Barbri BA

6 type of fact patterns

1. Organization of a corporations
2. Issuance of stock
3. Directors and officers
4. Shareholders
5. Fundamental corporate changes
6. Federal securities

What does it take to form a corporation?

PPA
People
- incorporator. Execute the articles and deliver to sec. of state.
- Can be a person or entity.
Paper - Art. of Incorporation
- K between shareholders and C.
- K between C and State.
Act

PEOPLE (PPA) Information in Articles of Incorp

a. NAMES and ADDRESSES
1) corporation, company, incorporated, or limited. Must have 1 of these 4.
2) Name and address of each incorporator.
3) Name and address of each initial director.
4) Name of registered agent and address of the registered office.
(Registered agent is the company's legal representative, so can receive service of process for the corporation.)

PAPER (PPA) Duration and Purpose

- If no statement on duration, we presume perpetual existence.
- MUST Have a statement of purpose
BEC:

PAPER (PPA) BEC.

What if the articles of Vance Refrigeration, Inc. say the corporation will "manufacture refrigeration machinery" and the corporation then goes into gold mining?

Doing this is an ULTRA VIRES activity (it's beyond the scope of the articles). At common law, any ULTRA VIRES contract could be voided as beyond the company's capacity. How do we handle ultra vires today? (\***EXAM\***)

1. Ultra Vires K's are valid as to Third Parties
2. Shareholders (S) can seek an injunction to stop an Ultra Vires act.
3. Corporation (C) itself can sue responsible managers for Ultra Vires losses.

Watch out of 'specific purposes' in the article--\>that means they are asking about ULTRA VIRES (\***EXAM**)

PAPER (PPA) Capital Structure. Must include in art of inc.?

Definitions:
\** 1. Authorized Stock: Max \# of shares C can sell
2. Outstanding Stock: Shares issued and not reacquired
3. Issued Stock: \# of shares the C actually sells.

Articles MUST INCLUDE: (a) authorized stock, (b) number of shares per class, and (c) information on voting rights and preferences of
each class.

ACT (PPA)

1. Deliver notarized articles Sec. of State and pay fees. If "accepted" by Sec. of State office, then: "Conclusive PROOF" OF VALID FORMATION. At that point, have a De Jure Corporation.

2. Board of Directors (Bd) then needs to hold the organizational meeting, where it selects
officers and adopts any bylaws.

Formation is Big.

Internal affairs of a corporation (e.g., roles and duties of directors, officers, and shareholders) are governed by?

the state law in which they are formed. True if they only do business in Iceland? YES.

State law governs INTERNAL affairs doctrine.

Cs as entities and Tax

A corporation is a separate legal person. It can sue and be sued, hold property, be a partner in a partnership, make charitable contributions, etc.

It is taxed on its profits

in addition, shareholders are taxed on distributions. So there's "double taxation."

Can avoid double taxation by?

Forming an S corp.

- An S Corporation has no more than 100 shareholders, all of whom are human and U.S. citizens or residents.
-There is one class of stock and
- It is not publicly traded.

Who is liable for what the corporation does?

Are the directors or officers liable for what the entity does? No

Are the shareholders (owners) liable for what the entity does? No
-This is LIMITED LIABILITY: meaning the S's generally can only lose the amount that they invested in the company.

WHO IS LIABLE? The corporation itself.

DEFACTO Cs. and Cs by Estoppel. BEC.

When would this come up?

The proprietors failed to form a de jure corporation, so they will be personally liable for what the business does (because it's just a partnership).

Under these doctrines, the business is treated as a corporation, so shareholders are not liable for what the business did.

\*** Anyone asserting either doctrine must be unaware of failure to form de jure corporation.\***

Defacto C Requirements

1. There is a relevant incorporation statute (there is!) but mention it.

2. The parties made a good faith, colorable attempt to comply with it. And
-i.e. maybe drafted articles and mailed but got lost in the mail.

3. Some exercise of corporate privileges (acting like we have a corporation).

If Defacto C doctrine applies:

....the business is treated as a corporation for all purposes EXCEPT in an action by the state. (Such an action would be quo warranto).

HYPO--

Incorporators put together the proper documents and mail them to the Secretary of State. Unbeknownst to them, the documents are lost in the mail. In the meantime, the business is being operated as a corporation, and enters a contract. Are the shareholders liable on the contract?

YES. Unless the court applies Defacto Corporation.

Corporation by Estoppel.

one who treats a business as a corporation may be estopped from denying that it is a corporation.

-It can also prevent the improperly-formed "corporation" from avoiding liability by saying it was not properly formed.

HYPO--
You do business with people who hold their business out as a corporation. They think it's a corporation. So do you. You write checks to the "corporation" and deal with it as a corporation. But there is no corporation. You sue the proprietors individually.

Under C by Estoppel doctrine, you cannot win. You are estopped to deny that the business was a corporation.

Corporation by estoppel applies only in what kinds of cases?

Contract NOT Tort.
Narrower doctrine than Defacto C doctrine.

Status of Defacto and Estoppel

Abolished in many states (MENTION THAT ON EXAM).
But if it applied, apply it.

BYLAWS: Adopt, Amend, Conflict

NOT RQ TO HAVE THEM

Who ADOPTS? The Bd at the org meeting.

Who AMENDS? Shareholders can amend. In some states the Bd can too.

If in CONFLICT with Articles, WHICH CONTROLS? The articles. they are a K with the state, way more important than Bylaws.

BEC. Pre-Incorporation Ks.

Promoter (person acting on behalf of a corporation NOT YET FORMED) enters into K before C is formed.
- Liability of the corporation. \*** The corporation is not liable on pre-incorporation contracts until it "ADOPTS" the contract.\***
a. Adoption here is functionally equivalent to ratification.
b. Adoption can be:
i. EXPRESS: board takes an action adopting K (Like resolution) or
ii. IMPLIED (if C accepts the benefit of the K)

Pre-Incorporation K's: When is PROMOTER liable?

The promoter is LIABLE on pre-incorporation K's until there is a NOVATION:

-An agreement of the promoter, the corp, and the other contracting party that the corp will replace the promoter under the K.

HYPO\---
On January 10, P, acting as a promoter for a corporation not yet formed, leases a building from Don Draper and signs the lease "Oscar de la Rental Cars, Inc." On February 20, Oscar de la Rental Cars, Inc. is formed.
Is C liable?
Is the promoter liable?

- Yes, if it adopted it. Adoption can be:
Express: Takes a Bd action adopting the K.
\***Implied\***: Arises if the C accepts the *benefit* of the K. HUGE.

Will P be liable on the lease if Oscar de la Rental Cars, Inc. is never formed? YES.

\*** Will P be liable on the lease if Oscar de la Rental Cars, Inc. is formed and adopts the lease? YES, P is liable until NOVATION. There is no novation here. The C is liable as well, but the Promoter is still liable.

FOREIGN CORPORATIONS

Foreign is one incorporated 'outside this state'

-Foreign corporations transacting business in this state must qualify and pay prescribed fees.
i. transacting business\= the regular course of intrastate (not interstate) business activity. Does not include occasional or sporadic sctivity in this state, and not simply owning property there.

-Foreign corps qualifies by?
-What happens if a foreign C transacts Biz without qualifying?

-Foreign corps qualifies by getting a certificate of auth from the secretary of state. It gives info from its articles and proves good standing in its home state. MUST have a registered agent in this state and pay fees too.

- There is a fine. Have to qualify before C can sue, BUT can be sued.

What is an issuance of stock?

C sells its own stock.

-Way for corporation to raise capital
-Rules APPLY ONLY when there is an issuance.

Family Guy sells 3,000 shares of XYZ Corp. stock. Do the "issuance" rules here in Fact Pattern 2 apply?

No. because it is family guy selling the shares of XYZ Corp and not XYZ Corp. Just applies to an issuance by corp.

Revocation of SUBSCRIPTIONS

HYPO--
On January 10, S signs a subscription, offering to buy 100 shares of C Corp., a corporation not yet formed. A week later, S changes his mind. Can S revoke?

SUBSCRIPTIONS are written offers to buy stock from corporation.

No, pre-incorporation subscriptions are irrevocable for 6 months.

Post- incorporation subscriptions revocable?

Yes, until acceptance.

At what point are the corporation and the subscriber obligated under a subscription agreement?

when the BOD accepts the offer.

Consideration - Form

ALWAYS PERMITTED:
(1) money (cash or check),
(2) tangible or intangible property, and
(3) services already performed for the corporation
*NV allows very broad use, also includes \*** Promissory Notes & Future Services. \***
*BOD Determines adequacy of consideration (conclusive when BOD acts w/out fraud)

Consideration - Amount

Par value: means minimum issuance price.

C Corp. is issuing 10,000 shares of $3 par stock. It must receive at least:
Could it get more?

$30,000,
YES

No par means?

"no minimum issuance price."

Board of directors sets a price.
NV does not require a min issuance price.

Treasury Stock

stock the company issued and then reacquired.
It is considered authorized but unissued, and the corporation can then resell it. If it does, the board sets any issuance price it wants.

-Say the corporation issues stock in exchange for property or past services. Who determines the value of the property or services?

The BOD.

Is their valuation conclusive?
-Yes if made in good faith.

PRE-EMPTIVE RIGHTS

Right of an existing S to maintain her percentage of ownership by buying stock whenever there is a new issuance of stock FOR MONEY

PRE-EMPTIVE RIGHTS
S owns 1,000 shares of C Corp. There are 5,000 shares outstanding. C Corp. is planning to issue an additional 3,000 shares. If S has pre-emptive rights, then S has?

the RIGHT to buy 600 shares.

In other words, S owned 20% of company pre-issuance, and pre-emptive right allows you to keep this ownership IF YOU WANT.

PRE-EMPTIVE RIGHTS

If the articles are silent, do we have preemptive rights?

NO.

PRE-EMPTIVE RIGHTS

BEC. Suppose the C Corp. articles provide for pre-emptive rights. You own 20 percent of the stock of C Corp. C Corp. issues stock to Peggy Olson to purchase property from Peggy. Do you have pre-emptive rights?

No. NOT AN ISSUANCE FOR MONEY. Must have been issued for money NOT property or any other thing.

STATUTORY REQUIREMENTS — DIRECTORS (adult natural person)

\***MOST TESTED**

1. Have to be adult natural person
2. NUMBER: one or more
3. ELECTION: Initial directors usually named in the articles. Thereafter, the shareholders elect at annual meeting (\***)
4. REMOVAL: Shareholders can remove directors before their terms expire - vote of a majority of the shares entitled to vote.
-On what bases? With or WITHOUT CAUSE.
-SH's hire and fire directors.
5. VACANCY: Maj of remaining directors will select who will serve for rest of term.
the SH's must select replacement.

DIRECTORS: How can the Board ACT?
BOD can only take an act in 2 ways.

1) *Unanimous* agreement in *writing*.
2) At a meeting (which has to satisfy the quorum and voting requirements).

What if directors agree to an act through individual conversations, without a meeting or unanimous written agreement?

Does a conference call count?

void unless ratified later by a valid act.

CONFERENCE CALL w/ SIMULTANEOUS COMMUNICATION DOES COUNT, YES.

NOTICE of MEETINGS
-Regular?
-Special?
-Unless?
-Note?

-Regular meetings: Notice is NOT required.
-Special Meetings: Notice IS REQUIRED. must state the time and place. In NV, must state the purpose for meeting or action taken does not count. Failure to give notice voids what happens at that meeting.
-UNLESS the directors not notified waive the notice defect in writing anytime OR by attending the meeting w/o objecting.
*NOTE: IF there is a board meeting, method for giving notice is usually set in the bylaws.

Can Directors give proxies?

NO, these are void as against public policy.

Quorum for Meetings of the Board (3)

1. Must have a majority of ALL directors to do business (unless a diff percentage is set in bylaws).
2. If quorum IS PRESENT at meeting, passing a resolution requires only a majority vote of THOSE PRESENT.
3. Quorum can be lost or broken if people leave. Once a quorum is no longer present, the board cannot take an act at that meeting.

9 directors. Need at least\____to have a qurorum. To have a majority vote you need

5,
3

Role of Directors

-Manage the business. Day to day.
-The board can delegate to a committee of one or more directors. BUT Committee CANNOT:
1. Fill vacancies on the board
2. Declare dividends
Committee can RECOMMEND but CANNOT DO IT.

Director DUTY OF CARE

Burden is on the plaintiff.
\***A director owes the Corporation a duty of Care. She must act in good faith and do what a prudent person would do with regard to her own business.\***

Director DUTY OF CARE. 2 ways to breach

1. Nonfeasance. (doing nothing): on EXAM, State definition of duty of care, then APPLY IT. A prudent person would attend meeting and do work. He is liable only if his breach **caused\** a loss to the C (MUST PROVE CAUSATION). Hard to prove causation.
2. Misfeasance. BOD does something AND it harms the C. Causation easy here. BJR only applies to misfeasance.

BJR Business Judgement Rule. (4)

A court will NOT second-guess a business decision IF at time made decision:
1. It was informed
2. It was made in GF.
3. It was made w/o conflicts of interest, AND
4. It had a Rational Basis.
*Prudent people do appropriate homework. \*** A director is not a guarantor of success. Looks at the facts. Did they analyze, deliberate?

Exculpation Rule in Nevada

-Automatically get exculpation right unless articles take them away
-Director or officer not individually liable to the corp, SH's, or creditors for damages as a result of any act or failure to act w/in his capacity as director or officer UNLESS
1. D's act or failure to act constituted a breach of his fiduciary duties AND
2. The breach also involved intentional misconduct, fraud, or a knowing violation of the law.

Duty of Loyalty \** 2 Magic Sentences**

burden on the Defendant. 2 magic sentences:

\*** A director owes the corporation a duty of loyalty. She must act in good faith and with a reasonable belief that what she does is in the corporation's best interest. \***

BJR doesn't apply to?

BJR doesn't apply to Duty of Loyalty because no conflicts of interest is a prerequisite to BJR.

RULE: BJR never applies when there is a conflict of Interest.

DEFINITION: any deal between the corporation and one of its directors (or a close relative of a director) or another business of the director's.

Interested Director Transaction Rule?

*STATE THE DUTY OF LOYALTY STANDARD--\> THEN...
Interested director transaction will be set aside (or the director will be liable in damages) UNLESS the director shows either:
(1) the deal was fair to the corporation when entered, OR
(2) her interest and the relevant facts were disclosed or known and the deal was approved by either of these:
(i) Majority of the disinterested directors, OR (ii) Majority of the disinterested shares.

Directors can set their own compensation as directors or officers, but it must be?

Reasonable and in good faith. If excessive, it is a waste of corporate assets and breach of the duty of loyalty.

Competing Ventures
-Rule?
-Remedy?

RULE: A director cannot compete with her corporation, a director is a fiduciary.

REMEDY: constructive trust on profits
i.e. if director goes into competition--\> then get this remedy.

What is a Corporate Opportunity?

Something the Corp has an interest or expectancy in, OR the D found out about it on company time or resources. In the C's business line.

Corporate Opportunity
-Director cannot usurp a corporate opportunity. The director can't take it until he?

1. tells the BD about it AND
2. waits for the board to reject the opportunity.

Corporate Opportunity
-Remedy?

REMEDY: director must sell it to the corporation at his cost if still has it OR if director sold at a profit, the corp gets the profit (constructive trust).

NO DEFENSE that company had financial inability to pay for opportunity.

Other State Law Bases of Director Liability

1. ULTRA VIRES ACTS--responsible officers and directors are liable for ultra vires losses.
2. Improper distributions
3. Improper loans EXCEPT if reasonably expected to benefit the corporation.
NOTE: Sarbanes Oxley Act: generally forbids loans to executives in large, publicly traded corps. Rqrs board to establish an audit committee and oversee work of registered public accounting firm. Chief executive and financial officers MUST certify accuracy and completeness of financial reports.

A director is PRESUMED to concur with board action unless her dissent or abstention is?

-Noted in writing in corporate records.
a. In writing means (1) in the minutes or (2) delivered in writing to the presiding officer at the meeting or (3) written dissent delivered to the corporation immediately after the meeting. So an oral dissent alone is not effective.
\-- Cannot dissent if you voted for the resolution at the meeting.

A director is PRESUMED to concur with board action but there are **2. Exceptions.

1. An absent director is not liable for stuff done at the meeting she missed.
2. A director is entitled to rely in GOOD FAITH on information (including financial information) presented by an officer, employee, or committee (of which the relying director was not a member), or professional reasonably believed competent. This is a defense to liability.

OFFICERS are \_________? Who owe???

Officers are agents--owe the same duties of care and loyalty as directors. BEcause agents, can bind the corporation for acts which they have authority (WATCH FOR AGENCY CROSS OVER Q on EXAM).
**The president generally has inherent authority to bind the corporation to contracts in the ordinary course of business.**

Traditionally, must have what officers?

president, secretary, and treasurer. Can have others.

Today, one person CAN hold multiple offices simultaneously.

Officers are selected and removed by the

BOARD (BD)

which also sets officers compensation.

NOTE: BD may be liable for damages if remove and there was an employment K.

Generally, then, shareholders do NOT?

Generally, then, shareholders do NOT hire and fire officers.
SH hire and fire directors.
BOD Hire and fire Officers.

INDEMNIFICATION OF DIRECTORS AND OFFICERS. 3 possible categories

-No indemification allowed IF?

D is held liable to the C or held to have received an improper personal benefit. Can NOT indemnify.

INDEMNIFICATION OF DIRECTORS AND OFFICERS. 3 possible categories

-C MUST indemnify (mandatory) IF?

If D is successful in defending, on the merits or otherwise. (note if case thrown out bc of SOL, this is "otherwise").

INDEMNIFICATION OF DIRECTORS AND OFFICERS. 3 possible categories

-C MAY indemnify (permissive) IF?

-Anything not in the above 2 categories. If the case is settled.
-She must show that she acted in good faith in the belief that she acted in the C's best interest. DOLoyalty.

-Who Determines Indemnification Eligibility?

Disinterested directors, disinterested shares, or independent legal counsel determines eligibility.

NOTE: DESPITE these rules, court where dir or off was sued can order reimbursement if it is justified in view of all the circumstances. If D held liable to corp, it is limited to costs and attorney's fees (cannot include judgment).

Articles can eliminate director liability to the corporation for...?

Throw these in every time.

damages, but not for intentional misconduct, usurping corporate opportunities, unlawful distributions, or improper personal benefit.

SPLIT AS TO IF APPLY TO OFFICERS TOO.

SHAREHOLDERS. Do they manage the C?

No, the BOD manages the corporation. HOWEVER, in certain \*** CLOSE \*** Corporations they can.

A Close Corporation is a Corp with?

1. Small number of SH's and
2. The stock is NOT publicly traded.

**EXAM: MOST WILL BE CLOSE CORPS\***

If the corporation's stock is not traded on a national exchange, shareholders can..?

How can they do this? (2)

-Eliminate the board and run the corporation directly. -EITHER BY:
a. In the articles and approved by all shareholders OR
b. By unanimous written shareholder agreement.
*EITHER WAY: agreement should be conspicuously noted on the front and back of the stock certificates.
*The managing SH's owe the duties of care and loyalty to the Corp.

What happens when a harmed minortiy SH in a Close C is oppressed? (2)

1. Probably a breach of fiduciary duty by the controlling shareholders (who have fiduciary duties in most JX's).

2. The Minority SH has no way out, they can't sell their stock becuase there is no market for stock in a close corp.

Licensed professionals, including lawyers, medical professionals, and CPAs, may incorporate as?

-A "professional corporation" or "professional association." The name must have one of those phrases or "P.C." or "P.A."
- The articles must state that the purpose is to practice in a particular profession.
-Directors, officers, and shareholders usually must be licensed professionals. The P.C. MAY employ non-professionals BUT NOT to render the professional services.
-Professionals ARE personally liable for their malpractice.
-Shareholders are generally not liable for corporate obligations or for other professionals' malpractice.
-Generally, the rules governing regular corporations apply to the P.C.

Generally SH's are not liable for the debts of a corp unless?

*the corp veil has been pierced
*If the veil has been pierced, individuals will be held jointly and severally liable for corp obligations.

Close Cs only

PCV Standard- Nevada courts will pierce the corp veil if the stockholder? (3)

-Acts as the alter ego of the corp.
-A stockholder acts as the alter ego of a corp if:
1. the corp is influenced and governed by the stockholder
2. there is such unity of interest and ownership that the corp and the stockholder are inseparable from each other
3. and adherence to the corp fiction of a separate entity would sanction fraud or promote manifest injustice
*Note: whether a stockholder acts as the alter ego of a corp must be determined by the court as a matter of law

3 Ways the Corporate Veil Can be Pierced?

1. Use of corporate assets- X commingles personal and corp funds

uses the corp car as his own

uses corp credit to pay for personal purchases

C corp fails to pay for bills.
2. Undercapitalization - failing to maintain sufficient funds to cover foreseeable liabilities
3. Failure to follow corporate formalities- fail to issue stock, fail to keep corp records, fail to hold meetings, fail to select officers, etc. (this factor alone is insufficient)

SHAREHOLDER DERIVATIVE SUITS (SHAREHOLDER AS PLAINTIFF)

In a derivative suit, a shareholder is suing to enforce the corporation's claim, not her own personal claim. It's a case in which the corporation is not pursuing its own claim, so a shareholder steps in the shoes of the corp to bring suit to responsible party (in other words, the board will not authorize a suit against the corp). ALWAYS ASK:

Could the C have brought this suit? If yes, probably a derivative suit.

SH derivative suits HYPO--

S, a shareholder of C Corp., sues the board of directors of C Corp. for usurping corporate opportunities. Is that a derivative suit?

YES—duty of loyalty (and care) are owed to corporation so corporation could have brought this suit for breach of duties owed to it.

SH derivative suits HYPO--

S sues board of directors of C Corp. for issuing new stock without honoring her preemptive rights. Is this a derivative suit?

No. This is a SH personal claim. Corporation not hurt, so couldn't have brought suit.

To bring a derivative suit you must have 3 things:

1. stock ownership when the claim arose AND throughout the suit.
2. Fairly and adequately represent the interests of the corp & SH's.
3. Must make written demand on corporation (usually that means the board) that the corporation bring the suit. *But SH doesn't have to make a demand if it would be FUTILE

Derivative Suits
-If the board made a business decision that is being challenged?

The Plaintiff SH must allege particularized facts demonstrating a reasonable doubt that the directors were disinterested or that the BJR otherwise protects the challenged decision

Derivative Suits
-If the board made no business decision, but simply failed to act, and that failure is being challenged?

The plaintiff SH must allege particularized facts demonstrating a reasonable doubt that the board can impartially consider a demand.
**Even if the pleadings show demand futility the court must later hold an evidentiary hearing to determine whether failure to comply with the demand requirement deprives SH of his standing to sue

Additional Items Req'd for derivative Suit

4. Complaint must be verified and must plead specific facts
5. The Plaintiff SH may be req'd to post a bond for costs - to avoid nuisance suits
6. The corp must be joined as a D.

What happens to SH if wins/loses derivative suit?

If WINS: Corp gets money from judgment, SH gets costs and attorneys fees--usu from judgment won.

If LOSES: SH doesn't get costs and attorneys fees AND SH is liable to the D he sued for that D's costs and attorneys fees IF he sued without reasonable care.

Shareholder Voting.

-The record shareholder?

GENERAL RULE: The "record shareholder" as of the "record date" has the right to vote.
\---The record shareholder is the person shown as the owner in the corporate records. The record date is a voter eligibility cut-off date.

3 Exceptions to the general rule that record owner on record date votes?

1. The corporation re-acquires stock before the record date, so it is the owner of this "treasury stock" as of the record date. Treasury stock does not vote.
2. Death of Shareholder. S owns stock in C Corp.

S is the record shareholder. After the record date, S dies. S's executor has the authority to vote the shares.
3. Proxies

What is a Proxy? (4)

A Proxy is a
(i) writing (fax and e-mail are OK),
(ii) signed by record shareholder (e-mail OK if can identify sender),
(iii) directed to secretary of corporation,
(iv) authorizing another to vote the shares.

-How long are Proxies good for in Nevada?
-Are Proxies Revocable?
-Unless?

Proxies good for 6 months UNLESS the proxy states otherwise

max duration of 7yrs

Can ALWAYS revoke proxies, even if it states that it is irrevocable. Except for "proxy coupled with an interest" like they own the stock but bought it after the record date)

Voting Trusts and Agreements

SH's ability to increase their influence by block voting (e.g. voting as a group)