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Corporations Outline

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This is an extract of our Corporations document, which we sell as part of our Corporations Outlines collection written by the top tier of Oklahoma City University School Of Law students.

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Final Corporations - Paliotta - S'11 Corporations Outline Paliotta - Fall 2011

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Ways to form business o Partnerships (Limited Liability Partnerships, General Partnerships (must have 2), Sole Proprietorships (one person), Limited Partnerships (must have 2)) o Limited Liability Companies (vast majority now) o Corporations o Each of these is like people (can own property, etc) How can a shareholder of a corporation be sued?
o Limited liability (shareholders have no liability for debts of company) - Okla 1006(b) (6)
? Can have provision in articles that makes shareholders personally liable. Otherwise, shareholders are not personally liable, except that they may be liable for their own tortuous acts. o Shareholders are not protected from their own personal torts (personally hitting someone in a corporate truck)

The Corporate Form - Corporation management o Directors
? Elected by shareholders
? Make general business decisions (what they are going to produce, expansion, etc)
? Directors are in control o Officers
? Elected by Directors
? Carry out day to day duties of the corporation, implement decisions of board of directors o Shareholders
? Provide the capital (in the form of equity)
? Vote
? Sue

Formation of the Corporation and Governance Expectations of the Initial Participants

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Two types of documents that govern how a corporation will be run o Certificate of Incorporation
? File with the secretary of state
? It is a contract, can be signed by anyone

* Contract between corp and state

* Between corp and shareholders

* Between the shareholders
? Title 18, Section 1006 (Oklahoma)

Final Corporations - Paliotta - S'11

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? Document becomes public o Bylaws
? More detailed
? The internal rules that govern the corporation
? Does not have to be filed anywhere
? Not public (unless publicly traded), but is discoverable o Certificate always trumps the bylaws if they conflict, decisions of directors are trumped by the bylaws Filing the certificate o This is the way that corporations are formed. Have to physically sign and turn in the certificate. (Okla 1006, Del 102 - what has to be in the certificate)
? Mandatory provisions

* Have to have name with a special word or abbreviation o The name has to be unique - don't want to sue the wrong company

* The address of the offices, and name of the registered agent at that address

* Nature of business to be conducted

* Number of shares authorized to issue, and whether there will be common and preferred

* Name of incorporator
? Optional provisions

* Management of company

* Can give shareholder preemptive right to buy stock (get first chance to buy new stock, determined on your percentage) (frequent in small companies)

* Something that requires a larger majority on certain votes

* Something that limits the length of time the corporation will last (if not mentioned, will continue in perpetuity)

* Provision that imposes personal liability

* Provision that limits liability of directors Internal affairs doctrine - the law of the state you incorporate in determines the duties of the corporations and their managers Amending the Articles of Incorporation o Under Oklahoma SS 1077, must be initiated by the directors, and then sent to the shareholders for their approval. Amending the Bylaws o Under Delaware SS 109, the bylaws can be amended by the shareholders. o Under Oklahoma SS1013, only the directors have the power to amend the bylaws, but this power can be given to the shareholders in the Articles Interpreting statutes o Woolf v. Universal

Final Corporations - Paliotta - S'11 Where a state gets a statute from another state, can use the jurisprudence of the other state when interpreting the statute What is Adequate Consideration?
o From Eastern Okla. Television
? In order to have adequate consideration, constitution requires (art 9, sec 39) money, labor done, or property actually received. And the legislature shall proscribe the necessary regulations to prevent the issuance of fictious stock. (Statute is 18 OS 1033)
? Inadquate consideration would be a promissory note, promise of future services, or intangible property
? 18 OS 1033 - valuable consideration is any tangible or intangible property, or any benefit to the corporation, or any combination thereof, except services to be performed

* Labor to be performed is clearly prohibited by both the statute and the constitution*

Voting Rights

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Cumulative voting equation o SX/(D + 1)
? S is the total number of shares voting (of all shareholders)
? X is the number of directors you want to elect
? D is the number of electors to be elected A minority shareholder in a closely held company does not have much power Straight voting o Each shareholder gets to vote the number of his shares for each director. Therefore, a person who owns 51% of the company can get the entire board. Cumulative voting o Get the number of shares you own multiplied by the number of directors to be elected (so if own 2 million share, and 9 directors are being elected, then you would have 18 million votes)
? The whole point of cumulative voting is to give the minority shareholder some votes
? In order to have cumulative voting, put it in the articles of incorporation Class voting o Can have multiple classes of stock with each class having a different amount of votes

Electing and Removing Directors

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Three ways to elect directors o Annual shareholders meeting o Special meeting (Del 211(d), Okla 1056(d)) (Delaware - only the directors can call a special meeting, unless authorized by the certificate or bylaws to allow others to call the meeting) o Written consent - Del 228 - circulate a piece of paper that allows stockholders to consent to the action, need a majority of the stock to be effective and have to deliver

Final Corporations - Paliotta - S'11

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it to the corporation; don't need a meeting or a vote; has to be a date line next to each signature; have to give notice to the shareholders who did not sign it Hoschett v. TSI o Court says that these annual meetings are important to preserve democratic values of the corporation. However, the court also recognizes that the meeting may be a waste of time, especially when one person may own a majority of the corporation. But, court says that there still must be an annual meeting. o After this case, the Delaware legislature amended the statute. Del 211(b) now allows directors to be elected by written consent in lieu of having the annual meeting Removing directors o Common law says that directors could only be removed for cause o Delaware statute (141(k)) now says that directors (one or the entire board) can be removed with or without cause by a majority of the shares, with exceptions
? Cannot remove a director without cause if the board is classified, unless the articles state otherwise (can still remove for cause)
? Cannot remove a director without cause if cumulative voting is in effect, unless there are enough people voting in favor of removal that the director could not be elected. o Campbell v. Loews (pg 177)
? Cannot oust directors simply because they desire to take control of the corporation
? However, deliberately obstructive directors who are harassing and hurting the corporation is cause for removal
? Procedural requirement for removing a director

* Cannot do this behind the back of the director who you are seeking to remove

* Have to give the director some ability to present his side of the issue In order to protect a corporation, the corporation can change the default rules in the statute to require higher voting percentages to amend the certificate, etc. (From Centaur) Sutter v. Sutter Ranching o Sutter wants the court to order that the corporation be dissolved. He owns 33% of the company o Per the statute, any shareholder holding at least 25% of a farming and ranching corporation can go to the court to dissolve o The sisters argue that Sutter is bound by the certificate which required a 75% vote to dissolve the corporation o Sutter argues that the certificate only says that 75% is needed if the corporation is seeking to dissolve itself, not judicial dissolution o HOLDING: Supreme Court agrees with Sutter and says that there is a distinction in the certificate about dissolution by the corporation and by the court o Seems that even if they had put in the certificate that judicial dissolution requires 75%, doubt the court would have allowed the certificate to trump the statute.

Final Corporations - Paliotta - S'11 Initial Issuance of Securities

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What is a security? (from the cases) o A security is an investment in a common enterprise with the expectation of profit from the efforts of others o Edwards case - buying the phone booth was an investment contract, but was a security because the corporation was going to take care of it o Clearly a condo in a resort area would not be a security, unless it is a rental pool where others are going to do the work o Stock is a security Securities Act of 1933 o If a corporation is going to sell or issue securities, the securities have to be registered o Two exceptions
? Section 4(2) - if a nonpublic offering, do not have to register securities

* Even if you are exempt from registration under 4(2), you are still subject to the antifraud rules, so you have to be truthful in the offering

* To qualify under 4(2) o The purchasers of the stock have to have experience and knowledge in investment matters to be able to understand the risks and benefits of the investment o Purchasers must have access to all information o Have to agree not to resale their securities to the public o Cannot use any form of public solicitation or advertising
? Section 3(a)(11) - intrastate offering exception. If you just sell stock within one state, don't have to register

* State law will trump federal law SEC v. Ralston Purina o The law at the time was 4(1), but it is now 4(2) o The corporation offered stock to employees, the directors authorized it, and the officers did not solicit employees to buy the stock, the employees had to take the initiative to buy the stock o Several hundred employees from throughout the country bought the stock. The employees do not seem to be very experienced in business transactions (many were lower level pay employees). o Court says that the number of people involved is a factor, but is not determinative, in deciding whether an offering falls within the 4(2) exemption o Court says it is trying to protect investors who are unsophisticated, and this group of people is some of the people the law is trying to protect. Following this case, there are now rules and regulations from the SEC for determining whether an offering is exempt. These are safe-harbors o Regulation D (Rules 501-508, focusing on 504 and 506)
? Rule 504 - Must not sell more than $1 million in securities in a year. No requirement that they be accredited investors. Can use general solicitation under 504 (most state securities laws prohibit this, however). Purchasers have to sign something saying they will not resale the securities to the public.

Final Corporations - Paliotta - S'11* SEC is giving up on regulating the small offerings with this rule Rule 506 - Unlimited dollar amount that can be raised, but can only sell to 35 unaccredited investors. Can sell to an unlimited number of accredited investors. If you are an accredited investor, the company does not have to give you any information. If you are a non-accredited investor, the company has to provide you with a prospectus. However, if there are any nonaccredited investors, then everyone has to be given the prospectus (even the accredited investors). Cannot use any general advertising or solicitation and purchasers still have to sign something saying they will not resell to public.

* To be an accredited investor, a person's net worth is more than $1 million, and income of more than $200k for each of the last two years or income with spouse of $300k with spouse for the last two years and have a reasonable expectation of having that this year.

* New rule - when determining the value of a person, cannot include the equity of the home

CHAPTER 4 - FIDUCIARY DUTY, SHAREHOLDER LITIGATION, AND THE BUSINESS JUDGMENT RULE The Business Judgment Rule

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o A judicial presumption that the directors know what they are doing and that they acted in good faith and that they did their fiduciary duty to the corporation.
? In order to sue, the shareholder has to overcome this presumption. Have to do something more than say it is a bad decision. To overcome the presumption, have to show that directors acted in bad faith, acted without requisite diligence, and without the requisite disintrest (director on the side that was benefited). Shlensky v. Wrigley o The plaintiff is a minority shareholder in the Chicago Cubs organization, and he sued the majority shareholder. Plaintiff is seeking to force the organization to install lights at the stadium to have night baseball o Plaintiff claims that the director was allowing his personal opinion regarding the purity of baseball and harm to the surrounding community, not about the best interest of the company. o HOLDING: Court says that looking at the health of the neighborhood around is a legitimate concern since a bad community would lead to decreased property value and decreased revenue o RULE: Wrigley says judges will usually refuse to impose an obligation on directors to maximize shareholder wealth
? Courts will use business judgment rule so long as there is any plausible connection between the director's decision and some possible future benefit regardless of how unlikely and implausible it may be.

Final Corporations - Paliotta - S'11 Fiduciary Duty of Loyalty

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o Two Types:
? Theft of corporate opportunities - taking opportunities that should be given to the corporation and benefiting personally
? Conflicted Interest Transaction - a transaction between the corporation and one of its directors (not totally illegal) Corporate Opportunity Doctrine Broz v. Cellular Information Systems o Broz is the president and sole shareholder of RFBC, and is an outside director of CIS o CIS is a publicly traded company o Broz and his company want the Michigan 2 license, but it doesn't appear at the time that CIS was interested in the license because they had just come out of Chapter 11 and other board members said they didn't want it o CIS claims that the license was an opportunity for them, whether they wanted it or not, and Broz should have offered the opportunity to company before taking it himself o HOLDING: Del. Sup. Ct. reverses, saying he had no duty to formally offer the opportunity. Also, he does not have to take into account that PriCellular is considering buying it when they have yet to take control of CIS. He only has to take into account the facts as they existed at the time the opportunity presented itself to him. o Duty of loyalty runs between Broz and CIS.
? He did not secretly proceed in pursuing the license. He told several of the directors. The directors were fully aware of the opportunity
? CIS was not interested in the license at the time. Each of the directors testified that they would not have been interested o RULE: Supreme Court says you do not have to consider the interests of a prospective buyer (however, it seems that there is some belief in the Delaware courts that you should) Guth v. Loft test (pg 292) (for theft of corporate opportunities) o A director may take the opportunity
? If presented to himself in an individual and not corporate capacity
? The opportunity is not essential to the corporation
? The corporation holds no interest or expectancy in the opportunity
? He has not wrongfully employed the resources of the corporation in pursing the opportunity o A director may not take the opportunity
? If the corporation is financially able to exploit the opportunity
? If the opportunity is within the corporation's line of business

* Activity as to which the corporation has fundamental knowledge, practical experience, and disregarding the economic issues, the ability to pursue, and which is logically adaptable to its business
? If the corporation has an interest or expectancy in the opportunity

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