PA: Corporations

• REQ:
• (1) People: at least one incorporator (person OR entity) to execute and file the articles.
• (2) Paper: Articles of Incorporation
• >> Contract b/wn corporation and the shareholders.
• >> Contract between corporation and the state.
• >> Contents:
• (i) statement that corporation is formed in accordance with PA BCL;
• (ii) name/address of the corporation (including one "magic" word);
• (iii) name/address of each incorporator (and directors if named);
• (iv) name/address of the registered agent;
• (v) authorized stock;
• (vi) info on part value (if any par shares);
• (vii) voting rights; AND
• (viii) preferences of each class of stock.
• (3) Act: Filing of the articles with PA Dept of State and pay required fee.
• >> Acceptance = conclusive proof of valid formation (de jure corp).

NEXT STEP: Organizational meeting -- select officers, maybe elect directors, adopt bylaws, conduct approp. biz.

GEN: If no statement of corp activity, can engage in all lawful business.

GEN: Failure to form a de jure corp. Doctrine is a defense in the face of a incorp error (ie. paperwork lost in the mail).

• REQS:
• (1) Relevant incorporation statute -- no problem in PA.
• (2) Parties made a GF, colorable attempt to comply with it.
• (3) Some exercise of corporate privilges -- acting like you have a corp.

RESULT: If applied, biz treated as a corp for all purposes except actions by the state.

GEN: One who treats a business as a corp may be estopped from denying it is a corp.

Promoter: person acting on behalf of a corp not yet formed.

• Corp Liability: Corp not liable on pre-incorp contracts until it ADOPTS the contract.
• >> Express: BoD action adopting K.
• >> Implied: Arises if corp accepts a benefit of K.

• Promoter Liability: Promoter remains liable on pre-incorp contracts until there has been a novation (unless K states otherwise).
• >> Adoption of K: Corp AND promoter liable. Adoption does not relieve promoter.
• >> Novation: agreement of the promoter, corp, and other contracting party that the corp will replace the promoter under the contract.
• >>>> Promoter relieved of liability.

• GEN: foreign corps must qualify and pay prescribed fees to transact biz in PA.
• >> Transacting: regular course of intrastate biz activity.
• >> Qualification: Certificate of authority from PA Dept State.
• >>>> Must have a registered agent in PA.

FAILURE TO QUALIFY: Civil fine and corp cannot sue in PA.

Issuance: occurs when a corp sells/trades its own stock. Way to raise capital for the corp.

• REQS:
• (1) Consideration -- practically anything, BoD has full discretion over adequacy.

• Subscription: written offers to buy stock from the corp.
• >> Revocation: subscriptions can be revoked anytime befor eht ecorp accepts it.
• >> Obligated: When BoD accepts the offer.

• Preemptive Rights: only exist if PA if articles explicitly provide for them.
• >> Exception: Statutory Close Corp -- never tested.

• DIRECTORS
• DUTIES: Set policy, select/monitor officers, declare dividends, ect.
• >> Also sets its and the corp's officers compensation.
• >>>> If not reasonable, waste of corp assets, breach of the duty of loyalty.
• NOTE: Board can delegate substantial management functions to a committee consisting of one+ director.
• >> BUT: Committees cannot unilaterally amend by-laws, fill a board vacancy, submit a fundamental corp change to SHs. This actions must be done by BoD.

• REQS:
• (1) Number: one or more natural human persons. If articles are silent, default is three.
• (2) Selection: initial directors named by incorporators; thereafter, named by shareholders.
• (3) Removal:
• >> SHs: Can remove directors before their terms expire with or without cause.
• >> Board: Can remove a director only for cause.
• >>>> When mental capacity is at issue -- only if there is a judicial determination.
• (4) Filling Vacancies: Majority of remaining directors fill a vacancy.
• (5) Board Action: either through (i) unanimous agmt in writing; OR (ii) at meetings -- satisfying quorum/voting reqs.
• >> Quorum: majority of all directors.
• >>>> Can be broken if directors leave, paralyzing the BoD's ability to take acts.
• >>>>>> Note: SH quorum never lost.
• >> Voting Req: Resolutions require only a majority of those present.
• >> Directors acting through individual conversations, or through a non-unanimous written agmt = void unless ratified by a valid act (above).
• >> Meetings: conference call okay.
• >> Writing: emails okay.
• (6) Notice for Meetings:
• >> Regular Mtgs: No notice needed.
• >> Special Mtgs: At least 5 days written notice UNLESS bylaws state otherwise.
• >> Waiver: waiver in writing at any time OR attendance at the mtg = waiver.
• (7) Proxies/Voting Agmts:
• >> Directors: No. Void.
• >> SHs: Yes.

• STANDARD: Director must discharge duties in GF and with a reasonabl belief that what a director does is in the corp's best interest.
• >> RPP standard of care -- ie. with regard to his own business.
• >> NOTE: Not required to consider the interest of any particular group as controlling (ie. employees).

• TYPES OF VIOLATIONS:
• (1) Nonfeasance: director does nothing. Must explain why director's failure to act was a breach (fact analysis)
• >> KEY: For liability to attach, must show causation of loss in non-feasance cases.
• (2) Malfeasance: director does something that hurts the corp.
• >> Director's decision must cause the corp to lose money/value.
• >> Business Judgment Rule (BJR): court will not second-guess a biz decision if it was made in GF, as informed, and has a rational basis.

• STANDARD: Director must discharge duties in GF and with a reasonable belief that what a director does is in the corp's best interest.
• >> Must act with the degree of care/loyalty of a reasonable prudent person WRT one's own buainess. But, in doing so, the director is not required to consider the interest of any one particular group as controlling.

KEY: NO Business Judgment Rule defense in DoL cases.

• CASES:
• (1) Interested Director Transaction: deal between the corp and one of its directors or another business of he director's.
• >> Interested Director transaction will be set aside UNLESS: (1) deal was fair to the corp when entered into; OR (2) material facts and director's interest were known and the deal was approved in GF by either (i) a majority of disinterest directors; or (ii) the SHs.
• >>>> Interested director can be counted for forum purposes, but vote ≠ count.
• >> NOTE: Board approval ≠ automatic safe harbor. Court may still ask for showing that deal was fair.
• (2) Competing Ventures: Cnnot compete unfairly with a corp.
• >> REMEDY: Constructive trust on profits -- corp recovers any profits.
• (3) Corporate Opportunities: Directors cannot USURP corp opportunities.
• >> CORP OPP: Something necessary to corp OR in which it has an interest or expectancy OR is in its line of business.
• >> Cannot take opp until director (i) tells the board; AND (ii) waits for the board to reject the opp.
• >> REMEDY: Constructive trust on profits.
• >> NOTE: Not valid defense to say corp lacked the financial ability to pay for the opp.
• (4) Other Violations: Self-dealing, stealing money, withholding info of tender offer, ect.

• STANDARD: Director must discharge duties in GF and with a reasonable belief that what a director does is in the corp's best interest.
• >> Must act with the degree of care/loyalty of a reasonable prudent person WRT one's own buainess. But, in doing so, the director is not required to consider the interest of any one particular group as controlling.

• LIABILITY (GEN): A director is presumed to have concurred with the Board's action UNLESS her dissent is noted in writing in corporate records.
• >> Records: (1) in the minutes; (2) in writing to the corporate sexretary at the meeting; OR (3) in writing to the corp secretary immediately after the meeting.
• >> Oral dissent, alone, is not effective.

• EXCEPTIONS:
• (1) Absent directors ≠ liable.
• (2) GF reliance on
• >> (a) book value of assets;
• >> (b) financial statements by auditors or president / chief accounting officer; OR
• >> (c) opinion of an employee, officer, professional, or committee of which the relying party is not a member (if competent).

Improper Distributions:

• GEN:
• Status -- Officers are agents of the corp, so they can bind the corp if they have authority to do so.
• Positions (Req) -- must have a president, secretary and treasurer, but one person can hold multiple offices.
• Review -- BoD selects, monitors, removes and sets compensation of the officers.
• >> NOTE: When fire officer, gone, but there may be a breach of contract.

BoL: Waste of Corp Assets

• Indemnification
• Nothing: if D convicted -- liable to corp.
• Mandatory: to extent D wins -- on the merits or otherwise.
• >> Need not win every claim.
• Permissive: Settlements, but must show DoL: (i) D acted in GF and (ii) w/ reasonable belief that her actions were in the company's best interests.
• >> Determined by disinterested direcrtos or independent legal counsel in a written opinion, or SHs.

ARTICLES MODIFICATIONS: Can provide for limitation OR elimination of director liability for damages, but NOT for breach of DoL, reckless/intentional misconduct, or wrongful personal benefit.

• ADVANCEMENT: Corp can (permissive) advance litigation expenses (incl. attorney's fees) to the offider or director, as long as she agrees to repay them if she is ultimately deemed ineligible for indemnification.
• NOTE: Court of Common Pleas, regardless of corp decision, can order indemnification -- expenses and atty fees only.

Close Corporations: SHs can manage close corps directly.

• GEN: 30 members (SHs) or less, and stock ≠ publicly traded.
• >> BoD can run the company or SH can eliminate BoD (articles or bylaws, or approval by all SHs) and run it.
• >> NOTE: Stock certificate should note such a change!

MANAGEMENT: SHs can manage close corps directly.

• NOTES: IN such cases, the managing SHs owe the corp the duties of care/loyalty.
• >> Controlling SHs may be liable for oppressive acts toward minority SHs.

• GEN: Only licensed profs are SHs. Can hire non-professionals to do other services.
• >> Professionals in PC NOT lianle for other members' malpractice.

KEY: Better than a partnership b/c in a partnership, responsible for other partner's malpractice.

• GEN: SH not liable for corporation's actions.
• >> Strong presumption against PCV in PA. Best shot is in tort cases.

• EXCEPTION:
• Piercing the Corp Veil (Only in Close Corps): court pierces the veil only if --
• (1) SHs abused the privilege of incorporating; AND
• (2) Faireness requires that they be held liable (ie. avoid fraud).
• >> Focus on harm caused or potential injustice.

• FREQ. CASES
• (1) Alter Ego -- treat corp assets as your own.
• (2) Undercapitalization -- corp undercap when formed.
• >> Failure to invest enough to cover prospective liabilities.
• ANALYSIS
• (1) Close corps
• (2) SH activity -- failure to respect the separate corp entity
• >> Also look for a situation where a parent corp forms a subsidiary to avoid obligations.
• (3) Harm resulted from such activity?
• (4) Limited liability unfair -- If no piercing, harm/injustice?

• GEN: SH steps in to vindicate a corporate claim.
• >> Corp must have been able to brough the suit.
• >> Typical cases: Breaches to duties of loyalty/care.

• KEY SAFEGUARD: Suit will dismiss suit IF invesitgation by disinterested directors reveals that suit ≠ in corp's best interest.
• >> Court engages in review of DD decision.

• SH REQS:
• (1) Stock ownership: at time claim arose -- or have fotten it by operation of law from someone who did. Must own stock throughout the litigation.
• >> If SH owns less than 5% of any class of stock, the corp an demand that the SH post security for costs (unless stock has FMV of $200K+).
• (2) Fairly/adequately represent SH interests -- more than ownership.
• (3) SH makes a written demand on directors that corp bring suit.
• >> Excused only where futile: -- SH must show that irreparable injury to corp would result if demand made.
• >>>> IE. directors would be defendants -- Almost always the case b/c breach of duty of loyalty.
• (4) Plead w/ particularity.
• (5) Corp must be joined as a defendant.

• RESULT:
• (1) Corp gets money from the judgment.
• >> Settlements subject to court approval.
• (2) SH receives costs and atty fees, usually from the corp, but only if court finds the case conferred a substantial benefit on the corp.

BUT: If suit found to be commenced without reasonable cause, a corp -- if successful -- may be reimbursed for its expenses.

CLAIM PRECLUSION: If one SH sues and case is decided on the merits, then another SH cannot later sue.

• GEN: Record SHs as of record date can vote.
• >> See record date.

• WHERE: vote by --
• (1) File w/ corp a unanimous written consent of the holders of all voting shares to act w/o a meeting (includes emails); OR
• (2) Meeting that satisfies quorum/voting rules.
• >> Annual Meeting -- must be held. Set in bylaws. Elect directors.
• >> Special Meeting -- can be called by board OR the holders of at least 20% of the voting shares (or someone else as provided in the articles).
• (3) Notice -- written notice (when, where, purpose) to every SH entitled to vote.
• >> If fail to give proper notice, actions taken at the mtg are VOID unles those not sent notice waive the notice defect.
• >>>> WAIVER: express (in writing and signed any time); OR implied (attend mtg w/o objection).

• HOW:
• (1) Quorum -- focus on number of shares represented.
• >> Usually a majority of outstanding shares.
• (2) Vote -- majority of shares actually cast on the particular issue -- NOT necessarily a majority of all shares present.
• NOTES:
• Meetings can be over the internet (if participates can read/hear)
• Officer must preside over the meeting.

• PROXIES: Permitted.
• >> Writing signed by record SH (email ok) that's directed to the secretary of the corp authorising another to vote the shards.
• >> Good for 3 years unless proxy says otherwise.
• >> Revocation: okay -- effective when corp secretary receives it in writing, OR upon written noice of SH death to secretary.

IRREVOCABLE PROXIES: Only where proxy is coupled with an interest (ie. option to but the shares -- any interest beyond simple voting)

• VOTING TRUST:
• (1) written trust agmt controlling how shares will be voted;
• (2) copy to corporation;
• (2) transfer legal title of shares to the voting trustee; AND
• (4) original SHs receive trust certificates and retain all SH rights except voting.

• POOLING AGMT:
• GEN: Enforceable in PA (rare in other states); just need a contract.

KEY: SHs can remove DIRECTORS, but NOT officers.

• GEN: Multiply number of shares of stock in corp by the number of open directorships. Can vote that total for one or more candidate.
• NOTE: CV is a default.

• GEN: Okay if reasonable under the circumstances (not an undue restraint on alienation).
• EFFECT: Does not affect transferee UNLESS (1) conspicuously marked on the stock certificate OR (2) transferee had actual knowledge of the restriction.

• SH:
• (1) SH have standing to demand access (during reg biz hours) to books and records, but must furnish a verified written demand stating a proper purpose (related to your interest as a SH).
• >> No showing needed to inspect bylaws.

• DIRECTORS:
• (1) Right to access books/records w/o making a showing.

• GEN: Declared at BoD's discretion, unless the corp is insolvent or the distribution would render it insolvent.
• >> Insolvent: Unable to meet debts as they come due; OR total assets are less than total liabilities.
• >> Effect: If distribution unlawful, directors are personally liable.

• GEN: Unusal occurrences requiring
• (1) board action;
• (2) notice to SHs; AND
• (3) Approval by a majority of the shares actually cast on the issue.

• Dissenting SH Right of Appraisal (Closely-held Corps -- no nat'l stock listing and less than 2,000 SHs)
• GEN: Right of a SH to force the corp to buy the SH's shares at a fair value.
• ARISES: Merger, consoldiation, transfer of most assets, shares acquired in a share exchange.
• REQ:
• (1) File w/ corp written notice of objection and intent to demand payment;
• (2) Abstain or vote against the proposed change; AND
• (3) W/in 30 days after notice that the change was approved, make written demand to be bought out.
• ***MUST INCLUDE: Right of appraisal is the exclusive remedy for fundamental changes UNLESS fraud or fundamental unfairness.

• Procedure
• BoD Action
• Notice to SHs
• SH approval (maj votes cast)
• Amendments filed w/ PA Dept of State

• Procedure (BOTH CORPS)
• BoD Action
• Notice to SHs
• SH approval (maj votes cast)
• >> Short Form Merger: No SH approval required if subsidiary merging w/ parent and 80% or more owned by parent.
• Articles of merger filed w/ PA Dept of State

• KEY: Dissenting SH Right of Appraisal -- for both companies.
• >>Most popular way to raise a right of appraisal.

EFFECT: Successor Liability -- Surviving company succeeds to all rights/liabilities of the constituent companies.

• KEY: Fundamental changes only for the SELLER, not for the buyer.
• RESULT: Dissenting SH Right of Appraisal only available to Seller's SHs.

• PROCEDURE:
• BoD Action (both corp)
• Notice to SHs (seller corp)
• SH approval by Seller Corp (maj votes cast)
• Filing
• >> If Share Exchange: Seller files articles of merger w/ PA Dept of State
• >> If Transfer of Assets: no filing.

LIABILITY: Buyer corp not usually liable for seller cop's liabilities UNLESS deal provides otherwise OR corp purchasing the assets is a continuous of the selling comapny (or fraud exists).

• Voluntary Dissolution:
• BoD Action
• Notice to SHs
• SH approval by Seller Corp (maj votes cast)

• Involuntary Dissolution: Court order --
• SH/director petition b/c of fraud, illegal/oppressive acts, ect.
• Creditor can petition bc corp is insolvent and the creditor has an unsatisfied judgment against corp or corp admits debt in writing.

FINAL STEP: Post wind-up, president and secretary execute verified articles of dissolution, file with PA Dept of State.

• EFFECT: Corp remains in existence for winding up purposes.
• >> Gather assets, convert to cash, pay creditors, distribute remainder to SHs.