Exam 3 studyguide
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Exam 3 study guide Chapter 41 1 For pro t corporations a Issue stock to shareholders who get dividends and gain from increased market value b Shareholders aren39t concerned in the management of the corporation 2 Not for pro t corporations a Do not issue stock or expect to make a pro t b No income tax c Regulated by the states 3 Governmentowned corporationsperform governmental as well as business functions 1 Regular corporation 2 Professional corporation 3 Lowpro t corporation 4 Nonpro t corporationstill liable for other taxes than federal and state tax such as sales tax no shareholders Rights a Owners have none only voting of directors b Directors have the right to set strategic course of business c Of cers have the right to run the business a Regular and professional corporations are focused on making a pro t b Lowpro t corporations are focused on doing social good and making some pro t c Nonpro t corporations are focused on doing social good only Regulation of Foreign and Alien Corporations a Foreign corporationrefers to where you39re incorporated and if you do business outside the state b Domestic corporationwhen doing business in the state that has granted its charter c Due Process Clauseforeign corporations need to have enough contact with the state before a state can exercise jurisdiction over the corporation d Commerce Clause a Federal government regulates interstate commerce b States don39t have power over foreign corporations who just have interstate commerce c A foreign corporation39s activities can be regulated by the state if they enter into a state to do intrastate business in a stateunless it unduly burdens interstate commerce Not unduly burden 1 the law serves a legitimate state interest 2 the state has chosen the least burdensome means of promoting of promoting that interest 3 the legitimate state interest outweighs the statute s burden on interstate commerce d Doing business generally if a corporation is doing business in the state it is subject to the state s laws 1 Purpose of determination a To determine whether a corporation is subject to a lawsuit in a state court To determine whether the corporation is subject to the state39s tax To determine if the corporation must qualify to carry on its activities in the state To see if the state can regulate the corporation39s internal affairs b C d e Subjecting Foreign corporations to suit a corpor corpor Must meet minimum contacts testcourt weigh the ation39s contacts within the state against the burden of the ation Even an isolated event may be enough to give jurisdiction on a state39s courts f Taxationforeign corporation can be taxed unless it violates the Due Process Clause or Commerce Clause a 1 2 3 4 b corpor No violation of commerce class if Tax is applied to an activity that is mostly in connection with the taxing state ls fairly apportioned Does not discriminate against interstate commerce interstate commerce has more taxes or something ls fairly related to the services provided by the state A state can tax an interstate sale if the foreign ation has buyers in the state and a physical presence in the state building store etc 9 Qualifying to do businesscorporations may have to qualify to conduct business within a state a 1 2 b 1 2 3 4 5 Not a qualifying business soliciting orders that require con rmation outside the state Its an isolated transaction that only happens one and is completed within 30 days Qualifying business Maintaining an of ce of business Selling personal property Contracts with local business or sales Using real estate to conduct intrastate business Maintaining inventory in the state to ll orders h Regulation of a Corporation39s Internal Affairs a States usually regulate the internal affairs of corporations that are incorporated in their state b A corporation may do most of its business outside its incorporated statepseudoforeign corporation Some states heavily regulate their internal affairs as if they where domestic corporations Piercing the corporate veil i Once a shareholder has made their contribution investment they are no longer liable to the corporation Contracts and debts are not the shareholders j when the court to promote justice and to prevent inequity disregards the separation of the corporation and its shareholders Furthermore shareholders may lose their limited liability k Requirements to pierce the veilneed both a Domination of a corporation by its shareholders 1 Corporate formalities are followed 2 Separate books and records of the corporation and subsidiary 3 Pay for personal expensesshows domination 4 Capitalization corporation has low equity and high debt 5 Not conducting businessshell entities that are made by the dominant company 6 Corporation is using assets for personal reasons b Use of that domination for an improper purpose I Improper purpose a Defrauding creditors 1 Thin capitalizationinadequate capitalization in relation to the business39s risks and nature Creditors don39t have any protection against their claims with low capital 2 Looting a transferring corporate assets to shareholders that are undervalued gtFMV b the same shareholders of two companies may cause one corporation to loot the other c parent companies not liable for subsidiaries debt or obligations may cause the subsidiary to transact for its own bene t and hurt loot the subsidiary b Circumventing a statute a corporation should not do something prohibited by a statute c Evading an existing obligation Reincorporating or forming a subsidiary to evade an onga on Nonpro t corporations a a member is not personally liable for corporation39s obligations or acts b only if the nonpro t organization is used to defraud creditors circumvent a statute or evade obligations will the court pierce its veil Chapter 42 Promoteranybody can promote of the business Promotion period 1 Corporation is only liable when the agreement or contract is adopted 2 Promoter is liable prior to the existence of the corporation a Avoid future liability i Nova on ii Stated in the contract promoter will be released upon creation of corporation Formation of Corporation 1 File with state secretary 2 Authorization of shares being issued and number of sharescommon preferred different classes of stock 3 An addition of shares issues requires an amendment to articles of corporation Failure of to incorporate 1 Fail to le correctly or at all a Consequences i essentially a foreign corporation ii De facto corporationtreated as a real corporation so third party and corporation must keep contracts iii Liability of shareholders if you participate in the business and know of failed incorporation Incorporation of Nonpro t Corporations 1 Similar to forpro t incorporationsincorporators le with the secretary of state 2 Nonpro t must state purpose public bene t corporation mutual bene t or religious a Public bene tcreated for the bene t of the public b Mutual bene tdesigned to bene t the members 3 Nonpro ts may not have members they should specify if they do Liability for Preincorporation Transactions 1 Nonpro t status protects members and managers from personal liability 2 If the nonpro t is formed incorrectly or is not formed then the promoters and others that transact for the nonpro t are liable nonexistent principal 3 The corporation becomes liable on preincorporation contracts when its BOD adopts the contracts Financing ForPro t corporations 1 Sale of corporate securities to raise fundsshares debentures bonds and LT notes payable 2 Corporate security can be 1 a share or 2an obligation of the corporation 3 Equity securities stock a Common shares i shareholders have the right to elect the directors voting rights ii claims are subordinate to creditors and preferred shareholders claims iii shareholders have a claim to the corporation39s earnings and assets share in company growth iv sometimes they can be convertible to preferred stock rare b Preferred shares i Liquidation preferences a stated amount that must be paid before common shares and other subordinates ii Dividend preferencescan be cumulative or noncumulative Cumulativeif dividends aren39t paid they accumulate and must be paid before common shareholders get any dividends Noncumulativepreferred shareholders in the current year must get their dividend before common shareholders iii Redemption or call provision allows a corporation to repurchase shares at their purchase price forcing shareholders to give up their shares iv Voting rights 0 Usually limited to voting on big things like a merger or the shareholder39s dividend rights 0 They don39t usually have the right to vote for directors con ict of interest 0 Some classes of preferred stock will have more voting rights than others i Authorizedshares a corporation is permitted to issue A corporation may not issue more shares than authorized ii Issuedshares that have been sold to shareholders iii Outstandingshares held by shareholders iv Canceleddon39t exist not authorized issued or outstanding They can39t be reissued v Shares restored to unissued statusrepurchased shares can be put in unissued status and not cancelled They are still authorized and can be issued later vi Treasurv sharesrepurchased shares that are not canceled or unissued but still outstanding 5 Options Warrants and Rights i Optionsallow holders to buy a speci ed number of shares at a given price at a certain time period ii Warrantsoptions evidenced by certi cates iii Rights transferable ST certi cated options give present shareholders the right to subscribe a proportional quantity of the same or different security a shareholders have the opportunityright to newly issued shares in the same proportion as the shareholder39s current ownership keeps the ownership interest the same 6 Debt securities a Corporations borrow money by issuing debt securities b Corporation has to pay interest and principal c Types i DebenturesLT unsecured debt securities ii BondsLT secured debt security that usual have indentures They are usually secured by collateral iii Promissory notesshorter in duration can be secured or unsecured Consideration for Shares The board has the power to issue shares for the corporation 1 Quality of consideration for shares a Consideration must have real value b Consideration can be cash tangible or intangible property bene t to the corporation future services c Some states may have strict limits on what is permitted as consideration 2 Quantity of Consideration for shares BOD is required to issue shares for an adequate cash amount of consideration This depends on the par value of the shares a Par valueminimum amount of consideration needed to be issued an arbitrary dollar amount that the articles of incorporation assigned to the shares Doesn t re ect fair value b Accounting for consideration receivedconsideration received by the corporation is recorded as equity or capital in the shareholder39s equity section of the 35 c Resales of shares i Par value of shares is important only when the shares are issued by the corporation ii Treasury shares are not reissued when resold iii If the purchasing shareholder knows the selling shareholder bought the shares below par then the purchasing shareholder is liable to the corporation for the share s par value minus purchase price Share subscriptiona prospective shareholder gives a promise to buy shares with a speci c price and amount Once the subscriber has paid for the shares and the corporation accepted the subscription they become a shareholder a A subscriber can be a shareholder even before the shares have been issued b Promoters often use share subscriptions preincorporation subscriptions and they are binding once the corporation comes into existence and the BOD approves of the share subscription Issuance of shares 1 A corporation has a duty to issue only the number of shares authorized by its articles Therefore overissued shares are void a If a person is entitiled to overissued shares paid for shares already there are two remedies 1 reimbursement for value paid plus interest2 the corporation has to nd identical issued shares b Overissuance of shares may make directors liable 2 A share certi cate is evidence that a person has been issued shares owns shares and is a shareholder Not necessary for corporations Transfer of shares 1 Share certi cates are ownership evidence so a transfer of the share certi cate is evidence of a transfer of ownership 2 Shares issued a Registered sharestransfer happens by signature on back of share certi cate b Street certi catetransfer of a share certi cate without naming the transferee c Uncerti cated securities are transferred when the corporation registers the security under the new owner39s name Restrictions on transferabiity of shares 1 Generally there are no restrictions on transferabiity of shares 2 Many close corporations restrict the transferabiity of shares to maintain control 3 Types of restrictions a Rights of rst refusal and option agreements Right of refusal agreement gives the corporation or other shareholders the right to match the offer that a selling shareholder gets for her shares Option agreement 5 gives the corporation the option to buy the selling shareholder39s shares at a predetermined price b Buvandsell agreementscompels the shareholder to sell their shares to the corporation at a predetermined price on the agreement This obligates the buyer to buy the selling shareholder39s shares at the predetermined price c Consent restraints requires the seller to get consent from the corporation to sell their shares d Provisions disqualifying purchasers basically unwanted purchasers are excluded by this provision e Drag alongtag along 1 drag alonga majority control interest can force the minority interest to sell their shares 2 tag alonga minority interest can tag along when a majority interest is selling their shares 4 To be enforceable against a shareholder a transfer restriction must be stated in the articles of incorporation The shareholder must also agree NonPro t Corporations a Memberships in a nonpublic corporation are not freely transferable b Therefore no member of a public bene t corporation or religious corporation can transfer their membership or rights as a member c Members of mutual bene t corporations may transfer their membership only if the articles permit it Chapter 43 Corporate objectives a Enhance corporate pro ts and shareholder gain b Socially responsible actions c Corporate constituency statutes objective is to act in the best interests of the company and have longterm pro t Corporate Powers a Limitations of power are usually stated in the state statute and the articles of incorporation b Primary source of corporation39s powers is the corporation statute of state in which it is incorporated c Other state corporation statutes limit the powers of corporation Purpose a Usually stated in the articles of incorporation but its optional b Ultra Vires Doctrine a Any act not permitted by the corporation statute or by the corporation39s articles of incorporation is void due to lack of capacity has been abused b May be used by three types of persons 1 A shareholder seeking to enjoin a corporation from doing something in ultra vires 2 A corporation suing its management for damages caused by exceeding the corporations power 3 State39s attorney general who may have the power to enjoin an ultra vires act or dissolve a corporation that goes beyond its powers Nonpro t corporation power a Power to engage in lawful activity and anything an individual can do Board of Directors a BOD has the authority and duty to manage the corporations b Usually elects of cers to manage the business c Power to manage and direct ordinary business and issue stock and set their pnces d Committees cannot make some decisions for the BOD like mergers but help manage the business Directors a are not agents of a company just because they39re a director b directors manage the company when they act as a board and the board can grant directors agency c not personally liable generally d generally directors have the right to inspect the books that have information essential to their duties unless they in adverse interest denied right to inspect if their actions are adverse and hurtful towards the company Election of Directors a any individual can be a director but corporations usually have quali cations for directors in their articles of incorporation b Must have at least one director state requirements may differ directors gt shareholders c A company may have a minimum number of director requirement in their corporation statute Shareholders usually vote for directors e Proxy Solicitation process 0 e 1 Passive investors are usually not interested in voting but pro t 2 Once public ownership lt50 the corporation cannot do business unless some of these passive investors vote 3 Solution is proxie requires a shareholder who isn39t attending to appoint someone else to vote for them Management solicitation of proxies 1 To maintain control on matters that require shareholder votes the corporation39s managers CEO solicit proxies from shareholders to vote for the directors they want and other big decisions like mergers 2 BOD may not work ef ciently as a representation for shareholders and evaluating the CEO and of cers 3 Process of solicitationa highpower executive of cer nds new directors that will be voted in aows executive to keep control of the board a C Straight voteone vote per share shareholders with more shares lt50 will always dominate the election Cumulative votingshares x number of directorstota of votes aocate votes to try to get members on the boards helps minority shareholders get representation on the BOD Class votingcertain classes of shareholders are have the right to elect a speci ed number of directors d A majority vote is needed to ll empty director spots on the BOD Removal of Directors a b c d e f Shareholders can remove a director with or without cause unless stated otherwise in the articles of incorporation Usually stated in the bylaws what the cause must be for removal of a director Becomes an issue in closely held corporations Before removal the director has to be given notice and an opportunity for a hea ng Class voted A director elected by a class of shareholders must be removed by that same class protects voting rights of that class Cumulative voted director may not be removed if the votes cast against the removal is enough to get the director reelected protects minority voters Quoram Majority requirements a b apem e f Approvalmay need majority unanimous approval Only directors that show up can make decisions Consentshould be unanimous For directors to act a quorum of the directors must be present Quorum majority number of directors Ensures the decision of the board represents the views of most directors Majority voting provisionswith a quorum present a vote of a majority of directors present is an act of the BOD unless stated otherwise Supermajority voting provisionscommon in closely held corporations Without a meeting directors are permitted to act if there is director consent in writing to the action taken Of cers of the corporation Um no h president vice president treasurer and secretary Of cers are agents of corporation have express authority given to them by the bylaws or BOD Of cers have apparent and implied authority Presidentholds no power to bind the corporation by virtue of of cetitle has implied authority Vice presidentholds no bower to bind the corporation either unless they39re the vice president of a department If so they can transact on normal business of that department Secretarydocuments meetings maintains corporate records certi es corporate records as authentic Treasurerhas custody over the corporation39s funds does not by virtuetitle have authority to borrow money issue negotiable instruments or to make other contracts on behalf of the corporation Of cers can be removed at any time with or without cause and with no recourse unless it violates their contract Managing close corporations a b C d Shareholders want to be involved in management and they want to place restrictions on management discretion Close corporations can get rid of a BOD and just have shareholders manage the corporation Supermajority voting is used on big decisions that are not ordinary business decisions Shareholders have unlimited power to restrict the power of discretion of the BOD Managing Nonfor Pro t Electing directors apem th Members typicay eect directors at least three gt 49 of directors may have a nancial interest in the corporation Voting can be straight or cumulative and by class Directors of publicbene t or religious corporations should not receive compensation An individual director has no authority to transact for a corporation If there are of cers their authority is granted to them in the bylaws and they have apparent authority Selfperpetuating Initial incorporator chooses rst directors Then those directors choose new directors Duties for directors and of cers Acting within authorityan of cer or director has the duty to act within the authority given to them in the articles of incorporation the bylaws or the BOD An of cer or director may be liable to the corporation if it damages the corporation in an act that s not in their authority a Act in good faith putting the corporation rst b Reasonablyhonestly believe acting in best interests of corporation C Reasonable person that39s prudent would make the same decision if met you satis ed duty of care and protected from liability from their harmful decisions a Informed decision b No con ict of interest c Rational basis for decision and it s in the best interest of company 1 A logical connection to the facts 2 With reasonable investigation or that the decision manifested reasonably Managers39 wrongdoing act must be grossly negligent before they lose the protection of the business judgment rule Board opposition to Acquisition of Control of a Corporation Outsiders try to acquire control by tender offersan offer to the shareholders to buy their shares at a premium Takeover defenses are taken to oppose tender offers but this hurts shareholders Courts protect directors under the business judgment rule Takeover defenses must be reasonable UnocalDirectors must show Tender Offer defense BIR 1 It had reasonable grounds to believe that a danger to corporate policy and effectiveness was posed by the takeover attempt 2 It acted primarily to protect the corporation and its shareholders from that danger 3 The defense tactic was reasonable in relation to the threat posed to the corporation Reasonable grounds is a higher standard of BjR informed decision 0 Act to protect corporation usually con icts of interest are possible for managers Reasonable defense tactic is a high standard than rational basis Unocal test compliance 1 BOD must make a reasonable investigation 2 Must be motivated to protect the company from the raiders not their jobs or power 3 Takeover measures must be reasonable compared to the threat Duty of Loyalty Directors and of cers have a duty of utmost loyalty and delity to the corporation Duties Not to selfdeal Not to usurp a corporate opportunity Not to oppress minority shareholders Not to trade on inside information apem Con icts of interest transactions don39t have to be voided if 1 The transaction has been approved by a majority of informed disinterested directors 2 The transaction has been approved by a majority of the shares held by informed disinterested shareholders or a Armslength basis transactionis the transaction the same as if it was wo con ict of interest b Only fair for the corporation with the con ict of interest transaction be excused Unanimous approval of an interested person transaction by informed shareholders needs to release the director from liability even if the transaction is unfair Intrinsic fairness standard a Reasonable investigation b Decision fair to the corporation c Reasonable person acting at armslength Unsurpation of Corporate Opportunitv a Directors and of cers can steal opportunities that are good for the company b The opportunity should come to those in hisher corporate capacity easy to accomplish c Opportunity should have a relationconnection to an existingprospective activity 0 Should be related to ordinary business for it to be a corporate opportunity d Corporation should be able to nancially take advantage of the opportunity A director or of cer can actually take an opportunity that the corporation has rejected Oppression of Minoritv Shareholders Minority shareholders sometimes don39t get any returns may not receive dividends or can39t sell shares at a good price Shareholder agreement should help minority shareholders Freezeoutmerging a corporation with a newly formed corporation and the minority shareholders don39t get shares of the new corporation they receive cash instead Going privatefreeze out of publically owned corporations by going private Freezeout methods a Freezeout mergermajority shareholders form a new corporation minority shareholders are not included but may receive cash only b Reverse share splitarticles are amended to reduce the number of outstanding shares Legal standard 1 Total fairness a Fair dealingenough information is provided and there39s an opportunity for neganUon b Fair price 2 Business purpose testlegit business purpose Directors right to decentmust on record not approve of an action or fail to meet at BOD Insurance and indemni cation Indemni cation a Mandatory when a director is sued and is wholly successful in claim director is reimbursed for legal fees Usually required for reimbursement 1 Director acting in good faith 2 Director acting in best interests of corporation b Permissible Chapter 43 review Duty of care 1 General BJR 2 Tender Offer BJR 3 Reasonable persondepends on the facts circumstances Duty of loyalty 1 Con icts of Interestintrinsic fairness test arms length 2 Usurping corporate opportunity 3 Oppression of minority of shareholders a Total fairness test b Business purpose test 4 Insider trading Chapter 44 Shareholders39 Rights and Liabilities Shareholder39s role a Electing and removing directors b Voting on important decisions c Making sure the corporation39s managers are abiding by applicable state corporation statute articles of incorporation and the bylaws Shareholders39 Meetings a Annual meeting is held to elect new directors b Shareholders with 10 ownership can call a special meeting requires immediate action c Corporation must give notice of annual and special meetings Special v annual meeting notices a Special meetingsthe notice must list the purpose of the meeting b Annual meetingnotice need not include the purpose of the meeting unless shareholders have asked for an extraordinary corporate change 0 Only shareholders of record are entitled to vote at shareholders meetings Conduct of Meetings A quorum of outstanding shares must be represented at the meeting to conduct business at a meeting a Each class of shares must have a quorum majority of shares outstanding b Majority vote usually will decide issues Shareholder39s right to full participation includes the right to a offer resolutions b to express thoughts for and against a proposed resolution c ask questions of the of cers Shareholders are permitted to act without a meeting if all the shareholders entitled to vote consent to the action in writing a Voting trustsshareholders can transfer their shares to voting trustees and receive voting trust certi cates in exchange a Shareholders keep their rights to dividends b Voting trustees get to vote for directors and other matters c Supposed to control the corporation by have the voting power vested in participating shareholders d Ensures that the shareholders group will control the corporation despite the creation of differences e Usually last 10 years unless shareholders agree otherwise b Shareholder voting agreementsshareholders form an agreement about how they ll vote a Shareholder voting agreement must be written b Only the shareholders who have signed the agreement are bound by it c Unlike voting trusts they do not have to be led in the corporation39s offices c Proxiesappointing a person to vote for their shares a Usually limited to 11 months unless stated otherwise b An ordinary proxy is revocable at any time c A proxy is irrevocable if it is coupled with an interest Irrevocable proxies are used with shareholder agreements Require shareholder action a Fundamental changes to the structure or business of a corporation b Amendments to the articles of incorporation c Merger and consolidations both companies39 shareholders must approve d Share exchange selling shareholders must approve e Dissolution requires shareholder approval 0 The shareholder approval of a surviving corporation isn39t required if the merger doesn39t change the business or reduce voting and dividend rights Dissenter rights a Dissenters do not agree with the majority of shareholders and can either sell their shares or remain shareholders b Dissenters39 rights of closely held corporations require corporations to pay the dissenting shareholders the fair value of their shares Dissenter shareholder must a Have the right to vote b Not vote in favor of the transaction Shareholders39 information and inspection rights a Most state corporation statutes speci cally grant shareholders inspection rights b MBCA grants absolute right to 1 Right to inspection of a listing of the shareholders entitled to notice of a meeting 2 Right to inspection of articles bylaws and minutes of shareholder meetings from the past three years 3 Right to receive information that is important to their voting and investing decisions nancial statements d The demand of inspection should be in a good faith and b proper purpose no adverse interest Preemptive Right a Issuance of additional shares leads to the shareholder39s shares lowering in value lower voting power dividend and liquidation rights b The corporation may give existing shareholders a percentage of the new shares so that their ownership doesn39t change Preemptive right c Does not exist unless its stated in the articles Distributions to shareholders Similarities between all distributions 1 corporate assets are transferred to shareholders 2 an asset transfer to shareholders may harm the corporation39s creditor s claims against assets 1 Dividends a Cash or property dividends I ii iii iv Declared by the BOD and paid on a speci c date Once a dividend is declared it becomes a debt of the corporation Only cash and property dividends have are considered Preferred dividendsthere39s a set dividend rate stated in the articles of incorporation If the dividend is not mandatory then BOD can determine when and what amount to pay the dividend Cumulative preferred dividendsunpaid dividends cumulate into a liability that must be paid out before regular dividends are paid out b Two limits on paying dividends Solvency testinsolvent corporations can39t pay debts in normal business can39t make dividends Balance sheet testcorporations may pay dividends to the extent it has excess assets that aren39t needed to cover liabilities c Share dividends and share splits iv Corporations distribute more shares of the corporation to their shareholders keeps the cash in the corporation Share dividendsa speci ed percentage of outstanding shares is declared by the board of directors It may be revoked after its declared Share splitshareholders receive a speci ed number of shares in exchange for each share that they currently own Can also happen in reverse reverse sharesplit but it requires shareholder action to amend the articles Share dividends and share splits do not change the value of the corporation or the shareholder39s wealth d Share repurchasesrepurchasing shares from shareholders Two kinds 1 Redemptionright to force an involuntary sale by a shareholder at a xed price a Right of redemption must be stated in the articles b Unlike preferred shares common shares are not subject to redemption 2 Openmarket repurchasecorporation repurchases their shares on the open market voluntarily from a shareholder who is willing to sell them Ensuring a shareholder39s return on investment Minority shareholders in closelyheld corporations usually have a hard time getting dividends Ensuring a return a b A mandatory dividend Demand employment and a salary Shareholders39 Lawsuits a Shareholders39 individual lawsuitsshareholder sues in their own name to prevent a breach of the shareholder39s contract Reasons 1 to prevent the corporation from doing an ultra vires act 2 to enforce a right to inspection 3 enforce preemptive rights b Shareholder Class Action Suits a if many shareholders have been affectedharmed then one of these shareholders may bring a class action on behalf of all shareholders b a shareholder who successfully brings a class action must get reimbursed from the award for his reasonable expenses including attorney fees c If a class action suit is unsuccessful and doesn39t have a reasonable foundation sometimes the court makes the suing shareholder pay the defendants reasonable litigation expenses and attorney fees c Shareholder derivative actions a General rule a shareholder doesn39t have the right to sue someone who harmed the corporation in his own name or recover damages for himself even though the value of the shareholder may be impaired Exceonns 1 Directors failed to pursue a corporate cause of action 2 Derivative actionderivative suit against the CEO on behalf of the corporation It can also be used to bring a corporate claim against an outsider If a derivative action is successful damages are awarded to the treasury for the bene t of the corporation and the suing shareholder only gets reimbursed for reasonable attorney fees Eligible shareholders 1 The person suing must be a shareholder who also had shares when the alleged wrong happened 2 Must fairly and adequately represent the interests of the shareholders in a similar situation Doublederivative suita shareholder of a subsidiary sues the parent corporation regularly permitted by the court Demand on directorsshareholders must make a demand to the BOD to bring a suit Demandinforms the BOD that the corporation may have the right to sue someone Once the demand is approved by the BOD and the board decides to bring the suit then the shareholder may institute a derivative suit A shareholder can initiate a suit without a demand if the board is unable to make a disinterested decision if they should sue So if the BOD is interested in the transaction the demand is futile Usually a BOD must approve of a demand because the decision to bring a lawsuit is an ordinary business decision business judgment rule applies Shareholder litigation committee SLCpurpose is to decide whether or not to sue Directors must 1 Not be defendants in the derivative suit 2 Not interested in the challenged action Independent of the defendant39s directors 4 Preferably not directors at the time of wrongdoing SLCs decision to not to sue may prevent the shareholder from suing SLC members must be a independent b disinterested c make a reasonable investigation if the demand should be dismissed and d act in good faith 0 A court allows a shareholder that has a valid defense and gets refused by the directors to defend their breach of duciary duty to defend for the bene t of the corporation shareholders and creditors Shareholder Liability a Shareholder liability for illegal distributionsdividends and distributions are received with the knowledge of their illegality 1 Liability falls primarily on the directors 2 Directors do get a contribution from shareholders who knew the share was illegally made Shareholder liability for corporate debts 1 Defective attempts to incorporate and piercing the veil can make a shareholder liable for corporate debts beyond their contribution to the company Sale of a control block of shares 1 The per share value for a majority shareholder of a corporation is more that the per share value of the minority shareholder39s Shareholders who can sell their shares at a premium can39t be liable to the company unless the premium is coupled with wrongdoing Purchasers with shortterm interests a History of mismanagement and personal use of corporate assets b Lack of interest in the physical facilities c Their particular interest in the liquid assets Members39 Rights and Duties in Nonpro t Corporations 1 2 Members can use the facilities of the corporation or consume its output and are obligated to pay the corporation periodically with cash or labor All members have equal rights and obligations for voting dissolution redemption of membership and transfer of membership unless stated otherwise in the articles Members39 meeting and voting riohts P PWF we 8 9 10 Must have one annual meeting Members must have 5 ownershipvoting power to call a special meeting Members on record have one vote unless stated otherwise in the articles Must have a quorum to act 10 on the votes entitled to the matter lt13 of the voting power must be present to vote on matters not in the meeting notice Members have the right to remove directors without cause To approve of a matter 23rds of members or the majority of voting power need to approve by voting For meetings about important matters mergers members need to have a fair and reasonable notice Voting agreements can39t last more than 10 years Members can act without a meeting if 80 agree in writing Member inspection and information rights 1 2 Similar to forpro t corporations right to inspect with the demand being in good faith and proper purpose Religious corporations can abolish or limit the right of a member to inspect any corporate record Resignation and Expulsion of members 1 2 A member can resign at any time but a member can39t sell or transfer their membership to another person Nonpro ts can easily expel a member as long as they follow procedures that are fair reasonable and carried out in good faith Derivative Suits 1 2 1 2 3 4 A derivative action can be made by members with 5 voting power or 50 members If the action is successful members will get reimbursed for legal fees A corporation can be dissolved by its directors or shareholders Directors must adopt a dissolution resolution and the majority of shareholders must agree with dissolution Need to le articles of dissolution to the secretary of state The secretary of state can also dissolve a corporation if they ve a not led their annual report b not paid its annual franchise tax cappointed or maintained a registered of ce or agent in the state dthe corporation39s period of duration has expired must give the corporation 60 days to x their faults before the secretary can dissolve them Winding up and termination 1 A dissolved corporation can continue to exist but it can39t carry on business unless it39s neededappropriate when winding up its affairs 2 Winding upan orderly collection and disposal of assets and the distribution of the proceeds 3 Order of distribution of proceeds 1 Creditors 2 Preferred shareholders 3 Common shareholders Dissolution of nonpro t corporations is similar to forpro t dissolutions They may be dissolved voluntarily administratively orjudicially
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