at CL were not consideration; modernly are sufficient consideration
controlling shareholder's duties
- owe fiduciary duties (care/loyalty) to minority shareholders.
- 1) refrain from obtaining a special advantage
- 2) refrain from causing corporation to prejudice minority shreholders
- 3) must refrain from selling corporation to a looter, unless reasonable measures were taken to investigate
mergers - what is required?
- 1) directors and shareholders entitled to vote of BOTH corporations must approve
- 2) appraisal rights of dissenting shareholder: 1) written objection before mtg, 2) vote against merger, 3) file written claim
sale of assets - what is required?
- if outside the ordinary course of business,
- 1) majority of directors and shareholders entitled to vote must approve
- 2) sale of assets may be a de facto merger, may trigger possible recission or appraisal rights
- 3) purchasing corporation may be liable for debts and liabilities
dissolution and liquidation - what is required to enter into?
majority of directors and shareholders entitled to vote must approve
one person sells stock to another. what remedies?
- 1) tort of fraud or misrepresentation
- 2) Rule 10b5 federal securities action
short-swing profit rule (Rule 16b)
- 1) large corporation [national exchange, or 500+ sh & $10MM assets)
- 2) Officer, director, or 10% shareholder
- 3) purchase and sale of stock within 6 month period
- *strict liability!
10b5 private plaintiff action [against corporation, against another shareholder]
- private plaintiff must show:
- 1) interstate commerce
- 2) fraudulent conduct (scienter - intent to deceive; materiality; misrepresentation or failure to disclose that breaches fiduciary duty)
- 3) reliance
- 4) in connection with purchase or sale
- 5) damages
What is an "insider" for purposes of 10b-5?
someone who owes a fiduciary duty not to disclose material, nonpublic information
- an insider breaches 10b5 if by trading he breaches a duty of trust and confidence owed to:
- 1) issuer
- 2) shareholders of the issuer
- 3) another person who is the source of the material nonpublic information (misappropriation)
- 1) insider
- 2) bought or sold stock via interstate commerce
- 3) based on nonpublic information
- insider gives a tip of material inside information to someone else who trades on the basis of the inside information, tipper can be held liable under 10b-5 if:
- 1) insider
- 2) improper purpose
- 3) personal gain (reputation or monetary)
- 10b-5 violation
- 1) tipper breached
- 2) tippee knew that tipper was breaching
- 3) tippee bought or sold stock via interstate commerce
misappropriation theory for stock trades?
- brought by government against any trader who:
- 1) misappropriated information from any source
- 2) breach of duty of trust and confidence owed to the source of information
- *if you find tippee is not liable bc tipper not liable, then raise misappropriation theory!