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corp formation requirements
- signs & files the articles of incorprtation with the state.
- article must include:
- 1. authorized shares - max number of shares the corp is authorized to issue. corp can issue less but not more.
- 2. purpose - general purpose and perpetual duration presumed. (if corp engages in a purpose not specified, it is an ultra vires activity. State an enjoin the UV act; corp can sue (own officers can sue for losses caused by the UV act)
- A PAIN
- A = authorized shares
- P = purpose
- A = agent (registered agent is corp's official legal representative)
- I = Incorporators
- N = name of corporation (must contain some indication of corporation status)
piercing the corporate veil
- gen rule - a shareholder is not liable for the debts of the corp. except -
- piercing the corporate veil to avoid fraud or unfairness.
- 1. failure to observe sufficient corporate formalities, or
- 2. undercapitalization - failure to maintain sufficient funds to cover foreseeable liabilities
issuance of stock
- par value - minimum issuance price; "no par" = no minimum inssurance price.
- can acquire property with par value stock.
- treasury stock - stock previously issued the reacquired by corp, then to be re-sold. it is no par stock.
- if stock issued for less than par value:
- 1. can recover the difference from directors, OR
- 2. can recover the difference from buyers
right of an existing shareholder to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock for cash.
director / officer liability
- 1. dir have a duty of manage the corp
- 2. in managing, the directors are protected from liability by the Business Jusgment Rule (presumption that the directors manage the corp in good faith and in the best interest of the corp and its shareholders. so not liable for innocent mistakes of business judgment)
- 3. dir are fiduciaries who owe the corp duties of care (must act with prudence) and loyalty (no self-dealing, usurping corporate opportunities, ratification. (officers owe same duties)
- Ratification - dir may defend a claim by obtaining independent ratification through (a) majority vote of ind directors, (b) majority vote of a committee of at least 2 ind directors, (c) majority vote of shares held by ind shareholders.
shareholder derivative suits
- shareholding is suing to enforce the corp's cause of action.
- requirements for bringing a shareholder derivative suit:
- 1. contemporaneous stock ownership (must own at least 1 share when claim arose)
- 2. must generally make demand on directors that they cause their own corp to bring suit.
- who has right to vote at an upcoming meeting where voting occurs?
- only owner on the record date has right to vote the shares. record date = voter eligibility cut-off date set by board or any day up to 70 before the meeting.
shareholder voting by proxy
- a proxy is a ...
- 1. writing
- 2. signed by record shareholder
- 3. directed to secretary of corporation
- 4. authorized another to vote the shares
- 5. valid for only 11 months
quorum (shareholder meeting)
- determination of a quorum focuses on the number of shares represented, not the number of shareholders. a quorum requires a majority of outstanding shares when the meeting begins, unless otherwise provided in Articles.
- If quorum is presented, action is approved if votes cast in favor of the proposal exceed the votes against.
cumulative voting for directors
- X ownes 1000 shares. under traditional voting, X can case 1000 vote for Y.
- Under cumulative voting, X can multiply the number of shares by the number of directors to be elected. So 9 directors. X can ten use 9000 votes for Y.
- * no cumulative voting rights unless expressly granted in the articles.
dividens - priority of distribution
- * common stock - pay equally, paid last.
- * prefered - paid 1st. leftover to be divided equally for common stock.
- * preferred participating - paid 1st as prefered but then gets paid 2nd time as part of common stock.
- * preferred cumulative - adds up dividends from previous unpaid years. so no dividens in 3 prior years, then preferred cumulative gets 4 years worth. rest goes to common shares.
shareholder agreement to eliminate corporate formalities (closely-held corporations)
- require: (1) unanimous shareholder election in articles, bylaws, file agreement. (2) usually a reasonable share transfer restriction (no public trading)
- consequences: (1) no piercing the corporate veil even if you fail to observe formalities. (2) taxes as if you are a partnership & not a corp.
- licenced professionals - lawyers, accountants ...
- 1. organizers file Articles with name "Professional Corporation" PC
- 2. shareholders must be licensed professionals.
- 3. the corporation may practice only one designated profession.
- 1. the professionals are liable personally for their own malpractice.
- 2. not liable personally for each other's malpractice or the obligations of the corporation itself.
fundamental corporate change
- recognized fundamental corp changes:
- merger, consolidation, dissolution
- fundamental amendment of the Articles; Sale of substantiall all of the corp's assets.
- Procedural Steps -
- 1. resolution by Board at a valid meeting.
- 2. notice of special meeting
- 3. approved by majority of all shares entitled to vote, and by majority of each voting group that is adversely effected by the change.
fed securities law
anti-fraud Sec 10(b)
- essential elements of a 10(b) action - P needs to prove there was a misrepresentation of a material fact using an instrumentality in interstate commerce in connection with the purchase or sale of a security.
- a. scienter (intent to decieve)
- b. deception, misrepresentation (liar, insider trading)
- c. in connection with the actual purchase or sale of securities.
- * In addition, in a private action for damages, investors must also prove: reliance, loss causation.
fed securities law
- applies when ...
- 1. big corp - list on national exchange, or at least 500 shareholders and 10 mill in assets.
- 2. big shot defendant - officer, director, more than 10% shareholder
- 3. type of transaction - No buying and selling stock (short-swing) within a single 6 month period.
- * when 16(b) applies - all progits from such short-swing trading are recoverable by the corp.
Sarbanes Oxley Act
- reporting corps
- 1. CEO and CFO must cerfity that based on the Officer's knowledge, reports filed with the SEC do not contain falsehoods.
- 2. willfully certifying a false report could bring $5 million fine and 20 years.
- 3. if flase report have to be corrected and restated, the corp may recover officer's benefits made from trading the company's securities within 12 months after the report was filed, and may recover incentive-based compensation received during that period.
- 4. corporations may also recover any benefits made by officers from trading corporation's stock during "black out" periods when employees are prohibited from trading in their retirement paln's securities.
SEC Rule 16(b)
Under SEC Rule 16(b), any profit earned by a director,
- officer, or shareholder holding 10% or more of the outstanding shares of the
- corporation from any purchase and sale, or sale and purchase, in a period of
- less than six months must be returned to the corporation.
SEC Rule 10(b)-5
Under Rule 10b-5, it is unlawful for any person, directly or
- indirectly, by the use of any means of interstate commerce to 1) employ any
- device, scheme, or artifice to defraud, 20 make any untrue statement of a
- material fact or omit to state a material fact, or 3) engage in any act,
- practice, or course of business that would operate as a fraud in connection
- with the purchase or sale of any security.
under the misappropriation doctrine, the goverment can prosecute a person under 10b-5 for trading on market information in breach of a duty of trust and confidence owed to the source of the information.
derivative suit recovery, settlement and expenses
in a derivative suit, the recovery of any losses will go to the corporation, although the ones who borught the suit may recover reasonable expenses of litigation.