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BA II OutlineTyler Tarney | Wood

Limited Liability Companies_________________________________________________________I.

Limited liability for all obligations of the venture, even if members participate in the control of the business

Flow through tax treatment

Freedom to contractually arrange the internal operations of the business though the operating agreement

Can have only one member, foreign ownership, more than 100 members, and more than one class of stockMembers make subsequent contributions in order to raise more capital for the LLC

Benefits

GenerallyA.

ULLCA is the law of our jurisdiction

101(1)

Articles of organization - filed with Secretary of State and serves as public notice1.

101(13)

(a) Need not be in writing, unless otherwise stated this act governs

103 - Effect of Operating Agreement

103(b) lists non-waiveable provisions in the operating agreement

Operating agreement (most important)2.

Two documents

Formation

202(a) - May be created by just one person

203(c)(1) - Internally operating agreement prevails, externally the articles of organization prevail

Organization

Describes how one becomes a member/owner

401. FORM OF CONTRIBUTION. A contribution of a member of a limited liability company may consist of tangible or intangible property o

benefit to the company, including money, promissory notes, services performed, or other agreements to contribute cash or property, or c

for services to be performed.

Contribution

The choice between member-managed and manager managed is required to be in the articles of organization

Voting is per capita in a member-managed company with majority decision

Many states use a per capita method to determine rights to management

In a member managed firm, 404(a)(1) requires only a majority of the members

See page 119 problem

(1) each member has equal rights in the management and conduct of the company's business; and

(2) except as otherwise provided in subsection (c), any matter relating to the business of the company may be decided by a m

of the members.

(a) In a member-managed company:

Voting in per capita with majority decision, but voting only applies to managers

(1) each manager has equal rights in the management and conduct of the company's business;

(2) except as otherwise provided in subsection (c), any matter relating to the business of the company may be exclusively deci

the manager or, if there is more than one manager, by a majority of the managers; and

(i) must be designated, appointed, elected, removed, or replaced by a vote, approval, or consent of a majority of the me

and

(ii) holds office until a successor has been elected and qualified, unless the manager sooner resigns or is removed.

(3) a manager:

(b) In a manager-managed company:

(1) the amendment of the operating agreement under Section 103;

(2) the authorization or ratification of acts or transactions under Section 103(b)(2)(ii) which would otherwise violate the duty

loyalty;

(3) an amendment to the articles of organization under Section 204;

(4) the compromise of an obligation to make a contribution under Section 402(b);

(5) the compromise, as among members, of an obligation of a member to make a contribution or return money or other prop

or distributed in violation of this [Act];

(6) the making of interim distributions under Section 405(a), including the redemption of an interest;

(7) the admission of a new member;

(8) the use of the company's property to redeem an interest subject to a charging order;

(9) the consent to dissolve the company under Section 801(b)(2);

(10) a waiver of the right to have the company's business wound up and the company terminated under Section 802(b);

(11) the consent of members to merge with another entity under Section 904(c)(1); and

(12) the sale, lease, exchange, or other disposal of all, or substantially all, of the company's property with or without goodwill

(c) The only matters of a member or manager-managed company's business requiring the consent of all of the members are:

(d) Action requiring the consent of members or managers under this [Act] may be taken without a meeting.

404. MANAGEMENT OF LIMITED LIABILITY COMPANY.

Management

AnalysisB.

Outline

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(e) A member or manager may appoint a proxy to vote or otherwise act for the member or manager by signing an appointment inst

either personally or by the member's or manager's attorney-in-fact.

As a manager, did Jerez have authority to make the loan on behalf of the LLC without knowledge of the other members and c

to the operating agreement? 301(c), 301(b)(1)

Taghipour v. Jerez - Taghipour, Rahemi, and Jerez formed an LLC and the articles of organization designated Jerez as the LLC's mana

operating agreement prevented him from entering into loans. Without verifying his authority, Mt. Olympus entered into a loan with

They knew he was manager but didn't know he lacked authority. He absconded the money without knowledge by the others and th

into default.

Examples

301(a) - apparent authority of members in member-managed LLC

Taghipour- Operating agreement said "no loans may be contracted on behalf of the LLC unless authorized by a resolution of

members"

Taghipour- The lack of authority was contained in the operating agreement, rather than the articles of organization

301(b) - apparent authority of managers in manager-managed LLC

In member-managed LLC, manager is an agent and can transfer real property unless power is limited by articles of organization

In a manager-managed LLC, manager is an agent and can transfer real property unless power is limited by articles of organization

Taghipour - the restriction was in the operating of agreement rather than the articles of organization

301(c) The instrument is conclusive in favor of a person who gives value without knowledge of the lack of authority of the person sig

and delivering the instrument

301. AGENCY OF MEMBERS AND MANAGERS.

Authority

Does an LLC's member's rights of inspection extend to the right to inspect emails and document drafts?

Kasten v. Doral Dental USA, LLC- LLC created for creating and administering dental programs. During negotiations Marie made num

requests to check the books, but only some were granted. The LLC was subsequently sold for $95 million. The operating agreement

permitted inspection ofcompany documents. Sought to compel production of emails, drafts of documents, etc.

Examples

Kasten considered whether an email was a "record," and determined that an email is a record if it relates to the busines

LLC

Whether the request is restricted by date or subject matter1.

Look at the connection

The reason given (if any) for the request, and whether the request is related to that reason2.

The importance of the information to the member's interest in the company, and3.

Whether the information may be obtained from another source4.

Kasten said "upon reasonable request" is to protect the company from member inspection requests that impose undue

on the company. The court must consider the following factors:

While the ULLCA was not applied in the case, Kasten did have a reasonableness requirement like 408(b)(2) (get (b)(2)?)

(a) A limited liability company shall provide members and their agents and attorneys access to its records, if any, at the company's p

office or other reasonable locations specified in the operating agreement. The company shall provide former members and their ag

attorneys access for proper purposes to records pertaining to the period during which they were members. The right of access prov

opportunity to inspect and copy records during ordinary business hours. The company may impose a reasonable charge, limited to t

of labor and material, for copies of records furnished.

SECTION 408. MEMBER'S RIGHT TO INFORMATION.

Inspection and information

CORPORATIONS

7.32(a)(1) - allows a corporation to eliminate board of directors in certain instances (aka treated like a partnership)

Closely-held corporations (7.32)1.

Publicly traded corporations (1.40 (18(a))2.

Two basic types of corporations

GenerallyA.

7.32(a)(1) - Shareholders can agree to eliminate the board of directors

Corporate name must contain the words: corporation, incorporated, company, or limited, or their abbreviationsa.

A corporate name must be distinguished upon the records of the secretary of stateb.

4.01

A corporate name for the corporation that satisfies the requirements of section 4.011.

The number of shares the corporation is authorized to issue (2.02(a)(2)2.

Corporation's registered address; and3.

Incorporator's address4.

Articles of incorporation must set forth:

2.02 - Articles of Incorporation

4.01 - Name

3.02 - Powers and duration - MBCA assumes perpetual duration, but permits limitations on duration

3.01 - Purpose - of engage in any lawful business (may be limited)

Minutes - Record used to reference how a decision has been made

General Powers. The business and affairs of the corporation shall be managed by its board of directors.1.

Board of directors in a closely held corporation

Formation of a Closely Held CorporationB.

Formation _________________________________________________________

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8.01

Unless under 7.32 you eliminate the board and comply with the requirements

OH requires 3, unless the number of shareholders is fewer

Number - 8.03(a) - Board must consist of one or more individuals

Number, Tenure, and Qualifications - 1.432.

Regular Meetings - 8.203.

Special Meetings- 8.204.

Notice - unless proscribed otherwise, special meetings must be preceded by at least two days notice of the date, time, and place- 85.

Default is 1/2 of the directors - (a)(1)

Cannot be less than 1/3 - (a)(2)

Other quorums are required for different groups other than the board of directors

Quorum for board of directors - 8.246.

Board decisions - 8.24(c) - "A majority of those present"7.

(a)(3) - if the directors remaining in office constitute fewer than a quorum of the board, they may fill the vacancy if it is f illed

shareholders, and only the directors elected by that voting group are entitled to fill the vacancy if it is filled by the directors

Vacancies - 8.10 Vacancy on Board8.

3.02(11) - to elect directors and appoint officers, employees, and agents of the corporation, define their duties,, fix their

compensation, and lend them money and credit

8.01(b) -

Compensation - 3.02(11), 801(b)9.

Presumption of Assent - 8.24(d) - "a director present at a meeting of the board of directors . . .is deemed to have assented to the a

unless an exception exists

10.

(a) Except as provided in subsection (b), the validity of corporation action may not be challenged on the ground that the corporation

lacked power to act

Strong power, but subject to limitations in (c)

(1) In a proceeding by a shareholder against the corporation to enjoin the act;

A corporation may pursue a wrongful action against officers

Actions by shareholder may fall under here if acting as an agent of the corporation

(2) in a proceeding by the corporation, directly, derivatively, or through a receiver, trustee, or other legal representative, agai

incumbent or former director, employee, or agent of the corporation; or

(3) in a proceeding by the attorney general under section 14.30

(b) A corporation's power to act may be challenged:

The Comment to 3.04 states that an injunction is equitable only if the third party knew about the corporate incapacity.

"if equitable" (clean hands)

(c) In a shareholder's proceeding under subsection (b)(1) to enjoin an unauthorized corporate act, the court may enjoin or set aside

if equitable and if all affected persons are parties to the proceeding, and may award damages for loss (other than anticipated profit

suffered by the corporation or another party because of enjoining the unauthorized act

3.04 - Ultra Vires

711 Kings Highway Corp v. F.I.M.'s Marine Repair Serv., Inc.- D entered into a contract that called for a 15 year lease of premises wwere to be used as a movie theater, however a corporation was formed to marine activities. P alleges K is invalid.

"[U]ltra vires may not be invoked as a sword in support of a cause of action any more than it can be utilized as a defense"

If corporation enlists a shareholder to bring an action on its behalf, then shareholder is an agent and action is a 3.04(b)(2) action (which do

permit an injunction)

Ultra ViresC.

2.02(a)(4) - Name of each incorporator must be in the articles of incorporation

2.01 - One or more persons may act as the incorporator or incorporators of a corporation by delivering articles of incorporation to t

secretary of state for filing

Must faithfully make known all facts what mighthave influenced prospective members in determining whether to pursue

memberships

Duty to refrain from misrepresenting material facts

Duty to make known any personal interest the D's had in any transaction relating to the corporation

An incorporator owes a fiduciary duty to prospective members to disclose material information.

Incorporators/Promoters

Can the president of an association which filed its articles of incorporation, which were first rejected but later accepted

held personally liable on an obligation entered into by the association before the certificate of incorporation had been

Robertson v. Levy- Robertson and Levy entered into an agreement where Levy was to form a corporation which was to purch

Robertson's business. Levy submitted the articles of incorporation, the articles were rejected, but Levy began to operate it. Ju

to when the certificate of incorporation was issued, Robertson sold his business to the corporation receiving a note for install

payments. One payment was made after the certificate of incorporation was issued.

"knowing there was no incorporation" - not jointly and severally liable under 2.04

In Cranson, the court found a corporation by estoppel because IBM dealt with the Bureau as if it were a corporation and

Cranson v. International Business Machines Corp.- Cranson was not personally liable for the debts of his defectively incorpora

association, the Real Estate Burea. He had agreed to invest in the Bureau and to become an officer and a director of the new

company. Cranson and others hired a lawyer to incorporate but there was a defective filing. Cranson paid for and received sto

up bank accounts, and maintained corporate records. It incurred a debt to IBM.

Examples

Defective incorporation

Premature Commencement of BusinessD.

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on its credit rather than that of Cranson, it was "estopped to deny the corporate existence of the Bureau."

They didn't know that Kunkel had failed to incorporate.

Frontier was content to look only to Kunkel for performance of its agreements

"Frontier with full knowledge that a corporation had not yet been formed chose to transact its business with Kun

individual"

In Frontier, the court said "[n]either Fairfield nor Beach, expressly or impliedly, authorized Kunkel to make such

representations or to enter into contracts with Frontier in the name of 'Kunkel's, Inc.'"

Individual liability could not be imposed upon Fairfield and Beach because they were creditors, not partners.

Frontier Refining Company v. Kunkel's, Inc. - P is suing D for over $6,000 in gas. Kunkle went to Fairfield for a loan. Fairfield ob

but did talk with Kunkle about the formation of a corporation. Kunkle was to start it and Fairfield and Beach would purchase

Griffit (the previous owner of the lease). There is conflicting testimony regarding an alleged conversation between Fairfield a

Frontier. A financial statement was obtained from Kunkel, but not from Fairfield or Beach. Frontier then entered into an agree

with "CLIFFORD D. KUNKEL DBA KUNKEL'S INC." Soon after, Kunkel took over and started doing business. Fairfield and Beach

$11k after Kunkle started doing business.

Solely contributing money is not purporting to act (Frontier)

"Purporting to act"

The court in Robertson said "[t]he corporation comes into existence only when the certificate has been issued."

All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this Act, are jointly a

severally liable for all liabilities created while so acting

Estoppel exception where a third person knows that no corporation has been formed, but insists that his contract be

immediately entered into in the name of the corporation (Quaker Hill)

Exception where a transaction is entered into after the articles have been mailed or delivered to the filing office but hav

been received in the filing office through no fault of the filer

Exception where a corporate organizer enters into a transaction in the name of the corporation when he reasonably anhonestly believes that articles have been filed but they have not been due to attorney neglect or other cause

The comments provide for three exceptions

2.04 - Liability for Preincorporation transactions

Disregard of the Corporate Entity ____________________________________________

Identify a coherent set of factors that every court thinks is important in deciding whether to disregard the corporate entity (test comes from

Radaszewski)

The fact that a corporation is created for limited liability is not, in and of itself, unfair

Generally

Baatz v. Arrow Bar- Baatz alleges hat Arrow Bar served alcoholic beverages to McBride prior to an accident while he was already intoxicated. A

owned the corporation and financed it on a loan in which they personally guaranteed => What counts as capitalization?

The law permits the incorporation of a business for the very purpose of escaping personal liability when there is no evidence of fraud,

misrepresentation, nor illegality; Dissent - not a piercing case, the subsidiary is the agent.

Bartle v. Home Owners Co-OP - bankruptcy trustee trying to hold D corporation liable for the debts of its subsidiary corporation

DeWitt Truck Brokers v. W. Ray Flemming Fruit Co.- corporation sold produce as agent for growers

Fletcher v. Atex, Inc. - Kodak's subsidiary, Atex, is being sued over keyboards it manufactured

Telecom wanted to reduce the influence of the Teamsters unit in their business so they created a subsidiary, and they obtained insurance

insurance agent was another subsidiary of Telecom and had gone bankrupt.

Radaszewski v. Telecom Corp. - man seriously injured in car accident, struck by a car driven by an employee of Contrux, with Telecom as the par

company

Examples

The issue is whether the court should disregard the corporate entity and hold the stockholder personally liable for the debts of the corporation

Corporation being formed is not, of itself, unfair

Disregard of the corporate entity involves the question whether a specific shareholder is personally liable for a specific corporate obligation

6.22 - Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of t

corporation except by reason of his own conduct

In the case, a cash management system did not show siphoning of funds when "a strict accounting [was] kept of each

subsidiary's funds," and was "a function of administrative convenience."

Exertion of control over major expenditures or interlocking directors does not meet the standard.

As shown in Fletcher v. Atex, "complete domination" can be shown if the parent corporation and the subsidiary "operated as

economic entity."

The court may consider if dividends were paid, corporate records kept, officers and directors functioned properly, board

meetings and minutes were kept, stock records

Failure to observe corporate formalities weighs toward control,, but Dewittshows this factor may be given little weight

Parent and corporation must be reported on the same tax return (but a charge is usually imposed)

Legal services; central financing of capital improvements; transferring employees from one subsidiary to another or to o

the parent

Areas of control may be justified

"Complete domination"

Control, not mere majority or complete stock control, but complete domination, not only of finances, but of policy and business practice

respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence o

own; and

1.

In determining whether there was "disregard of the corporate entity," one must show ( Radaszewskiand OH)

Analysis

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"in connection with the transaction attacked" - the P must show "complete domination" over the transaction in question

To be adequately capitalized, a corporation must have enough unencumbered assets to meet reasonably expected debts of t

corporation

Loans are not contributions because the debt is encumbered

In Dewitt, the court said "[n]o stockholder or officer of the corporation . . . received any salary, dividend, or fee fr

corporation.

The dissent in Bartle noted there was no way the business could profit b/c the setup didn't offer dividends, and th

benefits that would otherwise inure to the corporation would go to the parent corporation

Non payment of dividends

In DeWitt, the D "was withdrawing funds from the corporation at the rate of $15,000 per year."

Siphoning of funds

As shown in the case, meeting the statutory minimum standards for insurance shows adequate capitalization wit

to claims on that insurance.

If the claim is tort, Baatz shows liability insurance is a contribution when the insurance will cover the type of claim and

insurance is sufficient

As discussed in DeWitt, "[t]he obligation to provide adequate capital begins with incorporation and is a continuing obligation

thereafter"

Undercapitalization provides an inference that the parent either deliberately or recklessly created a business that will not be

pay its bills or satisfy judgments against it

Undercapitalization is the most important factor in determining if control was used to commit a wrong

Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive

duty, or dishonest and unjust act in contravention of plaintiff's legal rights; and

2.

Injury is damages that go unpaid.

Control and breach of duty must proximately cause the injury or unjust loss complained of.3.

Financial Matters and the Corporation______ __________________________________________

Authorized - the maximum number of shares a corporation may issue in any class or series

Issued - the corporation itself has traded the shares in exchange for value

Outstanding - shares that have been authorized, issued, and remain in the hands of shareholders

Treasury shares - shares that have been authorized, issued, and repurchased by the corporation

Conversion rights may allow a preferred stockholder to convert preferred shares into common shares

Types of shares

Par value - provides a fund for paying creditors at issuance (outdated)

Stated capital - amount not distributable, reserved for debtors

Par stock has automatic stated capital calculated by the number or shares times the stated par value

OH offers low value par or no par. If stating par is necessary, par should be stated as low as possible.

In the secondary market, par value is meaningless

Par Value and stated capital

Taxes - "S" corp. status, taxable income, taxable income

Piercing - undercapitalizing with debt rather than equity "deep rock"

Risk - what level of risk is client willing to take, whether client desires an income stream

Debt and Equity considerations

Generally

Hanewald v. Bryan's Inc. - retail store issued 100 shares of stock at $1000 par value per share and issued shares for no consideration => st

capital $100k => liable for the amount they said they had contributed

Page 301(1) - see the question, too long to write out

Examples

1.40(22) - "Shares" means the units in which the proprietary interest of the corporation are divided

Par value only applies to the original issue of stock, not the secondary market ( Torres)

2.02(b)(2)(iv) - Par value is optional [par value is value stock cannot be issued below]

(a) The articles of incorporation must set forth any classes of shares and series of shares within a class, and the number of shares of each

and series, that the corporation is authorized to issue. If more than one class or series of shares is authorized, the articles of incorporation

prescribe a distinguishing designation for each class or series and must describe, prior to the issuance of shares of a class or series, the teincluding the preferences, rights, and limitations, of that class or series. Except to the extent varied as permitted by this section, all share

class or series must have terms, including preferences, rights and limitations, that are identical with those of other shares of the same cla

series

Voting on board of directors, bylaws

(1) one or more classes of shares that together have unlimited voting rights, and

Preferred shareholders often have preferred status in liquidation

Residual claimants get what is left of a corporation after the debts of the corporation have been paid

(2) one or more classes of share (which may be the same class or classes as those with voting rights) that together are entitled to rec

net assets of the corporation upon dissolution

(b) The articles of incorporation must authorize:

(1) have special, conditional, or limited voting rights, or no right to vote, except to the extent otherwise provided by this Act;

(2) are redeemable or convertible as specified in the articles of incorporation:

(c) The articles of incorporation may authorize one or more classes or series of shares that:

6.01 - Authorized Shares

Debt and Equity CapitalA.

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(i) at the option of the corporation, the shareholder, or another person or upon the occurrence of a specified event;

(ii) for cash, indebtedness, securities, or other property; and

(iii) at prices and in amounts specified, or determined in accordance with a formula;

(3) entitle the holders to distributions calculated in any manner, including dividends that may be cumulative, noncumulative,or par

cumulative; or

(4) have preference over any other class or series of shares with respect to distributions, including distributions upon the dissolution

corporation

(a) The powers granted in this section to the board of directors may be reserved to the shareholders by the articles of incorporation.

Shares can be issued for future services

Identical shares can be issued for different prices

However, in OH, ORC 17.01.18(b)(c) provides that promissory notes and future service contracts are not permitted for consideratio

(b) The board of directors may authorize shares to be issued for consideration consisting of any tangible or intangible property or bene fit

corporation, including cash, promissory notes, services performed, contracts for services to be performed, or other securities of the corpo

This section leaves open an opportunity for shareholders to contest inadequacy of consideration, fraud, or breach of fiduciary duty

(c) Before the corporation issues shares, the board of directors must determine that the consideration received or to be received for shar

issued is adequate. That determination by the board of directors is conclusive insofar as the adequacy of consideration for the issuance of

relates to whether the shares are validly issued, fully paid, and nonassessable.

6.21 - Issuance of Shares (After incorporation)

Hanewaldshows that a shareholder's loan is a debt not an asset of the corporation

(a) A purchaser from a corporation of its own shares is not liable to the corporation or its creditors with respect to the shares except to pa

consideration for which the shares were authorized to be issued (section 6.21) or specified in the subscription agreement (section 6.20).

In Hanewald, K & J issued 100 shares at $1000/share and did not pay. K & J was liable to corporation creditors to pay for the shares

(b) Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts o

corporation except that he may become personally liable by reason of his own acts or conduct

6.22 - Liability of Shareholders

"[T]he power of the individual stockholder to vote in proportion to the number of his shares is vital, and cannot be cut off or c

by the action of all the other stockholders, even with the cooperation of the directors and officers."

The court in Stokes stated "a stockholder has an inherent right to a proportionate share of new stock issued for money only .

while he can waive that right, he cannot be deprived of it without his consent except when the stock is issued at a fixed price

than par and he is given the right to take at that price in proportion to his holding, or in some other equitable way that will en

to protect his interest by acting on his own judgment and using his own resources."

Stokes v. Continental Trust Co. of City of New York- Stockholder has a 4.42% interest and wants to maintain proportionality after a

transaction to issue twice as much stock. He wants to protect his voting power and equity/distributions.

Book value is a corporation's liquidation value, and does not take into account going concern.

Katzowitz v. Sidler- P and D's owed several corporations. Corporation held by P and D's owed each $2500. D's wanted to invest mo

other corporations, P objected. In order to freeze P out, the D's sold stock at 1/18th of its book value which caused an immediate d

of the book value of the outstanding securities. Was the sale of stock in violation of P's preemptive rights?

Lacos - D was officer, director, and shareholder. Although already majority shareholder, D pushed to introduce a new class of stock voting rights for more control. In his role as officer/director he made a threat that he would not give his support to future transacti

b/c of the breach, the vote to recapitalization was void

Examples

Policy - Provides proportionality in voting and distributions by preserving a stockholder's percentage ownership in the corporation

Preemptive rights apply to shares that are authorized, but not yet issued.

"opt in" clause - no right unless granted by articles of incorporation

(a) The shareholders of a corporation do not have a preemptive right to acquire the corporations unissued shares except to the ext

articles of incorporation so provide.

As shown in Stokes, if a corporation has preemptive rights, a shareholder has the right to preserve their % share in the

corporation, rather than the number of shares

The issue price is markedly below book/fair value; and

In Katzowitz, shares were offered at $100/share and book value was $1800/share

Remaining shareholders directorly benefit from the issuance

Even if offered, preemptive rights may be insufficient if, as shown in Kasowitz:

"The corollary of a stockholder's right to maintain his proportionate equity in a corporation by purchasing additional sh

the right not to purchase additional shares without being confronted with dilution of his existing equity if no valid busin

justification exists for the dilution."

(1) The shareholders of the corporation have a preemptive right, granted on uniform terms and conditions prescribed by the b

directors to provide a fair and reasonable opportunity to exercise the right, to acquire proportional amounts of the corporatio

unissued shares upon the decision of the board of directors to issue them.

(2) A shareholder may waive his preemptive right. A waiver evidenced by a writing is irrevocable even though it is not support

consideration.

(i) shares issued as compensation to directors, officers, agents, or employees of the corporation, its subsidiaries or affilia

(ii) shares issued to satisfy conversion or option rights created to provide compensation to directors, officers, agents, o

(3) There is no preemptive right with respect to:

(b) A statement included in the articles of incorporation that the corporation elects to have preemptive rights (or wordsof simila

means that the following principles apply except to the extent the articles of incorporation expressly provide otherwise:

6.30. SHAREHOLDERS PREEMPTIVE RIGHTS

Preemptive RightsIssuance of Shares by a Going Concern: Preemptive Rights, Dilution, and RecapitalizationsB.

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employees of the corporation, its subsidiaries or affiliates;

(iii) shares authorized in articles of incorporation that are issued within six months from the effective date of incorporat

(iv) shares sold otherwise than for money.

(4) Holders of shares of any class without general voting rights but with preferential rights to distributions or assets have no

preemptive rights with respect to shares of any class.

(5) Holders of shares of any class with general voting rights but without preferential rights to distributions or assets have no

preemptive rights with respect to shares of any class with preferential rights to distributions or assets unless the shares with

preferential rights are convertible into or carry a right to subscribe for or acquire shares without preferential rights.

(6) Shares subject to preemptive rights that are not acquired by shareholders may be issued to any person for a period of one

after being offered to shareholders at a consideration set by the board of directors that is not lower than the considerationse

exercise of preemptive rights. An offer at a lower consideration or after the expiration of one year is subject to the sharehold

preemptive rights.(c) For purposes of this section, shares includes a security convertible into or carrying a right to subscribe for or acquire shares

Recapitalization involves changing the stock structure of a corporation.

Shareholders do not owe a fiduciary duty to the corporation, but directors and officers do.

In recapitalization, Lacos shows directors owe a duty of loyalty to the corporation and must act in the best interest of the corporation eve

means acting against his personal interests.

Recapitalization

Distributions only concern the "original issue"

Cumulative dividends ensure payment of proffered dividends before distributions are made to common shareholders

A noncumulative dividend is not carried over from one year to the next. If no dividend is issued, the preferred shareholder lo

right to that dividend

A partially cumulative dividend typically is cumulative to the extent there are earningsin the year, and noncumulative with reany excess dividend preference

Dividend rights can be cumulative, noncumulative, or partially cumulative

Dodge v. Ford Motor Co. - Ford had its best year ever with an expected profit of $60 million and shareholders wanted dividen

Henry Ford wanted a quasi-charitable organization and to use the surplus to sell cheaper cars

Corporate benefits/distributions must be provided to shareholders, rather than society at large.

The remedy for a breach is repayment back to corporation

As shown in Wilderman, when considering whether a salary payment is reasonable, the court may consider (1) whether the s

bears a reasonable relation to the success of the corporation, (2) the amount previously received as salary, (3) whether increa

salary are geared to increases in the value of services rendered, and (4) the amount of the challenged salary compared to othe

salaries paid by the employer

Wilderman v. Wilderman - D and P each half shareholders in corporation before they divorced. D does most of the labor and

the bookkeeping. After the divorce D greatly increased his salary and kept P's the same

Dividends may be disguised in the form of salary in order to exclude it from the corporation's taxable income.

Generally

Can shareholders compel a board of directors to issue a dividend on common stock?

Gottfried v. Gottfried- P own common stock and haven't been paid dividend in 14 years. Closely held corporation w/ no market for

stock. Dividends had been paid on the other classes of stock. P's allege "bitter animosity."

Examples

1.40(6) - Distribution means a direct or indirect transfer of money or other property (except its own shares) or incurrence of indebtedn

corporation to or for the benefit of its shareholders in respect of any of its shares. A distribution may be in the form of a declaration or pa

of a dividend; a purchase, redemption, or other acquisition of shares; a distribution of indebtedness; or otherwise.

Note - Proportionate redemption of outstanding shares is a distribution (Gottfried)

Ability to make a distribution is not tied to earnings

(a) A board of directors may authorize and the corporation may make distributions to its shareholders subject to restriction by the a

of incorporation and the limitation in subsection (c).

(b) If the board of directors does not fix the record date for determining shareholders entitled to a distribution (other than one invo

purchase, redemption, or other acquisition of the corporations shares), it is the date the board of directors authorizes thedistribut

6.40. DISTRIBUTIONS TO SHAREHOLDERS

The "equity/insolvency test" determines whether a corporation can pay its debts as they become due.

(1) the corporation would not be able to pay its debts as they become due in the usual course of business; or

The "balance sheet/insolvency test" guarantees those with superior rights will receive their distributions before holders

common stock.

(2) the corporations total assets would be less than the sum of its total liabilities plus (unless the articles of incorporation per

otherwise) the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy

preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution

(c) No distribution may be made if, after giving it effect:

(restrictions on distributions that always apply)

Employment from company (if shareholder is excluded from employment)

Compensation equity (if some have high compensation)

Loans (if some receive loans, or loans with favorable terms)

Freeze-out (if someone is pushed out of the corporation for insufficient consideration)

Evidence of bad faith can be shown by considering:

To compel a dividend, P must show dividend was withheld in bad faith

Redemptions

Distributions by a Closely Held Corporation

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A redemption is a purchase by the corporation and is a type of distribution. The rules for redemptions require compliance wit

rules for distributions.

Generally

If a corporation redeems stock in the hands of its shareholders it is a redemption.

Proportionate redemption of outstanding shares is a distribution (Gottfried)

Generally, shareholders do not owe a fiduciary duty to other shareholders.

1.40(18A) defines "public corporation" as "a corporation that has shares listed on a national securities exchange or regularly t

a market maintained by one or more members of a national securities association."

There is an exception for non-public corporations when there is a shareholder agreement under 7.32(a)(1) that eliminates the board

directors or restricts the discretion or powers of the board of directors.

If a majority of shareholders take control of a non-public corporation, the director's fiduciary duty shifts and majority shareholder h

fiduciary duty to the minority shareholder

Meinhardshows that once a fiduciary duty attaches "[n]ot honesty alone, but the punctilio of an honor the most sensitive, is then th

standard of behavior."

Donahue v. Rodd Electrotype - (Wood loves this case) P's husband and Harry Rodd became owners of Rodd Electrotype

split off from its parent company. Rodd owned 80% of the stock and P owned 20%, and before Harry Rodd transferred

management and stock to his sons. P was unaware of the transfer and a few weeks later tried to sell their shares for the

price received by Harry Rodd.

"If the close corporation purchases shares only from a member of the controlling group, the controlling stockholder can conv

shares into cash at a time when none of the other stockholders can," thereby operating "as a preferentialdistribution of asse

Donahue v. Roddshows the controlling stockholders must offer each stockholder an equal opportunity to sell a ratable number of h

to the corporation at an identical price

Once this breach is found, the remedy is repayment to the corporation.

Management and Control of the Corporation_______________________________________________

7.32 - shareholder agreements in closely held corporations (OH 17.08(591)), and does not cut off until the corporation becomes public (7

MBCA Chapter 8 addresses directors and officers

Generally the duty of directors runs to the corporation and not to the shareholders. A contract is illegal and void so far as it preclud

board of directors, at the risk of incurring legal liability, from changing officers, salaries, or policies, ore retaining individuals in office

by consent of the consenting parties

McQuade v. Stoneham - P was treasurer of the Giants and D was the president. P was removed as treasurer despite an agreement for D to

best efforts to keep him as treasurer.

Where the directors are the sole stockholders, there seems to be no objection to enforcing an agreement among them to vote for c

people as officers; there was no injury suffered by or threatened to any party

Clark v. Dodge - written agreement where it was agreed that P would continue to manage and in connection would disclose a secret form

Doge's son that was necessary for the successful operation of the business was NOT not illegal against public policy

Upheld - (1) no apparent public injury, (2) no objecting minority interest, (3) no apparent prejudice to creditors

Court examined the duration (now in 7.32(d) and default of 10 yrs) - operative while parties are living, purpose - salary continuation

Galler v. Galler- shareholders made internal agreement with specific instructions addressing who was to manage the corporation

Traditional Roles of Shareholders and Directors - (historical development of the general rule)

Starting point: 8.01. You can have an exception to 8.01, if you follow the requirements of 7.32.

8.05 - Terms of directors generally

8.08 - Removal of directors by shareholders and whether there needs to be cause for removal (internal)

8.09 - Removal of directors in a judicial proceeding (external)

8.33 - Directors Liability for Unlawful distribution, then go to 6.40, so 6.40 and 8.33 require reference to each other

8.40 - Officers

MBCA Chapter 8 - Directors

7.07 - Record date for shareholders

7.22 - Proxies

7.23 - Nominees

MBCA Chapter 7 - Shareholders

Generally

The general rule is that directors owe a fiduciary duty to the corporation

Under 8.01(a), "except as provided in section 7.32, each corporation must have a board of directors.

(a) A corporation has the officers described in its bylaws or appointed by the board of directors in accordance with thebylaws.

(b) The board of directors may elect individuals to fill one or more offices of the corporation. An officer may appoint oneor more officers

authorized by the bylaws or the board of directors.

(c) The bylaws or the board of directors shall assign to one of the officers responsibility for preparing the minutes of the directors and

shareholders meetings and for maintaining and authenticating the records of the corporation required to be kept under sections 16.01(a

16.01(e).

(d) The same individual may simultaneously hold more than one office in a corporation.

8.40. OFFICERS

Under 8.09(a)(1), cause may be found if the director engaged in fraudulent conduct with respect to the corporation or its sharehol

grossly abused the position of director, or intentionally inflicted harm on the corporation.

(a) The shareholders may remove one or more directors with or without cause unless the articles of incorporation provide that directors

removed only for cause.

8.08. REMOVAL OF DIRECTORS BY SHAREHOLDERS

Board of Directors

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(b) If a director is elected by a voting group of shareholders, only the shareholders of that voting group may participate in the vote to rem

(c) If cumulative voting is authorized, a director may not be removed if the number of votes sufficient to elect him under cumulative votin

voted against his removal. If cumulative voting is not authorized, a director may be removed only if the number of votes cast to remove h

exceeds the number of votes cast not to remove him.

(d) A director may be removed by the shareholders only at a meeting called for the purpose of removing him and the meeting notice mus

that the purpose, or one of the purposes, of the meeting is removal of the director

Removal by judicial proceeding can be simpler and less expensive than calling a shareholders meetings to remove a director

(a) The [name or describe] court of the county where a corporations principal office (or, if none in this state, its registeredoffice) is locat

remove a director of the corporation from office in a proceeding commenced by or in the right of the corporation if the court finds that (1

director engaged in fraudulent conduct with respect to the corporation or its shareholders, grossly abused the position of director, or inte

inflicted harm on the corporation; and (2) considering the directors course of conduct and the inadequacy of other available remedies, r

would be in the best interest of the corporation.

(b) A shareholder proceeding on behalf of the corporation under subsection (a) shall comply with all of the requirements of sub-chapter 7

except section 7.41(1).

(c) The court, in addition to removing the director, may bar the director from reelection for a period prescribed by the court.

(d) Nothing in this section limits the equitable powers of the court to order other relief

8.09. REMOVAL OF DIRECTORS BY JUDICIAL PROCEEDING

Enforceable, agreement allows nothing not permitted by statute. Not against public policy, no intervening rights of third part

the stockholders agreed

Zion v. Kurtz- agreement said "no business or activities shall be conducted without the consent of a minority stockholder" and not

compliance with DE's close corporation statute.

Shareholders may remove director unless articles of incorporation provides otherwisestockholders cannot force a meeting

board cannot legally do what the meeting is calling for, there must be some legal purpose for meeting

Standard by which directors can be removed: MBCA 8.08 (internally), 8.09 (externally)

Shareholders meetings: 7.01; 7.02-.05 = notification requirements for mtgs

Note: Shareholders cannotelect officers

If its allowed in their articles of incorporation, then shareholders can remove a director without cause. If there is a director w

violated a duty of care or a duty of loyalty, then cause for removal exists.

Matter of Auer v. Dressel- bylaws obligated President to hold a special meeting upon majority stockholder request but President fa

do so

Historical development of shareholder agreements

Generally

(1) eliminates the board of directors or restricts the discretion or powers of the board of directors;

(2) governs the authorization or making of distributions whether or not in proportion to ownership of shares, subject to the limitat

section 6.40;

(3) establishes who shall be directors or officers of the corporation, or their terms of office or manner of selectionof removal;

(4) governs, in general or in regard to specific matters, the exercise or division of voting power by or between the shareholders anddirectors or by or among any of them, including use of weighted voting rights or director proxies;

(5) establishes the terms and conditions of any agreement for the transfer or use of property or the provision of services between t

corporation and any shareholder, director, officer or employee of the corporation or among any of them;

(6) transfers to one or more shareholders or other persons all or part of the authority to exercise the corporate powers or to manag

business and affairs of the corporation, including the resolution of any issue about which there exists a deadlock among directors or

shareholders;

(7) requires dissolution of the corporation at the request of one or more of the shareholders or upon the occurrence of a speci fied

contingency; or

(8) otherwise governs the exercise of the corporate powers or the management of the business and affairs of the corporation or th

relationship among the shareholders, the directors and the corporation, or among any of them, and is not contrary to public policy.

(a) An agreement among the shareholders of a corporation that complies with this section is effective among the shareholders and the

corporation even though it is inconsistent with one or more other provisions of this Act in that it:

(A) in the articles of incorporation or bylaws and approved by all persons who are shareholders at the time of the agreement

(B) in a written agreement that is signed by all persons who are shareholders at the time of the agreement and is made know

corporation;

(1) set forth

(b)(1,2) require unanimous agreement among shareholders for agreement or amendment to agreement

(2) subject to amendment only by all persons who are shareholders at the time of the amendment, unless the agreement provides

otherwise; and

(3) valid for 10 years, unless the agreement provides otherwise.

(b) An agreement authorized by this section shall be:

(c) The existence of an agreement authorized by this section shall be noted conspicuously on the front or back of each certi ficate for outs

shares or on the information statement required by section 6.26(b). If at the time of the agreement the corporation has shares outstandi

represented by certificates, the corporation shall recall the outstanding certificates and issue substitute certificates thatcomply with this

subsection. The failure to note the existence of the agreement on the certi ficate or information statement shall not affect the validity of t

agreement or any action taken pursuant to it. Any purchaser of shares who, at the time of purchase, did not have knowledge of the existe

the agreement shall be entitled to rescission of the purchase. A purchaser shall be deemed to have knowledge of the existence of the agr

if its existence is noted on the certificate or information statement for theshares in compliance with this subsection and, if the shares are

represented by a certificate, the information statement is delivered to the purchaser at or prior to the time ofpurchase of the shares. An

7.32. SHAREHOLDER AGREEMENTS

Shareholder Agreements

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Requires the existence of an agreement to be noted on each certificate

enforce the right of rescission authorized by this subsection must be commenced within the earlier of 90 days after discovery of the exist

the agreement or two years after the time of purchase of the shares.

Concerns duration

(d) An agreement authorized by this section shall cease to be effective when the corporation becomes a public corporation. If the agreem

ceases to be effective for any reason, the board of directors may, if the agreement is contained or referred to in the corpor ations articles

incorporation or bylaws, adopt an amendment to the articles of incorporation or bylaws, without shareholder action, to delete the agree

any references to it.

(e) An agreement authorized by this section that limits the discretion or powers of the board of directors shall relieve the directors of, and

upon the person or persons in whom such discretion or powers are vested, liability for acts or omissions imposed by law on directors to th

that the discretion or powers of the directors are limited by the agreement.

Proxy - One who is authorized to act as a substitute for another; esp., in corporate law, a person who is authorized to vote an

stock shares

Proxies

Generally

Registered owner - Pioneer (bankrupt), beneficial owner = Shepard (bankrupt)

Protections for beneficial owners - Beneficiary can (1) order a transfer on the books to the beneficial owner, (2) have a proxy

registered owner to the beneficial owner, (3) action

Salgo - record owner was a person different from the beneficial owner; the corporation must determine who had been authorized

the shares by the record owner.

Examples

(a) Except as provided in subsections (b) and (d) or unless the articles of incorporation provide otherwise, each outstandingshare,

regardless of class, is entitled to one vote on each matter voted on at a shareholders meeting. Only shares are entitled tovote

7.21. VOTING ENTITLEMENT OF SHARES

7.22. PROXIES - (a) A shareholder may vote his shares in person or by proxy.

1.40(21) - Beneficial owner is the one with equitable title to the stock, the registered owner is the one who votes (even if in

bankruptcy)

7.24(a) - Corpration has to accept proxy if name signed on proxy is name of a shareholder

(d)(1) a pledgee (if you use stock as security)

(d)(2) a person who purchased or agreed to purchase the shares (ex. If I sell you stock today but it doesn't transfer for 7 days,

could demand an irrevocable proxy to vote the shares until transferred)

7.22(d) - proxies are revocable unless

Proxy separates voting power from beneficial ownership

Proxies

(a) The bylaws may fix or provide the manner of fixing the record date for one or more voting groups in order to determine the sha

entitled to notice of a shareholdersmeeting, to demand a special meeting, to vote, or to take any other action. If the bylaws do not

provide for fixing a record date, the board of directors of the corporation mayfix a future date as the record date.

(b) A record date fixed under this section may not be more than70 days before the meeting or action requiring a determination of

shareholders

7.07. RECORD DATE

If the articles of incorporation authorize dividing the shares into classes, the articles may also authorize the election of all or a speci

number of directors by the holders of one or more authorized classes of shares. A class (or classes) of shares entitled to elect one o

directors is a separate voting group for purposes of the election of directors

8.04. ELECTION OF DIRECTORS BY CERTAIN CLASSES OF SHAREHOLDERS

8.05(e) - director continues to serve until the director's successor is elected and qualifies or there is a decrease in the number of directors

Shareholder Voting and Agreements

Advantageous for majority

Straight Voting can cast as many votes as you have shares of stock for each director spot

7.28(b) - straight voting is default

Advantageous for minority

A decision to classify the board in this way may be attacked as a breach of fiduciary duty

Staggered board can limit the effect of cumulative voting (8.06)

Cumulative Voting means that the shareholders designated are entitled to multiply the number of votes they are entitled to cast

number of directors for whom they are entitled to vote and cast the product for a single candidate or distribute the product among

more candidates (7.28(c))

7.28(b) - Corporation can opt-in to cumulative voting if stated in articles of incorporation

NS = # of shares needed to elect the number of desired directors

ND = # of directors desired to elect

TS = Total shares

TD = Total directors

NS = ((ND x TS) / (TD + 1)) + 1

Fractions should be ignored, round down to the nearest whole #

Formula

[(200x1)/(5+1)]+1 = 34 shares needed to elect one director

Total number of votes you have = 34 x 5 = 170

How many shares do you need to elect one director? 200 voting shares; 5 directors being elected

Examples

Cumulative vs. straight voting

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Total votes being case = 200 x 5 = 1,000

Total votes you don't have = 1000 - 170 = 830

[(200x3)/(5+1)]+1 = 101 shares needed to elect one director

Total number of votes you have = 101 x 5 = 505

Total votes being case = 200 x 5 = 1,000

Total votes you don't have = 1000 - 505 = 495

How many shares do you need to elect 3 directors? 200 voting shares; 5 directors being elected

7.30 - Concerns property law, and transferring legal title to a trustee and the trustee votes, 7.31 - contract about how to vote

Not a voting trust, voting not separated from equitable title, trust rules didn't apply and agreement is enforceable

Under the MBA, the result would be different, they would be cast according to how the arbitrator said

Ringling Brothers -3 stockholders; 2/3 entered voting agreement that they will act jointly in voting; arbitrator cast votes contr

the terms of the agreement => Court said votes did not count

Stricter rules for trusts than agreements - worried about trustees not voting in the best interest of the corporation

Generally, voting buying is discourage and can be voided at the insistence of the corporation

Only illegal to sell a vote if it amounts to a fraud on the corporation

Generally

Humphry's v. Winous Co - the affect of cumulative voting can be diminished by breaking directors into classifications

Examples

Trustee = record owner

Voting trusts give trustee legal title to shares and you keep equitable title

(a) One or more shareholders may create a voting trust, conferring on a trustee the right to vote or otherwise act for them, b

an agreement setting out the provisions of the trust (which may include anything consistent with its purpose) and transferring

shares to the trustee. When a voting trust agreement is signed, the trustee shall prepare a list of the names and addresses of owners of beneficial interests in the trust, together with the number and class of shares each transferred to the trust, and de

copies of the list and agreement to the corporations principal office.

(b) A voting trust becomes effective on the date the first shares subject to the trust are registered in the trustees name. A vo

is valid for not more than 10 years after its effective date unless extended under subsection (c).

(c) duration is 10 years

7.30. VOTING TRUSTS

7.22(d) - in a voting trust, the trustee can appoint a proxy

Cannot favor one class at the expense of another such an exercise of power is in derogation of the trust and ma

upheld, even though the thing done be within the scope of the powers granted to the trustees in general terms

A power may not be exercised if it constitutes a breach of fiduciary duty

A voting trust may arise when a corporation is in bankruptcy

Brown v. McLanahan -trustees made amendment that favored debentures and disfavored preferred stockholders

Trustee can't favor one class at the expense of another when he is trustee of both classes

Trustee has a fiduciary duty to vote in beneficial interest of shareholders

Creditors make shareholders put shares into a voting trust (at the threat of forcing bankruptcy) as a way to get company to change

management

Voting trusts

Voting agreements are contracts between parties about how they will vote

(a) Two or more shareholders may provide for the manner in which they will vote their shares by signing an agreement for tha

purpose. A voting agreement created under this section is not subject to the provisions of section 7.30.

Comment states this section "avoids the result reached in the Ringling case."

(b) A voting agreement created under this section is specifically enforceable

7.31. VOTING AGREEMENTS

(a) The articles of incorporation, bylaws, an agreement among shareholders, or an agreement between shareholders and the

corporation may impose restrictions on the transfer or registration of transfer of shares of the corporation. A restriction does

affect shares issued before the restriction was adopted unless the holders of the shares are parties to the restriction agreeme

voted in favor of the restriction.

(1) to maintain the corporations status when it is dependent on the number or identity of its shareholder

(2) to preserve exemptions under federal or state securities law;

Includes provisions designed to enable owners in closely held corporation to remain close (ex. To sele

persons with whom they will be associated in business, to permit withdrawing participants to liquida

some reasonable basis)

(3) for any other reasonable purpose.

6.27(c)

Restrictions authorized by the section1.

1.40(3) - "Conspicuous" means so written that a reasonable person against whom the writing is to operate should

noticed it. For example, printing in italics or boldface or contrasting color, or typing capitals or underlined, is cons

"Noted conspicuously on the front or back of the certificate"2.

(b) A restriction on the transfer or registration of transfer of shares is valid and enforceable against the holder or a transferee

holder if the restriction is authorized by this section and its existence is noted conspicuously on the front or back of the certifiis contained in the information statement required by section 6.26(b). Unless so noted, a restriction is not enforceable agains

person without knowledge of the restriction.

6.27. RESTRICTION ON TRANSFER OF SHARES AND OTHER SECURITIES

Voting agreements

Voting trusts and voting agreements

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Ling and Co. v. Trinity Sav. And Loan Ass'n- corporation may impose restrictions on the transfer of its stock

are expressly set forth on the articles of incorporation and copied at length or in summary form on the face

certificate, the articles of incorporation by reference on the face or back of the certificate of the provision o

articles of incorporation which restricts the transfer of stock

"Not enforceable against a person without knowledge of the restriction."3.

Buy/sell agreements

(1) obligate the shareholder first to offer the corporation or other persons (separately, consecutively, or simultaneously

opportunity to acquire the restricted shares;

Right of first refusal

(2) obligate the corporation or other persons (separately, consecutively, or simultaneously) to acquire the restricted sh

Cross-purchase agreements between shareholders

(3) require the corporation, the holders of any class of its shares, or another person to approve the transfer of the restr

shares, if the requirement is not manifestly unreasonable;

Stock-redemption agreements

(4) prohibit the transfer of the restricted shares to designated persons or classes of persons, if the prohibition is not ma

unreasonable.

(d) A restriction on the transfer or registration of transfer of shares may:

(e) For purposes of this section, shares includes a security convertible into or carrying a right to subscribe for or acquire sha

In creating the corporation important to draft triggers for buyouts

OH does not have a buyout provision

Buyout - 14.32 indicates who has rights to buyout

Client desires dissolution followed by buyout, he can petition for judicial dissolution if "oppressive conduct is shown"

Generally

14.34 election to purchase in lieu of dissolution (see next case)

Majority - Courts are reluctant to dissolve a corporation and will only do so when competing interests "are so discordant as to

efficient management" and the "object of its corporate existence cannot be attained." This is not met when there is no stalem

impasse as to corporate policies, the corporation is flourishing, dissolution is not necessary for the corporation or for either

shareholders, and the only grievance is non payment of salary.

Dissent - issue is whether there is a deadlock as to the management of the corporation, not whether business is being condu

profit or loss

In Re Radom & Neirdoff- brother and sister had equal shares and there was a deadlock in whether to dissolve the corporation

Oppressive does not carry an essential inference of imminent disaster, it can contemplate a continues course of conduct

The Davis court considered the absence of "malicious suppression of dividends or excessive salaries,"

Davis - fraud is not necessary to dissolve, but oppressive conduct may be enough to require a remedy. The court defines oppressive

as "burdensome, harsh and wrongful conduct," "lack of probity and fair dealing in the affairs of a company to the prejudice of some

members," "a visible departure from the standards of fair dealing, and a violation of fair play on which every shareholder who entru

money to a company is entitled to rely."

Majority - Yes "associated stockholder could frustrate corporate action until all of their joint demands were met."

Dissent - Would force new election

Can the remaining directors elect a replacement director when one of them purposely abstains in order to avoid a quorum?

Gearing v. Kelly- 4 directors, 1 resigns and needs to be replaced, bylaws required majority (3) for a quorum w/ straight voting, direc

intentionally refused to attend a meeting in order to avoid a quorum necessary to elect a new director, 2 directors elect a replacemeanyway

Examples

7.28(a) - directors are elected by a plurality

Cumulative voting can cure a deadlock by electing a new director, but straight voting cannot cure a deadlock and may re

dissolution or buyout

(e) Despite the expiration of a directors term, he continues to serve until his successor is elected and qualifies or untilthere i

decrease in the number of directors

8.05. TERMS OF DIRECTORS GENERALLY

7.25 - Quorum requirements

(1) the shareholders may fill the vacancy;

(2) the board of directors may fill the vacancy; or

(3) if the directors remaining in office constitute fewer thana quorum of the board, they may fill the vacancy by t

affirmative vote of a majority of all the directors remaining in office.

(a) Unless the articles of incorporation provide otherwise, if a vacancy occurs on a board of directors, including a vacan

resulting from an increase in the number of directors:

(b) If the vacant office was held by a director elected by a votinggroup of shareholders, only the holders of shares of th

group are entitled to vote to fill the vacancy if it is filled by the shareholders.

(c) A vacancy that will occur at a specific later date (by reason of a resignation effective at a later date under section 8.0

otherwise) may be filled before the vacancy occurs but the new director may not take office until the vacancy occurs

8.10. VACANCY ON BOARD.

Quorum

Deadlocks as to director vacancies

A majority of the incorporators or initial directors of a corporation that has not issued shares or has not commenced business

14.01. DISSOLUTION BY INCORPORATORS OR INITIAL DIRECTORS

Deadlocks as to dissolution

Deadlocks

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(1) the name of the corporation;

(2) the date of its incorporation;

(3) either (i) that none of the corporations shares has been issued or (ii) that the corporation has not commenced bus

(4) that no debt of the corporation remains unpaid;

(5) that the net assets of the corporation remaining after winding up have been distributed to the shareholders, if share

issued; and

(6) that a majority of the incorporators or initial directors authorized the dissolution

dissolve the corporation by delivering to the secretary of state of state for filing articles of dissolution that set forth:

The secretary of state may commence a proceeding under section 14.21 to administratively dissolve a corporation if:

(1) the corporation does not pay within 60 days after they are due any franchise taxes or penalties imposed by this Act or othe

(2) the corporation does not deliver its annual report to the secretary of state within 60 days after it is due;

(3) the corporation is without a registered agent or registered office in this state for 60 days or more;

(4) the corporation does not notify the secretary of state within 60 days that its registered agent or registered office has been

changed, that its registered agent has resigned, or that its registered office has been discontinued; or

(5) the corporations period of duration stated in its articles of incorporation expires

14.20. GROUNDS FOR ADMINISTRATIVE DISSOLUTION

Note - Comment states "may" preserves court's discretion as to whether dissolution is appropriate even though g

exist under the specific circumstances

(i) the corporation obtained its articles of incorporation through fraud; or

(ii) the corporation has continued to exceed or abuse the authority conferred upon it by law;

(1) in a proceeding by the attorney general if it is established that:

In Re Redom shows dissolution is permissive, not mandatory, and the court will only do so when competing

interests "are so discordant as to prevent efficient management" and the "object of its corporate existence

be attained."

"Can't show irreparable injury" was added to address situations such as In Re Redom when the business is

flourishing

(i) the directors are deadlocked in the management of the corporate affairs, the shareholders are unable to break

deadlock, and irreparable injury to the corporation is threatened or being suffered, or the business and affairs of corporation can no longer be conducted to the advantage of the shareholders generally, because of the deadlock

Davis defined oppressive conduct as "burdensome, harsh and wrongful conduct," "lack of probity and fair d

the affairs of a company to the prejudice of some of its members," "a visible departure from the standards

dealing, and a violation of fair play on which every shareholder who entrusts his money to a company is ent

rely."

Conspiring to deprive someone of stock ownership1.

Payment of fees on behalf of one shareholder and not another2.Converting someone's stock3.

Malicious suppression of dividends4.

Excessive salaries5.

Corporation buying things from a shareholder at greater than FMV6.

Corporation investing in a shareholder's business7.

The Davis court listed types of conduct that may be oppressive:

(ii) the directors or those in control of the corporation have acted, are acting, or will act in a manner that is illega

oppressive, or fraudulent;

Gearing v. Kelly

(iii) the shareholders are deadlocked in voting power and have failed, for a period that includes at least two cons

annual meeting dates, to elect successors to directors whose terms have expired; or

(iv) the corporate assets are being misapplied or wasted;

(2) in a proceeding by a shareholder if it is established that:

(i) the creditors claim has been reduced to judgment, the execution on the judgment returned unsatisfied, and

corporation is insolvent; or

A corporation is insolvent if its assets are less than its liabilities

(ii) the corporation has admitted in writing that the creditors claim is due and owing and the corporation is inso

(3) in a proceeding by a creditor if it is established that:

(4) in a proceeding by the corporation to have its voluntary dissolution continued under court supervision

(a) The [name or describe court or courts] may dissolve a corporation:

14.30. GROUNDS FOR JUDICIAL DISSOLUTION

Specifically provides for a buyout

(a) In a proceeding under section 14.30(a)(2) to dissolve a corporation that is not a public corporation, the corporation maye

it fails to elect, one or more shareholders may elect to purchase all shares owned by the petitioning shareholder at the fair va

the shares. An election pursuant to this section shall be irrevocable unless the court determines that it is equitable to set asid

modify the election.

Comments indicate that a court should consider all relevant facts and circumstances of the particular case in dete

fair value

Fair value is intended to be fluid

(c) If, within 60 days of the filing of the first election, the partiesreach agreement as to the fair value and terms of purchase o

petitioners shares, the court shall enter an order directing the purchase of petitioners shares upon the terms and conditions

to by the parties.

14.34. ELECTION TO PURCHASE IN LIEU OF DISSOLUTION - (Buyouts)

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(i) immediately before the effectuation of the corporate action to which the shareholder objects;

(ii) using customary and current valuation concepts and techniques generally employed for similar businesses in t

context of the transaction requiring appraisal; and

(iii) without discounting for lack of marketability or minority status except, if appropriate, for amendments to the

pursuant to section 13.02(a)(5).

Under 13.01(4) "Fair value" means the value of the corporation's shares determined:

The 13.01(4) definition of fair value doesn't say whether good will is included

(d) If the parties are unable to reach an agreement as provided for in subsection (c), the court, upon application of any party,

stay the section 14.30(2) proceedings and determine the fair value of the petitioners shares as of the day before the date on

the petition under section 14.30(2) was filed or as of such other date as the courtdeems appropriate under the circumstance

When the person authorized by the corporation, usually the secretary, on questions of authorization, that authority wil

questioned.

"Statements made by an officer or agent in the course of a transaction in which the corporation is engaged and which are wit

scope of his authority are binding upon the corporation"

In the Matter of Drive-In Development Corp.- subsidiary guaranteed the debt of its parent, nothing in bylaws or resolutions that gav

authority secretary certified authority

"Employment contracts for life or on a 'permanent basis' are generally regarded as 'extraordinary' and beyond the authority o

corporate executive if the only consideration for the promise is the employee's promise to work for that period."

Lee v. Jenkins Bro's - P was allegedly orally promised by D to pay his former pension in exchange for coming to work for D. No actua

authority, but apparent?

Examples

8.01(b) - All corporate powers shall be exercised by or under the authority of the board of directors of the corporation, and the busines

affairs of the corporation shall be managed by or under the direction, and subject to the oversight, of its board of directors, subject to any

limitation set forth in the articles of incorporation or in an agreement authorized under section 7.32.

(a) The board of directors may hold regular or special meetings in or out of this state.

(b) Unless the articles of incorporation or bylaws provide otherwise, the board of directors may permit any or all directors to partici

regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all directors partic

may simultaneously hear each other during the meeting. A director participating in a meeting by this means is deemed to be presen

person at the meeting

8.20. MEETINGS

8.21 - Action without meeting

Articles of incorporation

By-laws

Resolution of the board

Officers have to have authority to act according to:

As shown in Lee v. Jenkins, the President has authority to bind his company by acts arising in the usual and regular course of busines

not for contracts of an "extraordinary" nature. "Apparent authority . . . depends not only on the nature of the contract involved, butofficer negotiating it, the corporation's usual manner of conducting business, the size of the corporation and the number of its stoc

the circumstances that give rise to the contract, the reasonableness of the contact, the amounts involved, and who the contracting

party."

1.40(2) defines "secretary"

8.41 - Functions of officers - Each officer has the authority and shall perform the functions set forth in the bylaws or, to the extent consi

with the bylaws, the functions proscribed by the board of directors or by direction of an officer authorized by the board of directors to pre

the functions of other officers.

Action by directors and officers

Modern Corporate Governance__________________________________________________________

Ex. Stock options granted for compensation

Regulation G requires disclosure of non-GAPP financial info

Each registered agency should have a financial expert or explain why they don't

Majority of each board must be independent of management

Independent from management and1.

Has financial expertise2.

Audit committee that is:

CEO has to certify financial reports (quarterly and annually)

Internal controls and procedure for financial disclosure

Prohibition against loans to many officers

Changed audit procedures

Mandates electronic filing and posting of stock ownership

Sarbanes Oxley

Note - Housing crisis was from securitization of asset backed securities and credit-default swaps (insurance on loans)

Proxy Regulation______________________________________________________________________

Whether, and to what extent, a corporation must allow a shareholder to use corporation resources to solicit proxies1.

What must a proxy statement contain to comply with Section 14 - concerned with adequate disclosure to make sure shareholders a

Standards appropriate for proxy statements2.

Major Issues

Generally

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mislead and whether they have enough information

10k - Required annual report of all registered corporations

Anything material to shareholder in deciding whether to buy or sell(resignation of a director, election of new director, resignation o

auditor)

8k - Report of any significant change throughout the year

10q - Quarterly reports from the corporation

Reports

(a) Company A sells securities under Section 4(2) of the Securities Act of 1933 every year for 3 years. It eventually has total assets o

million and 450 shareholders. Does company A have to register under Section 12? => No. Has over $10,000, but less than 500 shareh

(b) Company B sells securities under Section 4(2) every year for three years. Eventually it has total assets of $9.8 million and 700

shareholders. Does Company B have to register under Section 12? => No. Sufficient shareholders, but insufficient assets.

(c) Company C has been registered under 12(g) for four years, and has consistently had $9.8 million in total assets and 450 shareho

May its registration under Section 12 be terminated? => Yes. Reg. 12 g-4(a)(1).

(p. 569 #2 - Wood said would be good MC test question) - Under 12g-1 and 12g-4, how should the following problems be resolved:

Examples

It shall be unlawful for any member, broker, or dealer to effect any transaction in any security (other than an exempted security) on a nati

securities exchange unless a registration is effective as to such security for such exchange in accordance with the provisions of this title an

rules and regulations thereunder. The provisions of this subsection shall not apply in respect of a security futures product traded on a nati

securities exchange.

12(a) - General requirement of registration

Difference between (A) and (B) effected the initial rolling out of the rule: 750 and larger first, then 500 and more => now we u

within one hundred and twenty days after the last day of its first fiscal year ended after July 1, 1964, on which the issuer has total a

exceeding $1,000,000 and a class of equity security (other than an exempted security) held of record by seven hundred and fifty or mpersons; and

A.

Applies to 500 or more shareholders and assets exceeding $10,000,000 if they engage in interstate commerce or a business a

interstate commerce

within one hundred and twenty days after the last day of its first fiscal year ended after two years from July 1, 1964, on which the is

total assets exceeding $1,000,000 and a class of equity security (other than an exempted security) held of record by five hundred or

but less than seven hundred and fifty persons, register such security by filing with the Commission a registration statement (and suc

thereof as the Commission may require) with respect to such security containing such information and documents as the Commissi

specify comparable to that which is required in an application to register a security pursuant to subsection (b) of this section. Each s

registration statement shall become effective sixty days after filing with the Commission or within such shorter period as the Comm

may direct. Until such registration statement becomes effective it shall not be deemed filed for the purposes of section 18. Any issu

register any class of equity security not required to be registered by filing a registration statement pursuant to the provisions of this

paragraph. The Commission is authorized to extend the date upon which any issuer or class of issuers is required to register a securi

pursuant to the provisions of this paragraph.

B.

Every issuer which is engaged in interstate commerce, or in a business affecting interstate commerce, or whose securities are traded by u

mails or any means or instrumentality of interstate commerce shall--

1.

any security listed and registered on a national securities exchange.A.

any security issued by an investment company registered pursuant to section 8 of the Investment Company Act of 1940.B.

any security, other than permanent stock, guaranty stock, permanent reserve stock, or any similar certificate evidencing nonwithdr

capital, issued by a savings and loan association, building and loan association, cooperative bank, homestead association, or similar

institution, which is supervised and examined by State or Federal authority having supervision over any such institution.

C.

any security of an issuer organized and operated exclusively for religious, educational, benevolent, fraternal, charitable, or reforma

purposes and not for pecuniary profit, and no part of the net earnings of which inures to the benefit of any private shareholder or

individual; or any security of a fund that is excluded from the definition of an investment company undersection 3(c)(10)(B) of the

Investment Company Act of 1940.

D.

any security of an issuer which is a "cooperative association" as defined in the Agricultural Marketing Act, approved June 15, 1929,

amended, [12 U.S.C.A. 1141 et seq.], or a federation of such cooperative associations, if such federation possesses no greater powe

purposes than cooperative associations so defined.

E.

any security issued by a mutual or cooperative organization which supplies a commodity or service primarily for the benefit of its me

and operates not for pecuniary profit, but only if the security is part of a class issuable only to persons who purchase commodities o

services from the issuer, the security is transferable only to a successor in interest or occupancy of premises serviced or to be served

issuer, and no dividends are payable to the holder of the security.

F.

Such insurance company is required to and does file an annual statement with the Commissioner of Insurance (or other office

agency performing a similar function) of its domiciliary State, and such annual statement conforms to that prescribed by the

Association of Insurance Commissioners or in the determination of such State commissioner, officer or agency substantially co

to that so prescribed.

i.

Such insurance company is subject to regulation by its domiciliary State of proxies, consents, or authorizations in respect of se

issued by such company and such regulation conforms to that prescribed by the National Association of Insurance Commissio

ii.

After July 1, 1966, the purchase and sales of securities issued by such insurance company by beneficial owners, directors, oro

such company are subject to regulation (including reporting) by its domiciliary State substantially in the manner provided in s

16.

iii.

any security issued by an insurance company if all of the following conditions are met:G.

any interest or participation in any collective trust funds maintained by a bank or in a separate account maint