CORPORATIONS PROFESSOR WILLIAM A. BIRDTHISTLE CHICAGO KENT COLLEGE OF LAW

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1 CORPORATIONS PROFESSOR WILLIAM A. BIRDTHISTLE CHICAGO KENT COLLEGE OF LAW CHAPTER 1: INTRODUCTION AND FORMATION OF CORPORATIONS A. Intrductin 1. Crpratins Generally Definitin: A distinct that can cnduct business in its wn right by buying, selling, and hlding prperty r by suing r being sued, and by lasting frever. Why frm a crpratin? Limited ; and Prmting investment. Crprate law: Set f state laws gverning the f crpratins and the rights and respnsibilities f the participants in crpratins. 2. The Peple Invlved in a Crpratin : Investrs, ultimate wners f a residuary interest in a crpratin; : Elected by sharehlders, respnsible fr majr crprate decisins, appint fficers; : Run the crpratin n a daily basis. CHAPTER 2: FORMATION PRE-INCORPORATION TRANSACTIONS Wh is liable? A. Prmters Try t find investrs wh are willing t invest in the crpratin Enter int n behalf f the crpratin (even befre it exists) Prmters are f the crpratin they cannt make secret prfits.

2 B. General Rule Crpratin is fr pre-incrpratin agreements. Prmters are fr any cntracts entered int befre the crpratin exists. C. Exceptin : Special agreement that alters the default rule; it shifts liability frm the prmter t the crpratin. An agreement between the prmter, the crpratin, and the third party Crpratin is substituted fr the prmter under the agreement. CHAPTER 3: FORMATION ARTICLES OF INCORPORATION A. Incrpratin 1. Incrpratrs Must and the articles f incrpratin, pay a fee Incrpratrs are fr cntracts frmed by prmters. 2. Articles f Incrpratin Like a cntract between the crpratin and the sharehlders establishes their basic rights Als like a cntract between the state and the crpratin Must include: The f the crpratin, which must include: Crpratin, Cmpany, Incrprated, Limited, r an abbreviatin f these wrds; The f the crpratin (name and address within the state f incrpratin); The names and addresses f the ; The f the crpratin (mst are perpetual); The f the crpratin; and Ultra vires: Acts beynd the pwers f the crpratin. If the crpratin acts utside f its stated purpse, the acts will be held unenfrceable. can sue t enjin an ultra vires actin. Crpratin can take actin against ultra vires directrs r fficers. can initiate prceedings t enjin such actins. Tday: The purpse is usually stated as t engage in any lawful activity Themis Bar Review, LLC Crpratins

3 As a result, ultra vires claims are nt as cmmn. Authrized. Must state the maximum number f shares f each class f stck that the crpratin is authrized t issue CHAPTER 4: TIMING OF INCORPORATION Mment f incrpratin is when limited liability begins. Rule: When the Secretary f State and the articles, the crprate existence begins. A. Bylaws NO bligatin t file bylaws almst every crpratin des have them. Bylaws set frth the day-t-day rules regarding the peratin and management f the crpratin. Culd be put in the articles but mst cmpanies d nt why? Bylaws are easier t. Bard can typically change bylaws; articles can nly be amended by the sharehlders. If the bylaws and the articles f incrpratin cnflict, the always win. When all f the statutry requirements fr incrpratin have been satisfied, a de jure crpratin is created. B. Defective (De Fact) Crpratins Issue: What if the crpratin is nt prperly frmed, but nevertheless enters int bligatins after it was suppsedly frmed? Rule: Crpratin will still be treated as a crpratin, with limited liability, if the rganizers: Made a effrt t cmply with the incrpratin prcess; and Have n f a defect in the crprate status. CHAPTER 5: VEIL PIERCING General rule: Sharehlders are NOT persnally liable fr the debts f a crpratin, but nly liable fr the amunt invested int the crpratin, except a curt may pierce the veil f limited liability t avid r. Three factrs in deciding whether t pierce the veil: Crpratins 2018 Themis Bar Review, LLC 3

4 : The investr r sharehlder has failed t bserve any crprate frmalities between the persn and the crpratin treated the cmpany just like itself; Example 1: Persnal funds intermingled with the cmpany s funds; nt hlding separate meetings r taking separate minutes. : Failure t maintain funds sufficient t cver freseeable liabilities; and : The parties engaged in fraud r fraud-like behavir. Curts are mre likely t pierce the veil in trt situatins rather than cntractual situatins; mre likely in small, clsely held crpratins. Exam Tip 1: If yu re ding a questin n crpratins n the bar, veil piercing is a very ppular tpic. Remember, the basic rule is that crpratins enjy limited liability, but there may be circumstances in which a curt is willing t pierce the veil t get assets frm sharehlders. CHAPTER 6: INVESTING IN THE CORPORATION A. Stck and Dividends 1. Stck Ownership is represented by shares f stck. Carries vting attributes and rights. Traditinally, wnership was demnstrated by stck certificates. Tday, wnership is generally demnstrated electrnically. 2. Debt and Equity hld the debt f a crpratin. Entitled ONLY t repayment f their lan plus interest (equity hlders) entitled t ALL the value that remains in a crpratin after the debts have been paid. 3. Preferred Stck Has preference ver with respect t: Dividends (payments t sharehlders); and. Nte 1: Upn liquidatin, a secured creditr will generally take pririty ver even preferred sharehlders Themis Bar Review, LLC Crpratins

5 4. Classes f Stck Mst crpratins have ne class f stck. Can have as many as they chse, with different vting and ecnmic rights Example 2: Family-wned business retain cntrl by creating different classes f equity wnership (different vting rights and ecnmic rights). CHAPTER 7: ISSUANCE OF STOCK (PART 1) The sale f stck frm the crpratin t the investing public 1. Fur Cncepts a. Shares Maximum number f shares that the directrs f a crpratin can sell Set in the articles f incrpratin and need sharehlder apprval t sell mre b. Shares Number f shares frm the authrized pl that the directrs have actually sld c. Shares Shares that were nce issued t sharehlders and still remain in the pssessin f the sharehlders NOT reacquired by crpratin d. Shares Stck previusly issued t sharehlders, but then reacquired by the crpratin. Nte 2: Usually, nly utstanding shares are vted. Example 3: A crpratin s articles f incrpratin authrize ne millin shares f stck, and it has sld 400,000 shares t the public. Subsequently, the crpratin has reacquired 25,000 shares. Authrized Shares: ; Issued Shares: ; Outstanding Shares: ; Treasury Shares:. Exam Tip 2: If the wrd r cncept f utstanding shares cmes up, that s particularly imprtant fr determining wh can vte. Remember, it s nly utstanding shares whse vte is imprtant. Crpratins 2018 Themis Bar Review, LLC 5

6 CHAPTER 8: ISSUANCE OF STOCK (PART 2) A. Par Value Stck A crpratin may, but is nt required t, issue stck at a par value. If it des, it must sell the shares fr at least the minimum par value amunt. Example 4: If a crpratin sells 10,000 shares f $2 par stck, hw much must it receive? At least $. Tday, par is typically NOT required. If it is required, it will usually be set at a value. 1. Valuatin f Cnsideratin Crpratin can receive any valid cnsideratin that the bard f directrs deems adequate (e.g., labr, IP rights, etc.). Directrs have discretin. 2. Stck The crpratin sets a par value amunt and sells the stck fr less than the stated amunt. Example 5: A crpratin sells 10,000 f its $2 par stck fr $15,000 instead f $20,000. Wh is liable? The wh bught the belw par value stck (watered stck) are liable t the creditrs f the crpratin. Exam Tip 3: If the wrd par r par value cmes up, it will almst certainly ging t invlve a questin f watered stck, s keep thse cncepts tgether. CHAPTER 9: ISSUANCE OF STOCK (PART 3) A. Stck Subscriptins Ask peple t agree in advance t buy stck befre the crpratin is frmed. Prir t incrpratin: Subscriptin agreements are irrevcable fr. B. Preemptive Rights Right t acquire stck t maintain the percentage f wnership any time new shares are issued Example 6: Darjeeling Crpratin has 2000 shares utstanding. Yu wn 500 f the shares (25%). If the crpratin wishes t make mre mney and issue anther 8000 shares, preemptive rights allw yu t buy a prprtinal amunt (2000 additinal shares) t maintain yur percentage f wnership (25%) Themis Bar Review, LLC Crpratins

7 Default rule in mst jurisdictins: Sharehlders preemptive rights unless negtiated r included in the articles. CHAPTER 10: GETTING MONEY OUT OF THE CORPORATION (DISTRIBUTION) A. Tw Ways Bard can declare a (usually cash). Bard can buy back shares f the crpratin. B. Directrs Authrity and Liability Pwer t authrize dividends lies with the bard f directrs. have NO right t dividends. Bard CANNOT declare dividends under tw circumstances: If the crpratin is ; r If, by issuing the dividend, the crpratin wuld becme inslvent. Directrs wh vte t authrize an unlawful dividend are, jintly and severally, t the crpratin fr the amunt in excess f the lawful amunt. Defense: A directr will NOT be liable if he relied in gd faith n financial statements. CHAPTER 11: PRIORITY OF DISTRIBUTION Example 7: If a crpratin declares a $500,000 dividend, wh will receive what prtin f that dividend? ,000 shares f utstanding cmmn stck then each cmmn stck share receives a $ dividend ,000 shares f cmmn stck and 50,000 preferred shares with a $4 dividend preference the preferred shares receive a ttal dividend f $. The crpratin is left with $ t be divided amng the 100,000 cmmn shares. Thus, each cmmn share receives $ dividend per share ,000 shares f cmmn stck and 50,000 participating preferred shares with a $4 dividend preference. S, first the 50,000 participating preferred shares are paid their $4 dividend t equal $, leaving $. Participating means yu cllect as preferred and then participate with the cmmn shares. The cmmn shares and participating preferred shares are cmbined t equal 150,000 shares. Third, the $300,000 is divided amng thse cmbined shares. Thus, the cmmn stck hlders get $ per share, and the participating preferred stck hlders get $4 fr the preferred dividend Crpratins 2018 Themis Bar Review, LLC 7

8 and $ per share as part f its participatin, fr a ttal f $6 per share ,000 cmmn shares and 50,000 cumulative preferred shares with a $4 dividend preference and last year, n dividend was paid. Each cumulative preferred share receives $4 fr this year, which equals $200,000, and cllects $4 fr last year because the shares are cumulative. Thus, the cumulative preferred sharehlders get $ per share. The crpratin is left with $100,000 t be divided amng the cmmn shares. Thus, each cmmn share receives $ per share. Exam Tip 4: If the fact pattern mentins the size f the dividend being paid ut, then keep a clse track f where that mney is ging t be ging. CHAPTER 12: POTENTIAL ILLEGALITIES WITH THE SALE OF SECURITIES Generally, sharehlders can sell shares t anyne at time fr price. Tw majr exceptins: Clsely held crpratins and federal restrictins A. Clsely Held Crpratins ( Restrictins n the Sale f Securities) T prevent frm becming invlved in the crpratin S the initial sharehlders can retain ver the shares 1. Restrictin Must Be Nted The stck certificate must cntain either a full and statement f what the restrictin is r a statement that says that there are restrictins, which will be prvided upn request. 2. Enfrceability Generally, restrictins are enfrceable. Even a lawful restrictin may nt be used against smene with n f it. Unless the restrictin is certified and cnspicuus. 3. Types f Restrictins prhibitin n transfers Requires cmpany s Cmpany has an t buy Cmpany has a Themis Bar Review, LLC Crpratins

9 4. Challenge t Restrictins Usually made n the basis f restraint n ; Test is ne f. It is reasnable t restrict t maintain (e.g., an S Crp). 5. Wh is Bund? Anyne wh agrees: Almst any sharehlder in a clsely held crpratin agrees t these restrictins. CHAPTER 13: FEDERAL CAUSES OF ACTION A. Rule 10b-5 Fraudulent purchase r sale f stck r ther securities (like bnds r ptins) Fr a t pursue a 10b-5 actin, the fllwing must be met: Plaintiff has t have purchased r sld the security; Transactin invlves interstate ; Defendant engaged in fraudulent r cnduct; Cnduct related t material infrmatin; Defendant acted with ; Editrial Nte 1: A defendant is nt liable fr negligently making a false r misleading statement. Instead, the defendant must make the statement intentinally r recklessly. Plaintiff n defendant s cnduct; Plaintiff suffered harm. 1. Fraudulent r Deceptive Cnduct Making an f a material fact Failing t state a material fact that is necessary t prevent statements already made frm being misleading Exceptin: Opinins and d nt cunt as untrue statements f material fact. 2. Materiality Material if a reasnable investr wuld find that fact imprtant in deciding t purchase r sell the security. Crpratins 2018 Themis Bar Review, LLC 9

10 3. Scienter Statements must be made r 4. Harm A causal cnnectin between the cnduct and the harm 5. Cmputing Damages : The difference between the stck s value and the price the plaintiff paid r received N damages are allwed CHAPTER 14: SECTION 16(B) (INSIDER TRADING) A crprate insider can be frced t return shrt-swing prfits t the crpratin. The reasn fr buying r selling r having nn-public infrmatin is irrelevant. Necessary elements: Applicable cmpanies nly the fllwing: Crpratins with securities traded n a natinal exchange; r Crpratins with assets f mre than $ millin and mre than sharehlders Crprate insiders: Directrs, fficers, r sharehlders wh hld mre than 10% f any class f stck Officers president, vice president, secretary, treasurer, cmptrller, etc. Transactins made smene becmes a crprate insider are generally nt subject t shrt-swing issues; transactins made after a crprate insider leaves ffice may be. Shrt-swing prfits: During any, a crprate insider wh bth buys and sells the crpratin s stck is liable t the crpratin fr made n thse transactins. Reprting: Crprate insiders must reprt changes in stck wnership t the SEC Themis Bar Review, LLC Crpratins

11 CHAPTER 15: SHAREHOLDER MEETINGS A. In General Mst imprtant duty elect the Vte n majr decisins that affect fundamental changes in the crpratin B. Meetings 1. Annual Meeting Every crpratin must hld an annual meeting t elect and cnduct ther sharehlder business. 2. Special Meetings May be called t vte upn (e.g., disslutin, merger) State laws typically specify wh may call special meetings (e.g., bard f directrs, senir fficer, a certain percentage f sharehlders r shares, etc.). 3. Ntice Sharehlders must be given ntice f either type f meeting (annual r special) n fewer than days, but n mre than days, befre the meeting. Must include the,, and f the meeting. Special meeting: Ntice must include the f the meeting. Insufficient ntice can allw a sharehlder t challenge any actins taken at the meeting. Waiver f ntice: Ntice can be waived by. 4. Recrd Date Used t determine which sharehlders are eligible t vte The must fix a recrd date. Must be n mre than 70 days befre the meeting ONLY sharehlders wh actually wn shares n the recrd date are entitled t vte. Example 8: Peke Crpratin s recrd date is 45 days befre its annual sharehlder meeting. Three mnths ag, A sld her stck t B. One mnth ag, B sld the stck t C. One week ag, C sld the stck t D, and D hlds the stck at the time f the meeting. Which sharehlder is entitled t vte? Sharehlder was the nly sharehlder wh wned the shares n the recrd date and is, therefre, the ONLY sharehlder entitled t vte at the meeting. Crpratins 2018 Themis Bar Review, LLC 11

12 CHAPTER 16: SHAREHOLDER MEETINGS (CONT D): MEETING ALTERNATIVES All sharehlders may take any actin withut a meeting by unanimus cnsent. A. Prxy Allws large crpratins t deal with meeting lgistics sharehlders rarely attend the meeting in persn Authrizes thers t vte shares in accrdance with the wishes f the sharehlder T be legally effective, a prxy must: Be in writing; Be signed by the sharehlder as f ; Be sent t the f the crpratin; State that it authrizes anther t vte the sharehlder s shares; and Cannt be valid fr mre than, unless therwise specified. CHAPTER 17: VOTING A. Issues Sharehlders typically vte n: Electin f directrs; Mergers; Share exchanges; Amendments t the articles f incrpratin; Sales f all r substantially all f its assets; r Disslutin. B. Sharehlder Apprval 1. Qurum Fr the vte t be effective, a qurum f the crpratin s (NOT sharehlders) must be represented at the meeting, in persn r via prxy. A qurum is a majrity f the crpratin s shares represented at the start f the meeting. Example 9: Earl Grey Crpratin has 10 millin authrized shares. S far, the bard has issued 7.5 millin, and f thse, 7.2 millin are utstanding. 950 sharehlders hld the utstanding shares. What cnstitutes a qurum? shares (7.2 mil / 2 + 1) Themis Bar Review, LLC Crpratins

13 2. Necessary Vte If a qurum is present, a sharehlder vte is effective if the vtes cast f the prpsal exceed the vtes cast the prpsal. Example 10: Earl Grey Crpratin has 7.2 millin utstanding shares. Fur millin shares are present at the meeting, and nly ne millin are vting n an issue. Hw many shares must vte in favr fr it t pass? shares. CHAPTER 18: CUMULATIVE VOTING, INSPECTION RIGHTS A. Cumulative Vting Applies nly t the electin f directrs Prtects sharehlders right t elect directrs Crpratins can chse t permit cumulative vting in the articles. Sharehlders are given a number f vtes that is equal t the number f, multiplied by the number f psitins being vted n. Vtes can be spread arund r put n ne directr. Example 11: If yu wn 10,000 shares f a crpratin and there are nine directr psitins up fr electin, yu will be able t cast vtes instead f 10,000 vtes. B. Sharehlder Inspectin Rights A sharehlder may inspect the crpratin s recrds in persn r thrugh an agent as lng as the sharehlder states a. Must be a sharehlder and have a prper purpse related t the sharehlder s financial interest in the crpratin. Imprper purpse designed t harass the crprate fficers. CHAPTER 19: SHAREHOLDER LITIGATION A. Direct Lawsuits Sharehlder is suing in the sharehlder s wn name fr damages and the damages g directly t the sharehlder. A sharehlder can sue directly if the sharehlder has been harmed directly, including: Interference in vting rights r dividends, misinfrmatin abut imprtant issues, and trt injury. Crpratins 2018 Themis Bar Review, LLC 13

14 B. Derivative Lawsuits Sharehlder is suing n behalf f the crpratin Alleged harm harms the crpratin, principally Harm t crpratin bad business decisins (e.g., dislyalty) Claim must be made in the and any recvery belngs t the 1. Standing Must maintain cntempraneus Requirements: Must have been a sharehlder at the time f ; Must hld the shares thrughut the litigatin; and Must fairly and adequately represent the interests f the crpratin. 2. Demand Requirement The plaintiff sharehlder is generally required t first demand that the bard f directrs bring the lawsuit in the crpratin s name befre the sharehlder can bring the suit. Demand demand is nt required if it wuld be futile (e.g., directrs have been named as the ptential defendants). 3. Recvery Nte 3: Althugh the futility exceptin is recgnized in sme states, it is nt recgnized in states that have adpted the RMBCA. Any recvery ges t the crpratin, NOT the sharehlder. Attrney s fees: If the litigatin prduces a t the crpratin, the plaintiff s attrneys are entitled t have their fees paid by the crpratin. CHAPTER 20: SHAREHOLDERS DUTIES TO OTHER SHAREHOLDERS Sharehlders d NOT we a duty t fellw sharehlders in the crpratin. A. Duties f a Cntrlling Sharehlder An exceptin t the general rule pertains t cntrlling sharehlders. A cntrlling sharehlder MAY we a fiduciary duty t sharehlders in tw circumstances: 1. Sale f Stck t an Outsider/Lter A cntrlling sharehlder may be liable fr damages caused t ther sharehlders when the cntrlling sharehlder sells stck t an utsider if the stck was sld t an utsider intent n r destrying the cmpany Themis Bar Review, LLC Crpratins

15 Classic red flags include: The lter had dne this befre r the lter had given sme indicatin that this is what they intended t d. 2. Cntrlling Sharehlder Transacts with the Crpratin A cntrlling sharehlder wh receives a special distributin r therwise cnducts majr business transactins t his wn benefit wes a duty f lyalty. B. Wh is a Cntrlling Sharehlder? Easy case thse wh wn 50% plus ne, r mre Less than 50% plus ne lk t the nature f the wnership f the cmpany Example 12: A widely held crpratin with an average investment stake f 0.1%. A sharehlder wh wns 15% r 20% culd be a cntrlling sharehlder based n the nature f wnership f the cmpany. CHAPTER 21: MANAGEMENT OF THE CORPORATION A. Bard f Directrs 1. In General The bard f directrs manages and directs the management f a crpratin s. Main tasks: Appint fficers; Oversee fficers; and Make high-level crprate decisins. Directrs may (and usually d) receive cmpensatin. 2. Number and Qualificatins A crpratin must have at least. Directrs must be natural persns. 3. Term and Selectin Elected by sharehlders Serve fr a limited term usually 4. Remval and Replacement Sharehlders may remve directrs with r withut cause. There is an imprtant exceptin: Staggered bard Classes f directrs are elected at different times e.g., nine directrs: Three elected in year ne, three elected in year tw, and three elected in year three; Crpratins 2018 Themis Bar Review, LLC 15

16 May nly be remved fr cause, nly if the articles prvide; and Different classes f sharehlders may elect different directrs nly directrs elected by a particular class may be remved by that class. Vacancy r size f the bard has increased new directr(s) can be chsen by the at a special meeting OR by the. CHAPTER 22: BOARD MEETINGS Bards are relatively small and meet regularly. Directrs must be given ntice fr meetings, but nt fr meetings. waives ntice, unless the directr prmptly bjects at the meeting. Directrs CANNOT vte by prxy r enter int vting agreements. A. Vting Requirements 1. Qurum A majrity f the ttal number f the directrs, unless the specify a higher r lwer number. 2. Affirmative Vte As lng as a qurum is present, a reslutin f the bard will pass upn a majrity vte f thse. Example 13: A crpratin has 13 directrs. T have a qurum, at least seven directrs must attend the meeting. If seven directrs are present, hw many must vte in the affirmative t pass a reslutin? directrs. 3. Unanimus Written Cnsent The bard may apprve a prpsal and avid a meeting, if agreed upn by unanimus written cnsent. B. Dissent T avid ptential liability fr a bard decisin with which a directr disagrees, the directr must dissent by: Entering dissent in the ; File written dissent befre the meeting is adjurned; r Themis Bar Review, LLC Crpratins

17 Prvide written dissent by certified r registered mail t the crpratin s immediately fllwing the adjurnment f the meeting. CHAPTER 23: OFFICERS Officers are selected by the. Run the crpratin n a daily basis Typically cnsist f a president, secretary, and treasurer Duties: Owe fiduciary duties f and A. Duty f Care Directrs and fficers we a fiduciary duty f care t the crpratin. 1. Rule Directrs and fficers are prtected frm legal liability under the business judgment rule. Rule: In the absence f,, r, curts will nt disturb gd-faith business decisins. 2. Standard f Care Editrial Nte 2: See V.H.1.c.1) f the Crpratins utline fr infrmatin abut vercming the business judgment rule. Act with the care that a persn in a like psitin wuld reasnably believe apprpriate under similar circumstances. Special skills are expected t be used (i.e., accunting backgrund, legal backgrund). 3. Reliance Defense A directr r fficer is entitled t rely n the expertise f fficers and ther emplyees, utside experts, and f the bard. Exam Tip 5: Crpratin s mst imprtant rule is the Business Judgment Rule, which is: In the absence f fraud, illegality, r self-dealing, a curt will nt disturb an hnest business judgment. CHAPTER 24: DUTY OF LOYALTY A. General Rule May nt receive an unfair benefit t the detriment f the crpratin withut effective and ratificatin Crpratins 2018 Themis Bar Review, LLC 17

18 B. Transactins A transactin in which the directr, fficer, r their relative receives a substantial benefit directly frm the crpratin (e.g., a salary). C. Crprate Opprtunity Dctrine Usurping r stealing a crprate pprtunity D. Insulatin frm Liability/Ratificatin A self-interested transactin may be upheld if it is disclsed and ratified by: A majrity f disinterested ; r A majrity f disinterested. Ratificatin desn t always win the case it might nly shift the burden. E. Fairness If a directr r fficer can demnstrate that the transactin was fair, then they will win. CHAPTER 25: INDEMNIFICATION The practice f crpratins paying fr the csts f a directr s r fficer s defense in litigatin, usually by purchasing insurance. A. Required r Mandatry Indemnificatin The crpratin is ALWAYS required t pay the csts f defense if the directr r fficer the case. B. Prhibited Indemnificatin The crpratin CANNOT indemnify a directr r fficer wh is liable fr receiving an frm the crpratin r therwise lses a lawsuit. C. Permissive Indemnificatin The crpratin may, but is NOT required, t indemnify a directr r fficer fr the csts f a suit if the directr r fficer: Acted in with n intent t harm the crpratin; r Had n reasnable cause t believe the cnduct was illegal. CHAPTER 26: FUNDAMENTAL CHANGES TO A CORPORATION A. Required Apprval BOTH the sharehlders and directrs must apprve fundamental changes Themis Bar Review, LLC Crpratins

19 B. Merger and Cnslidatin Merger: The cmbinatin f tw r mre crpratins where ne crpratin survives and assumes the and the f the ther crpratin. Cnslidatin: The cmbinatin in which neither f the tw crpratins survives. New entity is created; New entity assumes the assets and liabilities f bth crpratins. C. Disslutin 1. Definitin The existence f a crpratin is extinguished either by the sharehlders and the directrs r by disgruntled parties. 2. Invluntary Disslutin A crpratin may be disslved invluntarily by creditrs if the creditrs shw the crpratin is nt paying its debts. Sharehlders can have a crpratin disslved if the sharehlders can shw: The crprate assets are being wasted; The directrs are acting fraudulently; r The directrs and sharehlders are deadlcked. D. Prcess The bard must adpt a reslutin prpsing the change; must be sent t the sharehlders f the special meeting; and A f the sharehlders casting a vte must vte in favr f the fundamental change. CHAPTER 27: DISSENTERS RIGHTS OR APPRAISAL RIGHTS A. General Rights If a sharehlder des nt wish t participate in a duly authrized merger, asset sale, share exchange, r amendment f the articles, the sharehlder is entitled t dissenters r appraisal rights. Entitled t have their shares purchased frm them by the crpratin at a determined by the curt. B. Prcedural Requirements T invke dissenters rights: Crpratins 2018 Themis Bar Review, LLC 19

20 The sharehlder must send t the crpratin prir t the vte f her intent t dissent; At the meeting, the sharehlder must r vte n (dissent) at the meeting; and The sharehlder must make prmpt fr fair market value after the actin has been apprved. C. Fair Market Value Determinatin If the sharehlder and the crpratin disagree as t fair market value, a curt can appint an t issue a binding appraisal f the value. CHAPTER 28: CLOSE CORPORATIONS, LLCS, AND OTHER CORPORATE ENTITIES A. Clse Crpratins 1. Clse crpratin (r clsely held crpratin ) Term used t describe a crpratin with few 2. Characteristics Sharehlders are ften als directrs and fficers. Typically NOT publicly traded Relaxatin f rigid rules fr crpratins it is hard t get ut due t the lack f a market t sell the shares. 3. Vting Agreements Can frm vting agreements Different frm regular crpratins (where it is nt permitted) 4. Preemptive Rights The default rule prhibiting preemptive rights may be relaxed. B. S Crpratin An S Crp is really just a crpratin fr state crprate law purpses, but it gets special treatment fr tax purpses. Only taxed, like a partnership NOT taxed at entity level allws pass-thrugh taxatin An S Crp is limited in the number f sharehlders it may have. C. Limited Liability Cmpany (LLC) 1. In General The LLC cmbines the limited liability f crpratins with the tax treatment f a partnership Themis Bar Review, LLC Crpratins

21 Generally n limitatins n the number f sharehlders, n residency requirements, and n natural persn requirements (mre flexible than an S Crp). 2. Key Characteristics An LLC files articles f rganizatin and an perating agreement with the state. The wners are called, rather than sharehlders. An LLC is presumed t be managed by ALL f its members. 3. Cmparisn t Crpratins Legally, LLCs are generally treated like crpratins. There is a difference in terminlgy and taxing features, but therwise, analyze LLCs under general crprate law principles. CHAPTER 29: COMMONLY TESTED TOPICS A. Fiduciary Duties 1. Business Judgment Rule In the absence f fraud, illegality, r self-dealing, a curt will nt disturb the gd-faith judgment f the directrs r fficers. 2. Duty f Care Directrs and fficers must use the care a persn in a like psitin wuld reasnably believe apprpriate under similar circumstances. Did the fficer r directr have special skills? If s, she is bligated t use them. An fficer r directr is entitled t rely n the expertise and the reprts f: Officers and ther emplyees; Outside experts; and A cmmittee f the bard f directrs. 3. Duty f Lyalty Directrs and fficers cannt receive unfair benefits t the detriment f the crpratin unless they effectively disclse and btain ratificatin f thse benefits. Self-dealing transactin: When the directr r fficer (r a relative) receives cmpensatin directly frm the crpratin. Crprate pprtunity: When the directr r fficer prevents mney frm cming int the crpratin. Aviding liability: (i) apprval by the disinterested bard members; (ii) apprval by the disinterested sharehlders; r (iii) a curt cncludes the transactin was fair Crpratins 2018 Themis Bar Review, LLC 21

22 B. Sharehlder Vting 1. Annual Meetings Every crpratin is required t hld an annual meeting at which the sharehlders elect directrs and cnduct ther sharehlder business. 2. Special Meetings A special meeting may be called t vte n fundamental crprate changes. Fundamental changes include mergers and disslutins. Typically, a special meeting may be called by sme percentage f the bard, by the president r sme number f fficers r directrs, r by a specified grup f the sharehlders. Adequate ntice must be given t the sharehlders befre the meeting: N fewer than 10 days but n mre than 60 days; The ntice must give the date, time, lcatin, and purpse f the meeting; and Anyne wh attends the meeting r participates in the meeting waives the ntice requirement. 3. Recrd Date T determine which sharehlders are eligible t vte, the directrs fix a recrd date n mre than 70 days befre the meeting. Only the sharehlders wh actually hld the shares n that date are entitled t cme t the meeting, even if they subsequently sld their shares. 4. Absence f a Sharehlder Meeting Business may be cnducted by sharehlders by unanimus written cnsent. 5. Vting Prxies There are several requirements that are necessary fr a prxy t be used. A prxy must be: In writing; Signed by the sharehlder; Sent t the secretary f the crpratin; An authrizatin by the sharehlder t vte the shares; and Valid fr n mre than 11 mnths, unless therwise specified. C. Distributins by the Bard f Directrs 1. Distributin When a crpratin remves prfit frm the crpratin and gives it t the sharehlders Themis Bar Review, LLC Crpratins

23 2. Authrizatin The pwer t authrize a dividend lies with the bard f directrs. A bard cannt declare a dividend if: 3. Liability The crpratin is inslvent; r Declaring the dividend wuld make the crpratin inslvent. Directrs wh vte t authrize an unlawful dividend in vilatin f their fiduciary duties are persnally liable, jintly and severally, t the crpratin in the amunt in excess f the lawful amunt. [END OF HANDOUT] Crpratins 2018 Themis Bar Review, LLC 23

24 Themis Bar Review, LLC Crpratins