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Stock
(Capital Structure)
Authorized stock: maximum number of shares corporation can sell
Issued stock: number of shares corporation actually sells
Outstanding stick: shares that have been issued and not reacquired by
corporation
Articles must include
o Authorized Stock
o Information on par value (if any par shares)
o Voting rights, and
o Preferences for each class of stock
Act must file articles with PA Department of State and pay required fee
If Department accepts articles for filing, that is conclusive proof of valid formation
At that point, we have de jure corporation (legal corporation)
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Under the BCL, a corporation is given the power to exercise all powers necessary or convenient
to effect its purposes, and a corporate may be formed for any lawful purpose. Combined, these
provisions provide authority for a corporation to do almost anything that is rationally related to a
business purpose. Unless an exam question restricts a corps purpose, you should usually find
corporate acts to be within the corporations powers
Generally, people who run corp (directors and officers) are not liable for what corp does
Generally, owners (shareholders) are not liable for what corporation does
o Principle of limited liability means shareholders are generally only liable for price of
stock
Adoption of bylaws not a condition precedent to forming corporation but nearly every corp
has them
o They are for internal governance (meeting times, methods of notice, etc)
Bylaws are binding on directors and officers but not outsiders, because just internal
Liability of the corporation a corp is not liable on pre-incorporation contracts until it adopts
the contract
o EX: On Jan 10, Promoter leases business and signs lease as OR Cars, Inc. On Feb 20,
corp is signed.
Is corp liable? Yes, if it adopted the contract
Adoption of Contract
o Express board of director action adopting the contract
o Implied if corporation accepts a benefit of the contract (based on conduct)
Liability of promoter unless K says otherwise, promoter remains liable until there is a
novation
o Novation: agreement of the promoter, the corporation, and other contracting party
that corporation will replace the promoter under the contract
o
o
Foreign corporations are any which are incorporated anywhere other than PA. Must qualify
& pay fees in PA
Transacting business means regular course of intrastate (not interstate) business activity.
o Not just occasional or sporadic activity, and not simply owning property in PA
Preemptive rights apply only if the articles provide for them. If not in fact pattern, not
there
o Exception: in a statutory close corporation preemptive rights exist unless articles
provide otherwise (never tested before)
Shareholders can remove directors before term expires with or without cause
o But if classified Board, shareholders can only remove with cause
Directors cannot agree to act through individual conversations it is void unless ratified
by valid act
Ex: they all agree verbally to do something. Unless it is written, it is void
Conference calls counts as meeting, email counts as writing if printed and left in file
Quorum for Directors Meeting must have majority of all directors present (or different % if
specified in bylaws)
o If quorum is present, need a majority note of those present
EX: 9 directors, so at least 5 must attend meeting, and at least 3 must vote for
resolution
If one of the 5 leaves, there is no longer quorum and cannot vote
Role of Directors
Generally Board of Directors manages business of corp
Can delegate substantial management functions to a committee consisting of 1 or more
directors
o But committees cannot:
amend bylaws
fill board vacancy
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Standard: A director must discharge her duties in good faith and with a reasonable belief that
what shes doing is in corporations best interest (duty of loyalty). She must act with that degree
of care a prudent person would use with regard to her own business. (duty of care) In doing so,
a director is not required to consider the interest of any particular group as controlling. [know
this inside and out]
Interested Director Transaction any deal between the corporation and one of its directors (or a
directors relative, close enough to affect judgment, or another business of the Directors. If
director will benefit from transaction her corp is about to enter into, must disclosure
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to Board or SH. Disinterested directors (or SH) must then approve the transaction. If
no disclosure, transaction can be set aside unless it is fair to the corp. Corp can
recover damages equal to the directors profit.
EX: Martha is director of XYZ. Sells wraths to the corp. This is an interest director
transaction
Way to respond on essay:
o State all three sentences of the standard
o Then- interested director transaction will be set aside unless the director shows:
The deal was fair to the corporation when entered, or
Material facts and her interest were known, and the deal was approved of either:
Majority of disinterested directors, or
Majority of shares in good faith (dont have to be disinterested)
EX: XYZ Corp has 7 directors. Four of them (W, X, Y, Z) are interested in the transaction
being considered. Three of them (A, B, C) are disinterested. We want approval by a majority
of the three disinterred directors. Support A, B, C, Z show up at the meeting. Is there a
quorum?
Yes. Interested directors count towards the quorum. Need 4 to be a quorum.
The vote of the interested party wont count, but presence does towards the
quorum
Competing Ventures director cannot compete unfairly with her corporation.
o A remedy for this breach: Constructive trust on profits (so corporation can recover any profit
she made competing)
o EX: Sharon is director of O Music Co. Also serves on board of directors at Home Depot (no
competition). Can she open her own music company?
First, state full three sentences of standard
Then state she cannot unfairly compete
Corporate Opportunity something necessary to the company, or in its business line, or in which
it has an interest or expectancy
o EX: D is director of C Realty Corp which develops condo projects. D learns of some land that
has been zoned for condos and buys it for himself as investment. What are Cs rights against
D?
State all of standard
Then, director cannot USURP a corporate opportunity. That means he cannot take it
until:
He tells the boards, and
Waits for the board to reject the opportunity
It is not a valid defense to say corporation could not have afforded to make the
purchase
o Remedy: if D still has it, must sell it to C Corp at his cost. If he has sold it for a profit, the
corporation gets the profit. (Constructive trust: court will make her account for her profit)
Other self-dealing can breach standard (stealing $ from corp, accepting $ to resign from board,
etc)
Board can set its and officers compensation, but must be reasonable. If excessive, waste of
corporate assets and breach of duty of loyalty
OTHER STATE LAW BASES OF DIRECTOR LIABILITY
Ultra vires acts responsible officers and directors are liable for ultra vires losses
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Very limited defense. Dont allow a corporation to get out of a K just because its
outside the stated purpose
Improper distributions
Which directors are liable for what?
o General Rule: director presumed to have concurred with Board action unless dissent is
noted in writing
In the minutes
In writing to corporate secretary at meeting
In writing to corporate secretary after meeting
o Exceptions:
Absent directors not liable
***Good faith reliance on
Book value of asset, or
Financial statements by important parties, or
Opinion of an EE, officer, professional
o
Status: officers are agents of corporation. Can bind corp if they have authority to do so.
President has inherent authority to bind the corporation to a contract in the ordinary court of
business. President also has actual authority given her by board and certified by secretary
o Must have a president, secretary, and treasurer or persons who act as such
o Can also have others. One person can hold multiple officers at once
Important: shareholders hire and fire directors, but directors hire and fire officers.
Shareholders generally DO NOT hire and fire officers
Shareholders have no power to run day-t0-day activities, that power is vested in
Board of Directors, and SH have power to elect the board. BUT: if there are
relatively few shareholders (35 or fewer) the corporation can be considered a
close corporation, and SH can generally run a close corporation as they would
run a partnership as long as it doesnt prejudice public, creditors, or minority
shareholders
Sarbanes-Oxley Act (federal) generally forbids loans to executives in large, public
corporations.
o Requires the corps board to establish audit committee & oversee work of registered
public accounting firm
o CEO and CFOs must certify accuracy
Indemnification of Directors and Officers
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Person sued in her capacity as officer or director who has incurred costs, and maybe
fines/judgment/settlement seeks reimbursement from corporation
o No indemnification is allowed when she was held liable to the corporation
o Mandatory indemnification is required to the extent she wins on the merits or otherwise
Doesnt have to win on EVERY claim to qualify for mandatory indemnification
just the one(s) won
o Permissive indemnification corporation may indemnify when mandatory or prohibited
situations dont apply. For instance: settlement of case
Must show she acted in good faith and reasonably believed her actions were in
corps best interest
Determined by disinterested directors, independent legal counsel in
written opinion, or SH
o
OTHERWISE:
Courts can order indemnification if justified in view of all circumstances.
Would be for expenses and attorneys fees, only not for a judgment
Corps can advance litigation expenses (including attorney fees) as long as she
agrees to repay them if later determined she is ineligible for indemnification
Articles can provide for limitation or elimination of director liability for damages,
but not for breach of duty of loyalty, reckless or intentional misconduct, or
wrongful personal benefit
Corps can purchase liability insurance to indemnify officers or directors
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Can have a board of directors, or shareholders can eliminate board and run the corporation
o Do this by shareholder bylaws or in the articles
Duties
o If eliminated, the duties of care and loyalty are owed to corporation by those who run it
(shareholders)
o Shareholders also owe fiduciary duties to each other
Can be liable for oppressive acts toward minority shareholders
Ex: selling control to someone who loots corp. (not having properly
investigated the buyer)
Prevents big guys sticking it to the little guys
o EX: A, B, C own 1/3 each of stock of C. Corp, close corp. All have jobs with C Corp. A
and B fire C from his job, kick him off premises, refuse to pay him, and have C Corp buy
stock in another corp A & B own.
Breached duty to minority shareholder
Professional Corporation only licensed professionals are shareholders. Can hire nonprofessionals for other services
o Liable for own malpractice
o Not liable for other members malpractice
o Rules of operations generally same as that for a general corporation
Shareholder liability for acts or debts of corporations
Shareholders generally not liable because corporation is liable for what it does
o Even if only 1 shareholder
But can be liable for corporate acts/debts if court pierces corporate veil
because it ignores corporation and holds shareholders liable
This only happens in closed corporations
Remember (and always say this): Courts may be more willing to PCV for a tort victim
than for a K claimant.
Also PCV can operate in related corporation situation (where parent company forms subsidiary
to escape liability)
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Plaintiff must plead with particularity her efforts to get corporation to sue, or why demand
futile
If shareholder bring suit owns less than 5% of any class of stock, corp can demand she post
security for costs (unless stock has FMV of more than $200K)
Corp must be joined as defendant even though its the corporations claim, because it did not
bring the suit itself
Shareholder Voting
WHO VOTES
General rule is that record shareholder as of record date has the right to vote
Record Shareholder is person shown as owner in corporate records.
o Record date is voter eligibility cut-off, not more than 90 days before the meeting
EX: C Corp sets annual meeting 7/7, and record date as 6/6. S sells B her C Corp
stock on 6/25. S is entitled to vote because owned stock on the record date
Exceptions:
o Corp reacquires some of its stock before record date
This is treasury stock
It does not vote this stock
o Death of shareholder Ss executor can vote
o
Proxies
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A proxy is
A writing (including fax or email)
Signed by record shareholder (email treated as such)
Directed to secretary of corp
Authorizing another to vote the shares
Valid proxy is good for 3 years unless it says otherwise
A proxy can be revoked when notice is given to secretary in writing or by
electronic transmission
Can be revoked even if the proxy states its irrevocable
Irrevocable Proxy: only way to have one is if it is a proxy couples with an interest
which requires
That the proxy says its irrevocable, and
Proxyholder has some interest in the shares other than voting
EX: S sells B shares after record date but before meeting. S gives B
irrevocable proxy. S cannot revoke because this proxy is coupled with an
interest proxy owns the shares
Voting trusts and voting agreements (when shareholders with few shares join together in block
voting)
o Voting Trusts
Requirements for voting trusts:
Written agreement controlling how shares will be voted
Copy to corporation
Transfer legal titles of shares to voting trustee
Original shareholders receive trust certificates, retain all s-holder rights except
voting
No time limit, but trust law might
10 year limit on voting trusts for banks, though
o
Meetings can be on internet as long as people can hear or read and vote
Officer must preside over meeting
Shareholders cannot call a special meeting for purpose of removing officer that is done by
Board
Notice Requirements: written (includes fax/email printout) to every SH entitled to vote, for all
meetings
Contents of notice: must always say when and where. Also states purpose of meeting
because whatever is stated as the purpose is the only thing the meeting can cover
If fail to give proper notice, then action taken at meeting is void unless those not sent notice
waive the notice defect. Waiver happens if
Express in writing and signed any time, or
Implied they attend meeting without objection
If need to restrict, courts will uphold restriction if reasonable under circumstances (no
undue restraint)
o Right of first refusal is okay if corp offers a reasonable price
Even if reasonable, cannot be invoked against transferee unless either
o It is conspicuously noted on stock certificate, or
o The transferee had actual knowledge of the restriction
Right of Shareholder to Inspect and Copy the Books and Records of Corporation
Standing: Any shareholder can demand access during regular business hours to books (also Also
has CL right to inspect)
Procedure: verified written demand stating proper purpose reasonably related to interest as a
shareholder
If corp doesnt allow inspection, shareholder can seek court order to allow inspection and
recover costs and fees
o Burden is on corp to show shareholders purpose is improper
Each shareholder has right to inspect bylaws without making any showing
Directors have right of access to all books and records
Participating means paid again, so 20,000 gets paid first (preferred) and
again
o 20,000 times $2 = $40,000
o Leaves $360,000 divided by 120,000 shares = $3 each
If they cannot agree of fair value, corp petitions court to determine fair value
Amendment of Articles
Board of director action (or petition by at least 10% of shares) and notice to shareholders
Shareholder approval at least majority of shares that voted (4000 entitled, 3000 attend,
2400 vote, need 1201)
*** Generally, buying corp not liable for liabilities of other selling corp unless deal provides
otherwise or unless company purchasing assets is merely a continuation of the selling
company, or if the transaction is fraudulent. (This is because selling corp still exists so can
still be sued by creditors)
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Dissolution
Voluntary board of directors, notice to shareholders, and approval by majority of shares
voting on issue
Involuntary court order
o *** Shareholder or director can petition because of fraud, illegal or
oppressive acts by director(s), waste of assets, or deadlock by directors
that harms company
Even if dissolution not warranted, court can appoint one or more custodians
to run corp
o Creditor can petition for dissolution because corp is insolvent and creditors has
unsatisfied judgment against corp, or corp admits debt in writing
Remains in existence, but only for winding up (liquidation) to
o Gather assets
o Convert to cash
o Pay creditors
o Distribute remaining to shareholders
After wind up, president and secretary execute verified articles of dissolution with PA Dept
State
FACT PATTERN 6 FEDERAL SECURITIES LAW
Securities are Investments
Debt investor lends capital to corp to be repaid
o Secured by corporate assets mortgage bond
o Unsecured debenture
Equity investor buys stock and has ownership interest in corp. Has various rights
Rule 10b-5
Federal law that prohibits fraud and misrepresentation (or nondisclosure) in connection with
purchase or sale of any security (debt or equity)
o Instrumentality of interstate commerce (phone, mail)
o
Types of transactions
Misrepresenting material info
Trading on material inside info
See more details in PAT outline, page 32
Tipping (passing along material inside info)
Materiality misrepresentation or omission must concern material fact
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