Corporations California Bar Exam Outline

CORPORATIONS

1. Organization of corporation

   1. Formation requirements: people, paper, act

      1. Ultra vires activities

      2. De Jure Corporation: acceptance of Articles by the Secretary of State

      3. De Facto: good faith attempt to comply with the inc. statute.

      4. Corporation by Estoppel: one dealing w/ a business as a corp. may be estopped from denying the business’s corp. status.

   2. Promoters

      1. Pre-incorporation contracts.

         1. Promoter always liable until there is novation

         2. Corporation never liable until there is adoption

      2. Promoter cannot make a secret profit on her dealings w/ corp.

   3. Foreign corporations must qualify by getting a “certificate of authority”

2. Issuance of Stock

   1. Only applies when corp. is selling its own stock

   2. Subscriptions – written offers to buy stock

      1. Pre-incorporation – irrevocable for 6 months unless provided otherwise

      2. Post-incorporation – revocable until acceptance

   3. Consideration

      1. Forms

         1. Traditional rue: (1) money, (2) tangible/intangible property; (3) services already performed

         2. Modern trend: “any tangible or intangible property or benefit to the corp” including promissory notes and future services.

      2. Par value – minimum issuance price

      3. Watered stock

   4. 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.

3. Directors and Officers

   1. Statutory Requirements – for directors

      1. Number – one or more adult natural persons

      2. Election: SHs elect directors at the annual meeting (staggered, classified board)

      3. SHs can remove directors with or without cause

      4. Board action: (1) unanimous written consent, or (2) a meeting

   2. Duty of Care – Owed to corp. She must act in good faith as a prudent person would act in regards to her own business. P bears burden of proof.

      1. Nonfeasance: only liable if caused loss to corp.

      2. Misfeasance: not liable if satisfies BJR (no review if good faith, informed, rational basis).

   3. 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.

      1. Deals w/ interested directors VOID unless (1) fair to corp. OR (2) interest and relevant facts disclosed to corp. AND approval by a majority of disinterested directors or shares.

      2. Can’t compete with the corp.

      3. Can’t usurp corp. opportunities (D liable for any profits made at the corp.s expense)

   4. Who’s liable: a director is presumed to have concurred w/ Board action unless her dissent or abstention is noted in writing. Exceptions:

      1. Absent directors

      2. Good faith reliance

   5. Indemnification: depends largely on the outcome of the suit.

      1. 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.

      2. A corporation may NOT indemnify a director where D is liable to the corp. or D received an improper personal benefit

      3. Other times it’s permissive, the standard being whether the D breached duty of loyalty

4. Shareholders

   1. 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.

      1. Alter ego

      2. Undercapitalization

   2. Generally, the board of directors not the SHs manage the corp. Exception: close corporations.

   3. SH Derivative Suits: where SH sues to enforce a corp.’s claim not her own personal interest.

      1. P must: (1) have been a SH at the time of the conduct giving rise to the suit (2) adequately represent the corp., and (3) make a written demand of the corp. to bring suit unless it would be futile.

      2. Recovery goes to corp.; SH-P gets costs and atty fees (if successful)

      3. Corp. can move to dismiss if a committee of disinterested SHs determines that the suit is not in the best interest of the corp.

   4. SH Voting: Record SH as of record date had the right to vote.

      1. Proxies: SH may authorize another to vote his shares

         1. Good for 11 months unless otherwise agreed

         2. Revocable unless “proxy coupled with an interest

      2. Voting trusts / voting agreements

      3. Quorum:

         1. For meeting: usually a majority of outstanding shares, but no less than 1/3 of shares entitled to vote.

         2. To pass resolution either (1) majority of shares represented at meeting OR (2) majority of shares actually voting (split in authority)

      4. Cumulative voting (only for directors): # of shares x # of director seats

   5. Transfer restrictions – valid if reasonable under the circumstances (e.g. not an undue restraint on alienation).

   6. Right to Inspect Books:

      1. Traditional view: must have owned stock for 6 months or own at least 5%

      2. Modern trend: any SH

   7. Distributions:

      1. Board has discretion to declare distributions. To force distribution, must make a very strong showing of abuse of discretion.

      2. Which SH get dividends:

         1. Preferred: paid first

         2. Participating: paid again

         3. Cumulative: add them up

      3. Where does the money come from?

         1. Earned surplus: all earnings – losses – dividends already paid

         2. Capital surplus: income generated by stock over par value

         3. NEVER stated capital: par value.

5. Fundamental corporate change

   1. Merger and Consolidation:

      1. 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.

      2. Short form merger does not require SH approval

      3. Appraisal rights of dissenting SH. Requires: (1) written objection before meeting, (2) vote against merger or abstaining, (3) file written demand for purchase.

   2. Sale of Assets:

      1. Substantially all – requires approval from directors and a majority of SHs entitled to vote

      2. De Facto Merger – sale of all assets

         1. May trigger appraisal rights

         2. Successor liability

   3. Amendment of Articles: Board action + approval by a majority of shares entitled to vote.

   4. Dissolution:

      1. Voluntary: board action + approval by a majority of shares entitled to vote (wind up)

      2. 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

6. securities and related topics

   1. Common Law Liabilities

      1. 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…

         1. No sale to looters – must make reasonable efforts to investigate the buyer

         2. No sale of corporate assets

         3. No sale of board positions

      2. Special Facts Doctrine: Many courts impose an affirmative duty on officers and directors to disclose special facts during securities transactions with a SH.

         1. Special facts = those a reasonable investor would consider important in making an investment decision.

         2. SH may recover difference between price paid and value of the stock after public disclosure.

      3. Misrepresentation

         1. Misrepresentation of a material fact

         2. Which D knew/believed to be false or w/ reckless disregard to its truth

         3. Intent to induce reliance on the misrepresentation

         4. Actual reliance

      4. 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.

   2. Federal Rule 10b-5: makes it illegal to use any fraudulent scheme in connection with the purchase or sale of any security.

      1. Elements:

         1. Instrument of interstate commerce.

         2. Fraudulent conduct: (misrepresentation, omission, tipping)

         3. In connection with either purchase or sale

         4. Material fact

         5. Scienter – intent to defraud

         6. Reliance

      2. Insider trading – abstain from trading or disclose the insider information.

         1. Fiduciary relationship required

         2. Tipper/Tipee: where an insider gives a tip of inside info:

            1. The tipper can be liable if the tip was made for any improper purpose

            2. The tipee can be liable if the tipper breached a duty and the tippee knew that the tipper was breaching the duty.

      3. Damages: the difference between the price paid and the price a reasonable time after public disclosure.

   3. Federal Rule 16(b) – 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.

      1. 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.

      2. Result: all profits go to the corporation.

         1. Profits occur where within 6 months before or after any sale, there was a purchase at a lower price.

         2. To calculate: match the highest sales price against the lowest purchase price during any 6-month period.