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California Bar Exam Outlines
Organization of corporation
Formation requirements: People, Paper, Act
Ultra vires activities: valid against 3rd parties, SHs and Corp can sue managers
De Jure Corporation: acceptance of Articles by the Secretary of State
De Facto: good faith (“colorable”) attempt to comply with the inc. statute by exercise of corporate privileges, unaware party can treat as valid so SHs not liable (defense in K cases)
Corporation by Estoppel: one dealing w/ a business as a corp. may be estopped from denying the business’s corp. status. (not applicable against a tort P)
Promoter always liable until there is novation (several are jointly liable)
Corporation never liable until there is adoption, which can be implied
Promoter cannot make a secret profit on her dealings w/ corp.
Foreign corporations must qualify by getting a “certificate of authority”
Issuance of Stock
Only applies when corp. is selling its own stock
Subscriptions – written offers to buy stock
Pre-incorporation – irrevocable for 6 months unless provided otherwise
Post-incorporation – revocable until acceptance
Traditional rule: (1) money, (2) tangible/intangible property; (3) services already performed
Modern trend: “any tangible or intangible property or benefit to the corp” including promissory notes and future services.
Par value – minimum issuance price
Watered stock: shortfall between par value and issuance proceeds. Directors liable if knowingly authorized issuance.
Pre-emptive rights: right of a SH to maintain her percentage of ownership by buying stock whenever there is an issuance of new common stock for money.
Directors and Officers
Statutory Requirements – for directors
Number – one or more adult natural persons
Election: SHs elect directors at the annual meeting (staggered, classified board)
SHs can remove directors with or without cause
Board action: (1) unanimous written consent, or (2) a meeting
Committees cannot declare dividends or fill Bd positions
Duty of Care – Owed to corp. She must act in good faith as a prudent person would act in regards to her own business in managing the corporation to the best of their ability. P bears burden of proof.
BJR Standard: duty is discharged by acting: (1) in GF, (2) with care of an ordinary prudent person in the circumstances, (3) in manner he reasonably believes to be in the corporation’s best interest.
Director may rely on: (1) reports prepared by officers or employees he reasonable believes competent, (2) accountants, attorneys or other reasonably believed acting within professional competence; or (3) board committee of which he’s not member.
Nonfeasance: only liable if caused loss to corp.
Misfeasance: not liable if satisfies BJR (not liable if good faith, informed, not conflicted and rational basis).
Duty of Loyalty – Owed to corp. She must act in good faith in the reasonable belief that she is acting in the best interest of the corp.
Deals w/ interested directors VOID unless safe harbor: (1) transaction is fair to corp. OR (2) interest and relevant facts disclosed to corp. AND approval by a majority of disinterested directors or shares.
Can’t compete with the corp.
Can’t usurp corp. opportunities (D liable for any profits made at the corp’s expense)
Interlocking directorate: director knows that he or related party is director, officer, etc of another entity conducting biz with the corp of such importance that will be brought to the board.
Who’s liable: a director is presumed to have concurred w/ Board action unless her dissent or abstention is noted in writing. Exceptions:
Good faith reliance
Indemnification: depends largely on the outcome of the suit.
A director is entitled to indemnification for legal expenses incurred if the D is “wholly successful” or “to the extent” she was successful in defending a suit.
A corporation may NOT indemnify a director where D is liable to the corp. or D received an improper personal benefit
Other times it’s permissive, the standard being whether the D breached duty of loyalty: must prove acted in GF in corp’s interest
Articles cannot eliminate D’s liability for intentional misconduct, usurping opportunities, unlawful distribution or improper personal benefit.
Generally, a SH is not liable for the acts or debts of the corporation, but the Court will pierce the corporate veil and hold the SH personally liable to avoid fraud or unfairness by abuse of corporate privilege. Classic fact patterns, more likely in favor of tort claimant when:
corporate formalities ignored and injustice results;
Undercapitalization: insufficient to cover foreseeable liabilities or
Fraud: formed to avoid existing liabilities or misstatement of fact.
Equitable subordination. Shareholders that are unsecured creditors generally do not subordinate themselves to other creditors. However, a court may subordinate shareholder’s credits if a wrongdoing is attributable to them. (Deep Rock doctrine)
No fiduciary duty by the SH to the Corp exc controlling SH cannot use position to obtain a special advantage to the expense of minority (oppression).
Management. Generally, the board of directors not the SHs manage the corp. Exception: close corporations. Some courts hold SHs in close Corps owe duties to each other similar to partners.
SH Derivative Suits: where SH sues to enforce a corp.’s claim not being vindicated by the Corp; not her own personal interest.
P must: (1) have been a SH at the time of the conduct giving rise to the suit and through suit (2) SH adequately and fairly able to represent the corp., and (3) make a written demand of the corp. to bring suit unless it would be futile (eg. Agreed by >).
Derivative suit cannot be brought until 90 days after demand to Corp unless (a) Corp notifies it will not take action; or (b) irreparable injury will occur
Recovery goes to corp.; SH-P gets costs and atty fees (if successful)
Corp joined as defendant (venue and jx)
Settlements allowed only under Ct approval.
Corp. can move to dismiss if majority of disinterested directors (at least 2) or committee of disinterested SHs determines that suit is not in the best interest of the corp.
SH Voting: Record SH as of record date had the right to vote. Ordinary voting rule: when a quorum is present, votes in favor exceed those against.
Proxies: SH may authorize in writing another to vote his shares
Good for 11 months unless otherwise agreed
Revocable unless “proxy coupled with an interest” and says “irrevocable”
Voting trusts a trust, in writing that controls how shares are voted. Shares are transferred to trust and Corp receives copy. Max duration 10 years
voting agreements: in writing, no duration requirement, no need to report it to Corp, specifically enforceable against shareholders.
For meeting: usually a majority of outstanding shares, but no less than 1/3 of shares entitled to vote.
To pass resolution either (1) majority of shares represented at meeting OR (2) majority of shares actually voting (split in authority)
Cumulative voting (only for directors): # of shares x # of director seats
Transfer restrictions – valid if reasonable under the circumstances (e.g. not an undue restraint on alienation).
Right to Inspect Books:
Traditional view: must have owned stock for 6 months or own at least 5%
Modern trend: any SH for proper purpose, by written request
Board has discretion to declare distributions. To force distribution, must make a very strong showing of abuse of discretion. Amount distributed must allow debts to be paid as they become due.
Which SH get dividends:
Preferred: paid first
Participating: paid again (for their pref and then for common share)
Cumulative: add them up for every year in which no distribution
Where does the money come from?
Earned surplus: all earnings – losses – dividends already paid
Capital surplus: income generated by stock over par value
NEVER stated capital: par value.
Directors are personally liable for excess distributions. May seek contribution from other directors and recover from SH who knew it was unlawful.
Fundamental corporate changeS
Merger and Consolidation:
Requires that the Ds adopt a resolution setting forth proposed action, and submitting it for a vote at a SH’s meeting. Need approval by a majority of shares entitled to vote.
Short form merger does not require SH approval (90% affiliate absorbed)
Appraisal rights of dissenting SH. Requires: (1) written objection before meeting, (2) vote against merger or abstaining, (3) file written demand for purchase.
Sale of Assets:
Substantially all – requires approval from directors and a majority of SHs entitled to vote
De Facto Merger – sale of all assets
May trigger appraisal rights
Amendment of Articles: Board action + approval by a majority of shares entitled to vote.
Voluntary: board action + approval by a majority of shares entitled to vote (wind up)
Involuntary: court ordered via SH petition b/c of director abuse, director deadlock that harms the company, or SH deadlock and failure for at least two annual meeting to fill a vacant board position. Alternative: court may order buy-out of the complaining SH
securities and related topics
Common Law Liabilities
Sale of Controlling SHs interest: Generally, a SH may act in their own personal interest and have no fiduciary duty to the corp. or other SHs. But, a SH who has a controlling interest must not act in a way that unfairly prejudices minority SHs. Thus, a controlling SH may sell for more than its value, but…
No sale to looters – must make reasonable efforts to investigate the buyer
No sale of corporate assets
No sale of board positions
Special Facts Doctrine: Many courts impose an affirmative duty on officers and directors to disclose special facts during securities transactions with a SH.
Special facts = those a reasonable investor would consider important in making an investment decision.
SH may recover difference between price paid and value of the stock after public disclosure.
Misrepresentation of a material fact
Which D knew/believed to be false or w/ reckless disregard to its truth
Intent to induce reliance on the misrepresentation
Misappropriation: some courts have adopted a rule imposing a duty to disclose on anyone who has misappropriated nonpublic information. Thus, anyone who has breached a fiduciary duty owed to anyone else is liable on this theory when brought by the government.
Federal Rule 10b-5: makes it illegal to use any fraudulent scheme (misrepresentations, nondisclosures) in connection with the purchase or sale of any security using instrumentalities of interstate commerce. (No need that D purchase or sell securities)
Fraud: intent to deceive, manipulate or defraud.
Materiality of statement: substantial likelihood that a reasonable investor would consider it important.
Misrepresentation of material information. Elements of prima facie case:
Fraudulent conduct: (misrepresentation, omission, tipping)
Concerning a material fact (reasonable investor would consider it important)
In connection with either purchase or sale of securities
Using instrument of interstate commerce
With scienter – intent to defraud
Reliance (in some cases; while presumed in non-disclosure like insider trading)
Damages (in private actions, gov doesn’t need to prove)
Insider trading – Most common form of fraudulent conduct under 10 b-5. Fiduciaries must abstain from trading or disclose the insider information.
Fiduciary relationship required
Tipper/Tipee: where an insider gives a tip of inside info:
The tipper can be liable if gives tip for any improper purpose
The tippee can be liable if the tipper breached a duty and the tippee knew that the tipper was breaching the duty.
Misappropriation. Person who trades on insider information received in breach of a duty of trust or confidence is liable under 10b-5.
Damages: the difference between the price paid and the price a reasonable time (90 days) after public disclosure of corrective information.
Defendants: anyone who breaches a duty not to use insider information: tipper (if gets any benefit), tippee (trades on tip knowing improper) buyer or seller that makes misrepresentation.
Penalties: 3x gains, 1 million penalties, 10 years jail time.
Federal Rule 16(b) Strict liability for short swing trading – provides that any profit realized by a director, officer, or ten percent SH from any purchase and sale, or sale and purchase, of any equity security of his corporation within a six-month period must be returned to the corporation.
A person is ten percent SH is she directly or indirectly owns 10% of any class of equity security at the time immediately before both the purchase and the sale.
Applies to corps that trade their stock in a national exchange, have more than 2,000 shareholders or more than $15 million in assets.
Imposes a SL standard to prevent misuse of insider information.
Result: all profits go to the corporation.
Profits occur where within 6 months before or after any sale, there was a purchase at a lower price.
To calculate: match the highest sales price against the lowest purchase price during any 6-month period.
CORPORATIONS 7/20/16 Pg 1 of 4
Defendants: anyone who breaches a duty not to use insider