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Not all states have adopted this approach and there is no recognized cause

of action for oppression and C could seek involuntary dissolution


Corporation Intro

We Focus on the for profit corporation

Corporations is seen as separate legal entity
o Separate from the ppl who own it
o Separate from the ppl who run it
As an entity a corporation can sue and be sued
o Can serve as a partner in a partnership
o Can enter in k
o Can incur debts
Consequences flow from the fact that a corporation is seen as a legal
o Most Important consequence (and advantage) and the major
benefit of conducting business as a corporation is the principle of
limited liability
Limited liability means that a shareholder might lose their
investment but the shareholder is not personally liable for
the torts/breach/etc. of the corp.
Who is liable when the corporation incurs a debt,
commits a tort, breaches a K, etc.? THE
o not its owners or managers bc they have
limited liability
Huge benefit over a partnership where each partner is
personally liable and can be sued individually for the harms
created by/in the partnership
o 2 consequence (disadvantage): Double Taxation
In general, a corporation must pay income tax on its
In addition, if the corporations pay dividends to
shareholders the shareholders are taxed on the dividends
as well
Here a pship has the advantage: Flow thru taxation
the pship is not taxed on its profits, only the partner
is taxed on their share of the profits
There is a way around corporate double taxation
Qualifying as an S corp
o Small corporations
Shareholders are all Us Residents and

o No taxation on entity level. Only taxes on

3 Sets or Players
Shareholders AKA Stockholders
o Owners
How do the owners become owners?
The Corporation issues shares of stock
o The stocks are unit of ownership
o Person buys the stock and becomes a
o In the general corporate model, the owners/shareholders do not
manage the corporation
The shareholders elect those (the Board of Directors) who
manage the business
This separation of power creates one of the big
advantage of the corporate form of doing business:
passive investment
o A shareholder can invest in a business and
hope to share in the profit without being
burdened by the management responsibilities
Different from Pship because the
partners (aka owners) have equal
management rights and must be
burdened with management
o Shareholder power is measured by how many shares they own
X owns 50 shares and Y owns 10 shares
X has 5 times the ownership stake that Y has
X has 5 times more votes that Y has
X will get $5 dividends for every $1 Y gets
The Board of Directors
o The managers
o They set corporate policies
o Make the big business decisions to guide the corporation
o Must act as a group
Individual board member has no authority to do anything
to bind the corporation
o Not agent of the corp
o Appointed and monitored by the board to carry out the policies
set by the board
o Officers act as individuals

CEO, Pres, VP, Etc.

o Officers are Agents of the Corporation (who is the Principle)
Meaning officers can bind the corporation
Side notes
o It is possible for one person to be all three at the same time
If tested on an exam, test-taker must keep track of which
hat the person is wearing
o A corporation can be formed with just one person as all three of
the players
The one person will still not be personally liable

Exceptions to the corporate model

Exception found in the Closely held Corp
The law tends to see corporations as falling into 2 categories
o Public Corp
Enormous businesses
Stock traded on the public stock exchange
o Closely held
Majority of corporations
Few shareholders, many only have 1
No public market for the stock
Sometimes family businesses
May diverge from the basic model
The corporation is formed under and governed by State law
Many classes use Delaware law or the Model Act know which one your
class knows
Delaware has flexible rules
A corporation can be formed only by satisfying the requirements set
forth by the state statute
o One must deliver to the appropriate state officer a document
called the articles of incorporation
AoI Must be accepted for filing by that appropriate state
Corporation does not begin until that happens
This is the case with any BO that has limited liability

Companies that dont require this filing can be

formed strictly by conduct like the partnership
o Every Company will need capital
Most businesses are funded initially by the proprietor
Businesses including corporations can raise capital/money
two ways
Debt financing- getting loans
Equity financing: Selling ownership interest
Hotly contested issue is whether a for profit corporation can engage in
any other activity than trying to make money
o Such as make a charitable contribution or support a philanthropic
Economist generally say the answer should be no
Argument is that those running the business have
one job that is to maximize the profit for the owners
o If the owners want to take that money and give
it away let them do it
o This exemplifies the conflict inherent in the corporation
Those making the decisions (The Board of Directors) are
not the owners
those who are calling the shots are effecting the
So if the BoD decides to give a 100K donation to a
college whose money are they giving away?
o Shareholders will argue that is their money
being given away
If Shareholders dont like this, they can
retaliate by voting members off of the
o Today the law recognizes that a Corporation are separate entities
with person status and as such are members of the community
As responsible members of the community Corps should
support charitable causes
Recent creation is called the Benefit Corporation (B Corp)
o A for profit corporation that is expressly committed to benefitting

Module 2: Corporation Formation


Corporation Formation and Organization

A. Formation takes 3 things

1. Person: the incorporator

a. May have more than 1
b. Does not have to be a human may be an entity
c. Must execute the article and arrange to have the
document filed
2. Paper: Articles of Incorporation (AoI)
a. 2.02 (a) Model Act: 4 things necessary to include AoI:
i. Name:
Must have corp., co., Inc., limited
(either spelled out or abbrev.) in the
corporate name
o Shows the world that they are
dealing with a corp
Name and address of each incorporator
Name of registered agent and address of
registered office
The official legal representative of the
o Someone to receive process or
state tax documents
Address must be in state of
Number of shares that the corporation will be
authorized to share/issue
If Corporation is going to offer different
classes of stock, information about that
must be included
b. Some states require a statement of purpose for
forming Corp.
i. Can be as simple as making a statement This
corporation is formed to make a profit.
c. Things not required but that may be put into AoI
i. Exculpation Provisions
Name the Directors
3. Act: Delivering that document to the state agency for
filing (Secretary of State
a. Incorporator will sign the AoI and have them
b. AoI must then be delivered to the Sec of state
c. Generally, must pay a fee
d. The Sec of State will examine
e. If everything checks out the Sec of State will stamp
the AoI filed



At the moment the Sec of State stamps filed

the corporation is formed into a de jure
B. Organization of the Corporation
1. If the Board of Directors (BoD) were named in the AoI
they will get together for an Organizational meeting
where they
a. Select officers
b. Adopt initial bi-laws for the corporation
2. If the BoD were not named in the AoI the Incorporators
will get together for an Organizational meeting
a. Doesnt have to be an in person meeting, might just
be by written consent
b. Incorporator will select the BoD
c. Incorporator may choose to select officers and set bilaws or they may leave that up to the BoD
3. Important not to confuse the AoI with the bi-laws
a. AoI are much more important
b. AoI are available to the public, Bi-laws are not
c. AoI usually a very short document, bi-laws generally
more lengthy
i. Bi-laws will lay out the internal rules running
the Corp
May describe how to give notice of
meetings to BoD, etc.
d. AoI are difficult to amend (called a fundamental corp.
change), bi-laws are easy to amend
i. In most states the shareholders can vote to
amend the bi-laws
e. AoI and bi-laws should never contradict each other
i. If they do conflict the AoI is the ruling doc
Internal Affairs Rule and Foreign Corporations
If a Corporation is formed in state A but wants to do business in State B
it is not required to incorporate in State B
The Corporation incorporated in state A must gets qualified to do
business in state B as a Foreign Corporation
In the corporate world domestic refers to a corporation in its
state of Inc. while it is a Foreign Corporation in every other state
The meaning of Doing Business
A Foreign Corporation is doing business if engaged in the regular
course of intrastate business activity and must be qualified to do
business in that state

The doing of occasional or sporadic stuff in a state other than the

one where a corporation is incorporated does not necessitate
becoming qualified to do business as a foreign corp.
A. Qualifying for doing business as a Foreign corporation
1. Must go to the Sec of State there and apply for a
certificate of authority
a. Must show that Sec of State two things:
i. AoI
Must prove Corporation is in good standing
where it is Inc.
b. After getting certificate of authority must appoint a
registered agent in the state
c. Pay Fees
2. If the Foreign Corporation fails to go thru the steps for
getting qualified
a. May face a civil penalty
b. Cannot assert a claim in the state
B. What Law will govern a Foreign Corp.s Internal Affairs?
1. The law of the state of Inc. is the law that governs the
internal affairs
a. True even if the corporation does not do most of its
business in the state of Inc.
b. What are Internal Affairs?
i. The roles, relationship, and duties among the
shareholders, BoD, an officers, etc.

III. Pre-Incorporation Contracts

Here the Corp. has not yet been formed but needs to conduct some
type of business (leasing of property) and the promoter steps up on
behalf of a corp. not yet formed and enters into a K
A. Liability for a K when a Corporation has not been formed
1. When all parties to a K know that the Corporation has not
been formed the Corporation is not liable for a K until it
adopts the K after it officially becomes a Corp.
a. 2 types of Adoption
i. Express
Ex: BoD has a meeting and votes to
adopt the K
If the Corporation accepts a benefit of
the K
2. Promoter (agent) that acts on behalf of a Not yet formed
corporation (non-existent principle) is personally liable on
the K

a. Promoters continues to be personally liable even

after incorporation and adoption of the K
i. Promoters liability only ceases at Novation
Novation would be an agreement b/t
the promoter, the corp, and the third
party that replaces the Corporation as
liable under the K
Defective Incorporation
Here dealing with a question of who is liable when people think that a
corporation has been formed but turns out there is no corporation
o For example, the AoI were not yet filed unbeknownst to the
Corporation formers and the ppl they do business with
A de jure corporation has not been formed, but a sole
proprietorship (SP) (if only 1 person) or partnership HAS
been formed (both can be formed by conduct alone)
Sole Proprietors and Partners are personally liable for
business debt
o 2 doctrines that may help personal liability: De
Facto Corporation (DFC) and Corporation by
Estoppel (CbE)
A. De Facto Corporation (DFC) and Corporation by Estoppel (CbE)
Under theses doctrines a business is treated as a corporation and their
promoters are not personally liable
Anyone asserting any one of these 2 doctrines must be unaware of the
failure to form a de jure corp.
Common Law Doctrine and states may apply one or both or none
Make sure to know if prof thinks theyre still good law
1. Defacto Corporations
a. 3 Requirements
i. Must show that there is a relevant inc statute
Every state has one
Must show that the parties made a good faith
colorable attempt to comply with the statute
Must show that there has been some exercise
of corporate privileges
Simple as showing that the business
has acted as a corp
b. When De facto Corporation is applicable the court
treats that business as though it is a corp.
i. Promoters neither liable for Ks or Torts
c. Exception: The state can come after the promoters
for failing to form a se jure corp
2. Corporation by Estoppel

a. If the business and a third party thinks the business

is a corporation and the third party treats it or acts as
if it is a corporation and later finds out it is not, then
tries to holed the promoters personally liable for a K
the third party may be estopped to deny its a
i. If a ct agreed the third party could not sue the
partners personally
b. This is a defense that the promoters would use
against a third party
c. Only applied in K cases
d. Justification is that the TP should check to see if a
business is in fact a corp
3. 2.04 of the Model Act
a. Ppl who act on behalf of a corporation knowing that it
does not exist are personally liable
i. Some ppl think that statute means DFC and
CbE are abolished
Other ppl think that the statute implies that
acting on behalf of a corporation not knowing
that it was not yet formed means DFC and CbE
can apply
Module 3: Finance, Accounting, and Distribution
I. 2 ways that businesses raise money: Debt and Equity Financing
Usually a business raises capital using a combination of both debt and
equity financing
A. Debt Financing: borrow the money
1. One who loans money to the business is a creditor
2. If the Corp. fails, the money still has to be paid back
3. Riskier for the business bc the business must repay loan
B. Equity financing: Allow investors to buy ownership interests
(shares/stock) in the business
1. An entity who buys shares/stock is an owner and is said
to have ownership interests in the business
2. If the Corporation fails owner gets nothing of their
investment back
3. Riskier for the investor because the investor could lose
a. but also may produce a profit far greater than the
C. To use either one a corporation will issue securities
Issue means sell
Securities means investments
1. Debt Financing: Corporation can issue Debt Securities

a. Corporation gives an IOU to lender saying we must

repay you, you are a creditor. This is called a Bond
b. Debenture: a loan to the corporation the repayment
of which is not secured by corporate assets
2. Equity Financing: Corporation can issue Stock (aka
ownership interests)

Issuance of Stock: Corporation is selling its own stock

A. Terminology
1. Authorized Stock: the maximum number of shares a
corporation can sell
a. The maximum is set in the AoI and no more than that
may be issued/sold unless AoI are amended
2. Issued stock: the number of shares the corporation
actually does sell
a. Corporation does not have to issue all of its
authorized stock
3. Outstanding Stock: shares the corporation has sold and
not reacquired
a. After a corporation issues stock, they may go back
and buy the stock back
B. Issuance Rules
These rules only apple when a corporation is selling its own stock
1. Two things we must look at when a corporation is selling
its own stock
a. Must be for a proper form of consideration
i. Modern: 6.21 Model Act: The buyer may pay for
an issuance with any tangible or intangible
property or benefit to the corp
Very broad: includes promissory notes,
future/past services, money, property,
o Only problem under this rule is
issuing stock for nothing
b. Must be for a proper amount of consideration
i. After form has been established (easy to do)
then look at amount
If Corporationis selling stock it must at least
get the par value for it
Par: minimum issuance price
Par stock is set out in the AoI, but is not
If not set out in the AoI the board can
set whatever price it wants


If a corporationissues par stock for less than

par value the corporationwill sue to recover the
full amount
The BoD who voted to sell that stock
and the person who bought the stock
are liable for the missing amount
o The stock bought for less than par
value is called watered stock
If the buyer is sued for the remaining
amount, but the buyer has sold the
stock to a third party, the buyer and not
the third party is liable for the watered
stock if the third party did not know
about it
III. Distribution to Shareholders
Means that the corporation is paying a shareholder as a shareholder
(not as an employee)
Distributions of every type are made at the discretion of the BoD
A. 3 types of Distributions
1. Dividend
a. Where the corporation is doing well and the BoD
votes to pay money to its shareholders
b. Paid pro rata to each outstanding share (unless AoI
say differently)
i. Example: BoD declares a total pool of
dividends at 40K and there are 10k shares,
each share gets $4
This gets a little more complicated with
different types of share (such as
common or preferred)
o Preferred only means pay first not
pay more
o Ex: BoD declares a total pool of
dividends at 40K. Now we have 10k
shares of common stock and 2k
shares of preferred stock with a $2
dividend preference (preference set
out in AoI).
We first pay the $2 of
preferred stock on the 2k
shares. This is $4k
This leaves 36K to be paid to
the 10k common

shareholders at $3.60 a
2. Repurchased Stock
a. Corporation comes to shareholder and buys back the
3. Redemption (rare)
a. Must be set in the AoI
i. AoI says there is a class of stock (redeemable
Stocks) that the corporation can force the
shareholder to sell back to it at a set price
Propriety of Distribution
Law imposes restrictions on when a corporation can make a
A. Two Schools of Thought: Historical/Fund Approach and Modern
1. Historical/Fund Approach-must know about 3 types of
funds in the life of the Corp
a. Earned Surplus: The corporation earned this money
by doing well out in the market.
i. Corporations earning more than it spends
Proper fund for distributions
b. Stated Capital & Capital Surplus
i. These funds are created by issuing stocks
Every time the corporation issues stocks every
penny from that issuance must be allocated
between these Stated Capital & Capital Surplus
Stated Capital may never be used for
o Fund to protect creditors
How to determine what is stated capital and
what is capital surplus
Stated Capital is the par value of a par
Capital Surplus is the excess over par
o Hypo: Corporation issues 401k
shares of $2 par and issues it for
Stated Capital here is $20k
Capital Surplus is $30K
When no par is stated in the AoI the
BoD decides how much goes to Stated
Capital and what goes to Capital

2. Modern Approach: The corporation can make a

distribution unless the corporation is insolvent or the
distribution will render the corporation insolvent
a. Model ACT 6.40 c1 and c2: 2 definitions of
insolvency: corporation is insolvent if either of these
are met
i. Company is insolvent if it is unable to pay its
debts as they become due
If Corporation makes a distribution,
then the next day it cant pay for stuff
that distribution was improper
Company is insolvent if its assets are less than
its liabilities
Liabilities here include preferential
liquidation rights
o Can have a liquidation preference
class of stock with
Like preferred stock it still
means pay first but only is
distributed when the
company dissolves
Ex: Corporation has $50K in
assets. It has liabilities of
$4K. Corporation has Ki
shares of stock with a
liquidation preference of $2
per share which is $2k. We
must use the liquidation
preference in our math for
liabilities. So now the
Corporation has $50K in
Assets and $4k + $2K=$6K
in liabilities. It is insolvent
and made an improper
distribution of $AK.
A distribution is improper if made while the
Corporation is insolvent
3. Who is liable for improper distributions?
a. Directors who approved the distribution are usually
liable to the extent the distribution was improper
b. Shareholders are liable only if they knew the
distribution was improper the moment they received
Barbra Module 4 Corporations Board Directors and Officers


Background on Directors
A. Directors are either named in the articles or elected by the
B. After that the directors are elected by the shareholders at the
annual shareholder meeting
1. Annual meeting is a requirement
2. If the annual meeting is late the Directors are called holdover directors until the meeting is held and Directors are
C. Only need 1 or more directors
D. How many directors can there be?
1. Some states the AoI must set
2. Some states say it needs to be in the bylaws
3. In Model Act can be either
E. Directors must be human
1. Whereas an incorporation could be any entity
F. Individual directors are not agents of the corp
1. Means that individual directors have no authority to bind
the corporation to a K
a. Though Officers are agents
2. Directors must act as a group
G. BoD (acting together) responsible for the direction and the
management of the corporation
1. Small corporations the BoD does the day to day decisionmaking
a. May only be one person
2. In Large Corporations the BoD Doesnt get engaged in the
day to day
a. Here the BoD oversee the management but the day
to day is taken care of by the senior officers
H. The ultimate locust of power/decision making/authority in the
1. Set management policies and make the big decisions
2. Decides when stock is going to be issued and at what
3. Hires and monitors officers
I. In Large corporation it is common to have both inside and
outside directors
1. Inside director is both a director and employed full time
by the corporation
a. This is always going to be officer
b. Aka a management director
2. Outside Director-their day job is not with the corp
J. Shareholders do not manage the corporation but they do elect
the BoD



Election and Removal of Directors

A. Generally, the entire BoD is open to election each year
1. Generally, serve for a 1-year term
a. Unless there is a staggered board AKA a classified
i. A board divided into halves or thirds and then
or 1/3 of the directors are elected each year
Helps ensure continuity of management
B. Shareholders can remove a Director before her term expires
1. Can generally be done with or without cause
a. Unless staggered, this some states require cause to
remove a Director
C. Who elects the member to fill a vacancy on the board (a director
resigns or is removed)?
1. States vary but some allow either the Board or the
shareholders to select a replacement
a. In some states if the shareholder created the
vacancy by removing the shareholder then the
shareholders select the replacement
How Does the BoD act?
A. 2 ways that a Bod can take an action: Unanimous Written
Agreement or at a meeting
1. Unanimous Written Agreement
a. Generally, includes e-mail
2. At a meeting
a. 2 Kinds of Meetings: Special and Regular
i. Regular Meetings
Do not have to give notice to directors
Usually set out in bylaws
Special Meetings
Corporation must give notice to the
Notice must include Time and place
of the meetings
Notice doesnt have to state
purpose of the meeting
Model Act 8.22b says must give
directors 2 day notice
How to give notice is usually set in the
bylaws and statutes give no direction
on this point
Failure to give Directors notice means
any action taken at that meeting is

unless those who were not given

notice waived the notice defect
o Waving the notice defect
May be done in
writing anytime
May do this by
attending the meeting
w/o objecting at the
outset of the meeting
Case where a
director didnt get
notice, but heard
about the meeting,
then attends and
does not object to
the notice defect
at the outset of the
b. How do Meetings work?
i. Every decision the board makes will come
before the board as a resolution and the
question is whether the resolution will pass.
The first step in any meeting is to make sure
there is a quorum
BoD a quorum is going to be a majority
of all directors
If the majority is there and then a
member leaves the Board cannot
take any action
After you have a quorum the passing of
a resolution requires a majority of those
who are present
The BoD do not have to be in the same room
Telephonic and skype meetings are
Just must be able to hear each other
BoD owe non-delegable fiduciary duties to the
Proxies and agreement on how were
going to vote are void (against public
v. Every director present Is presumed to concur to
the action taken
Unless dissention s noted in writing
(oral doesnt count)



Writing may be in the minutes

(deliver to secretary)
Deliver in writing to the presiding
officer at the meeting
File written dissent with the
corporation immediately after the

Committees of the Board

A. Board can Delegate various function or tasks to a committee
1. Committee is a subset of the board
2. May only have 1 member
3. Statutes limit the tasks that can be performed by a
a. Statutes vary
b. In a lot of states, a committee cannot declare
distributions to shareholders or set director
i. A committee can however recommend those
types of things
B. Public traded companies there are usually all kinds of boards
1. Standing committees: Permanent Committees
2. Ad Hoc Committees: Put together for certain tasks along
the way
3. Under the Sarbanes Oxley act there must be a separate
audit committee
a. Member of that committee must have expertise in
financial matters
A. Officers are agents of the corp
1. Corporation is P and the Officer is the A
2. Whether an officer can bind the corporation depends on
whether the officer has the authority
a. Actual Authority
b. Apparent Authority
c. Inherent Authority: the power to bind the corporation
just by virtue of the office
i. E.g. President-corporation will be bound if the
Pres signs a K in the ordinary course of
B. Most statutes allow the Corporation to decide which officers they
1. Common to always have a Secretary
2. Today in most states one person can hold multiple offices
C. Officers are Hired and Fired by the BoD
1. Shareholders do not hire or fire the officers


D. BoD sets officer compensation

E. Performance of Officers is monitored by the BoD
1. Board should step up and fire an officer not doing the job
F. Officers do not make group decisions
1. Each officer has their own responsibilities and acts
according to those responsibilities
Fiduciary Duties of Directors and Officers
A. Directors and Officers are Fiduciarys (act on behalf) of the Corp
B. Duties are owed not to the shareholders but to the corp
C. If a fiduciary breach one of these duties, the corporation is hurt
1. Corporation will then have a claim against the fiduciary
D. Duties Officers and Directors owe the Corp
1. Duty of Good Faith
a. Conscious disregard of his/her obligation
i. Would be a breach of Good Faith if the BoD
failed to Establish and police a monitoring
Monitoring/Reporting system: The
higher level BoD gets notification of
what is going on with the Lower levels
of the corp.
2. Duty of Care
a. Developed at CL
b. Model Act 8.30 a and b talk about the duties owed by
directors (8.42 a make it clear that officers owe the
same duties)
i. Director must act in a way that a person in like
position would reasonably consider appropriate
(prudent person)
c. Implicated in 2 ways: nonfeasance and misfeasance
i. Nonfeasance director or officer is lazy
Usually brought against individual
directors and not the entire board
Director has failed to do anything. He
has not acted in such a way that a
person in like position would reasonably
consider appropriate (Breach (Barnes v
Breach is not enough for liability, must
also show causation (causation is very
hard to show)
Corporation would have to show
that it lost money bc this particular
person did not do anything


o Hard b/c Often corporation

wouldve lost money anyway
Causation easier to show if
officer/director had a special
Usually against the board as a whole
Whatever the board did cost the
corporation money
In this case causation is clear bc
the board did something (they
voted on something) and that
something caused the board to
lose money
In these cases, the directors are
protected by the BJR (business
judgment rule)
BJR is a presumption that when the
board does something it acts in
good faith and it did its homework
(acted as a reasonably prudent
person would)
o The idea here is that courts
have no authority to 2nd
guess business decision
(shinkley vs Rigley)
o True even if what the board
did lose money
o Shockley vs Rigley (The BoD
of the Chicago Cubs decided
that the Cubs would not play
night baseball games)
Corporation would
make more money if
Cubs played night
BoD protected by BJR
Bod are not
guarantors of success
3 ways the BJR can be overcome
o P can show conflict of
o Some decisions by the board
are so stupid that they lose
BJR Protection (Joy v North)

o P shows that the board failed

to do appropriate HOW Smith
v (Van Korum)
Van Gorkum: BoD of
Transunion approved
a merger which would
end the existence of
Board made that
decision on the basis
of one 2-hour meeting
where none of the
directors had a
written report about
what was going to
happen. No
presentation about
how the decisions on
value was made, and
only a hurried
suggestion from an
investment bank of
what would be a fair
Directors here not
protected by the BJR
3. Duty of Loyalty
a. 8.30 a 2: a director must act with the reasonable
belief that what he or she does is in the companys
best interest
i. Easy to spot bc they are conflicts of interest
meaning the Director is tempted to put her
own interest above that of the corporation
BJR doesnt apply
In these cases, the burden is on the defendant
to show that they should not be held liable
b. 3 Fact patterns that can implicate the duty of loyalty
i. Interested director (or officer) transaction aka
Here there will be a deal b/t the
corporation on one hand and on the
other hand with the director/officer or
even close relative
BJR does not apply here



The D is going to be liable unless the D

That the deal was fair to the
corporation when interest or
The deal was disclosed and
approved by the disinterested
director or
The deal was disclosed to and
approved by the shareholders
Competing Ventures
Fiduciary can have other business
interests but not those that directly
compete with the corporation (Dwayne
Jones) 48:55
In Jones we had a corporation that
ran an advertising agency and
some of the officers and directors
decided to set up a competing
advertising agency, (if they had
resigned from Dwayne Jones this
would have been acceptable but
they did not do that) and stole
clients and employees while they
were still fiduciaries for Dwayne
Jones. Obvious breach of the duty
of loyalty.
Usurpation of Corporation Opportunities
Ex. Corporation that develops condo
projects and it constantly in need of
land. One of its directors learns of land
that has just been zoned for condos,
but without telling the company the
director buys the land for himself. This
puts the director in a conflict of interest
situation. He puts his own interests
above that of the corp, the first step
in these cases is to determine if
this land was a corp. opportunity
that the director took.
Since Cts are all over the place
with regards to what a corporation
opportunity is know what your
professor thinks is a corporation


Some cts say it is a corporation

opportunity if it is in the line of the
corporations. Business
Some cuts say its an opportunity if
the corp. has an interest or
expectancy in this property
Some CT say its an opportunity if
found on company time or with
company resources
Some Courts look at the overall
fairness that this director took it
The next step if it is a corporation
opportunity, some courts say it is a
breach of fiduciary duty if she did not
offer it first to the corporation and wait
for the corporation to take it (ALI 5.05)
Fiduciary must first tell the
corporation first then the
corporation must turn it down in
order for the fiduciary to not
breach its duty
Some courts disagree about the
corporations financial ability to pay for
the opportunity is relevant.
Delaware says something is
probably not a corporation
opportunity (or the fiduciary wont
be liable) id the corporation could
not have paid for it)
Exculpation and Indemnification of Directors and Officers
A. Defense for breach of duty
1. Director or officer relied in good faith on what employees
or professionals told her
a. Valid defense in every state of the reliance was in
good faith
i. Comes up in improper distribution cases
Smith v VanGorkum, the directors said in
regards to that merger we relied on what the
CEO told us.
Ct said yes, but it wasnt good faith
reliance because if you would have
pushed more and asked questions you
wouldve known that the CEO did not
know what he was talking about.
B. Exculpation Statutes

1. Allows corporation to have a provision in the articles that

says directors and in some states also its officers cannot
be held liable to the corporation or its shareholders for
damages. (for the breach of du
2. Every one of these statutes has exceptions: we cannot
exculpate for:
a. Acts not in good faith
b. Breach of the duty of loyalty
3. Basically says that directors cannot be liable for the
breach of duty of care
C. Indemnification Statues
A director (and in many states also an officer) has been sued for
breach of duty and when she got sued she incurred expenses
and attorney fees. Now she goes to the corporation and says
reimburse me for all the litigation
1. Whenever a fiduciary gets sued she falls into 3 categories
for which the statures provide
a. Where the Corporation is required to reimburse her
i. If when she was sued she won a judgement,
then the company must pay her fees (Model
Act 8.52)
b. Corporation is prohibited from reimbursing her for
her expenses
i. If the person was adjudged liable to the corp
ii. Model Act 8.51 (d)(2) says that reimbursement
is prohibited only if she is held liable because
she received an improper financial benefit
c. Permitted reimbursement --Every other case
i. Here she may ask for reimbursement and they
may reimburse her If she shows:
1. She acted in good faith and
2. She acted with a reasonable belief that
her acts were in the companys best
interest (Model Act 8.51(a)(1)
Module 5 Corporation Shareholders
I. How Shareholders take an act
A. Some Acts Shareholders may take
1. Hiring and firing the directors
2. Approve fundamental corporation changes
3. Amend bylaws
4. Disinterested shareholder may approve an interested
director transaction
B. Shareholders act as a group in 2 ways
1. Unanimous written consent
a. Increasingly includes email

2. Act at a meeting (3 things to know)

a. Who votes
i. Unless articles say otherwise we assume that
each outstanding share gets one vote
To be eligible to vote you must be a record
shareholder as of the record date
A record shareholder is one who is
shown in the corporation records
Record Date is A voter eligibility cutoff
and is set b/t 10 and 60 days before the
Must have owned the stock on the
record date to be eligible to vote
EX: Corporation sets up a shareholder
meeting for July 7 and it sets the record
date as June 8, the ppl who get to vote
at that meeting is the shareholder who
owned the share on the record date
(even if the share is sold to someone
else between the record date and the
May use Proxies
A writing signed by the record
Directed to the secretary to the
Authorizing someone else to vote
your shares
This is an Agency relationship
Proxies are generally good for 11 moths
Proxies may be revoked with the same
formalities for creating the proxy or by
showing up at the meeting and voting
Proxies can be revoked despite saying
irrevocable (Agency Law)
Only irrevocable proxy is a proxy
coupled with an interest (need two
things for this:)
Proxy that says it is irrevocable
Proxyholder must have some
interest in that stock beyond the
interest of voting


Ex: Shareholder gives X an option

to buy his stock, in addition S also
gives X a proxy (that says
irrevocable) to vote for S in an
upcoming meeting. This is
irrevocable because it said
irrevocable and X has an interest
beyond voting (option)
In small corporations sometimes Shareholders
will try to combine their voting power, to pool
their strength in an effort to get some
representation on the BOD. There are 2 ways to
pool their power
Voting trust: here 2 or more S agree to
pool their voting power but want to
make it official. They create a trust
separating equitable and legal title.
In a voting trust 2 ppl have a
written trust agreement it requires
them to transfer the legal title of
that stock to a third party called a
voting trustee.
Written agreement will give Trustee
written instructions on how the
stock should be voted
The S giving up legal title of the
stock get trust certificates that
show S retain all other S rights
Ct will force the trustee to vote
those shares as the S agreed
Downside is that voting trust is
super cumbersome
a. Must set up a trust
b. Sometimes must file with the
corporation (not secret)
Voting Agreement: a written agreement
b/t S that says how they will vote their
shares, usually for each other to vote to
elect each other to the Board of
Just a written agreement
Downside is that Ct will not give
specific performance for this. (Del
and many states)

Model Act 7.31b makes voting

agreements specifically
enforceable (some states)
b. Where do the shareholders vote?
i. Meetings
Annual Meeting
Where shareholders elect directors
If a corporation has not held this
meeting a S can go into ct and
have that meeting forced
Special Meeting
Where S do anything else
Can be called by the BoD
In some states a specified number
of the shares can also call a
meeting (usually 10%)
Hypo: In a state where 10% of
shares is allowed to call a meeting
S who hold 10% of the share call a
meeting with the purpose of firing
the corporation President. This is
not gonna work because the S do
not hire and fire the officers (would
be okay if it were a director they
were firing)
Meeting Notice: Corporation Must give
written notice to every S that is entitled
to vote and in most states must be
delivered b/t 10 and 60 days before the
Notice must state date, place, and
time of the meeting
Notice of special meeting must
state the purpose of the meeting
a. Limits what the S can do at
the meeting to only that
If the S do not get this notice
whatever was done at that meeting
is voidable unless the S not notified
waived the notice defect
a. S may waive notice defect in
writing at any time or by
attending the meeting and

not objecting to the notice

c. How shareholders vote
i. Quorum: must first determine if there is a
Focuses on the number of shares
represented at the meeting rather than
number of shareholders
Quorum requires a majority of the
outstanding shares
S cannot act without a quorum
Once there is a quorum that quorum is
not lost if someone leaves the meeting
If there is a Quorum the we need to know what
vote is required to do any of the following:
To elect directors: need a plurality
No majority needed
To remove a director: states take
different approaches
Traditionally and in Delaware need
a majority off the shares entitled to
vote (high bar)
a. Not majority of shares
represented by the meeting
(low bar)
Modernly Model Act: majority of the
shares that actually do vote
Hypo: Corporation has 10K
outstanding shares, 8K of those
shares are represented at the
meeting (8k we have a quorum).
Only 6K vote whetehr to remove
this director
a. In Delaware you need at least
5001 to remove director bc
you need a majority of shares
entitled to vote
b. Under model act all you need
only 3001 bc all you need is a
majority of shares that did
vote at the meeting
Vote on Fundamental corporate
changesin Module 6)


Shareholders may vote to approve an

interested director transaction (module
Anything Else (like amending bylaws)
Traditional and Delaware view is
that we need a majority of the
shares present at the meeting
Model Act Modern View all you
need is the majority of share that
actually vote on that issue
Hypo 20K outstanding shares 8K
share are represented at the
meeting and 6K vote on amending
the bylaws.
a. Traditional View: 4001K
b. Model Act: 3001K
d. Cumulative voting
i. Used when the shareholders vote to elect
When S elect directors we use straight voting
or cumulative voting
Straight voting Hypo: A has 101 shares and B
has 100 shares. They vote on 3 different
directors; As vote will beat Bs vote because A
has more shares
Cumulative voting hypo: dont have an election
for each director but vote all together and the
top 3 finishers get the board seats
To find out voting power here you
multiply the number of shares times the
number of directors to be elected
Using hypo above A will have
101x3=303 and B will have
100x3=300 and A & B can allocate
however many they have between
those 3 directors
Cumulative voting must be set out in
Shareholder management of the corporation
A. Shareholders generally do not participate in management unless
it is a closely held corporation (usually mom and pops)
B. In a close corporation management can be set up in an a far
more informal way in a shareholder management agreement
C. Model Act 7.32 Requires shareholder management agreements
1. If in AOI



a. Must also be approved in writing by all shareholders

2. In not in AOI
a. Must have unanimous shareholder written agreement
D. After shareholder agreement passes then:
1. BoD can be abolished and let the shareholders run the
2. Can hire a third party manager to come in and run the
E. The people who actually do manage the corporation under the
shareholder agreement owe the fiduciary duties to the
corporation (duty of care, duty of loyalty, good faith)
Duties of Controlling Shareholders (to the minority shareholders)
A. Breach here gives rise to a direct action to those other
B. Usually comes up in a close corp
C. Duty of utmost good faith
1. A close corporation shareholders are kindle like partners
and since partners owe each duties of good faith we
import that to the close corporation situation
2. Hypo: 3 shareholders in corporation, B, And C. Each owns
1/3 of the stock, each of them has a job with the
corporation and now there is a disagreement and A & B
do not like C and vote to fire C from his job, refuse the
corporation to give dividends, A & B refuse to buy Cs
stock, and the stock is not publicly traded
a. C has been deprived of any voice, any job and any
return on investment.
b. In a big corporation that is publicly traded C could
just sell his stock
c. Do not want to be a minority shareholder in a closed
d. Many courts will let C directly sue A and B for
shareholder oppression
i. Shareholder oppression is where they have
frozen C out
This is breach of duty of utmost good
Leading state is Mass and Famous cases
are Donahue and Wilks
Not all states have adopted this approach and
there is no recognized cause of action for
oppression and C could seek involuntary
Liability of the Shareholder for Corporate Debt

We Inc. so that the S have limited liability but there are circumstances
where a corporation will allow a third party to sue the shareholders for
corporation debt.
A. Piercing the Corporate Veil
Only happens in close corp
a. Policy: If you want the benefits of limited liability (meaning you
are not personally on the hook for what the business does) you
must take the corporation seriously
i. Must Capitalize Efficiently
1. At the outset investors must invest enough money to
cover prospective liabilities
ii. Must treat the Corporation with respect
1. Must go thru all the motions of a corporation by the
a. Appt officers
b. Have shareholder meetings
c. Have director meetings
d. Have minutes and records of the meetings
e. Etc.
iii. If the corporation does not do these things a ct may say
that the shareholder is treating the corporation as an alter
ego (not respecting the corporate form).
1. Then the ct reaches thru the corporate view to
impose liability on the shareholders
a. 3 Ct differ as to what it takes to pierce the
corporate veil
i. Cts tend to say that being sloppy with
corporation formalities is not enough but
then they go then cts list all the
corporation formalities that were not
ii. Fact Pattern: S set up a corporation that
is involved in a dangerous activity, but
the S invest very little money, only
capitalize it with $1000 and they fail to
buy insurance. Insurance is a way to
capitalize against those business risks.
Then they fail to run the business with
corporation formalities and now a third
party is injured. The Plaintiff would sue
the corporation but the corporation has
no money so the P wants to pierce the
corporation veil and go after the
shareholders. P might succeed
1. No way to predict how a ct will rule
here but there is the argument that

the S undercapitalized by only

putting $1K into it, didnt buy
insurance, and have been acting as
if the corporation isnt even there
so a ct may PAC and place liability
on them
2. In a partnership all of the Partners
are liable for the corporation debts.
In a corporation sometimes ppl act
like partners and if they fail to
respect corporation formalities and
fail to capitalize it out the outset
sufficiently then a ct might say you
acted like it was a pship we will
treat it like one and impose
personal Liability for S


Shareholder Derivative Actions

Every time a S sues, meaning anytime you have a S acting like a
Plaintiff, we need to figure out immediately if this is a direct suit or a
derivative suit
When you see a Plaintiff that is a shareholder you must ask could the
corporation have brought this suit.
o If yes, derivative suit bc S is vindicating the corps claim
o If no, its a direct suit (among other things usually applies to
forcing dividends)
Direct Suit: S is suing to vindicate her rights as a S
1. Just regular litigation, can file the case there are no prereq
Derivative suit: S is suing to vindicate the corps rights
1.S sues BoD for breach of duties this is always a derivative suit bc
the fiduciary duties are owed to the corporation
2.There are many procedural hoops to jump through (vary by state)
a.Standing-must have owned stock when the claim arose
i. Or must have gotten the stock from operation of law
from someone who did own it when the claim arose
Operation of law could mean inheritance
b. Plaintiff must show that she will adequately represent the
corp.s interest in the suit
i. Meaning S should probably own the stock all the way
through the case, and must demonstrate to the court
that she and her lawyer can handle this litigation
c. S must make a written demand on the directors that the
corporation bring suit
i. Whether to have the corporation sue is a
management decision, and management is done by
the BoD, so S has to give them written demand

1. Under the model act the S must always make

that demand in every case and S cannot sue
until ninety days after making that demand
o Unless waiting will cause irreparable harm
to the corp
In many states including DE the S need not
make the demand if the effort will be futile
o Any times will be futile bc the BoD are
being sued (we demand you sue
d.We cannot settle or dismiss a derivative suit without court approval
3.If the S brings the derivate suit and wins, the corporation gets the
reward not the shareholder
a. Though S usually gets her litigation costs from the
defendants and her attorneys fees from the corp
4. If the S brings derivative suit and loses,
a.the S will bear her own costs and attorneys fees,
b. Ct might order the S to pay the Defendants attorney fees
if the suit wasnt brought with reasonable purpose
c.Then no other S can sue on that claim (Claim Preclusion)
5. When a S brings a derivative suit the Corporation usually moves to
dismiss bc the suit is not in the corps best interest
a. This claim must be made by independent directors (often
called a special litigation committee) and the BoD must
show they have undertaken a reasonable investigation.
i. Under the model act all the ct will look at 2 things on
this motion to dismiss 2
1. whether the ppl who investigated were
independent directors and
o Under Model Act Ct can appt a panel of
independent folks
2. whether they made a reasonable investigation
o If both are true, a model act state court will
ii. Under other states and DE, the court will look at these 2
things plus it will make its own independent business
determination of whether the suit is in the companys best
interest (Zapata)
VI. Inspection Rights
Shareholders have a right to inspect and copy records but may have to
jump through some hoops
A. Model Act bifurcates the types of records
1. For routine things (shareholder minutes, bylaws, list of directors)
shareholders can inspect those things by making a written demand
at least 5 business days in advance







2. For financial records, BoD meetings minutes, list of shareholders,

shareholder can make a written demand within 5 days in advance
but must state a proper purpose
a. A proper purpose is a purpose that is reasonable related to your
interest as a shareholder
1. Ex: to hunt out wrongdoing in order to bring a
derivative suit
2. Ex: The S in a close corporation wants to know what
her stock is worth
Preemptive Rights
A S in a close corporation worries about dilution of its ownership
Lets say a S owns 25% of stock and the BoD decided that the
corporation will issue new stock. If that is issued to someone else the
original S interest in the corporations diluted (voting power,
percentage of the financial stake go down if there is an issuance to
someone else. The S will want protection from dilution. This is where
Preemptive Rights comes in
Preemptive Rights: The Ss rights to maintain percentage of ownership
by buying stick when there is a new issuance of stock for money
Hypo above. S owns 25% and the Corporation is going to issue 1000
new shares, if the S has preemptive rights then the S has the right to
buy 250 of those 1000 shares.
In most states you will get preemptive rights only if the new issuance is
for money
a. If the corporation is issuing stocks for real property preemptive
rights do not apply
And in most states you will get preemptive rights only if the articles
say so
Stock Transfer Restrictions
Mostly comes up in close corp
In a Pship you cannot be forced to accept a Partner unless all the
partners agree but in a corporation this is not true. If someone owns
stock, they can usually transfer it to anyone but sometimes this is not
allowed (stock transfer restriction.)
Stock transfer restriction is set up in the AoI or be a simple agreement
b/t the corporation and the shareholders, or even just an agreement
amongst the shareholders to impose restrictions on the transfer of
Rules for Stock transfers
1. Are acceptable if they are reasonable
a. Reasonable means they are not an undue restraint on
i. Ex: The right of first refusal: Before a S can transfer a
stock to a 3rd party S must offer it first to a corp
a. Not undue restriction on transfer

2. If stock is transferred to a third party despite a stock transfer

restriction the restriction is enforceable against a third party only
if the restriction is noted conspicuously on the stock certificates
or if that 3rd party had actual knowledge of that restriction
Corporation Module 6 FUNDAMENTAL Corporation Changes
I. Background
Most business decisions during the life of the corporation are made by
the BoD rather than the shareholders.
o However, there are some changes that are so fundamental that
they cannot be done by BoD alone and require shareholder vote
as well,
A. 5 types of Fundamental Corporation Changes
1. Amending the Articles
2. Selling Off substantially all of its assets
3. Merging into another corporation
4. Converting to another business form
5. Dissolution
Procedure for Fundamental Changes
A. 4 Steps to make Fundamental Corporation changes
1. BoD adopts a resolution of Fundamental Changes
2. The BoD submits a proposal to the S with written notice of the
3. The BoD calls a special meeting of the shareholders who must
approve the change
a. 3 approaches to the level of shareholder approval needed
Remember always need a quorum
A S quorum is the majority of outstanding shares
i. The traditional Approach: the change must be
approved by 2/3 of the shares entitled to vote (TX,
Delaware Approach: the change must be approved
by a majority of the shares entitled to vote (in
contrast to a majority of the shares that do vote)
Modern Approach Model Act 7.25(c): the majority of
the shares that actually vote
Hypo: Corporation has 9000 outstanding shares. At
the meeting 7000 outstanding shares attend. (We
have a quorum). What vote is required?
Traditional: we need 6000 shares for approval
Delaware: we need 4501 shares for approval
Modern: we need 3501 shares for approval
4. If a resolution is approved the corporation must file a doc with
the appropriate state agency
III. Right of Appraisal

We have a S that does not like this fundamental change. Statutes in

every state provide a remedy called a right of appraisal.
A. Right of Appraisal is a Ss right to force the corporation to buy the
stock for fair value if the S doesnt like the fundamental corporation
1. Right of Appraisal only applies in close corporations a publicly
traded stock has a market
a. If a close corporation the fundamental changes that
trigger a right of appraisal
i. In most states: merger, selling off substantially all its
assists, or having all of its stock acquired in a
stock/share exchange, or if converting into another
Some states allow amendment of articles to trigger
the right of appraisal if the amendment harms the S
(like taking away a dividend preference)
b. If the closely held corporations doing something that
triggers the right of appraisal the S must take 3 steps to
perfect it:
i. Before the Ss vote the S files with the corporation a
written objection and notice of intent to demand
During the vote The S must abstain or vote against
the proposed change and
After the vote goes through the S makes a written
demand to be bought out and deposit the stock with
the corp
c. Now the corporation either pays the S their demand or
the corporation and the S disagree
d. If there is a disagreement that cannot be worked out its
time to litigate
i. Usually the corporation will bring suit
The court can bring in an independent appraiser
B. Unless Fraud can be shown the right of appraisal is the only remedy for
a disgruntled shareholder
Fundamental Changes
A. Amending the Articles
1. Must go through all the 4 steps
2. If it is approved the amended articles must be delivered to the
Sec of State
3. If it is a close corporation amending the articles some states will
allow a right of appraisal if the amendment harms the S
B. Mergers
1. In a merger 2 or more corporations combine and one of them
usually survive (survivor) the merger and the other disappears




2. Always a fundamental corporation change for the Corporation

that disappears
a. In some states can be a fund corporation change for the
survivor but rarely
3. Disappearing company has to go through all the 4 steps and if
approved the surviving corporation will deliver the Merger to the
Sec of State
a. If a closed corporation the S will have a right of appraisal
4. Consolidation is when 2 companies go in together and disappear
into a 3rd company. This is a fundamental corporation change
where both companies disappear
5. Effect of Merger: the surviving corporation succeeds to all rights
and liabilities of the disappearing corp.
a. Successor Liability: If C is a creditor of A, then A merges
into B the Creditor is now a creditor of B
Transfer of substantially all the assets
1. Substantially generally means a sale of at least 75% of its assets
2. This sale must not be in the ordinary course of business
3. This is a fundamental change for the selling company but not
one for the buyer
a. The selling corporation must go through the 4 steps
b. The buying corporation doesnt have to go through the 4
c. Generally, dont have to tell the Sec of State
d. In the sale of assets, we do not expect successor liability
i. The buying company does not succeed to all rights
and liabilities bc the selling company has not
e. Share exchange: work exactly the same way as selling
substantially all the assets except here the company is
buying up the stock of the selling company not the
assets. This is a fundamental change for the company
selling off the stock. Selling co must go thru the 4 steps
i. If approved the acquiring company will file, the AoI
Exchange with the Sec of State
Here we have a corporation but would rather have a different
corporation form
1. Model Act 9.50-9.56 corporation can simply convert (entity
conversion) and it is a fundamental change so the corporation
must go through the 4 steps
2. If a closed corporation the S will have a right of appraisal
3. The new business delivers Article of conversion to the sec of
state for filing
Dissolution and Liquidation
Ultimate fundamental corp. change, business is going out of business

There will be an event that triggers dissolution but dissolution is a

process rather than an event
No right of appraisal here
A. Several ways to dissolve
1. Administrative: allows a state official to declare that the
corporations dissolved (usually b/c corporation is not paying
taxes to the state)
2. Voluntary Dissolution
a. Go through the 4 steps
b. If approved the corporation delivers a doc called notice of
intent to dissolve to the sec of state for filing and the
corporation will notify its creditors so they can make
1. This is not dissolution this only triggers the process
2. The corporation still exists not to take on new
business but only to wind up the corporations affairs
3. Involuntary Dissolution
a. Judicial: someone goes into ct and asks the ct to enter an
order ending this corp
1. Who can petition the court:?
a. Most states allow creditors to go in and ask for
this If they have a corporation that is insolvent
and the creditor has a judgment against the
b. A shareholder can petition the ct
i. The usually happens in a close corp
ii. Model Act 14.30 says that the S petition
is only available in the close corp.
iii. S can ask for involuntary dissolution if
1. The directors are engaged in
illegal, fraudulent, or oppressive
a. Never overlook that if these
things are happening a S can
ask for dissolution
2. Sometimes when a S petitions the
court to involuntary dissolute the ct
will say instead of ordering
dissolution it will order the
corporation to buyout the
disgruntled S
4. Whether Voluntary or Involuntary the corporation must wind up
a. In Voluntary Dissolution the board will oversee this
b. In in dissolution the ct will probably appoint a receiver to
oversee the process

c. Either way the process takes 4 steps

1. Gather all assets
2. Convert to cash (sell)
3. Pay creditors
4. Distribute any remaining funds to the shareholder
a. This Is called liquidating dissolution
b. Hypo: Say we had 10K left after paying
creditors and there are 1000K shares of
common stock, each share gets $10 a share.
However, we might have a class of stocks in
the AoI with a liquidation preference (pay first)
i. If we had 10K left after paying creditors
and we have a 1000 shares with a
liquidation preference at $2 a share the
first $2000 goes to them
5. In the end file articles of dissolution with the state
and that terminates the corp