Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Topics
Corporations Organization of
Corporations / Formation
2
a. Every corporation has the inherent power to adopt; though not a condition
precedent to formation.
b. Either incorporators or BOD can adopt bylaws.
c. Only BOD can repeal or amend bylaws, unless otherwise stated.
d. If conflict with articles, articles control.
e. May contain nay provision not inconsistent with articles or IBCL.
f. Part of the K b/t corporation and SHs.
g. Indiana courts will not interfere with internal management contained in
corporations bylaws unless (1) personal liberty or (2) property rights are
jeopardized.
i. Ex. Requiring employment for 15 years; preventing stock trading for 15 years.
ii. BIG differenceIBCL allows broad discretion
V. Preincorporation Contracts
a. A promoter is person who acts on behalf of corporation not yet formed, and
undertakes to bring about the existence of the corporation.
b. Liability on preincorporation contracts.
i. Liability of the corporation.
1. Not liable on preincorporation Ks until it accepts the K by adopting
or ratification (expressly or impliedly).
a. IBCL allows corp. not then in existence to ratify (exception to
agency rule).
ii. Liability of the promoter on preincorporation contracts.
1. Unless K clearly provides otherwise, the promoter remains liable on
preincorporation K until there has been novationan agreement of
the promoter, the corporation, and the other contracting party that the
corporation will replace the promoter under the K (a release and
pledge to look solely to corporation).
2. Liable if never formed, even if formed and adopted; need novation.
c. Promoter stands in a fiduciary relationship to the corporation to be created, and its
SHs.
i. Therefore, no secret profits on the creation of the corporation
ii. Irrelevant what paid prior to becoming promoter.
iii. Profit is ok, it is secret profit that is not.
d. Corporation not liable to the promoter for compensation unless it is expressly
agreed to after incorporation.
i. So generally have agreement with potential-SHs; postpone passing deal.
VI. Foreign Corporations
a. Foreign corporation transacting business in IN must qualify:
i. (1) Foreign corporation is one incorporated outside of IN
1. (2) Transacting business means the regular course of intrastate (not
interstate) business activity. Not occasional or sporadic activity.
ii. (3) Must qualify by obtaining a cert of authority from sec. of state. Must
appoint registered agent and maintain registered office in IN.
iii. Consequences of foreign corporation transacting business without
qualifying: civil fine up to 10K and the corporation cannot sue in state (but it
can be sued).
iv. Cert. of authority may be revoked for variety of reasons (e.g. failure to
file reproes or pay taxes) after written notice, may be appealed in Superior or
Circuit Court within 30 days.
VII. S Corporation Status
3
a. State and Fedearl tax law allows qualifying corporations to file an S Election for
pass through tax treatment.
b. S Corporations file an information return, but pay no tax. Income or loss is declared
on SHs returns.
c. Corporations can file S elections only if (i) 100 or fewer SHs; (ii) All US residents; (iii)
Only one class of stock; (iv) All must be individual SH (no LLCs, etc.)
Corporations
Issuance of Stock
I. What is Issuance
a. Occurs when a corporation sells or trade its own stock. It is a way to raise capital for
the corporation.
i. Must be selling own stock.
II. Subscriptions (written offers to buy stock from a corporation)
a. A subscriber is a person who agrees in writing to purchase shares of stock either
before or after incorporation.
b. Revocation of preincorporation subscriptions
i. General rule, under IBCL, is irrevocable for 6 months unless it states
otherwise.
c. Post-incorporation?
i. No IBCL provision; depends entirely on terms of K/subscription.
d. The corporation and subscriber become obligated under a subscription
agreement whenever the Board accepts the subscription.
III. Considerationwhat must corporation receive when it issues stock?
a. Form of consideration.
i. BOD has broad discretion to issue shares in exchange for any
tangible/intangible property or benefit (cash, promisory note, services
performed or to be, other securities of the corporation).
ii. If stocked issued for promise to render services or promisory notemust be
reported in writing to SHs.
b. No Assessment
i. Once issued, shares are fully paid and non assessable and SHs are liable
only for the payment of any consideration.
IV. Preemptive Rights
a. Is the right of an existing SH to maintain its percentage of ownership by buying
stock whever there is a new issuance of stock in the corporation.
b. NOT provided for in IBCL, so need to appear in bylaws, articles, some other writing
in order to exist.
V. Issuance of certificates
a. Under IDCL, shares of corporate stock may, but need not, be represented by
certificates. If no certificates, must give SH written information statement stating
number, name and class (like a letter).
b. A corporation may issue fractional shares (voting)
i. Or may issue scrip (non-voting fractional share)
4
Corporations Action by and liability of officers
and directors
I. Statutory RequirementsDirectors
a. Existence
i. in general, corporation must have BOD; however, a corporation with 50
or fewer SHs may dispense of the board.
b. Number
i. one or more adult natural person with the number specified in or fixed in
accordance with the bylaws or articles.
c. Election
i. SHs elect directors (at the annual meeting). Directors hold office until term
expires and their successor is elected.
ii. Unless otherwise provided, directors are elected by plurality of the votes.
d. Filing Vacancies
i. BOD unless otherwise provided. Probably something want to include in
Articles. (not SH even though elect).
1. AND if quorum not met, then majority then in office can fill/replace.
e. Staggered terms
i. Articles of incorporation may, but need not, authorize staggered terms by
dividing directors into two or three groups. (3 year term or less).
f. Board Action
i. Two ways the board can take valid action: (1) Unanimous written
consent to act without a meeting or (2) a meeting at which a quorum is
present.
1. A conference call qualifies as a meeting if all directors can hear each
other simultaneously.
ii. Noticerequirements for directors meeting generally can be set in bylaws.
1. At least, 48 hours notice required for special meetings, but failure to
give can be waived in writing or by attending without objection.
iii. Quorummust have majority of all directors to do business unless a
different percentage is required in bylaws (but never less than 1/3 of
directors). If a quorum is present, however, passing a resolution requires only
a majority vote of those present.
1. See example pg. 10 notes
g. Removal
i. Directors can be removed w/ or w/out cause by BOD, or as otherwise
provided in the articles or bylaws.
II. Role of Directors
a. All corporate authority must be exercised by or under the authority of, and the
business and affairs of the corporation must be managed by, the board of
directors.
b. The Board can delegate substantial management functions to a committee, but a
committee cannot according to IBC (i) amend articles or bylaws (ii) fill vacancies
(ii) declare distributions (iv) recommend fundamental corporate change (v) issue
shares (vi) change share rights
5
c. Board may fix its own compensation must be reasonably proportion to the
services and the corporations ability to payif not, waste of corporate assets and
breach of the duty of loyalty.
III. Duty of Care (Burden on Plaintiff)
a. Business Judgment Rule. Directors must discharge their duties in good faith,
with the care an ordinarily prudent person would exercise under similar
circumstances, and in a manner the director reasonably believes to be in the
corporation best interest.
i. Director NOT liable for any action taken, or any failure to act, unless
director faield to perform to above standard AND failure constitutes willful
misconduct or recklessness.
b. Requires reasonable investigation: however, director is entitled to rely on
information and reports from officers, employees, legal counsel, accountants, and
board committees.
c. In determining best interest of the corporation, directors may consider
effect on: SHs, employees, supplies, customers, communities where facilities are
located and other pertinent factors.
IV. Duty of Loyalty (Burden on Defendant)
a. Directors of corporation act in a fiduciary capacity. They must act in good-faith
and with a reasonable belief that what they do is in the corporations best
interest.
b. Interested Director Transactionany deal b/t the corporation and one of its
directors or another business of the director.
i. RuleInterested director transactions is voidable UNLESS director shows:
(1) the deal was fair to the corporation when entered, OR (2) directors
interest and relevant facts were (i) disclosed or known and (2) the deal was
approved by (a) either BOD or (b) SH entitled to vote.
ii. Special quorum rules: interested directors count toward quorum. Approval
is by majority of directors without interest (but must be more than one).
c. Competing VenturesDirector cannot compete with his company. Remedy
constructive trust on profits in addition to lawsuits based on damages.
d. Corporate Opportunity Doctrine
i. RuleDirector cannot usurp corporate opportunity for personal profit
UNLESSS corporation is unwilling or unable to take it.
ii. Corporate opportunitySome courts say its anything necessary to the
corporation; Others say anything in corporations business line. If not in
corporation business line, probably not corp. op.
iii. Companys financial inability is no defense..
iv. Remedy. Sell it to corporation at cost. If sold, corporation gets profit by
constructive trust.
V. Other State Law Bases Of Director Liability
a. Ultra vires actresponsible officer and directors are liable for ultra vires losses.
b. Improper distributions(see below)
c. Which directors are liable?
i. General ruleA director is presumed to have concurred with Board
action UNLESS the director: (1) objects at the beginning of the meeting; (2)
enters dissent or abstention in the minutes; or (3) delivers written notice
of abstention at the meeting.
1. But cannot dissent if voted for the resolution at the meeting.
ii. Exceptions:
6
1. Absent directors are not liable.
2. Good faith reliance on (i) book value of assets or (ii) opinion of a
competent employee, officer, professional, or committee of which the
director relying was not a member, or (ii) financial statement by
auditors.
a. Must have reasonable belief in the competence of the persons
providing info.
VI. Note: If CLOSED CORPORATION, all owe these duties to each other.
I. Statutory RequirementsOfficers
a. Officers are agents of the corporation.
b. Corporation must have at least one person serving as an officer.
c. The corporation must delegate to one of the officers the duty of secretary of the
corp.
d. Selection and removal
i. Selected and removed by the BOD.
ii. Officer may resign at any time by delivering notice.
iii. Of course may be damages for breach of K.
II. Duty of Caresee above (same)
III. Duty of Loyaltysee above (same)
I. Indemnification of Directors and Officers [Circumstances where must , may , may not]
a. Context. Person sued in capacity as officer/director has incurred costs, attorneys
fees, maybe even fines, judgment or settlement; he seeks reimbursement from the
corporation.
b. Prohibited Indemnification. (Corp. barred from indemnifying).
i. If (i) person held liable to corporation or (ii) received improper benefit.
ii. Reasoningdo not want self-dealing.
c. Mandatory Indemnification. (Corp. required to indemnify).
i. Person was wholly successful in defending suit.
d. Permissive Indemnification. (Corp. permitted to indemnify).
i. Context. Anything not satisfying previous two; look for settlement.
ii. Must show (i) acted in good faith and (ii) with the reasonable belief that
actions were in companys best interest, [or, if criminal, reasonably believed
conduct was lawful].
iii. Who determines? (i) Disinterest majority of the board, or if doesnt exist,
(ii) Committee of disinterested directors (must be comprised of at least 2
disinterest directors), (iii) or special legal counsel. (iv) SHs may also make
determination (shares of director seeking indemnification not counted).
e. Court ordered
7
i. Notwithstanding these rules, unless articles provide otherwise, courts can
order indemnification if it is justified in view of all circumstances.
f. Advances. Corp. may advance expenses to defending director so long as director
furnishes statement that believes met appropriate standard of conduct and will
repay if later found not to.
g. Insurance. Corp. may purchase liability insurance to indemnify directors, officers,
employees, and agents even if not entitled via above standards.
9
ii. SH liable to D for cost and attorney fees only if sued without reasonable
cause.
iii. Different SH cannot sue same D; only one derivative suit allowed on that
subject matter.
g. The American Rule Major EXCEPTION
i. IN recently adopted stating that direct (rather than derivative) actions may
be brought by SH in CLOSE CORPORATION.
ii. Direct action will be allowed if court find it will not :
1. (i) expose the corporation to multiple suits;
2. (ii) materially prejudice creditors;
3. (iii) interfere with a fair distribution among all parties.
IV. SH Voting
a. Who. General rule is that record SH as of record date has right to vote.
1. Record SHperson shown as owner in corporate records
2. Record datea voter eligibility cut-off.
3. Ex. Corp. set annual meeting for 7/7 and record date for 6/6. SH1 sells
to SH2 on 6/25. SH1 is entitled to vote.
ii. Exceptions to general rule that record owner on record date votes:
1. Death of SH
a. Executor can vote share of SH who dies after record date.
2. ProxiesSH may vote in person or by proxy.
a. Proxyis a (i) writing (fax increasingly OK); (ii) signed by
record SH (iii) directed to secretary of the corp. (iv)
authorizing another to vote shares.
b. Limits. Proxy is good for 11 months unless otherwise provided.
c. Revocation by writing even if says irrevocable UNLESS
coupled with interest.
3. Voting Trusts and Voting Agreements
a. Ex. A, B, and C own relatively few shares in Corp. They decide to
increase influence on corp. policy by block voting, i.e. always
voting alike.
i. SH can creating voting trust or enter into voting
agreement. IBCL.
b. Requirements for voting trust:
i. (i) written trust agreement controlling how shares will
be voted;
ii. (ii) copy to corporation with list of beneficiaries;
iii. (iii) transfer legal title of shares to voting trustee;
iv. (iv) original SHs receive trust certificates and retain
all SH rights except for voting rights.
v. (v) generally irrevocable for max. 10 years unless
coupled with interest.
c. Requirements for voting (Pooling) agreement
i. (i) Writing agreement
ii. Are generally specifically enforceable.
b. When.
i. Annual meeting: to elect directors.
1. Required by statute. If not held, a SH can petition court to order one
after 6 months from end of fiscal year or 15 months from last meeting.
10
ii. Special meeting can be called by (i) the board (ii) person authorized by
articles or bylaws; or (iii)holders of atleast 25% of voting shares if corporation
has 50 or fewer SHs (if more, no SH call)
iii. Notice requirement. Every SH entitled to vote must be given written or
electronic notice for every meeting (annual or special).
1. Contents. (i) When and (ii) where and (iii) must state the purpose of
the meeting (which is important b/c that will then be only business
eligible for action).
2. Effect of incomplete notice (to all SHs). Action taken at the meeting
is void
3. Unless Waiver. Those not sent notice can waive the notice defect :
a. Expressin writing and signed any time; or
b. Impliedattend meeting w/out objection.
c. How.
i. Two ways SH can take a valid corporate act: (i) unanimous written
consent of holders of all voting shares (ii) meeting at which quorum is
present. (same as directors)
1. Quorum here focuses on number of shares represented, not
number of shareholders. Generally, quorum requires a majority of
outstanding shares.
a. Can require different quorum in articles but never less than
1/3.
b. Ex. Corp has 120K shares outstanding and 700 SHs. 60,001
shares constitutes quorum.
2. Majority of shares PRESENT (not shares VOTING) can bind
corporation.
a. Can required higher vote in bylaws.
b. Ex. Corp. has 120K shares outstanding. 62K represented at
meeting, but only 50K vote are particular proposal. 31,001
shares must vote for proposal for it to be accepted by SHs.
d. Cumulative voting. How and when.
i. Cumulative votinga device to give small SHs better chance of electing
someone to Board.
ii. When. Cumulative voting only available in voting for directors and only if
provided for in Articles or bylaws. (NOT provided for in the IBCL).
1. If articles silent may NOT vote cumulatively.
iii. How. Multiple number of shares owned times number of directors to be
elected.
iv. Ex. Own 1000 shares in Corp. Has nine directors up for election. Max could
vote for 1 is 9000.
V. Stock Transfer Restrictions. (i.e. rights of first refusal)
a. Generally, valid so long as not unreasonable.
b. Standard. Ex. SH stock sub. to trans. rest., requires her offer it first to corporation.
Sells to T in violation.
i. In action against the selling SH, look if restriction valid?
1. Stock transfer restrictions
a. upheld provided that they are reasonable under the
circumstances,
b. which means they are not an undue restraint on alienation.
ii. In action against buyer of stock, look for buyers knowledge or notice?
11
1. Even if restriction reasonable, cannot be invoked against
transferee unless:
a. (i) Consciously noted on the share certificate; OR
b. (ii) Transferee had actual notice.
c. Where. Valid transfer restrictions can be in the articles, bylaws, and agreement
among SHs, or b/t corporation and SHs.
d. Valid and enforceable if is authorized and existence is conspicuously noted in
front or back of cer. Or information statement.
VI. Right of SH to Inspect (and copy) Corporate Records
a. Context. Important in cases of SH dispute and in piercing cases. Once make SH,
automatically get this right no matter what, so something to consider.
b. (i) SHs of a corp. have right to inspect and copy certain records of corporation: (TIP:
ABCs)
i. Records which must be delivered upon request:
1. Aarticles and amendments
2. Bbylaws and amendments
3. Ccommunication to SH for last 3 years
4. Ddirectors and officers names and addresses
5. Eevery SH minutes for 3 years (and directors minute with respect to
stock rights)
6. Ffinancial statements for 3 years
7. ssecretary of state biannual report
a. Must be maintained at corporations principal office.
ii. Records with must be delivered IF request in good faith and a proper
purpose is shown:
1. Aaccounting records
2. B--- back SH minutes
3. Ccommittee recordsall
4. Ddirector minutesall
5. sshareholder listalphabeticalized by class
a. Must be maintained at any reasonable location.
b. Proper purpose unclearbut would include evaluation for
estate tax purposes; not for competitive purposes (get two
extremes).
c. (ii) SH must deliver written request at least 5 days before inspection.
d. (iii) Inspection must take place at place kept. (see above)
e. Remedy. Court order for inspection and attorney fees.
VII. Distributions
a. Def. Virtually any payment to SHs other than salaryi.e. cash, stock dividend, stock
redemption (forced purchase) or any other transfer of property for the benefit of
SHs.
b. Power to make distribution is within the broad discretion of the board.
i. Action to compel declaration of distribution unlikely to win.
1. Test. Can only win on a very strong showing of abuse of discretion
established by bad faith or illegal or oppressive conduct.
a. Ex. Corp. consistently makes profit but by Board refuses
dividend while paying selves bonuses or tax penalty incurred.
b. Ex. If did find abuse of discretion, anyone that voted on the
board is liable.
c. Determination of Dividends
i. Board must determine the financial soundness of the corporation b/f
making distribution.
12
ii. May not be made if would have effect of corporation
1. not able to pay its debts in due course, or
2. Total assets are less than sum of liabilities plus preferred shareholders
dissolution rights (essentially a solvency test).
iii. Directors approving distribution in violation of the solvency rule are
personally liableto the corporation for the excess (SUBJECT to the
Business Judgment Rule).
d. Dividing Dividends.
i. Four classes: (i) Preferred; (ii) Participating; (iii) Cumulative; (iv) Common.
ii. Ex. Corp decides to declare $400,000 dividends.
1. Common stock. If 100,000 shares of common stock each SH
receives $4 per share.
2. Preferred Stock. If 100,000 shares of common and 20,000 preferred
with $2 dividend preference.
a. Preferred share dividends are paid first.
b. So 40,000 goes to preferred SHs; leaving 360,000 distribution to
common stock.
3. Participating shares. 100,000 shares of common and 20,000 of $2
preferred that is participating.
a. Participating shares participate equally in common share
dividiends and preferred dividends (collect BOTH).
b. So 40,000 goes to preferred SHS. Now divide 360,000 by
120,000.
4. Cumulative. If 100,000 shares of common and 20,000 preferred with
$2 preferred that is cumulative (and no dividends have been paid
in the three prior years).
a. Shares with cumulative dividends continue to accrue
dividends year-to-year until they are paid.
b. So 4 years of $2 equals $8 per share. 160,000 to preferred.
Leaves 240,000 to 100,000 common stock = $2.40 for each
common share.
e. Source and Nature of Distribution
i. Dividend to be paid from unreserved and unrestricted earned surplus.
(IBCL; meaning ?)
1. Dividends may not be paid out of capital except in dissolution.
ii. Once declared, dividends constitute debt of corporation on par with
general unsecured debt.
f. Date of distribution
i. Board may fix a record date, declaration date and payment date for
distribution.
1. Record date is date set for determining identity of eligible SHs.
a. If no record date set, date board authorizes the distribution is it.
14
Corporations Fundamental Corporate Change / Transfer of all or sub.
all assets/Share Exchange
I. Transfer of all or sub. all of the assets not in ordinary course of business or share
exchange.
a. Fundamental corporate changes for the selling corporation only (only dissenters
rights for seller).
i. They are not fundamental corporate changes for the buying corporation.
b. Ex. S Corp. wants sell all assets B, Inc. or B, Inc. wants buy all shares S Corp. Each
12K shares outstanding
i. Required. (i) BOD resolution (both corporations), AND (ii) submittal to selling
corporation SH (planof share exchange also required)
ii. Approval by selling corporations SH, here, requires 6,001 of shares
approving the sale.
1. NO approval required by B, Inc. It is not a fundamental corp. change
for buyer.
iii. File articles of exchange in share exchange; usually no filing in transfer of
assets.
iv. Dissenting SHs rights of appraisal. For selling corporation.
v. Liability. Generally, acquiring company is not liable for debts of acquired
company unless deal says otherwise, or unless company purchasing of assets
is merely continuation of selling corp.
I. Indiana Control Share Acquisition Act designed to give SHs of large corp.
protection from hostile takeovers.
a. Purpose. Prevent hostile takeovers; provide for dissenters rights.
b. Applicability. Applies ONLY to:
i. Non-publicly traded corps. with:
1. (i) 100 or more SHs; and
2. (ii) Principal office or substantial assets in IN; and
3. (iii) either
a. More than 10% of SHs in IN; or
b. More than 10% of shares in IN; or
c. 10,000 SHs in IN.
c. Provisions.
i. 90day period/control shares. Person attempts to acquire shares in corp. in
any 90day period which puts SH over 1/5, 1/3 or 1/2 ownership interest, all
shares acquired during 90day period are control shares.
ii. Control shares. Statutorily stripped of voting rights unless restored by vote
of disinterested SHs
iii. SH has Dissenters rights IF (i) voting rights restored and (ii) acquirer has
majority share and (iii) SH voted no.
15
1. Fair value, here, is the highest price paid during control share
acquisition.
Corporations
Amendment of the Articles
I. Shareholders
a. Generally right to amend the Articles, in IN, lies with the SHs.
II. The BOD
a. May amend the articles without SH approval, unless the articles provide
otherwise, to:
i. Extend the duration of the corporation
ii. Delete
1. the initial directors
2. the initial registered agent or office
iii. Minor name changes (Corp. or geography).
iv. Increase common shares if percentage of ownership remains same.
v. Cancel treasury shares.
b. Make ANY article amendment, If shares have not yet been issued
c. May make amendment recommendations and submit for SH approval.
III. If approved, file amended articles with Sec. of State.
IV. Dissenting SH rights of appraisal for article amendments.
a. No.
b. BUT if amendment harms a class of stock, class voting.
i. Amendment must be approved by both (i) shares of that class itself and (ii)
the overall majority of all shares entitled to vote.
16
Corporations Dissolution (Voluntary,
Involuntary and Administrative)
I. Voluntary
a. If corp. has not commenced business, majority of incorporators or the BOD may
dissolve.
b. After business begins, corporation can dissolve upon recommendation of board
and a majority SH vote.
c. After either of these, (i) file articles of dissolution and (i) give notice to
creditors.
II. Involuntary (by court order)
a. Shareholder can petition because of
i. (1) director deadlock that harms the company OR prevents conduct of
business
ii. (2) SH deadlock and failure for at least 2 annual meetings to fill a vacant
board position.
iii. Alternative to dissolution: court may order buy-out of the complaining
SH (especially in a close corporation) under its equitable authority.
b. Creditor can petition b/c corporation is insolvent and the creditor either has an
unsatisfied judgment against the corporation OR the corporation admits in
writing the debt and that the corp. is insolvent.
c. Attorney General can petition if establishes corp. received articles through fraud
or abused its authority
III. Administrative (by Secretary of State)
a. For failure to
i. deliver biennial report .
ii. pay taxes or penalties.
IV. Wind-Up
a. After voluntary or court ordered dissolution, corporation stays in existence to wind
up.
b. Winding up steps:
i. (a) gather all assets (b) convert to cash (c) pay creditors and (d) distribute
remainder to SHs pro rate by share unless there is a dissolution (or
liquidation) preference.
ii. SHsreceive distributions only after payment of creditors (and this INCLUDES
declared distributionsrecall they are on parity).
V. Disposing of known and unknown creditor claims prior to the normal statute of
limitation (IBCL)
a. For known claimswritten notice to creditor stating amount of claim.
i. If no objection within time set, claim fixed.
ii. If objection, must sue within 90 days of deadline.
b. For unknown claimsnotice in general circulation paper.
17
i. Claims barred after two years from publication.
VI. Distribution upon dissolution
a. First to pay secured creditors
b. Then pay unsecured creditors (including unpaid dividends to SHs)
c. Then to preferred SHs
d. Then to common SHs.
Corporations Limited
Liability Companies (LLCs)
18