Fogel Business Associations Fall 2011

8/2/2019 Fogel Business Associations Fall 2011

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Business Associations-FogelFall 2011

Abbreviations

Some of these are more obvious than others:

##Y (number) years= equal not equal more than, above, or raise less than, below, or lower Constitution not, cannot, is not3/3P third party

A Agent Act auth actual authority Addl additional AG Attorney General

Agg aggregate Agmt agreement Annl annual App auth apparent authority Art of inc articles of incorporation Atty attorney Ay agencyB4 beforeBd boardBt betweenCC capital contributionCircum circumstantialCmmty communityConseq consequenceConvos conversationsCorp corporationDE DelawareDeriv derivativeDir Director Diss dissolutionE evidenceEmee employeeGF good faithGovt governmentIC independent contractor ID identification, identifyIncap incapacityIncomp incompetentIndep independentInsuff insufficientIrrevoc irrevocable

JSL joint and several liabilityJuris jurisdictionK contractLiab liable or liabilityM master Maj majorityMisrep misrepresentationMtg meetingNatl nationalNegl negligentO/S outstandingOblig obligation

Oppty opportunityP principalParts partnersPFE prima facie evidencePmt paymentPref preference or preferredPres presidentProhib prohibitedPship partnershipPV Par ValuePV No Par ValueReas reasonableRecog recognizeRepd representedReq require or requirementResol resolutionRSD residualRt rightS servants/t somethingSecy secretarySH shareholder SM subject matter SoS Secretary of StateSpec specialUE unjust enrichmentUOWP unless otherwise providedWU winding upXfer transfer YO years old

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Tort Liability

1) Agent liability

a) Must actually do s/t wrong

b) negl (may be able to recover from P) or

c) malfeasance (A has duty and fails)

i) non-feasance alone is insufficient UNLESS A assumed and commenced complete

and exclusive control such that he assumed and failed to perform a duty (Franklin)

ii) Mere status as S not sufficient, neither is not doing something

2) Principal liability

a) M/S or IC?

i) Definitions 2

(1) Master: P who employs A to perform service AND controls (or has right to)

physical conduct of A in performance

(2) Servant: A employed by M whose physical conduct is controlled (or subject to)

by M

(3) IC: Ks w/ another, but not controlled; may or may not be A

ii) Factors 220(2) (balance)

(1) Control over details of work (most important, but not conclusive)

(a) Control or influence over results insufficient, must be control of day-to-day

operations (Hoover)

(b) Look at K as a whole to determine who had the power of control (Humble)

(c) If M (franchisor) requires uniform logos, operations and dcor and it gives 3

impression that M controls, and 3 relies on this representation, M liable

(Billops)

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1. Bushey : sufficient, not req

(ii) Foreseeability

1. Factors ( Brown)

a. Nature of Ms business

b. Ss contact w/ public

c. Likelihood of use of force

d. Acts w/in auth time/place

e. Ss motive (personal or Ms)

(iii) Frolic v. abandonment 228

1. substantial deviation (total abandonment of employment) relieves M of

liab, a little deviation isnt enough (Clover)

(2) P liable for actions outside of scope if

(a) M intended conduct or consequences

(b) M was negl or R

(c) Conduct violated non-delegable duty of M OR

(d) S purported to speak/act on Ms behalf and 3 relied on app auth or Ay aided

in commission of tort

c) IC

i) P not liab for torts of IC UNLESS done in a manner directed or auth by P or towards

some result intended by P (IC still JSL) (Kourik)

(1) P must control means/manner, not just result

(2) EXCEPT acts P under a duty to perform w/ care AND if P has made

representations

(a) E.g. inherently dangerous acts performed by IC (Majestic)

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Contract Liability

1) Agent Liability

a) To 3

i) Partially undisclosed or undisclosed P 321, 322

(1) A has duty to disclose relationship w/ P and Ps identity; if not, A becomes a

party to the K and is liable ( Atlantic Salmon )

(2) EXCEPTION: Inherent Ay Power (Watteau )

ii) Implied Covenant of Authority

(1) A always gives ICA; if A assumes auth exists and is wrong, liable even if they

acted in GF ( Robinson)

(a) If 3 knew alleged P was incomp, A not liable b/c Ay terminates at death or

incomp of P (except durable PoA)

(2) If A acts on behalf of P after auth terminated, A liable to 3 (act auth only)

(Chamberlain)

b) To P

i) A accountable to P if he violates the duty of honesty and GF for personal gain (A

cannot UE himself) $ goes to P

(1) Gifts to A can be considered like tips

ii) Mere fact that service to P gave A oppty to get $ doesnt entitle P to the $ BUT if

thats the sole cause for the oppty, then P gets $

2) Principal Liability

a) To Agent

i) Written K : P may revoke As authority at any time, but can still be held liable for

breach of K (Chamberlain)

ii) Oral K: P may terminate agency at any time EXCEPT if irrevocable

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iii) Irrevocable Agency (oral or written)

(1) P/A agree that agency is irrevocable AND

(2) A has an interest in SM of AY (e.g. security interest)

(a) Interest in proceeds from sale insufficient

iv) If A, in GF, incurs expenses or devotes time/labor, P may be req to compensate A

b) To 3

i) P not obligated to act on K if A acts after auth terminated (Chamberlain)

ii) P can be liable under app auth

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Choice of Entities (MoPrac 1.2)

Corporations Partnerships LP, LLP, and LLCLiabilityDifficult to change after entity established

Usually limited (351.275.1)SH risks only what they invest; SHnot responsible for corp debt

Unlimited (each part liable)JSL for all pship debt (358.150(1))

LP: general parts JSL, limited partsare like SHLLP & LLC: no personal liability for members (347.057)

Fed Income

TaxDifficult to change after entity established

Separate tax paying entity

Special tax rateOwners pay tax on dividends (doubletaxation; 15%)S corps: no entity tax

Pass thru taxation: taxes pass thru to

partnersUsually best for members (comparedto corp)

Pass thru taxation

Management Agmt can change it

Centralized, often financiallydisinterested (Bd and officers)

Decentralized: each part has auth tobind and rt to manage

LP: gen parts have power to manageLLC: depends, can be member managed (like pship) or manager managed (like corp)

Continuity of Life

Agmt can change it

PerpetualSH cant force dissolution

Less continuity (not necessarily fatal,can be a mere speed bump)Subject to automatic dissolution (e.g.death of part)Each part has rt to dissolve @ anytime

LP: Gen part has same power aspart in pshipLLC: dependsGenerally, more continuity than Pship

Fee Xfer of Interest

Agmt can change it

Generally, shares are freely Xferable(can be limited by Art of Inc)

Generally, limited rt of disposal Assignee has limited rights unlessother part accept him as part

Relatively free Xfer, but easy to limitLP: may dispose but assignee haslimited rightsLLC: depends

Simplicity of Operation

Agmt can change it

COMPLEX Legal requirements:Formality and paperwork (art of inc,bylaws, annual meetings)Bd of Dir, Corp Pres, Secy, minutesannual report

SIMPLEFewer legal requirementsCan be formed w/ a handshakeCan be more complex

MODERATEFile papers to formOperating agmtDont need to have annual mtgsLaw relatively new, still devloping


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Sole Proprietorships (MoPrac 1.3)

Single personNo formalitiesProfits taxed to sole proprietor Sole proprietor personally liable for debts and acts of agents/servants

Joint Ventures (MoPrac 1.4)

Type of partnershipRelates to a partnership project for mutual benefit/profitPartnership rules applyTEST

o Consensual agmt ANDo = rt to control

Scope of authority to bind may be narrow (because of limited purpose)

Professional Corporations (MoPrac 1.5)

Give professionals rt to obtain advantages of corp tax and legal protectionLLC/LLP can take the place of theseIRS treats it as a corp

Advantages (over pship)o Continuityo Centralized mgmto Xfer interesto LL (SH liable for OWN negl or incomp)

Common Law Association (MoPrac 1.6)

CL contractual rights among membersTypically viewed as pships (if a business for profit)

Business Trusts (MoPrac 1.8)

Not used as often anymoreProperty transferred to trustees, held and managed for beneficiariesDiffers from regular trust because it is organized for profit-making (not a gift)

Not a lot of case lawDont know if courts would recognize it or how liability would be determined

Non Profits (MoPrac 1.9)

No income distributions to membersOrganized same as corp but no SH (instead: members)Members not liableCan be tax exempt, but may not be


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PARTNERSHIPS

1. Formation

a. Act required

i. Handshake (agmt) OR

1. To deny formation of pship, look at the written instrument or

testimony about convos or circum E (Martin)

ii. Act of going into business together (even w/o agmt on form)

b. Other requirements 358.060.1

i. 2+ people

ii. Co-own

1. Fenwick Factors:

a. INTENT of parties

b. PROFIT sharing

i. Receipt of share of profits = PFE of pship 358.070(4)

1. EXCEPT if in pmt of:

a. Debt

b. Wages/rent

c. Annuity

d. Interest

e. Consideration for sale of goodwill

ii. Splitting revenue pship 358.070(2)

iii. Splitting of gross returns pship 358.070(3)

iv. Indirect splitting of profit can be sufficient (Stuart)

c. LOSS sharing

d. OWNership and CONTROL


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e. CMMTY of power in admin

f. LANGUAGE in agmt

g. CONDUCT towards 3

h. RT to DISSOLVE

i. Degree of ACTIVITY

i. Active=likely pship, inactive pship

2. JT/TC/TE/Joint own alone pship 358.070(2)

iii. Business for profit

iv. Depends on how you characterize the facts (Martin)

c. Pship by estoppel 358.160, Young

i. 2 ways to create

1. existing pship OR

2. 2 people, not pship, get pship by estoppel

ii. Rule

1. person who reps self or permits another to do so

2. to anyone

3. as a partner in existing pship OR w/ other not actually parts

ARE LIABLE TO ANY PERSON

4. to whom a representation was made

5. who, on faith of rep, has given credit to act/app pship (Reliance)

2. Fiduciary Obligations

a. Part duties ( UPA 404)

i. Fiduciary (loyalty + care)

ii. Loyalty limited to:


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1. account and hold as trustee of any prop/profit/ben including

appropriation of pship oppty 358.210

a. One part cannot pick up business and leave where benefits

flow directly from the pship (duty of finest loyalty, unbending

and inveterate, uncompromising rigidity) (Meinhard)

2. refrain from dealing as/on behalf of party w/ adverse interest

3. refrain from competing w/ pship before dissolution

iii. Care

1. refrain from grossly negligent or reckless conduct, intentional

misconduct or knowing violation of the law

iv. GF and fair dealing

v. No violation of duty merely to act in self-interest

vi. Part may lend $ and transact business w/ pship

vii. Standard can be influenced by industry standards

1. Moskovitz : law partners cannot secretly attempt to lure clients, lie

to clients about their rt to follow atty, lie to partners about plans, or

quit on short notice. However, law partners can look for a new job,

tell clients (w/ a prior professional rel to atty) of plans and right to

choose. Ideally, the firm should receive notice of departure before

clients.

b. Any part has a rt to formal acting 358.220

i. If wrongfully excluded from pship by coparts

ii. If rt exists under agmt

iii. As provided in 358.210 (see above)

iv. When circum render it just and reasonable to do acting


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3. Management

a. Apparent Authority 358.090

i. Every part is A whose acts for purpose of apparently carrying on in usual

course of business - bind pship UNLESS no act auth and 3 knows it

ii. Acts not apparently for business in usual way dont bind pship UNLESS

authorized by others parts

iii. UOWP or unless other parts abandoned business, 1+ but less than all

have no auth to:

1. assign prop in trust

2. dispose of goodwill (name/logo/reputation)

3. any act that would make it impossible to carry on ordinary business

4. confess judgment

5. submit pship to claim/liab/arbitration

iv. No act of part w/o auth binds pship to 3 who knows no auth exists

b. Actual Authority 358.180

i. Pship indemnifies all parts for pmt and personal liabilities reas incurred in

ordinary and proper conduct of business or to preserve pship prop

1. If P1 acts w/o consent of P2, P1 cannot recover costs from P2

(Summers)

ii. Loans from parts to pship repaid w/ interest (not CC)

iii. All parts = rts in mgmt/conduct

iv. Part not compensated except @ WU

v. Need consent of all to become part


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vi. Differences resolved by maj; acts against agmt only w/ unanimous

consent 358.180(8)

1. P1 cannot tell 3 that P1 not personally liable for pship debts,

because it amounts to a unilateral attempt to revoke P2s auth to

bind pship (Nabisco)

c. SUBJECT TO PSHIP AGMT except :

i. partner liability for pship debt

ii. app auth to bind pship

iii. Cant K away external stuff, can K around internal matters (Day v. Sidley &

Austin)

d. Transfer of interests

i. Part can xfer interest, but NOT decision making power or liability for

losses 358.270

4. Liability

a. Part liability

i. All part JSL for e/t chargeable to pship 358.150.1

ii. Incoming Part: liable for existing pship oblig EXCEPT his liab satisfied out

of pship prop 358.170

b. Pship liability

i. Pship liable for wrongful acts committed by part in ordinary course of

business 358.130

1. Negligence: pship liable if in course of business

2. Extremely gross negligence may be different (Pacer)

ii. Misappropriation of entrusted prop 358.140.2


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1. $ from 3 held by pship and misapplied by part pship liable if

done in ordinary course of business

2. Pship bound by parts breach of trust to 3

c. Other issues

i. Admission/representation by part about pship affairs w/in scope of auth is

E against pship 358.110

ii. Notice to any part or knowledge of any part operates as notice

to/knowledge of pship 358.120

5. Dissolution & Winding Up

a. Definitions

i. Dissolution: change in legal relationship bt parties, nothing to do w/ end of

business 358.290

1. Pship continues 358.300

ii. Winding Up: actual closing of business

1. Pship ends

iii. Upon dissolution, the default next step is WU. Agmt bt parts can take

away right to WU so that business will continue after part leaves

b. Causation 358.310

i. W/o viol pship agmt

1. termination of definite term or particular undertaking

a. particular undertaking: event that cuts off pship (goal

towards which pship will head and will, upon completion,

terminate pship)

2. express will of any part (if no definite term/undertaking specified)

a. UOWP in pship agmt


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3. express will of all part who didnt assign debts before or after

termination of term/undertaking

a. UOWP in pship agmt

4. expulsion of part by power of agmt bt parts

ii. In violation of agmt : where circum dont permit dissolution, by any part at

any time BUT

1. consequences 358.380.2: dissolving part liable for breach of agmt

and other parts get to keep the business

2. avoid these conseq by getting court decreed dissolution (see

below)

iii. event makes business of pship unlawful

iv. death of part

v. bankruptcy or part or pship

vi. ct decree 358.320: on application of part, court shall dissolve if:

1. part mentally incap

2. part incapable of performing

3. part acts to prejudicially affect business

4. part willfully and persistently breaches agmt or conduct not

reasonably practicable to carry on business

a. minor/trifling differences w/o permanent mischief insuff to

dissolve (Owen)

i. continuance of overbearing and vexatious petty

treatment is more serious in its disruptive nature


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ii. where all confidence and cooperation bt parts is

destroyed OR where 1 part materially hinders proper

conduct of pship business, ct should dissolve

5. business only at a loss (deadlock bt parts)

6. other circum that make dissolution equitable

vii. Assignment of interest doesnt dissolve pship or give assignee any rt to

mgmt of pship 358.270

c. Consequences of Dissolution

i. DEFAULT: WU follows, look to pship agmt for provision otherwise

ii. Dissolution in violation of agmt: dissolving part liable for breach and

remaining parts get to continue business

iii. If part A dissolves pship by act/death/bankruptcy, A is liable to B/C for As

share of any liabilities incurred by pship after dissolution as if pship not

dissolved UNLESS (358.340):

1. dissolution by act: B/C had knowledge of dissolution

2. death/bankruptcy: B/C had notice of death/bankruptcy

iv. If pship continues in business: creditors, assets and emees follow pship

358.410

d. Post-dissolution part authority 358.350

i. Part can bind pship by:

1. act for WU/completing tasks

2. any transaction that would bind pship b4 dissolution IF 3P:

a. extended credit prior to dissolution, w/ no notice of

dissolution

b. knew pship b4 dissolution and no notice of dissolution


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ii. Inside creditors (loans from parts) 358.400(2)(b)

iii. Capital contributions 358.400(2)(c)

iv. Split profit/loss 358.400(2)(d) and (4)(a)

1. Default rule: 358.180

a. Each part shares in profits and losses

b. According to percentage share

c. Unless otherwise provided

2. Exception: $ part, labor part (Kovacik)

a. S part responsible for all losses up to

CC (each loses what he put in)

i. $ cant recover from labor

ii. Labor cant recover from $

iii. Any losses beyond that is split =

b. All or nothing: if labor part kicks in any $

or takes a salary, exception doesnt

apply

3. If 1+ but not all parts judgment proof:

remaining part(s) split insolvent parts share

358.400(4)(b)


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Now, same situation as the first part, but fewer assets:

Value of all assets $100,000Outside creditors (rent owed to LL) $200,000Inside creditors (Cspmt of consultant)

0

CapitalContributions

$150,000

BALANCE $250,000Split loss -$125K/partner Y: $50K (CC) - $125K (loss) = -$75KZ: $100K (CC) - $125K(loss) = -$25K


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CORPORATIONS

1. Formation

a. 3 requirements

i. Bd of Directors (so corp can act; allows for election of officers and sale of

shares)

ii. Art of Inc (so corp can exist)

1. Art of Inc refers to original articles and all amendments, including

articles of merger or consolidation 351.015(1)

2. SHALL include 351.055.1

a. Name

i. Name + Inc., Co., etc 351.110(1)

ii. Cannot imply its a govtal agency or org for an

improper purpose 351.110(2)

iii. must be distinct (not exactly the same) 351.110(3)

iv. trademark/confusion is a separate issue

v. Fictitious names: can incorporate under one name

and do business under another 417.200

b. Address of office/agent in MO (not PO Box)

c. Shares

i. Authorized shares 351.015(2)

1. aggregate # of shares of all classes (PV or

PV) that corp is auth to issue

2. Shares belonging to corp: issued but not

outstanding

ii. If aggregate # 30K or PV $30K


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1. indicate # of each class w/ PV

a. name class (A, B, C etc), list rights, and

indicate PV

b. can basically do whatever you want

2. # of shares of each class w/o PV

3. statement of preferences, qualifications, limits,

restrictions and special relative rights (including

convertible rights)

iii. Most corps spell this out even if 30K

d. Name/address of each incorporator

i. Incorporators 351.050

1. 1+ natural persons, 18yo

ii. can only act unanimously

iii. sign/deliver Art of Inc to SoS

iv. No role after incorporation, except to appt Bd and

adopt bylaws if they have not been provided for in Art

of Inc 351.080

e. # of years of continuance (can be perpetual)

f. Purposes for formation

i. Anything legal 351.020 UOWP with further limits

351.386(1)

ii. Further limitations can be a PITA, so most corps state

any legal purpose

3. MAY include

a. #/names of Directors


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b. Preemptive rights of SH to acquire addl shares limited or

denied

i. Default: preemptive rights protected UOWP 351.305

c. Provision eliminating personal liability of Dir or SH for breach

of fiduciary duty

i. BUT cant limit liab of Dir for:

1. breach of duty of LOYALTY

2. Acts omissions not in GF, or intentional or

knowing violation of law

3. Liab for improper dividends 351.345

4. transaction where Dir got improper personal

benefit

d. Anything else legal, chosen by incorporators, Bd or SH

iii. Bylaws (so corp know how to act)

b. Deciding where to inc.

i. Corporate friendly laws

1. insulate Dir from liability (e.g. only liab for gross negl and provide

for indemnification)

2. Make it difficult for SH to remove Dir (e.g. SH can remove Dir only

@ special mtg, only Bd can call special mtg)

3. Keep SHs noses out of Dirs business

4. Race to the bottom is, for all intents and purposes, complete

ii. Case law: lots of it in DE, may not be as much in other states w/ shorter

corp haven history

iii. Advantages of DE (for big corps):


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1. rich case law (novel issues already decided, lots of certainty)

2. mgmt friendly

3. publicly held corps tend towards DE b/c attracts investors

iv. Disadvantages of DE (for small corps)

1. cost (fees in DE and home state, offices in both, poss liab in DE)

2. costs easily absorbed by large corps

3. Closely held corps tend towards home state

c. Procedure (MO)

i. Articles of Incorporation filed 351.060.1

1. original signed by incorporators

2. delivered to SoS

ii. Filing complete when 351.051

1. Delivered to SoS

2. Satisfies requirements

a. Fees: $3 to issue cert, $50 1 st $30K of auth shares, $5 for

each addl $10K of auth shares OR each increase in # of

shares 351.065.1

b. $ amount of shares = PV of shares (PV shares valued @

$1/share) 351.065.2

3. In correct format

iii. Refusal 351.051.3-4

1. rejected doc returned to corp or rep w/ brief explanation

2. SoS serves ministerial function, refusal does not:

a. Affect validity/invalidity (whole/part)

b. Relate to correctness of info on form OR


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c. Create presumption of validity/invalidity

iv. Certificate of Incorporation issued 351.060.2

1. SoS attaches certificate to copy of Art of Inc

2. Delivers to corp agent

3. Serves as E of corp existence, CORP EXISTENCE DATES FROM

TIME OF FILING 351.075

4. Certificate of Good Standing 351.076

a. PFE that corp exists and is authorized to act in MO

b. Domestic corps: corp name, when incd, incd under MO

law, complied w/ req

c. Foreign corps: name in home state, name in this state,

state/juris incd in, complied w/ req

v. First mtg and organization of Bd 351.080

1. If Bd not named in Art, incorporators have rt to adopt bylaws and

appt Bd by unanimous vote or written consent

2. Organizational Meeting ASAP (in MO or elsewhere)

a. Called by maj. Or Bd

b. Purpose: elect officers, accept/reject subscriptions (sale) for

shares, authorize issuance of shares, anything else

d. De Facto Corps (Mendenhall)

i. Corp may lawfully exist

ii. Effort to organize and colorable compliance w/ statutory requirements

iii. Actual use/exercise of corp powers in pursuance of such lawful and

attempted organization

iv. Distinction bt DFC and DFPship: liability for individual incorporators


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e. Pre-Incorporation Acts of Corp

i. Three ways to view Ks

1. Offer/option to corp

a. will be a K if accepted by the corp

b. promoter makes a promise to form the corp IF irrevocable

option (if consideration is given)

2. Future Novation

a. Present K

b. Promoter bound until corp formed and accepts

c. Once corp formed and accepts, promoter off the hook

3. Personal Guarantee

a. Present K

b. Promoter liab primarily or as a surety

ii. 3P liability (Southern Gulf Marine)

1. 3P cant deny existence of corp after it Ks with it as a corp

2. UNLESS 3Ps substantial rights are affected

3. 3P should know who it Ks with: shouldnt reward stupid choices

iii. Promoter/Corp liability

1. Default Rule 351.053

a. JSL for anyone acting on behalf of corporation before inc.

2. UNLESS (How)

a. 3P agreed to look elsewhere AND

b. Promoter doesnt owe duty to form corp

c. This means you can K around the default rule

3. INTENT is the essential element


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a. Look to terms of agmt

b. If no E that 3P intended to look to promoter and E that 3P

accepted notes of corporation manifests an intent to look

to corp, not promoter (Quaker Hill)

2. Choice of Law (Internal Affairs Doctrine)

a. Internal affairs (e.g. # of Dir, SH liability) governed by law of state of inc.

b. External affairs (e.g. when corp Ks w/ 3P), law of state where act is done applies

3. Purposes and Powers

a. Purposes

i. Anything legal 351.020 UOWP with further limits 351.386(1)

b. Powers 351.385

i. Succession of name(continued existence)

ii. Sue/be suediii. Corp sealiv. Own/sell personal/RPv. Be a Gen/Ltd Partvi. Deal in shares of other corpsvii. Make Ks, incur liab,

mortgages, loansviii. Invest/lend take security

interests

ix. Conduct business anywherex. Elect/appt officers/directorsxi. Make bylawsxii. War time powersxiii. Cease operationsxiv. Catch all clause (all powers

necessary or convenient toeffect any or all purposes)xv. Charitable contributionsxvi. Renounce interests and

expectancies

c. Ultra Vires

i. Definition: acts attempted by a corporation that are beyond the scope of

powers granted by the Art of Inc.

1. Typically UV acts are voidable, not void

ii. Lack of capacity/power doesnt invalidate an act by the corporation

351.395 BUT lack of cap/power may be asserted:

1. in proceeding by SH ag corp to enjoin


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a. If K, where parties to K are parties in proceeding, Ct may

enjoin execution of K

b. Each party can be compensated for loss/damage BUT NOT

anticipated profits

2. Corp v. Officers/Bd

3. AG v. Corp (dissolve/enjoin unauthorized business)

4. MBCA contains similar provision

iii. Charitable contributions

1. Generally, permissible (A.P. Smith)

2. Some states require the contribution serve some sort of corp

purpose (maximize profits), although the connection may be

indirect (Smith: give $ to university educate public smarter

workforce)

3. Other states (NY, CA) dont require any connection to corp purpose

or interest

4. Can have a problem when SH dont approve of the contribution

d. Business Judgment Rule

i. Definition: Bd takes risks and has authority to make business decisions,

Ct should not 2 nd guess the Bd

1. UNLESS fraud, misappropriation or abuse of discretion

ii. Not w/in lawful power of Bd to shape and conduct the affairs of the corp

for the merely incidental benefit of SH and for the primary purpose of

benefiting others b/c corp is organized for sole benefit of SH (Ford)

1. Justification given for decision is key (need to characterize it as a

business plan)


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iii. Corporation cannot attack its own act (Charter) (hindsight might be 20/20,

but its also a day late and a dollar short)

4. Shareholders

a. Types of Stock & Dividends

i. Definitions

1. Common : typically has voting rights in corporate decision matters,

though perhaps different rights from preferred stock. Last in line for

dividends and liquidation.

2. Voting/Non-voting : whether class/series has right to vote on

everything OR only on creation of new class/series or change in

preferences/rts of classes before it (CLASS VOTING)

3. Participating/Non-participating : whether stocks share in dividend

after preferred classes have taken their share (RSD equity)

4. Preferred : Get first grab at dividend, typically guaranteed $/share

5. Cumulative : If dividend not paid, it carries over to the next year and

so on

6. Liquidation preference : gets first dibs on liquidation $

7. Treasury : shares issued and now owned by corp (must be issued

to SH and then repurchased by corp)

a. Not included in net assets 351.015(11)

b. Does not vote 351.245.2

8. Par Value : minimum price at which corp can ISSUE a share (1 st

time it is sold)

a. If corp resells after reacquiring it: any consideration is OK

351.185.1


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b. Watered Stock: shares sold PV

9. Net assets: assets liabilities

ii. Stock Warrants and Options 351.182

1. UOWP by Art: corp may create/issue, on bd approval, rts/options

entitling holder to purchase shares of cap stock

a. If insufficient authorized/unissued shares: rts/options not

deemed invalid solely by this reason

2. Terms of Purchase upon exercise of rt/opt

a. Requirements

i. stated in Art or Resol creating/issuing rt/opt

ii. set forth or incorporated by reference in instrument

evidencing rt/opt

b. Permitted terms

i. Duration of rt/opt (limited/unlimited)

ii. Price/prices of purchase

iii. Holders who can exercise rt/opt

iv. Conditions to preclude/limit exercise, Xfer or receipt

or void rt/opt

v. Conditions on redeeming

vi. Permitted terms may be dependent on facts

ascertainable outside documents evidencing rts or

resol IF clearly/expressly set forth

vii. MAY restrict Xfer of shares, but CANNOT prohibit

Xfer (Witte)


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1. reasonable restrictions OK, absolute

prohibitions not OK

2. Reasonableness TEST:

a. Is restraint sufficiently needed by

enterprise to justify overriding general

policy ag restraints

b. FACTORS

i. Size of corp

ii. Duration of restriction

iii. Formula for right of 1 st refusal

iv. Likelihood that restrictions will

promote best interests of corp

c. Judgment of Bd conclusive UNLESS actual fraud in

transaction

d. Price: If PV cant be than PV; if no PV, then Bd fixes price

from time to time unless Art reserves that rt for SH 351.185

iii. Notification to SH 351.180.6

1. If corp auth to issue 1+ class/series of stock

2. Powers, designations, preferences, rights, qualifications, limits,

restrictions etc

3. Must be set forth:

a. In full or summarized on stock certificate OR

b. Certificate may say corp will furnish in upon req by SH

4. Corp should also furnish it upon request to uncertified SH

iv. Issuance of Shares 351.180.1


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1. Corp can issue stocks of any:

a. Class (PV or PV)

b. Series (full, limited, no voting powers)*

c. Designations/preferences*

d. Relative, participating, optional or special rights*

e. Qualifications, limitations, restrictions*

f. MUST be stated in Art (or amendment) OR resolution

adopted by Bd (thru auth granted by Art)

*can be made dependent on facts ascertained outside of

Art/resolution IF manner in which facts operate upon rt, pref, etc

is clearly and expressly set forth in Art/resolution

i. IF NOT SET FORTH IN ART, but in RESOLUTION

351.180.7

1. File certificate of designations (copy of res, # of

shares, executed by Pres or VP) w/ SoS

2. UOWP in resolution:

a. # of shares in class/series may be

BUT not above # of shares/classes

authorized in Art

b. # of shares in class series may be ,

BUT not below # of O/S shares

(dropped shares resume pre-cert status)

c. When no O/S shares: file cert saying no

O/S shares and no shares will be issued

that are subject to cert of designation


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3. Bd may amend pref/rts by resol by filing cert of

designations

a. PROVIDED O/S shares: amendment

not effective if adversely affects SH

UNLESS maj of SH of class/series

adopts amend (must state maj approval

in cert of design)

b. CLASS VOTING triggered (even if non-

voting shares) 351.093.1

i. agg # of auth shares of that

class

ii. PV

iii. Create new class w/ rts/prefs to

class in question

iv. rts/prefs, # of auth shares of

any class having superior rts

v. Alter/change powers/prefs/rts sp

as to adversely affect class

c. If affects series w/in class, series votes,

not entire class 351.093.2

d. Amends of this nature must pass:

i. Majority of O/S shares of each

class entitled to vote as a class

AND


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ii. Majority of total shares entitled to

vote (not voting as a class)

v. Redemption (Retirement of Shares)

1. Any corp that issued shares MAY retire shares by 351.200

a. Redeem all/part of shares IF subject to redemption (not

exceeding redemption price)

b. Purchase all/part shares

c. @ Bd resolution: apply amt of SC to purch/redemp (not

exceeding amt of SC represented by the shares)

d. By Bd resol in any manner not covered above or in

351.200.3 (see Conversion/Exchange)

e. Shares become authorized and unissued shares UNLESS

reissue prohibited by Art (in which case auth shares of class

by # of retired shares) 351.200.4

2. Stock of any class/series subject to redemption 351.180.2

a. 3 types :

i. Call right : corp option to redeem

1. SH cannot refuse, corp has absolute rt

2. Corp typically has to pay SH (according to Art)

ii. Put right : SH option to redeem

1. SH can force corp to buy

2. Tagalong Rights: If maj SH sells shares back

to corp, min SH gets chance to do the same @

same price (Donahue)


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a. Doesnt apply where redeeming SH not

in control of corp (Delahoussaye)

i. In such a case, BJR applies (corp

bought out dissenting SH)

b. Doesnt apply if maj SH sells to 3P

(Zetlin)

iii. Automatic : at specified event/date

b. PROVIDED at least 1 class/series of stock w/ full voting

rights is O/S and not subject to redemption

i. BUT:

1. Any stock of regulated investment co. can be

subject to redemption (call or put)

2. Any stock of corp that holds (direct/indirect) a

license, franchise, or K from govt agency to

conduct business OR is member of natl

securities exchange, that is conditioned on

some/all holders possessing qualifications, are

subject to redemption by corp to extent nec to

prevent loss of license or membership OR to

reinstate it

3. Can be redeemed for cash, property and/or rights (including co.

securities)

a. Times/prices/rates stated in Art/resolutions


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vi. Exchange/Conversion 351.180.5

1. Any class/series can be converted into/exchanged for, @ corp or

SH option, shares of other classes/series

a. Prices/rates of exchange and adjustments stated in Art/resol

2. Reacquired shares are retired 351.200.3

a. Amt of SC represented by retires shares automatically xfers

to other shares (to extent of SC represented by other

shares)

b. Where amt of SC exceeds SC of other shares Bd may

SC by any amount than excess

c. Shares become authorized and unissued shares UNLESS

reissue prohibited by Art (in which case auth shares of class

by # of retired shares) 351.200.4

vii. Dividends

NET ASSETS Earned surplus 351.220 pay out of this first

Total amt receivedfor shares

Paid In surplus

351.210, 351.220(2) providespecial rules for paying out of this

indicates liquidation of corp

Stated Capital

351.345 cannot pay out of this

Protects creditors

Dividends cancome out of these

NET ASSETS Earned surplus 351.220 pay out of this first

Total amt receivedfor shares

Paid In surplus

351.210, 351.220(2) providespecial rules for paying out of this

indicates liquidation of corp

Stated Capital

351.345 cannot pay out of this

Protects creditors

Dividends cancome out of these

1. Corp NEVER required to pay dividend

2. Preferred Stock 351.180.3

a. Entitled to receive in preference to any other class/series of

stocks


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i. Can have priorities w/in preferred stock (e.g. A

preferred gets pd before B preferred)

b. Dividends on pref/special stock set apart; dividends for other

classes/series pd out of remaining assets

c. Rights on dissolution as stated in Art/resolution 351.180.4

d. Advantages:

i. If dividend amount is low, pref stock guaranteed to get

something

ii. Safe investment guaranteed $

3. Stated Capital 351.015(17)

a. At any time, the sum of:

i. PV of issued shares +

ii. Consideration received for all issued shares w/o PV

EXCEPT those allocated to s/t other that stated

capital +

iii. e/t else transferred to state cap acct (upon issue of

shares as share dividend, etc)

iv. MINUS any formal reductions allowed

b. May be INCREASED by Bd Resol 351.190.3

c. May be REDUCED 351.195

i. By RETIREMENT of reacquired shares

1. Bd adopts resol: amt of reduction AND

manner AND directing SH vote (annual or spec

mtg)


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a. EXCEPT doesnt need to be adopted by

Bd, but can be submitted directly to SH

2. Notice to each SH entitled to vote

3. Need 2/3 majority

ii. No reduction which wld SC represented by shares

w/o PV and w/ pref rt to an amt agg preference amt

provided to pay off such shares

iii. Surplus from reduction = paid in surplus

iv. No distribution in connections w/ SC out of SC

UNLESS remaining assets sufficient to pay debts of

corp

v. All retired shares become authorized and unissued

shares of class UNLESS reissue is prohib by Art (if

so, auth shares of class reduces by # of retired

shares)

4. Paid In Surplus 351.210

a. Amount corp received for shares PV

i. If PV share: entire consideration goes to SC, then

Bd can reallocated to PIS

b. May be distributed in cash/kind

i. NO distribution to SH UNLESS pref/spec classes

have been fully paid

ii. NO distribution to SH when net assets are less than

SC or when distribution would net assets below SC


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iii. Disclosure to SH: each distribution IDd as liquidating

dividend and amt per share disclosed concurrent w/

pmt

c. May, by Bd resol, apply any/all PIS to any deficit or

dimunition of assets

5. Limitations on pmt of dividends 351.220

a. Not when net assets less than SC or when pmt wld net

assets SC

b. If dividend declared out of PIS 351.210 applies (see

above)

c. If dividend payable in own shares w/ PV, shares issued @

PV, xferred to SC @ time declared, amount of surplus = agg

PV of shares to be issued

d. If div payable in PV shares w/ pref rt issue @ liquidation

value, amt of surplus = agg pref amt payable xferred to SC

e. If div payable in PV shares w/o pref rts, Bd fixes value

(resol), surplus amt = agg value xferred to SC; amt/share

disclosed to SH

f. Split up/division of issued shares share dividend

i. Share dividend: For every 1 share, get 1.1 share

ii. Stock split: Each share is split in 2

iii. Difference: SD treated as cash dividend of extra

shares

1. Corp cant do it if net assets below SC

2. PV remains same (PV split in SS)


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3. Size of split doesnt technically matter

g. No dividend declared/paid contrary to Art

6. Director liability for improper dividends 351.345

a. Director who KNOWINGLY declares/pays dividend

i. EXCEPT as permitted by 351.210 and .220

b. JSL for existing corp debts AND for debts incurred as long

as Dir in office

c. PROVIDED amount liable for doesnt exceed amt of dividend

improperly paid

i. Dir absent @ time dividend made exempted if they file

OBJ in writing w/ corp Secy

d. Dir fully protected if GF reliance on corp books of acct

viii. Debt v. Equity

1. Two ways to invest in corp: stock (equity) or buy corp debt

2. Debt:

a. Must be repaid + INTEREST

b. Safer investment than preferred stock (bankruptcy is still a

risk)

c. E.g. notes, debentures (unsecured), bonds (secured w/ lien,

req Bd or SH approval)

d. Security can be debt (depending on purpose)

3. Equity:

a. Ownership interest in business

b. Shares (capital, common, preferred)

c. Security can be equity (depending on purpose)


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4. Advantages of Debt Financing

a. Taxes

i. Benefit for SH to lend rather than contribute outright

b. Non-tax

i. Distinction bt debt to SH and 3P

ii. 3P debt: provides leverage (earn more on $ than cost

of borrowing)

1. Amplifies losses more than gain (see chart)

2. Interest needs to be than % gain to profit

3. SH can make a lot more $ as corp makes more

$ BUT risk that, if corp doesnt make more $

than cost of loan, SH can be wiped out

iii. SH debt: used to =ize position of SH (shares not

issued for future services)

1. Deep Rock Doctrine

a. Permits subordination of SH owned debt

to claims of general creditors when ct

believes fair to do so

b. Uncertainty: inadequate capitalization

sufficient OR does there need to be

unfairness/fraud/misrep?

b. Voting and Meetings

i. Place, Time and Purpose 351.225

1. Any place, in/out MO, as in BYLAWS

a. If not in bylaws: @ recog office in MO


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2. ANNUAL Mtg 351.225.1-2

a. On day fixed in BYLAWS

i. If not in bylaws: 2 nd M in January

b. Failure to hold @ designated time forfeiture or dissolution

of corp

c. Purpose: elect Bd and a/t else

3. SPECIAL 351.225.3

a. Mtg called by Bd or other person authorized by Art or Bylaws

b. Called to remove Dir (cant be done @ annual) 351.315.3

c. MBCA 7.02 allows for SH to call special mtg

i. SHALL be held if either:

1. call of Bd or person(s) authorized by Art/bylaws

2. 10% SH votes demand (Art may this to 25%)

ii. Record date: date 1 st SH signs demand

iii. In/out of state @ place fixed by bylaws (or corp

prinicipal office if not stated)

iv. Agenda: limited to topics/purposes limited in notice

ii. Notice 351.230

1. Written/printed stating place/day/hour

a. Special meeting: must state PURPOSE

b. 10-70 days before meeting

c. By/@ direction of Pres, Secy or officer/person calling mtg

d. To each SH OF RECORD entitled to vote

e. Can be electronic

2. MAILED notice considered delivered when mailed


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3. attendance = waiver of notice except if SH attends to OBJ

iii. Closure of Transfer Books 351.250

1. Bd has power to close

2. no more than 70 days b4 mtg OR dividend pmt OR allotment of rts

OR date of change/conversion

a. If shares sold between RECORD date and dividend pmt,

parties will have to K around it:

i. Ex-dividend: share sold w/o dividend

ii. Cum dividend: share sold w/ dividend

b. Proxy voting 351.245.4:

i. SH can authorize proxy electronically or by phone or

in person

ii. Easy to do because of Proxy Solicitation Firms

iii. Very heavily regulated by fed securities law

iv. IRREVOCABLE PROXY

1. States it is irrevoc AND

2. coupled w/ an interest

3. like irrevocable Ay

v. Revocation by implication: give proxy and then show

up at mtg anyway

3. Bd may fix RECORD DATE in advance (no more than 70 days b4

mtg)

4. Only SH of RECORD on date of closing are entitled to notice and

vote


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5. If not closed: SH of record determined @ 20 days before date of

mtg EXCEPT if waivers signed by all SH (then all SH of record at

time of mtg)

iv. List of SH entitled to vote 351.255

1. Officer in charge of Xfer book makes a list of SH entitled to vote at

least 10 days b4 mtg

a. Alpha order, names, addresses, # of shares

b. Kept on file @ reg. office

c. Subject to inspection

d. Produced and kept open @ time/place/during mtg

e. Original/duplicate is PFE of eligibility to examine book and

vote

2. Failure to comply doesnt effect validity of action @ mtg

3. If officer fails to prepare book liable to any SH suffering damage

on acct of such failure

v. Convening of Meeting 351.235

1. Convened by Pres, Secy, person calling mtg

2. If mtg to elect Dir/SH vote AND bylaws require it: presiding person

appts 2+ inspectors (non-Dir) to receive/canvass votes

3. If rt to vote disputed, inspector checks books

vi. Quorum required 351.265

1. UOWP, majority of O/S shares entitled to vote = quorum

a. PROVIDED no event where maj = quorum

b. BUT less than quorum have rt to adjourn mtg


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2. majority of SH entitled to vote and represented in person/by proxy =

VALID ACT of SH UNLESS larger vote req by law, bylaws or Art

a. Shares repd by proxy w/o instructions on how to vote not

deemed repd for purposes of voting majority

3. Knowingly false proxy = guilty of infraction

vii. Postponement and Adjournment 351.268

1. UOWP by bylaws, mtg may be ADJOURNED to specific date w/in

90 days of mtg date

a. After meeting is convened

b. Notice not req if time/place announced @ adjourned mtg

c. If more than 90 days notice given to each SH entitled vote

2. Bd (resol) can POSTPONE UOWP in bylaws

a. Before meeting convened

b. Up to 90 days later

c. PROVIDED notice to each SH entitled to vote

viii. Vote

1. Simple majority of quorum (of shares entitled to vote ) 351.265.2

2. Bylaws may require more than simple majority 351.270

3. Written consents 351.273

a. Any action that can be taken at a mtg can be taken w/o mtg

if consents in writing signed by ALL SH entitled to vote

b. Same force/effect as unanimous vote

c. Consents filed w/ minutes of mtg


47/64

ix. Duly Called Meeting Rule : unless it happens at a meeting that was duly

called and convened, it didnt happen (e.g. bad notice or no quorum = no

meeting)

x. Cumulative Voting for Directors

1. Default rule for Dir elections 351.245.3

2. Straight voting :

A1 v. B1

A2 v. B2

A3 v. B3

Each SH votes # of shares in each mini-race; so, if A has 4 shares

and B has 6, B would be able to fill entire Bd

3. Cumulative voting

a. Take all vacancies and elect at the same time

b. Ensures min SH gets voice on Bd (assuming min votes

intelligently)

c. Number of shares needed to GUARANTEE election of 1 dir:

# shares O/S

# vacancies + 1

# sharesneeded toget 1 dir

# shares O/S

# vacancies + 1

# sharesneeded toget 1 dir

d. Number of shares needed to elect a given # of Dir

Total # votingshares at mtg # of shares

needed

# of Dir want to elect

Total # of Dir to be elected + 1

Total # votingshares at mtg # of shares

needed

# of Dir want to elect

Total # of Dir to be elected + 1


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e. If last position tied, revote cumulatively for just the remaining

unfilled positions (subject to bylaws)

E.G. A has 4 shares, B has 6. Election for 3 Dir:

A1: 12 votes

A2: 0

A3: 0

B1: 6

B2: 6

B3: 6

Revote

In second vote, A gets 8 votes, B gets 12. If A votes all for

A2 and B votes 8 for B1 and 4 for B2, A (min SH) will

actually get maj Bd b/c B didnt vote efficiently

c. SH Agreements

i. Bound by provisions in Art of Inc (Gaddy)

ii. SH may combine to elect Dir, but SH/Dir cannot make agmt to completely

control Dir exercise of independent business judgment ( McQuade)

1. If SH make agmt to vote a certain way w/in their power: OK. BUT if

SH/Dir make some agmt (e.g. to keep certain officers or to fix

salaries), this invades province of Bd

2. Directors may not combine to elect officers (violates duty to act in

best interest of corporation)

iii. FACTORS to determine if agmt is legal

1. SH participation

a. All: K valid, but must be consistent w/ fid duties (Clark)

b. Some: K not valid (McQuade)

2. terms of K (more important than SH participation)


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a. if leaves Bd w/ discretion OK (e.g. % rather than salary,

pay only if in best interests of corp) (Clark)

b. If requires Bd to act a certain way NOT OK (McQuade)

c. Cannot enforce absolute restriction on Xfer of shares;

reasonable restrictions OK (Witte)

i. reasonable restrictions OK , absolute prohib not OK

ii. Reasonableness TEST :

1. Is restraint sufficiently needed by enterprise to

justify overriding general policy ag restraints

2. FACTORS

a. Size of corp

b. Duration of restriction

c. Formula for right of 1 st refusal

d. Likelihood that restrictions will promote

best interests of corp

iii. Restrictions should be listed on stock certificate

(ensures notice/knowledge)

1. UCC 400.8-204 Restriction imposed by corp

ineffective ag person w/o knowledge of

restriction UNLESS

a. Security is certificated and restriction is

on it OR

b. Uncertificated sec and orig owner was

notified of restriction


50/64

2. If A sells in violation, sale ineffective;

Purchaser can recover from A

iv. Right of First Refusal :

1. generally OK, but can be unreasonable if requires low price for corp

2. strictly contractual

3. requirement of notice to corp depends on Art (may or may not have

to disclose ID of prospective buyers)

v. Pooling Agreements

1. SH agmt to act as voting bloc

2. Valid, but not self-enforcing (need proxy to make it self-enforcing)

(Ringling)

a. MBCA 7.31(b): pooling agmts are specifically enforceable

3. Voting Trusts as enforcement mechanism

a. Xfer shares to trustee trustee votes shares

i. Corp will look to trustee as owner, not to actual

owners

ii. Votes according to agmt

iii. Dividends might go thru trustee then to beneficial

owners

iv. Can override wishes of dissenting SH

b. 351.246: any # of SH may create for any period of time

(RAP apply)

i. MBCA 7.30(b) limits to 10Y, but can be reauthorized


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vi. SH cannot confer rt upon one SH to unilaterally remove/replace Dir

1. wld have to be a share rt (in Art) 351.315.2

2. MBCA 7.32(a)(3) and (b)(1)(B) allow for this sort of agmt if written

and signed by all SH

vii. Closely held corps : higher duty as bt SH, similar to pship (Donahue) but

more freedom to make agmts

1. Can eliminate Bd or make other big changes to governance

351.800

2. CHC Reqs 351.755

a. 50 SH

b. Statement in Art

3. CHC kind of irrelevant (LLCs/pship took over)

d. Dilution and Preemptive Rights

i. SH has preemptive rt UOWP by Art (deny or limit) 351.305

1. doesnt define rt or how its exercised

ii. MBCA 6.30 defines preemptive rts

1. Presumption: no preemptive rts UOWP

2. Definition:

a. SH can acquire proportional # of shares when corp decides

to offer

b. E.g. J owns 10/100 shares, corp issues 10 more shares, J

can acquire 1 more share

c. Allows SH to avoid dilution (% of shares owned remains the

same)


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3. No preemptive rt to shares sold for case and shares issues @ very

beginning of corp (not clear if this is the law in MO)

iii. No preemptive rt to treasury stock because SH is just put back in original

place after treasury stocks reissued (no worse off) (Johnson)

1. J owns 10% (10 of 100)

2. Corp buys back 10 shares, now J owns 11% (10 of 90)

3. Corp resells treasury stock, J owns 10% (10 of 100)

iv. MO law not really clear, so need to spell out in Art

e. Organic Changes (MERGER) and Appraisal Rights

i. Two ways to get appraisal rights:

1. Merger 351.420

a. Bd first approves merger

b. Then must be submitted to SH vote @ either annl/spec mtg

i. Notice stating purpose (even if annual mtg) of vote on

merger w/ copy of merger plan to each SH of record

entitled to vote (usual notice time req apply)

ii. Need 2/3 O/S shares entitled to vote to approve

merger 351.425

1. all O/S shares, not just shares represented @

mtg

iii. OBJ 351.455(1)

1. File written OBJ prior to or at mtg

2. Dont vote for merger (vote no/dont vote at all)

iv. May make demand for pmt of FV of shares w/in 20

days


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1. FV as of the day before the merger

2. Corp SHALL pay upon surrender of certs

v. Demand must state #/class of shares

vi. Failure to make demand = consent to merger

2. Sale of substantially all assets 351.400

a. Procedure same as merger

i. EXCEPT sale of assets doesnt need to go to Bd first

(can go directly to SH)

b. Appraisal rights same as merger

i. Dir can abandon plan to sell assets if SH sues, Dir

gets benefit of BJR

c. Exempts sales in usual and regular course of business

3. Corps try to avoid appraisal rights

a. Buy substantially all assets of another corp (90%) 351.447

b. Rename corp 351.085

c. Appraisal rts still exist, but somewhat limited

d. To determine the nature of the transaction (does the guppy

eat the whale or vice versa), look at:

i. Agmt

ii. Consequence of transaction

iii. Purpose of law applied

e. Where SH forced to take shares of another corp appraisal

rights are triggered (Glen Alden) SH friendly rule


54/64

f. If, however, each step would be OK if done individually OK

when done together (Hariton) Transactional Lawyer Rule

(gives certainty)

f. SH Derivative Actions

i. Direct suits : harm to individual SH (e.g. separate K rt)

ii. Derivative suit : harm to corp

1. $ claims always go to corp

2. Director has somehow harmed corp (e.g. waste)

3. Indirect harm to SH

4. Whats really happening: SH forcing corp to sue its directors

a. SH = nominal

b. Dir =

c. Corp = nominal

iii. Procedure ( FRCP 23.1, MO Rule 52.09 )

1. was SH at time of transaction

2. action is not collusive

3. Plead with particularity:

a. Demand

i. Once SH makes demand, cant later claim that

demand would be futile

ii. Once Bd has denied demand, ct looks at it through

BJR (high deference to Bd)

iii. Directors almost always win

1. BJR high burden for


55/64

a. Must actually PROVE exception to BJR,

not just plead w/ particularity

2. Indep. Committee may determine suit is

nuisance (cost too prohib)

a. Dir Committees: 351.330

i. If bylaws provide, maj of Bd may

adopt resol

ii. 2+ dir on committee

iii. relieve Dirs of any liability

3. backscratching agmts

4. group mentality (indep cmttee not so indep)

5. SH doesnt really have any option is demand

made

b. Reason demand would be futile (Marx, Barr)

i. Majority interested (self interested or controlled by self

interested Dir)

ii. Dir didnt inform selves to extent reasonably

appropriate OR

iii. Dir didnt exercise business judgment

1. so egregious on its face that could not be

sound business judgment

2. similar to things that get your out from under

BJR

iv. DE rule (disjunctive) : look at:

1. Procedural (informed decision) due care


56/64

2. Substantive (terms of transaction) due care

v. Universal Demand : Bright Line Rule (11 states)

1. req demand in all cases

2. can bring suit w/in 90 days, even if rejected, if

corp faces irreparable injury

c. May sometimes need to make demand on SH (if s/t that SH

could approve)

i. Dont need to if it would be duplicative (eg all SH are

Dir) or impossible (too many SH, eg IBM)

ii. Routinely excused

4. must fairly and adequately represent interests of SH

5. Not dismissed or compromise w/o ct approval

iv. States have plenary power over derivative suits (No al problems)

(Cohen)

1. Federal courts (diversity cases) will generally apply state law

because it tends to be substantive (i.e. creates a new liability and

goes beyond mere pmt of costs)

v. Fall out

1. loses: usually has to pay own fees, but may (in some states)

have pay corp fees)

2. wins:

a. Directors (wrongdoers) have to pay corp

i. Indemnification 351.355(3)

1. UOWP in Art or bylaws


57/64

2. Dir indemnified ag expenses in actually and

reasonably incurred in defense of deriv suit

b. s atty gets pd by corp (this is what drives these suits, see

Cohen)

3. Efforts to control derivative suits:

a. Attys fees limited to % (fed)

b. Make small SH liable for s atty fees if they lose (discourage

all but sure winners)

5. Amendment of Docs

a. Articles of Incorporation 351.085

i. MAY at any time to:

1. add/change required or permitted provision

2. delete non-required provisions

3. BUT NOT to change name of incorporator

ii. Process 351.090

1. Before shares purchased : execute art of amendment 351.095.1

a. Maj of Bd adopts certificate, delivers to SoS

b. Must state:

i. Name of corp (if changed, original name)

ii. Date of adoption

iii. Text of amendment

iv. That no shares sold when adopted

2. After shares purchased

a. Bd adopts resolution (optional) and submits to SH vote

b. Written notice to each SH entitled to vote


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c. Meeting

i. Each SH entitled to vote votes

ii. Need maj of O/S shares to pass

iii. UNLESS a class of shares are entitled to vote as a

class, then need a majority of outstanding shares of

each class

d. Certificate of amendment delivered to SoS (if passes),

stating 351.095.2:

i. Name (if changed, original name)

ii. Date of adoption by SH

iii. Text of amendment

iv. # O/S shares, # entitled to vote, # entitled to vote as

class

v. # votes for/against

vi. Manner in which shares are exchanged, reclassified,

or cancelled (if applicable)

vii. Effective date (if different from adoption date)

3. Cumulative Voting

a. If CV: # Dir cant be 3 if # shares voting ag is enough to

ensure a Dir

i. Dir = harder for min to have voice on Bd

ii. Dir = # of shares to ensure Dir

b. If no CV, # Di 3 only by maj of O/S shares

4. Reduction of Stated Capital

5. Any # of amends can be voted on at one meeting


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6. Amend to provide that 351.407 apply req 2/3 vote

7. 10 SH: cumulative voting abolished only by 2/3 vote

iii. Two ways maj can get rid of min Dir:

1. # Dir , subject to 351.090.3

2. get rid of cumulative voting 351.090.7

iv. Class Voting

1. Bd may amend pref/rts by resol by filing cert of designations

a. PROVIDED O/S shares: amendment not effective if

adversely affects SH UNLESS maj of SH of class/series

adopts amend (must state maj approval in cert of design)

b. CLASS VOTING triggered (even if non-voting shares)

351.093.1

i. agg # of auth shares of that class

ii. PV

iii. Create new class w/ rts/prefs to class in question

iv. rts/prefs, # of auth shares of any class having

superior rts

v. Alter/change powers/prefs/rts sp as to adversely

affect class

c. If affects series w/in class, series votes, not entire class

351.093.2

d. Amends of this nature must pass:

i. Majority of O/S shares of each class entitled to vote

as a class AND


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ii. Majority of total shares entitled to vote (not voting as a

class)

2. Class voting is a right that cannot be taken away

b. Bylaws

i. Power to amend (make, alter or repeal) belongs to SH UNLESS Art gives

power to Bd 351.290(1)

1. Can contain any regulation/mgmt provisions that are legal and

consistent w/ Art

ii. Bd can pass emergency bylaws (during wartime) 351.290(2)

iii. Most of the time, the Bd has the power

6. Directors

a. #, election, termination, removal

i. Bd role: control and manage business of corp

ii. Qualifications in Art/bylaws 351.310

iii. Compensation set by Bd UOWP in Art/Bylaws

iv. At least 1 Dir (no max) 351.315.1

v. Term: 1-3 years (default is 1 yr)

1. must have annual elections, so have to vote for at least 1 each year

2. 1+ year term: Classified Bd

a. Provides continuity/institutional memory

b. Undermines cumulative voting (essentially converts it to

straight voting b/c fewer Dir up for election each time)

c. Take # of Dir and divide by yrs of term to figure out how

many to elect each year


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i. At start of corp, need to say Dir A starts w/ 3 years

left, Dir B starts w/ 2 years left, Dir C starts w/ 1 year

left (to create staggering effect)

d. If numbers dont work out (e.g. 5 Dir, 3 year terms): Art or

bylaws should direct how to deal w/ this

3. Hold Over Directors 351.315.1

a. Each Dir holds office for term or until successor elected and

qualified

i. This means that the previous director is still director if

they forget to vote

vi. Meetings

1. similar to SH meetings, but not as formal

a. can be conference call (physical attendance not req)

351.335

2. Two types: 351.340

a. Regular

i. According to bylaws (monthly/quarterly)

ii. No notice req

b. Special

i. Notice as prescribed by bylaws

ii. Should give some form of notice, although statute

could be technically read to not req any notice

1. The reason you may not want to require notice

is that way you do not have to worry about

delivering proper notice


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c. Attendance @ mtg is a waiver of notice UNLESS attendance

just to OBJ to mtg

3. To challenge Bd action through propriety of meeting:

a. Regular or special mtg?

i. Bylaws: when are reg mtgs?

b. If special, what notice is req?

c. Quorum (maj of Bd)?

d. If Y, has a majority of the Bd passed the act?

vii. REMOVAL

1. by SH 351.315.3

a. must be at special mtg (difficult to get Bd to call special mtg

for this purpose)

b. UOWP by Art/Bylaws

c. Majority of all shares entitled to vote (not mere maj of

quorum)

d. w/ or w/o cause

e. If cumulative voting: # of votes that guarantee a Dir can also

prevent removal

2. by Bd 351.317

a. must be for cause

i. fail to meet qualifications in Art/bylaws

ii. breach of agmt bt Dir and Corp relating to service as

Dir (could be implied agmt not to steal)

b. majority of ENTIRE Bd (even if some seats vacant)

c. NOTICE of proposed removal to ALL Dir prior to action


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i. Whether at spec or reg mtg

d. Once Bd makes decision: BJR applies

viii. Vacancies

1. May be filled by remaining Dirs then in office; new Dir up for

election @ next election 351.320.1

a. The replacement dir serves out the remainder of the term of

the previous dir

2. Bd needs a quorum of full Bd and maj of quorum do a/t (UOWP)

filling vacancies is the only exception 351.325

ix. Election of Officers

1. 2 reqd officers: Pres and Secy 351.360 (can be same person)

a. So there could be just one person acting as both positions

2. Duties:

a. Secy: delivers amends to SoS, administrative duties

b. Pres: convenes SH mtgs, ministerial duties

c. Nothing provided in stat, but bylaws or Bd resolution will

define role

i. Agency (usage) also comes into play (e.g. X always

bought office supplies)

3. Bd elects officers 351.360.1

a. Majority of quorum

4. Bd can vote officer out of office 351.365

a. Regardless of agmt bt officer and corp

b. BUT may be liable for remaining salary


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b. Agency

i. Corp does things through Bd vote agent empowered to act

ii. Bd can grant authority to A by resolution 351.360.2

iii. Officer has auth to act in ordinary business and for corp benefit (not 3P

benefit) (Molasky)

1. acquiescence by individual Dir not sufficient: must be subject to

vote at DULY CALLED MTG

iv. Can have actual authority from past acts (e.g. this president has always

ANDother presidents of this corp/in this area have always)

v. To make sure corp is bound:

1. get good standing cert (prove corp is a corp)

2. get statement of who officers are (incumbency certificate)

a. Dir and Secy attest to who officers are

b. May not always work

3. Get certified copy of resolution from Secy ( Drive In)

a. Secy has app and act auth to bind corp to statements saying

these are our resolutions thru attestations

b. Corp is bound and estopped from denying motion, even if its

not in mtg minutes

c. Reliance must be reasonable

d. If 3P knew not authorized: corp not bound

4 Get legal valid and binding opinion from court

Fogel Business Associations Fall 2011

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Transcript of Fogel Business Associations Fall 2011