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stevendwhang
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pre-incorporation: a promoter acts on behalf of corporation not yet formed. what does corporation have to do to become liable?
- 1) express board resolution
- 2) implied ratification through a) knowledge and b) acceptance of benefits
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is a promoter liable for pre-incorporation contracts?
yes, unless there is a novation releasing him from liability
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does promoter owe fiduciary duties to corporation?
yes
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What if a director/officer does an ultra vires act?
- 1) ultra vires act can be enjoined
- 2) corporation can recover losses from the D/O
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what is a de facto corporation?
- 1) corporation is not validly formed
- 2) organizers made a good faith, colorable attempt to comply with corporate formalities
- 3) no knowledge of the lack of corporate status
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what is piercing the corporate veil?
- when shareholders are personally liable for corporate debts
- results in joint and several liability!
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when is the corporate veil pierced?
- 1) alter ego: shareholders treat the assets of the corporation as their own, fail to observe sufficient corporate formalities
- 2) fraud: avoiding personal liability through corporate formation operates as a fraud on creditors
- 3) undercapitalization: failure to maintain sufficient funds to cover foreseeable liabilities
- *must be some basic injustice that equity requires that the individual shareholders be held responsible for the damage they caused
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what are requirements for effective board action?
- 1) board meeting [quorum, majority vote of those present], or
- 2) unanimous written consents
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director's duties?
- 1) duty of care
- 2) duty of loyalty
- 3) duty not to waste corporate assets
- 4) duty to disclose (material corporate information to other members of the board)
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duty of care
- directors must act in:
- 1) good faith
- 2) best interest of the corporation
- 3) due care of an ordinarily prudent person
- *BJR!
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What is the BJR?
presumption that directors manage the corporation in good faith and in the best interests of the corporation and its shareholders
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duty of loyalty
- director may not receive an unfair benefit to the detriment of the corporation or shareholders unless there has been:
- 1) material disclosure
- 2) independent ratification
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self-dealing/interested director transaction?
- director who receives an unfair benefit to herself (or relative, or another business of hers) in a transaction with her own corporation
- 1) ok if fair, or if independent ratification after full disclosure
- 2) remedy is recission
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corporate opporutnity doctrine
- director receives an unfair benefit by usurping an opportunity which the corporation would have pursued
- 1) remedies are damages, constructive trust, or corporation gets the opportunity at cost
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what is independent ratification?
- 1) majority vote of independent directors
- 2) majority vote of a committee of at least 2 independent directors
- 3) majority vote of independent shareholders
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requirements for shareholder derivative suit?
- 1) contemporaneous stock ownership - when claim arose, and throughout the litigation
- 2) demand must be made (and rejected), or excused because futile
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director indemnification - when?
- 1) mandatory indemnification if director is successful in defending the suit
- if director loses the suit, then indemnification depends on the nature of the suit
- 2) if director loses a derivative suit for wrongdoing, indemnification generally not allowed
- 3) suit is settled, some states allow indemnification
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shareholder pooling agreements
- written agreement to vote shares as required in the agmt
- 1) binding and enforceable
- 2) no time limit
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voting trust
- formal written agreement delgating voting power to a trustee
- 1) on file
- 2) expires in 10 years
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stock transfer restriction agreements - what requirements?
must be reasonable
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what is valid consideration for stock?
- 1) stock must be suppored by consideration
- 2) exchange of property for stock, the board must assess the adequacy of the consideration (duty of care & loyalty)
- 3) future services are not consideration
- 4) promissory notes at CL were not consideration; modernly are sufficient consideration
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controlling shareholder's duties
- owe fiduciary duties (care/loyalty) to minority shareholders.
- Must:
- 1) refrain from obtaining a special advantage
- 2) refrain from causing corporation to prejudice minority shreholders
- 3) must refrain from selling corporation to a looter, unless reasonable measures were taken to investigate
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mergers - what is required?
- 1) directors and shareholders entitled to vote of BOTH corporations must approve
- 2) appraisal rights of dissenting shareholder: 1) written objection before mtg, 2) vote against merger, 3) file written claim
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sale of assets - what is required?
- if outside the ordinary course of business,
- 1) majority of directors and shareholders entitled to vote must approve
- 2) sale of assets may be a de facto merger, may trigger possible recission or appraisal rights
- 3) purchasing corporation may be liable for debts and liabilities
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dissolution and liquidation - what is required to enter into?
majority of directors and shareholders entitled to vote must approve
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one person sells stock to another. what remedies?
- 1) tort of fraud or misrepresentation
- 2) Rule 10b5 federal securities action
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short-swing profit rule (Rule 16b)
- 1) large corporation [national exchange, or 500+ sh & $10MM assets)
- 2) Officer, director, or 10% shareholder
- 3) purchase and sale of stock within 6 month period
- *strict liability!
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10b5 private plaintiff action [against corporation, against another shareholder]
- private plaintiff must show:
- 1) interstate commerce
- 2) fraudulent conduct (scienter - intent to deceive; materiality; misrepresentation or failure to disclose that breaches fiduciary duty)
- 3) reliance
- 4) in connection with purchase or sale
- 5) damages
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What is an "insider" for purposes of 10b-5?
someone who owes a fiduciary duty not to disclose material, nonpublic information
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insider trading
- an insider breaches 10b5 if by trading he breaches a duty of trust and confidence owed to:
- 1) issuer
- 2) shareholders of the issuer
- 3) another person who is the source of the material nonpublic information (misappropriation)
- Elements:
- 1) insider
- 2) bought or sold stock via interstate commerce
- 3) based on nonpublic information
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Tipper liability
- insider gives a tip of material inside information to someone else who trades on the basis of the inside information, tipper can be held liable under 10b-5 if:
- 1) insider
- 2) improper purpose
- 3) personal gain (reputation or monetary)
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Tippee liability
- 10b-5 violation
- 1) tipper breached
- 2) tippee knew that tipper was breaching
- 3) tippee bought or sold stock via interstate commerce
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misappropriation theory for stock trades?
- brought by government against any trader who:
- 1) misappropriated information from any source
- 2) breach of duty of trust and confidence owed to the source of information
- *if you find tippee is not liable bc tipper not liable, then raise misappropriation theory!
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