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Pile Management Card
corporations
corporations
| Sale of controlling interest |
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controlling shareholder is under a fiduciary limitation when selling control - may NOT selling a fiduciary position! look for sale of control accompanied by resignations of friendly directors NOTE: seller of controlling interest has duty to make a reasonable investigation of the character and reputation of the buyer (if buyer loots and seller did not investigate, he is liable) |
| MA Consumer Protection Act (Ch. 93A) |
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prohibits use of unfair or deceptive practices and unfair methods of competition in ANY business or trade - incl. sale of securities - any stock offering must be accurate in all material respects - does NOT apply to corp governance--just misleading info in sale of securities REMEDIES: - willful violation: double or treble damages + atty's fees for egregious behavior (not automatic) - limited to actual damages + atty's fees in sale of securities - must mail/deliver demand letter 30+ days before filing suit (if reply w/in 30 days, P cannot recover more than offer) Statute of Limitations: 4 years - claim accrues when reasonable person would have learned of the deceptive conduct |
| MA Uniform Securities Act |
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prohibits: - device or scheme to defraud - material misstatements of fact - omission of fact necessary to make statements that were made not misleading - any act/practice that would operate as a fraud e.g., misstatement or omission about corp's worth NOTE: negligence insuff.--must be KNOWING engagement in fraud |
| Dissolution |
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VOLUNTARY: - Board action - approval by 2/3 of shares entitled to vote INVOLUNTARY: - 40% of voting shares may petition b/c director deadlock threatens irreparable harm OR shareholder deadlock and failure for 2+ annual mtgs to fill a vacant board position - court may order buyout of petitioning shareholders (typical in close corp) - creditor may petition b/c corp is insolvent and has unsatisfied judgment OR corp admits debt in writing - administrative dissolution: by secretary of state for failure to file req docs or pay taxes for 2 yrs or if inactive or in public interest (90 days' notice) - apply liquidation preference in winding up |
| Conversion between forms of business |
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requires: - Board action - approval by 2/3 of shares entitled to vote - deliver articles of conversion to state secretary |
| Fundamental corporate change: disposition of all or substantially all of ASSETS not in ordinary course of business OR SHARE exchange (one corp acquires stock of another) |
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these are fund changes for selling corp, not buying corp requires: - Board action (both corps) AND NOTICE to all of selling corp's shareholders - approval by transferring corp's shareholders special rules on sale of assets: - NO filing req w/ state secretary - acquiring corp NOT liable for debts of acquired corp (unless stated or merely a continuation of the selling corp) b/c selling corp still exists to be sued (did not disappear) |
| Mergers |
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require: - Board action (both corps) - NOTICE to all shareholders of disappearing corp - shareholder approval (usually only for disappearing corp) NO req of shareholder approval if 90%+ sub merged into parent: "short form merger" creates "successor liability" |
| Amendment of articles |
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requires: - Board action and NOTICE to all shareholders - shareholder approval: 2/3 of ALL shares ENTITLED to vote |
| Fundamental corporate changes |
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- extraordinary occurrences that require Board action AND - NOTICE of all shareholders (regardless of whether entitled to vote) AND - approval by 2/3 of shares entitled to vote (not just of those who actually vote) * some fund changes trigger shareholder's right of appraisal (right to force corp to buy her shares at FMV): - merger - transfer of subs all assets not in ordinary course of business - transfer of shares in a share exchange - some amendments to articles - conversion shareholder must perfect right of appraisal by: - before vote, file written notice of objection w/ corp of intent to demand payment - abstain or vote against proposed change AND - after vote, make written demand to be bought out NOTE: NO right of appraisal if corp is on national exchange w/ 1,000+ shareholders (i.e., ONLY in close corps) |
| What shareholders get dividends |
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- preferred - participating (paid twice) - cumulative - common corp may NOT make distribution if insolvent or distribution would render it insolvent (but ok to simply have not made profit prior year) - directors are personally liable for unlawful distributions: strict liability for ALL directors deemed to have agreed w/ the distribution (defense: good faith reliance; may get contribution from other directors) - shareholders only liable if they knew it was unlawful when received |
| Right of shareholder (personally or by agent) to inspect and copy books, records of corp |
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ROUTINE docs (articles, bylaws, annual report, lists of directors, minutes, etc.): unqualified right to inspect (5 days' written demand: no reason req) OTHER docs (sensitive docs: acct records, minutes of board mtgs, record of shareholders): written demand stating a proper PURPOSE NOTE: directors have unfettered access to docs |
| Distributions |
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subject to Board's discretion (shareholder must show abuse of discretion in action to compel) - DIVIDEND - to REPURCHASE shareholder's stock - REDEMPTION (forced sale to corp to price set in articles) |
| Stock transfer restrictions |
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in articles, bylaws or by agreement right of first refusal must not be an undue restraint on alienation; ok assuming corp offers a reasonable price - must be conspicuously noted on stock certificate OR - transferee had actual knowledge of the restriction |
| Stockholder voting |
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who votes: record stockholder no more than 70 days before mtg EXCEPT: - corp does not vote reacquired stock even if it was record owner on record date - death of shareholder (executor may vote) - proxies: writing signed by shareholder to secretary of corp authorizing another to vote (good for 11 months unless stated otherwise) * need QUORUM represented at mtg, depends on #shares, not #shareholders - quorum is NOT lost if ppl leave mtg (unless director voting) - depends on #shares voting, NOT #represented at mtg - articles may move quorum req up, but not down CUMULATIVE voting: available to vote for directors if stated in Articles |
| Shareholders: valid corporate act |
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- by unanimous written consent of holders of all voting shares OR - mtg that satisfies quorum and voting rules - annual mtg: shareholders may petition ct if late - special mtg: may be called by Board or holders of 10%+ of voting shares (40% if public) or according to articles or bylaws; need not be in MA - notice req: written to all shareholders entitled to vote 7-60 days beforehand w/ statement of purpose; must stick to statement of purpose; failure of notice makes actions taken void unless waived (express or implied) NOTE: shareholders do not remove officers |
| Voting (pooling) agreement |
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must be - in writing - signed NOTE: directors may NOT make voting agreements |
| Voting trust |
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requirements for valid trust: - written trust agreement controlling how shares will be voted - file copy w/ corp (NOT secret) - transfer legal title of shares to voting trustee (separate legal + equitable title) - original shareholders receive trust certificates and retain all shareholder rights other than voting NO time limit under Business Corp Act |
| Proxy: how to make irrevocable |
| statement says it's irrevocable + proxy holder has some interest in stock other than voting |
| Proxy |
| NOT in director voting, only shareholder |
| Derivative suit |
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shareholder suing to enforce corp's claim (not own claim) b/c corp is not pursuing it requirements: - stock ownership at time claim arose OR obtained by operation of law from someone who did (inheritance, divorce decree) - must own stock throughout litigation - must own stock during continuing wrong - must fairly and adequately represent the interests of the corp - must make written demand on directors that corp bring the suit - must wait 90 days after demand UNLESS corp rejects demand or it would cause irreparable injury to corp (corp can move to dismiss suit if majority of disinterested shares or directors (2+) found in good faith after a reasonably inquiry that a suit was not in the corp's best interest) examples: - S sues Board for usurping corp opportunities - S sues X for breaching contract w/ corp compare to DIRECT suits: - S sues Board for issuing new stock w/o honoring preemptive rights - S sues Board for oppression of S if S wins derivative suit: corp recovers judgment, S recovers legal costs + atty's fees - if S loses, may still recover costs ONLY if suit brought subs benefit to corp (unlikely!) - S is liable for D's atty's fees if ct finds that S sued w/o reasonable cause or for improper purpose |
| Piercing the corp veil |
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only in CLOSE corps must have: - shareholder treating corp assets as own (alter ego) AND - unfairness (state why) THEORIES: - alter ego - undercapitalization - parent corp forms a subsidiary to avoid obligations ***MA NOTE: MA courts more willing to pierce corp veil for TORT victim than contract claim |
| Shareholder liability for acts, debts of corp? |
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NO b/c corp is liable, BUT: court may pierce corp veil and hold shareholders personally liable IF - they have abused the privilege of incorporating - fairness requires it to avoid fraud or unfairness NOTE: only pierce corp veil in CLOSE corps - never automatic - classic fact pattern: alter ego theory (not mere failure to observe corp formalities such as selecting officers or holding mtgs) |
| Professional corporation |
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licensed professionals may incorporate - name must include "professional corp" or abbreviation - shareholders must be licensed professionals (e.g., CPAs, medical professionals) - generally may practice only 1 profession unless licensing allows - shareholders, directors + officers must ALL be licensed - may employ non-professionals - liability for malpractice: person who committed it AND the PC entity - shareholders NOT liable for each other's malpractice or corp obligations rules governing regular corps apply to PC entities |
| Freeze-out in close corp |
| court weighs business purpose against possibility of less harmful alternative for minority shareholder |
| Special protection for minority shareholders in close corps in MA |
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seller of controlling interest MUST investigate the character and reputation of a buyer! EXAMPLES of oppression by controlling shareholders: - controlling shareholders must NOT pursue course of conduct when alternative less harmful to minority shareholders exists - freeze-out - terminating a shareholder's employment w/o reason - any oppressive or underhand treatment * under Equal Access Rule: in close corp, majority/controlling shareholder must make same pro rata offer to buy shares to minority shareholders |
| Close corporation |
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- few shareholders - stock NOT publicly traded - subs shareholder involvement in management (but NOT req: can be run by Board) NOTE: most corps in world are close corps * shareholders may eliminate Board and run corp by: - in Articles or Bylaws and approved by ALL shareholders OR - written agreement signed by ALL shareholders and filed w/ corp both subject to 10-year renewable max. managing shareholders owe duties of care and loyalty ***MA: each shareholders owes others utmost duty of good faith and loyalty--more stringent than standard duty of loyalty; same duty as partners except owed to other shareholders, not to corp controlling shareholders may NOT pursue course of conduct when an alternative less harmful to minority shareholders exists ***MA: very protective of minority shareholders! |
| Shareholders |
| can manage ONLY in CLOSE CORPS (otherwise: Board manages corp) |
| Hierarchy of directors, officers |
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- shareholders hire/fire directors - directors hire/fire officers shareholders do NOT hire/fire officers |
| Indemnification of directors & officers |
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person sued in capacity as officer/director incurs costs, atty fees, fines, judgment/settlement: - MANDATORY indemnification: if person was wholly successful on merits or otherwise (entire case) - PROHIBITED indemnification: if suit lost for --breach of duty of loyalty --intentional misconduct --wrongful personal benefit --improper distribution - PERMITTED reimbursement: all other cases ELIGIBILITY: person acted in GOOD FAITH + w/ reasonable faith that act was in corp's BEST INTEREST - eligibility determined by disinterested director/officer or independent legal counsel - or may be ordered by court where reasonable under circumstances (usually limited to costs, atty's fees, NOT judgment) - articles can provide for limitation or elimination or director liability for damages (but NOT for officers), but NOT for: --breach of duty of loyalty --intentional misconduct --wrongful personal benefit --improper distributions - corp can purchase insurance for direct/officer liability |
| Selection and removal of officers |
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- selected/removed by directors (may be subject to breach of contract damages) - directors set officer compensation |
| Officers |
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owe same duties of CARE and LOYALTY as directors - agents of the corp - can bind corp by acts for which they have authority to bind it must have: - president - secretary - treasurer may have others (set in bylaws) - may have multiple office-holders ***MA: - deed to corp must be signed by Pres or VP AND Treas - inherent authority of Pres is limited: may NOT bind unless Board authorizes |
| Directors' liability for acts |
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director is presumed to have concurred w/ Board action UNLESS abstention or dissent is noted in writing in corp records: - in minutes - in writing to corp secretary at mtg - writing (email, fax ok) to corp secretary immediately after adjournment ORAL dissent alone is insuff. EXCEPTIONS: - good faith reliance on info, opinions, reports, etc., prepared by corp officers, employees, committees of which director not a member (must have CONFIDENCE in competence of persons providing info) - e.g., reliance on improper distributions |
| Sarbanes-Oxley |
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prohibits most loans to directors in big registered corps requires Board to establish audit committee must oversee work of registered public accounting firm CEO and financial officers must certify accuracy + completion of financial reports it's about: FINANCIAL ACCOUNTABILITY |
| * classic question: usurpation + interested director transaction |
| e.g., director buys land available for corp (USURPATION) to buy and then sells to corp (USURPATION + INTERESTED DIRECTOR TRANSACTION) |
| Improper loans to directors |
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must be approved by: - majority of disinterested shares - specific Board approval that loans benefit corp (e.g., to send director to school) |
| Ultra vires acts |
| officers and directors liable for losses |
| Corporate opportunity (expectancy) |
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director diverts opportunity to self duty of loyalty: director may NOT usurp a corporate opportunity (i.e., may not take until Board informed and turns it down) ***MA test: is it unfair to the corp that the director took the opportunity? |
| Competing ventures |
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as fiduciary w/ duty of loyalty, director may NOT compete directly w/ corp - remedy: corp gets CONSTRUCTIVE TRUST on director's profits + maybe damages if competition harmed the corp - but can serve on Board of non-competitor corp |
| Interested director transaction |
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any deal btw corp and a director or another business of a director duty of loyalty: about conflicts of interest--NO BJR applicable RULE: interested director transaction will be set aside UNLESS director shows that: - deal was fair when entered into OR - director's interest and material facts were disclosed or known and deal was approved by majority (2+) of all disinterested directors or shares (quorum suff.) ***MA: no automatic approval, just not automatically set aside if any inappropriate behavior, court may require showing of fairness even though statute requires fairness OR approval NOTE: directors may set own compensation if reasonable; excess=breach of duty of loyalty (waste) |
| Directors: duty of loyalty |
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burden on D focus: conflicts of interest standard: director must act - in good faith - w/ care that a person in like position would reasonably believe appropriate - w/ reasonable belief that it is in corp's best interest * in determining best interests of corp, directors may consider interests of any relevant group and society |
| Director: misfeasance |
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Board does something that hurts the corp: causation clear standard: person in like position would do appropriate homework director is NOT liable if meets the BUSINESS JUDGMENT RULE - look for: analysis, deliberation, etc. ***BJR: court will not second-guess a decision made in good faith, informed, w/ rational basis--director does not guarantee success! |
| Director: nonfeasance |
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director does nothing standard: person in like position would do something regarding business director is liable ONLY IF breach caused loss to corp (must show CAUSATION--hard to win nonfeasance case b/c corp would typically lose $ anyways) EXAMPLE: director fails to supervise officers who then do something illegal--key fact: size of corp: if large, then director may not be liable |
| Directors: duty of care |
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burden on P director must: - act in good faith - act w/ care that a person in like position would reasonably believe appropriate - act w/ reasonable belief that it is in the corp's best interest |
| Board of Directors function |
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management (set policy, supervise officers, declare distribution, decide when to issue stock, etc.) - can delegate to a committee w/ restriction: committee may NOT --declare distributions --recommend fundamental change to shareholders --fill a Board vacancy COMMITTEE = 1+ directors |
| Board action |
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- unanimous written consent to act w/o mtg - mtg (anywhere) that satisfies quorum and voting reqs; conf call ok OTHERWISE: any act taken is VOID unless ratified by a valid act NOTICE req: - regular mtgs: NO req - special mtgs: 2 days' notice stating when + where; notice must be in writing (email ok) unless oral notice is reasonable *** FAILURE to give notice at special mtg: renders acts taken void UNLESS waived if in writing, signed and filed w/ minutes OR by attending mtg w/o objection PROXIES, voting agreements: only for shareholders, NOT directors QUORUM for a mtg: if majority of directors present (or other % stated in articles or bylaws), then only a majority of those present is needed for Board to take an act |
| Directors & Officers: statutory requirements |
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1+ directors (persons) # is set in articles or bylaws; if not set, then if there is X shareholder you need X+ director OR: articles or bylaws may set a variable-sized Board - may be staggered in election: articles may divide Board by 1/2 or 1/3 ***MA: publicly-traded corp must have Board staggered w/ 3 classes - shareholders elect directors at annual mtg; may remove w/o cause EXCEPT public corps (must be for cause) - other directors may take majority vote to remove a director for cause ONLY |
| Pre-emptive rights |
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right of existing shareholder to maintain % ownership (never diluted) (can buy stock) whenever there is a new issuance "new issuance" incl. reacquired stock ONLY exist if Articles allow |
| Issuance of stock: consideration |
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when corp issues stock it must receive - any in/tangible benefit, incl. release from claim, services already performed, etc. - if NO consideration: Directors liable if knowingly authorized, buyer liable for failure to pay par = min issuance price ***MA: Board may determine what is adequate! may be less than par unless prohibited in Articles no par = no min price, so Board may set reacquired stock: no min price |
| Subscription |
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offer to buy stock from corp - PRE-incorp subscriptions: irrevocable for 6 months UNLESS stated otherwise or all subscribers agree - POST-incorp subscription: revocable until acceptance - corp and subscriber become obligated under subscription agreement when Board accepts the offer - call for payment must be uniform w/in each class or series |
| Securities |
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investment: - debt: investor is a CREDITOR --secured: bond --unsecured: debenture - equity: stock--investor is an OWNER * debt: may be convertible, redeemable in INSTRUMENT * equity: may be convertible, redeemable in ARTICLES - redemption: forced sale to corp - conversion: security holder has right to convert (debt to equity or vice versa, or btw classes) |
| Issuance of stock |
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authorized issued outstanding issuance: corp sells/trades own stock to raise capital |
| Foreign corp: consequences of doing business w/o qualifying |
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- civil fine - liable for late fees, interest, penalties - corp may not sue in state (but may be sued) |
| "Doing business" |
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regular course of INTRASTATE (not interstate) business activity - NOT occasional, sporadic - incl. owning/leasing property, any activity req labor - NOT incl. holding bank acct, holding mtgs alone |
| Foreign corporation |
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corp formed outside MA qualifies by: - getting authority from MA state secretary (delivering certificate giving info from articles and certificate of good standing from home state) - describe business to be done - pay fees - maintain registered office - file annual report of condition |
| Profit: definition |
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on pre-acquired property: price paid by corp - FMV on post-acquired property: price paid by corp - price paid by promoter NOTE: promoter is only liable to corp for SECRET profits (depends on corp's knowledge)! |
| Secret profit rule |
| promoter may not make a SECRET profit on dealings w/ corp |
| Promoter: liability on pre-incorp contracts |
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person acting on behalf of a corp not yet formed remains liable on pre-incorp contracts UNTIL there has been a novation (agreement of promoter, corp and other contracting party and corp will replace promoter) NOTE: there may be ADOPTION but not NOVATION (so promoter is still liable) adoption: makes corp also liable, but does not relieve promoter |
| Pre-incorporation contracts |
| corp NOT liable on a pre-incorp contract UNTIL it adopts the contract (by express Board action or implied by corp knowingly accepting a benefit of the contract) |
| Bylaws |
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NOT required - internal rules - may be adopted by Board or Incorporators - may be repealed/amended by shareholders (directors: ONLY if allowed by articles or bylaws) - b/c internal, if conflict w/ articles, articles govern |
| De facto corp doctrine |
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P must be unaware of failure to form de jure corp req: - there is a relevant incorp statute (BCA) - parties made a good faith attempt to comply - some exercise of corp privileges (acting like corp) if req met, treated as corp for all purposes EXCEPT in action by state (quo waranto) |
| Corporation by estoppel |
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one dealing w/ business as a corp may be estopped from denying its status - may be used to preent corp from avoiding obligation by asserting lack of valid formation - usually limited to contract, not tort |
| charitable contributions |
| unlimited |
| Legal significance of formation in MA |
| if you form in MA, MA law governs, even if you do all business elsewhere |
| Organizational meeting |
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directors: - adopt bylaws - select officers - conduct appropriate business |
| Act |
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deliver articles + supp form to MA state secretary and pay fee if found in compliance, secretary files articles and corp is a DE JURE (legal) corp |
| Ultra vires contracts |
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VALID, but: - shareholders may seek injunction - directors, etc., liable for losses |
| Supplemental form |
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must state: - name of initial registered agent, address - name of initial directors, pres, treas, secretary - dates of initial fiscal year * presume perpetual existence if duration not stated * presumed that corp can do all lawful activity: no statement of purpose req * ultra vires contracts (outside stated scope) are VALID, but shareholders can seek injunction and directors, etc., are liable to corp for losses |
| Articles of organization |
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must include: - corporate name "corp," "incorp," "ltd" or "co" - name, address of each incorporator - info on stock (authorized # to be sold; #shares/class; voting rights, preference, limitations of each class/series) |
| Organization of corps: incorporators |
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execute Articles and deliver w/ Supplemental Form to State Secretary * may hold organizational mtg * may be done by person or entity |
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