Business associations (english)

BUSIIATIONS Corporate bargain limited liability I.CHARACTERISTICS OF A CORPORATION A.PRIISTICS OF A CORPORATION a Entity Status a corporation is a legal entity created under the authority of legislature b Limited Liability as a legal entity, a corp is responsible for its own debts its shs liability is limited to their investment c Free Transferability of Interest shares, representing ownership interests, are freely transferable d Centralized Management and Control a corps management is centralized in a board of dirs and officers.

Shs have no direct control over the boards activities e Duration Continuity of Existence a corp is capable of perpetual existence f Taxation a corp, as an entity, pays taxes on its own income shs are taxed only on dividends g Remember Attributes of the Corporation CLIFF 1 Centralization of management 2 Limited liability 3 Forever perpetual duration 4 Freely alienable shares can be sold . B.CORPORATIONS DIIATIONS. 1.GENERAL PARTNERSHIPS in most states, pships are governed by the Uniform Partnership Act UPA . However, the Revised UPA RUPA has been adopted by a few states a Aggregate Status a pship is an aggregation of two or more persons who are engaged in business as co-owners.

Although not a legal entity, a pship is treated as one for certain purposes, e.g ownership and transfer of property.

RUPA confers entity status on pships b Unlimited Liability every partner is subject to unlimited personal liability on pship debts c Transferability of Interests a partner cannot make a transferee a member of the pship. She can, however, assign his interest in the pship, thus permitting the assignee to receive distributions of profits.Because the assignee does not become a member of the pship, he is not entitled to participate in pship business or management. d Duration and Dissolution a pship cannot have perpetual existence.

It is terminable at will unless a definite term is expressed or implied, and is also dissolved by death, incapacity, or withdrawal of any partner. 1 Wrongful dissolution pships can also be dissolved in contravention of the pship agreement, by the express will of any partner, by a court or by a partners conduct.Upon wrongful dissolution, nonbreaching partners may seek damages for breach and, if they choose to do so, may continue the pship upon payment to the breaching partner of the value of his interest. 1 Compare dissociation under RUPA termination results in either the winding up of the pship or buyout of the dissociating partner, depending on the event triggering the termination.

A buyout may be reduced by damages if dissociation was wrongful. e Management and Control absent a contrary agreement, every partner has a right to participate equally in the partnership management. f Autority each partner, as an agent of the firm, may bind the pship by acts done for the carrying on, in the usual way, the business of the pship. 1 RUPA a pship is bound by a partners act for carrying on in the usual way either the actual pship business or a business of the kind carried on by the pship. g Ownership of Property title may be held in the name of the pship, but property is owned by the individual partners as tenants in pship.

There is no tenancy in pship under RUPA, which provides that property acquired by pship is owned by pship, not individual partners. h Capacity to Sue and be Sued under the UPA, a lawsuit may be brought by or against individual partners, rather than pship.

Partners are jointly and severally liable for wrongful acts and breaches of trust they are only jointly liable for debts and obligations of the pship. 1 Statutory reforms many state statutes specifically allow a pship to be sued in its own name. Other states make all pship liabilities joint and several. Other reforms provide that not all joint obligors need to be joined in a suit. 2 RUPA a pship may sue and be sued in its own name, and partners are jointly and severally liable for all pship obligations.

A claim against the pship cannot be satisfied from a partners personal assets unless pship assets have been exhausted. 2.JOINT VENTURE a pship formed for some limited investment or operation, as opposed to a continued business enterprise. Joint ventures are governed by the rules applicable to pships 3.LIMITED PARTNERSHIP this is a pship consisting of two classes of partners general partners with rights and obligations as in an ordinary pship and limited partners with no control and limited liability . 4.IABILITY PARTNERSHIPS in a LLP, a general partner is NOT personally liable for all pship obligations arising from negligence, wrongful acts, and misconduct absent his involvement in the misconduct.

There is no exclusion for liability for contractual obligations. 5.IABILITY COMPANIES LLC is a non-corporate business entity whose owners members have limited liability and can participate actively in its management.

An LLC may be either for a term or at will. It can be managed either by its members or nonmember managers.Depending on the statute, distributions are made either equally to each member or in proportion to each members contribution. a Withdrawal and Dissolution some statutes provide that any event that terminates a members membership death, resignation causes dissolution.

Other statutes distinguish between fault events member misconduct and non-fault events death, bankruptcy , and some provide that dissolution can be avoided by paying the withdrawing member fair value for his interest. b Advantages of LLCs An LLC for a business association, not publicly held, has strong advantages partnership taxation, virtually no restrictions in structuring ownership interests and management, limited liability for owners and managers, and no limitations on the number or nature of owners.

C.DISREGARD OF CORPORATE ENTITY since a corp is a distinct legal entity, shs are normally shielded from corporate obligations.In certain instances, however, the corporate entity will be disregarded. 1.PIERCING THE CORPORATE VEIL Suits by corporate creditors against shs its more common in contract claims than in tort claims.

The most important elements considered by the courts a Commingling of Assets commingling of corp assets and personal assets of shs e.g paying private debts with corp funds may lead to piercing of the corporate veil b Lack of Corporate Formalities whether basic corp formalities e.g regular meetings, corporate records maintained, issuance of stock were followed is also relevant. Statutory close corps are permitted more flexibility regarding corp formalities c Undercapitalization if the corp was organized without sufficient capital or liability insurance to meet obligations reasonably expected to arise, the corp veil may be pierced d Domination and Control By Shareholder the corp veil is often pierced when an individual or other corp owns most or all of the stock, so that it completely dominates policy or business decisions. e Alter Ego, Instrumentality, Unity of Interest when no separate entity exists and the corp is merely the alter ego or instrumentality of its shs could be a corporate shareholder , or when there is a unity of interest between the corp and its shs, the corp veil is often pierced.

These terms are usually applied only if other grounds are present f Fraud, Wrong, Dishonesty, or Injustice generally, the veil will be pierced only if one of these elements is available, e.g no piercing of veil if there is a lack of corp formalities without resultant injustice.

Piercing the veil usually involves corps with a small number of shs. 2.PIERCING HAPPENS MOST OFTEN WHEN 1 The number of shs is small the chance of one sh dominating the corp is greater 2 Deception There is some kind of deception 3 Agency individual is a principal and corp is his agent 4 Estoppel outsider was led to believe that he was dealing with an individual, while in fact he was dealing with the corporation. 5 Direct tort individual and corp acted together and should be jointly severally liable 6 Instrumentality requirement is satisfied I control of a subsidiary by parent ii to commit fraud iii to cause loss or injury. 3.PIERCING THE WALL BETWEEN AFFILIATED CORPORATIONS this occurs when a P with a claim against one corp attempts to satisfy the claim against the assets of an affiliated corp under common ownership.

This type of aggregation is permitted only when each affiliated corp is NOT a free-standing enterprise but merely a fragment of an entity composed of affiliated corps. 4.USE OF CORPORATE FORM TO EVADE STATUTORY OR CONTRACT OBLIGATIONS the corp form may be ignored when it is used to evade a statutory or contractual obligation. The issue is whether the contract or statute was intended to apply to the shs as well as the corporation.

Only third parties, not the corp or its shs, are generally allowed to disregard the corp entity. 5.TWO EXTREMES TO AVOID IN PIERCING THE CORPORATE WALL a Old model Superman sh used corp as his puppet b New Model Superman sh and corp are inseparable alter ego D.SUBORDINATION OF SHAREHOLDER DEBTS DEEP ROCK DOCTRINE if a corp goes into bankruptcy, debts to its controlling shs may be subordinated to claims of other creditors.

When subordination occurs, shareholder loans are treated as if they were invested capital stock . Major factors in determining whether to subordinate include fraud, mismanagement, undercapitalization, commingling, excessive control, etc. II.ORGANIZING THE CORPORATION generally, corps are created under and according to statutory provisions of the state in which formation is sought.

A.FORMALITIES IN ORGANIZING CORPORATION 1.CERTIFICATE OR ARTICLES OF INCORPORATION state law governs the content of the articles, which are filed with the secretary of the state.

Usually, the articles must specify the corp name, number of shares and classes of stock authorized, address of the corps initial registered office, name of initial registered agent, and the name and address of each incorporator. a Purpose Clause under most statutes, no elaborate purpose clause is needed.

It is sufficient to state that the purpose of the corp is to engage in any lawful business activity. b State of Incorporation incorporators need to consider how flexible the states corporate law is versus the costs associating with incorporating in that state 2.ORGANIZATIONAL MEETING filling the articles in proper form creates the corporation, after which an organizational meeting is held by either the incorporators or dirs named in the articles.

Matters determined at meeting 1 Incorporators elect directors, if no dirs are named in the articles 2 Directors choose officers 3 Directors ratify pre-incorporation transactions 4 Directors authorize issuance of shares 5 Directors adopt by-laws if necessary , corporate seal and stock certificate B.DEFECTS IN FORMATION PROCESS DE JURE AND DE FACTO CORPS when there is a defect or irregularity in formation, the question is whether the corp exists de jure, de facto, by estoppel, or not at all. This issue usually arises when a third party seeks to impose personal liability on would-be shs. Another method of challenging corporate status, used only by the state, is a quo warranto proceeding. Note where there has not been compliance with the statute, we apply principles of de facto, de jure and corp by estoppel.

Where there has been compliance with the statute, we apply principles of disregard of corporate fiction, a k a piercing the corporate veil, which is an exception, rather than a rule. 1.DE JURE CORPORATION this exists when the corp is organized in compliance with the statute.

Its status cannot be attacked by anyone not even the state. Most courts require only substantial compliance others require exact compliance with the mandatory requirements. 2.DE FACTO CORPORATION substantially abolished this exists when there is insufficient compliance as to the state i.e state can attack in quo warranto proceeding , but the steps taken are sufficient to treat the enterprise as a corp with respect to its dealings with third parties.

Requirements 1 Colorable or apparent attempt 2 Good faith 3 Some use of corporate franchise Then ct will recognize status as to all but state 3.CORPORATION BY ESTOPPEL a Definition estoppel is an equitable evidentiary rule which prevents a party from denying the existence of a fact notwithstanding that he fact is not true. Thus, certain parties are estopped from asserting defective incorporation when they have dealt with the corp as though properly formed. b Example shs who claimed corp status in an earlier transaction are estopped to deny that status in a suit brought against the corp. The estoppel theory normally does NOT apply to bar suits against would-be shs by tort claimants or other involuntary creditors. c Overlap With De Facto many of the facts which we would point to support a claim of de facto status are the same ones we point for estoppel.

However, substantial abolition of de facto concept doesnt necessarily abolish estoppel. d De Facto is For All Estoppel is For One estoppel depends on relationship between party and corp. 4.WHO MAY BE HELD LIABLE when a would-be corp is not a de jure or de facto or a corp by estoppel, the modern trend imposes personal liability against only those owners who actively participated in management of the enterprise. 5.EFFECT OF STATUTES a On De Facto Doctrine states following the prior version of the Model Act have abolished the de facto doctrine, thus making all purported shs jointly and severally liable for all liabilities incurred as a result of the purported incorporation.

However, statutes based on Revised Model Business Corporation Act require a person acting on behalf of the enterprise to know that there was no incorporation before liability attaches. b On Estoppel Doctrine the effect of both acts is an unsettled issue. c On Liability under the prior Model Act, liability extends to investors who also exercise control or actively participate in policy and operational decisions.

It is expected that the Revised Model Act will be interpreted in the same manner.

III.LIABILITIES FOR TRANSACTIONS BEFORE INCORPORATION. A.PROMOTERS a promoter participates in the formation of the corp, usually arranging compliance with the legal requirements of formation, securing initial capital, and entering into necessary contracts on behalf of the corp during the time its being formed. a Fiduciary Duties to Each Other Full disclosure and fair dealing are required between the promoters and the corp and among promoters themselves.

B.CONTRACTS MADE BY PROMOTERS ON CORPS BEHALF 1.RIGHTS AND LIABILITIES OF CORPORATION a English Rule the corp is not directly liable on pre-incorporation contracts even if later ratified.Rationale the corp was not yet in existence at the time the promoter was acting. b American Rule the corp is liable if it later ratifies or adopts pre-incorporation K. c Corporations Right to Enforce Contract under either rule, the corp may enforce the contract against the party with whom the promoter contracted, if it chooses to do so. 2.RIGHTS AND LIABILITIES OF PROMOTERS. a Liability on Pre-incorporation Contract generally, promoters are liable if the corp rejects the pre-incorporation contract, fails to incorporate, or adopts a contract but fails to perform, unless the contracting party clearly intended to contract with the corporation only and not with the promoters individually. b Right to Enforce Against the Other Party if a corp is not formed, the promoter may still enforce the contract.

C.OBLIGATIONS OF PREDECESSOR BUSINESS a corporation that acquires all of the assets of a predecessor business does not ordinarily succeed to its liabilities, with exceptions a Exceptions the successor corp may be liable for its predecessor liabilities if 1 the new corp expressly or impliedly assumes the predecessor obligations the creditors of the old corp may hold the new corp liable as third-party beneficiaries 2 the sale was an attempted fraud on the creditors or 3 the predecessor is merged into or absorbed by the successor.

IV.POWERS OF THE CORPORATION. A.CORPORATE POWERS generally, corporate purposes and powers are those expressly set forth in the corporations articles, those conferred by the statute, and the implied powers necessary to carry out the express powers.

Transactions beyond the purposes and powers of the corporation are ultra vires. 1.TRADITIONAL PROBLEM AREAS the following three powers are particularly significant express powers, since older statutes did not specifically confer them a Guarantees modern statutes confer the power to guarantee the debts of others if it is in furtherance of the corporate business b Participation in a Partnership present-day statutes explicitly allow the corp to participate with others in any corp, partnership, or other association c Donations because the general rule is that the objective of a business corporation is to conduct business activity with a view to profit, early cases held that charitable contributions were ultra vires the modern view permits reasonable donations without showing the probability of a direct benefit to the corp. B.AGENCY 1.DEFINITION agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other to so act. Rest2dAg a Parties to an agency relationship Principal Agent. Thus, three essential elements of an agency relationship 1 Manifestation by principal that agent shall act for him in some undertaking 2 Acceptance by the agent and 3 Understanding that the principal is in control of the undertaking.

I Note that these are factual issues if they are satisfied, then the relationship is one of agency, regardless of what the parties themselves call it but the parties labels may provide evidence of their intent 2.CATEGORIES OF AGENCY a Actual Express Authority authority is the power of the agent to affect the legal relations of the principal by acts done in accordance with the principal s manifestations of consent to him. Rest 7. Operative word is manifestation . If he says, do something, it s express but the manifestation may include implied assent to other things as well, which is b Actual Implied Authority unless otherwise agreed, authority to conduct a transaction includes authority to do acts which are incidental to it, usually accompany it, or are reasonably necessary to accomplish it. Rest 35 c Apparent Authority a.k.a. ostensible authority apparent authority is the power to affect the legal relationships of another person by transactions with third persons, professedly as agent for the other, arising from and in accordance with the other s manifestations to such third persons.

Rest 8. But note that the manifestation includes allowing the agent to represent accurately his own authority. d Inherent Authority this is the authority that inheres in an office.

General agent agent authorized to conduct a series of transactions involving continuity of service P is bound if A is acting in the interests of P and A does an act usual or necessary with respect to the authorized transactions 1 Unusual activities depositing corporate checks on a personal account is an unusual activity, and the bank should make inquiry if the person is authorized to do that otherwise, the bank is liable to the principal for lost money Mohr e Ratification ratification is the affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account, whereby the act, as to some or all persons, is given effect as if originally authorized by him. Rest 82. The principal can affirm by words, or by deeds. This includes the failure to repudiate the subject matter when presented, suing to enforce the obligation, retaining the benefits of the transaction.

Note several things 1 Ratification assumes that the principal was not previously bound.

If the principal had been previously bound, then the liability would be based on another agency theory. 2 It doesn t matter to whom the affirmance is made. It could be to the agent, to the third party, or anyone else or nobody at all. Why? Because what was lacking in the original contract was merely his expression of assent to the relationship of agency.

The terms are fixed, the third party believes he has an agreement, all that s missing is the opposite party.

So the President of the firm s note to himself that the affirms may be sufficient.

If there are some formalities required to authorize an act e.g sealed instruments, deeds then there might be additional formality required for affirmance. f Estoppel purported principal either a intentionally or carelessly causes the belief that a purported agent is acting on his behalf, or b sits silently knowing that such belief exists without taking reasonable steps, and the third party relies detrimentally.

C.ULTRA VIRES TRANSACTIONS those beyond the purposes and powers, express and implied, of the corporation. Under common law, shareholder ratification of an ultra vires transaction nullified the use of an ultra vires defense by the corporation. 1.TORT ACTIONS ultra vires is NO defense to tort liability. 2.CRIMINAL ACTIONS claims that a corporate act was beyond the corps authorized powers are NO defense to criminal liability. 3.CONTRACT ACTIONS at common law, a purely executory ultra vires contracts were NOT enforceable against either party fully performed contracts could NOT be rescinded by either party and, under the majority rule, partially performed contracts were generally enforceable by the performing party, since the nonperforming party was estopped to assert an ultra vires defense. 4.STATUTES most states now have statutes that preclude the use of ultra vires as a defense in a suit between the contracting parties, but permit ultra vires to be raised in certain other contexts a Suits Against Officers or Directors if performance of an ultra vires contract results in a loss to the corp, it can sue the officers or dirs for damages for exceeding their authority. b Suit By State these limiting statutes do NOT bar the state from suing to enjoin a corp from transacting unauthorized business. c Broad Certificate Provisions when the certificate of incorporation states that the purpose is to engage in any lawful activity for which corp may be organized, ultra vires is unlikely to arise.

V.MANAGEMENT AND CONTROL A.ALLOCATION OF POWERS BETWEEN DIRECTORS AND SHAREHOLDERS 1.MANAGEMENT OF CORPORATIONS BUSINESS corporate statutes vest the power to manage in the board of directors, except as provided by valid agreement in a close corp. He boards power is limited to proper purposes. 2.SHAREHOLDER APPROVAL OF FUNDAMENTAL CHANGES shs must approve certain fundamental changes in the corp, e.g amendment of articles, merger, sale of substantially all assets, and dissolution. 3.POWER TO ELECT DIRECTORS shs have the power to elect dirs and to remove them for cause, absent provisions for removal without cause in the certificate, bylaws, or in statutes.

Some statutes also permit the board or the courts to remove a dir for certain specific reasons e.g felony conviction . 4.POWER TO RATIFY MANAGEMENT TRANSACTIONS shs have the power to ratify certain management transactions and insulate the transactions against a claim that managers lacked authority, or shift the burden on the issue of self-interest. 5.POWER TO ADOPT PRECATORY RESOLUTIONS shs may also adopt advisory but nonbinding precatory resolutions on proper subjects of their concern. 6.BYLAWS shs usually have the power to adopt and amend bylaws, although some statutes give the board of dirs the concurrent power to do this. 7.CLOSE CORPORATION this is a corp owned by a small number of shs who may actively manage it has no general market for its stock, and it has some limitations regarding transferability of stock. 8.STATUTORY CLOSE CORPORATION STATUS the basic requirements to qualify for special treatment under the statutes are that, in its cert of incorpn, a statutory close corp must identify itself as such, and must include certain limitations as to the number of shs, transferability of shares, or both. a Functioning As a Close Corporation there may be sh agreements relating to any phase of the corp affairs.

B.DIRECTORS 1.APPOINTMENT OF DIRECTORS initial dirs are either designated in the articles of incorporation or elected at a meeting of incorporators.

Subsequent elections are by shs at their annual meetings.

The number of dirs is usually set by the articles or bylaws. a Qualifications absent a contrary provision in the articles or bylaws, dirs need not be shs of the corp or residents of the state of incorporation. b Vacancies statutes vary, but under Model Act, a vacancy may be filled by either the shs or dirs. 1 Compare removal some statutes require that vacancies created by removal of a dir be filled by the shs unless the articles or bylaws provide otherwise. 2.TENURE OF OFFICE a Term of Appointment under most statutes, office is held until the next meeting, although on a classified board, dirs may serve staggered multi year terms. b Power to Bind Corporation Beyond Term unless limited by the articles, the board has the power to make contracts biding the corp beyond the dirs term of office. c Removal of Director During Term at common law, shs can remove a dir for cause e.g fraud, incompetence, dishonesty unless an article or bylaw provision permits removal without cause. a dir being removed for cause is entitled to a hearing by shs before a vote to remove. a number of statutes permit removal without cause. 1 Removal by Board board can NEVER remove a dir unless authorized by statute 2 Removal by Court there is a split authority as to whether a court can remove a dir for cause.

I Statutes some statutes permit courts to remove a dir for specified reasons.

Usually, a petition for removal can be brought only by a certain percentage of shs or the attorney general. 3.FUNCTIONING OF BOARD a Meetings absent a statute, dirs can act only at a duly convened meeting consisting of a quorum.

In most jurisdictions, a meeting can be conducted by telephone or other means whereby participants can hear each other simultaneously.

Most statutes also allow board action by unanimous written consent without a meeting. 1 Notice although formal notice is unnecessary for a regular meeting, special meetings require notice to every dir of date, time, and place.

Usually, notice can be waived in writing before or after a meeting.

Attendance waives notice unless the dir attends only to protest the meeting. 2 Quorum a majority of the authorized number of dirs constitutes a quorum.

Many statutes permit the articles or bylaws to require more than simple majority or less than that. 3 Voting absent a contrary provision, an affirmative vote of a majority of those present, not a majority of those voting, is required for board action. b Effect of Noncompliance With Formalities today, most courts hold that informal but unanimous approval of a transaction is effective, as is a matter receiving the explicit approval by a majority of dirs without a meeting, plus acquiescence by the remaining dirs. c Delegation of Authority the board has the power to appoint committees of its own members to act for it either in particular matters or to handle day-to-day management between board meetings.

Typically, these committees cannot amend the articles or bylaws, adopt or recommend major corporate changes e.g merger , recommend dissolution, declare a dividend, or authorize issuance of stock unless permitted by the articles or bylaws.

Note that while the board may delegate operation of the business to an officer or management company, the ultimate control must be retained by the board. d Provisional Directors some statutes allow them to be appointed by court if the board is deadlocked and corporate business is endangered. a provisional dir serves until the deadlock is broken or until removed by a court order or by majority of shs. e Voting Agreements an agreement in advance among dirs as to how they will vote is void as contrary to public policy.

There are certain exceptions for statutory close corps. 4.COMPENSATION dirs are NOT entitled to compensation unless they render extraordinary services or such compensation is otherwise provided for. Officers are entitled to reasonable compensation for services. 5.DIRECTORS RIGHTS, DUTIES, AND LIABILITIES a Right to Inspect Corporate Records if done in good faith for purposes germane to his position as dir, this right is absolute. b Duty of Care dirs must exercise the care of an ordinarily prudent and diligent person in a like position, under similar circumstances.

There is no liability absent a conflict of interest, bad faith, illegality, or gross negligence for errors of judgment business judgment rule the rebuttable presumption that action was taken on an informed basis, in good faith and exercising reasonable care , but the dir must have been reasonably diligent before the rule can be invoked Shlensky 1 The duty of care requires I Education a dir should acquire at least a rudimentary understanding of the business of the corporation ii Information a dir is under a continuing obligation to keep informed about the activities of the corp iii Participation dirs must generally monitor corporate affairs, but need NOT involve themselves in the day-to-day operations i.e. they should attend board of dirs meetings with reasonable regularity . iiii Inquiry a dir has a duty to inquire when circumstances would alert a reasonable person for the need of inquiry. i Action where wrongdoing is revealed, a dir should object, correct, or resign.

Object to the course of conduct, steer toward correction, and resign if it isnt corrected. 2 Extent of liability dirs are personally liable for corporate losses directly resulting from their breach of duty or negligence in falling to discover wrongdoing. a director may seek to avoid being held personally liable for acts of the board by recording his dissent.

I Many statutes permit the articles to abolish or limit dirs liability for breach of the duty of care absent bad faith, intentional misconduct, or knowing violation of law. 3 Defenses to liability these include good faith reliance on management or experts reports.

Disabilities may be considered in determining whether the dir has met the standard of care. c Duty of Loyalty a catch-all duty designed to prevent unfairness the duty to act in good faith BJR applies . Application 1 Self-dealing transactions I Common Law 1 early absolute prohibition against self-dealing renders transactions void or voidable 2 permissive self-dealing dirs and officers may contract with the corp if a done in strictest good faith. b with full disclosure and c consent of all concerned. 1 burden of proof is on the dir to establish good faith, honesty fairness 2 courts weigh self-dealing transactions with closest scrutiny 3 self-dealing prohibition also applies to intercorporate transactions where dirs are common. ii Statutory example 1 quasi-safe harbor approach Iowa statute transaction is not void or voidable because of dirs interest, if either 1 interest is disclosed and approval is made without counting the vote of the interested dir. 2 interest is disclosed to shs and shs authorize 3 transaction is fair and reasonable 2 Note dir must still establish that he acted in good faith, honesty, and fairness 2 Domination of subsidiary by parent courts look at the transaction to see if self-dealing has occurred.

Example Sinclair Oil I declaration of dividends shared pro rata was NOT self-dealing BJR applies ii contract between parent and sub was self-dealing apply intrinsic fairness test 3 Managers compensation I Ordinary corporations conflicts are inevitable but all firms need to set compensation.

The burden of proof is placed on challengers as a matter of convenience. ii Close corporations the income generated by the firm may be diverted to salaries, so there is an option for self-dealing by the parties in control to take tax-advantaged compensation in the form of salaries taxed once as opposed to dividends taxed twice . d Statutory Duties and Liabilities in addition to general duty of care, federal and state laws also impose certain duties and liabilities, e.g registration requirements under the Securities Act of 1933, liability for rule 10b-5 violations, liability for illegal dividends.

Some statutes also impose criminal liability on corporate managers for unlawful corporate actions.

C.OFFICERS 1.ELECTION officers are usually elected by the board of dirs. Some statutes permit election of officers by shs. 2.AUTHORITY OF CORPORATE OFFICERS liability of corp to outsiders only authorized officers can bind the corp. Authority may be actual expressed in bylaws or by valid board resolution , apparent corp gives third parties reason to believe authority exists , or power of position inherent to position . If ratified by the board, even unauthorized acts can bind the corp. a Authority of President the majority rule is that the president has the power to bind the corp in transactions arising in regular course of business. 3.DUTIES OF CORPORATE OFFICERS the duty of care owed by a officer is similar to that owed by dirs and sometimes higher . D.CONFLICTS OF INTEREST IN CORPORATE TRANSACTIONS. 1.DUTY OF LOYALTY because of their fiduciary relationship with the corp, officers and dirs have the duty to promote the interests of the corp without regard for personal gain. 2.BUSINESS DEALINGS WITH THE CORPORATION conflict of interest issues arise when a corp transacts business with one of its officers or dirs, or with a company in which an officer or dir is financially interested. a Effect of Self-Interest on Right to Participate in Meeting most statutes permit an interested dir to be counted toward quorum, and interested dirs transactions are NOT automatically voidable by the corp because the interested dirs vote was necessary for approval. b Voidability Because of Directors Self-Interest today, such transactions are voidable only if unfair to the corporation.

The burden of establishing fairness is on the interested director.

Note that a dirs failure to fully disclose material facts may be per se unfair. 1 Unanimous shareholder ratification if, after full disclosure, shareholder ratification is unanimous, the corp will be estopped from challenging the transaction with the interested dir except at to creditors . I Less-than-unanimous ratification courts then will look at whether the majority shares were owned or controlled by the interested director.

Courts are more likely to uphold ratification by a disinterested majority so as to preclude the transaction from being attacked by the corp or by a sh in a derivative suit. 2 Statutes most statutes provide that such transactions are NOT voidable if 1 approved, after full disclosure, by a disinterested board majority or by majority of shs, or 2 the transaction is fair to the corp notwithstanding disclosure. I Interested an interested dir or officer is one who has a business, financial, or familial relationship with a party to the transaction that would reasonably affect the persons judgment so as to adversely affect the corp. c Remedies the corp may rescind, or affirm and sue for damages. 3.INTERLOCKING DIRECTORATES generally, transactions between corps with common dirs are subject to the same rules of interested director transactions.

There is no conflict of interest if one corp is the wholly owned subsidiary of the other.

However, a question of fairness arises where the parent owns only a majority of the subsidiarys shares. 4.CORPORATE OPPORTUNITY DOCTRINE Also see duty of loyalty a Definition COD bars dirs from taking any business opportunity belonging to the corp without first offering it to the corp If the corp is unwilling to pursue an opportunity after an independent board is fully informed of the opportunity , then the dir may pursue it. b Defenses available in most, but not all jurisdictions 1 Inability If the corp is legally or financially unable to take the opportunity, then the dir generally may take advantage of it. But the question of who caused the financial inability is quite relevant.

Example Irving Trust Co the defense of inability was rejected . 2 Rejection, abandonment, or approval then the fiduciary has a valid defense. c Remedies constructive trust or damages the fiduciary must account to the firm for all the profits he has made as a result of usurpation. d Definition of a Corporate Opportunity 1 Line of business test does the firm have fundamental knowledge, practical experience, and ability to pursue the opportunity? If yes, then it is within the firms line of business.

It should be a natural fit, and not a mere desire by a firm to pursue the opportunity. 2 Interest expectancy test e Application Guth Rule and Corollary 1 Guth rule offered in corporate capacity if there is presented to O D a business opportunity which the corp is 1 financially able to undertake, which is from its nature 2a in the line of business and is of practical advantage to it OR 2b is one in which the corp has an interest or reasonable expectancy under an established corporate policy or plan , and, 3 by embracing the opportunity the self-interest of the dir will be brought into conflict with that of his corp, then officer or dir may NOT take the opportunity. 2 Guth corollary a safe harbor satisfy all provisions and dir can take if a business opportunity 1 comes to O D in his individual capacity and 2 is not essential to the corp and is 3 one in which corp has no interest or expectancy, then the O D can treat it as his own, IF he has not taken corporate resources to pursue the opportunity.

I Essential indispensably necessary to the continued viability of the firm ii Individual or corporate? Look at O D capacity to determine how offer was made 5.COMPETING WITH CORPORATION such competition by a dir or officer may be a breach of fiduciary duty even when the competing business is not a corporate opportunity 6.COMPENSATION FOR SERVICES TO THE CORPORATION the compensation plan must be duly authorized by the board, and its terms must be reasonable.

Good faith and the BJR ordinarily protect disinterested dirs from liability to the corp for approving compensation. a Publicly Held Corporations The SEC has authorized shs to make proposals about executive pay in managements proxy statements.

Further, the tax code now limits expense deductions for executive pay over 1mln, unless it is tied to the corps performance. b Past and Future Services compensation for past services is generally invalid.

Compensation for future services is proper if there is reasonable assurance that the corp will receive the benefit of the services.

VI.INSIDER TRADING purchase or sale of securities by someone with access to material nonpublic information.

It may be illegal. It affects corps with more than 1 mln in total assets and with at least 500 750 shs. a Who may be hurt by insider trading 1 Target shareholders they sell too early 2 Other arbitrageurs they lose a portion of the gain that they make from honest effort 3 Other issuers they lose confidence in the stock market 4 The acquiring company insider trading drives up their cost of acquisition, since the target may adopt defensive measures otherwise not in place. b Possible Sources of Liability 1 Common Law 2 10b-5 traditional 3 10b-5 misappropriation theory OHagan 4 Mail or wire fraud 5 14e-3 6 Statutory liability under 16 b insiders are forced to give their profits to the corp, if the y buy and sell securities within a 6-month period regardless of whether they are using insider info. Need to know 2, 3, 6 c OHagan insider trading violation where a partner in law firm took info rom his firm regarding the firms clients plans for acquisition of Pillsbury and used that info to buy shares in Pillsbury d Penalties For Insider Trading ITSA Insider Trading Sanctions Act 3 measures 1 Out-of-pocket measure if a sh buys a share for 10, while in fact it costs 9, his out-of-pocket expense is 1. 2 Causation-in-fact because an insider engaged in insider trading, it caused a loss 3 Disgorgement we look at Ds profit.

ITSA measures the damage to sh by the amount of profit that D received from the transaction. 2 SEC civil penalties treble damages SEC may seek penalty capped by three times profit gained or loss avoided.

A.COMMON LAW under the majority rule, there was no duty to disclose to the shs inside info affecting the value of shares.

Therefore, the protection of investors was very weak. a For lability to exist there should be 1 At least fraud or deceit upon purchasers 2 May also be a device or scheme 3 May also be an implied misrepresentation. b Two Elements relationship and unfairness 1 Relationship existence of a relationship giving access, directly or indirectly, to information intended to be available for a corporate purpose and no other. I Insiders include at least officers, dirs, controlling shs In re Cady Roberts ii Persons charged with confidentiality by contractual or fiduciary relationship 2 Unfairness inherent unfairness that results when a party takes advantage of such information knowing it is unavailable to person with whom he is dealing.

B.SECURITIES EXCHANGE ACT OF 1934 IN GENERAL the act superseded common law. Section 12 of the Act requires registration of any security traded on a national exchange, or any equity security held by 500 or more persons of a corp with assets exceeding 5 million.

C.SECTION 10 B AND RULE 10B-5 section 10 b prohibits any manipulation or deception in the purchase or sale of any security, whether or not its registered.

Rule 10b-5 prohibits the use of the mails or other instrumentality of interstate commerce to defraud, misrepresent, or omit a material fact in connection with a purchase or sale of any security. 1.COVERED CONDUCT rule 10b-5 applies to nondisclosure by dirs or officers, as well as to misrepresentations.

It applies not only to insider trading but also to any person who makes a misrepresentation in connection with a purchase or sale of stock. 2.COVERED SECURITIES rule 10b-5 applies to the purchase or sale of any security, registered or unregistered. a jurisdictional limitation requires that the violation must involve the use of some instrumentality of interstate commerce. 3.WHO CAN BRING SUIT UNDER 10B-5 private plaintiffs and the SEC. Private plaintiffs must be either purchasers or sellers of security. 4.MATERIALITY for rule 10b-5 to apply, the information misrepresented or omitted must be material i.e a reasonable sh would consider it important in deciding whether to buy or to sell . 5.FAULT REQUIRED SCIENTER a defendant is not liable under rule 10b-5 if he was without fault or merely negligent.

The scienter requirement is satisfied by recklessness or an intent to deceive, mislead, or convey a false impression.

Scienter is also required for injunctive relief. a Recklessness Defined 1 D knew the hazard and proceeded nonetheless subjective test 2 D proceeded despite what a reasonable person would perceive objective test b Recklessness Under PSLRA 1 Knowing conduct yields jointly and severally liable 2 Non-knowing conduct e.g recklessness yields fair share proportionate liability , found in accordance with special interrogatories. 6.CAUSATION AND RELIANCE a plaintiff must prove that violation caused a loss i.e he must establish reliance on the wrongful statement or omission . However, in omission cases, there is a rebuttable presumption of reliance once materiality is established. a Fraud On The Market where securities are traded on a well-developed market rather than in a face-to-face transaction , reliance on a misrepresentation may be shown by alleging reliance on the integrity of the market. b Face-to-Face Misrepresentations a plaintiff can show actual reliance in these cases by showing that the misrepresentation was material, testifying that he relied upon it, and showing that he traded soon after misrepresentation. 7.WHEN NONDISCLOSURE CONSTITUTES a VIOLATION a Mere Possession of Material Information generally, nondisclosure of material, nonpublic information violates rule 10b-5 only when there is a duty to disclose independent of rule 10b-5 b Insider Trading insiders dirs, officers, controlling shs and corporate employees violate rule 10b-5 by trading on the basis of material, nonpublic info obtained through their positions. They have a duty to disclose before trading. c Misappropriation the liability of noninsiders who wrongfully acquire misappropriate material nonpublic info has not been ruled upon by the US Supreme Court, although some lower level federal courts have imposed criminal liability. 1 Duty to Employer using the misappropriation theory, criminal liability under rule 10b-5 has been imposed where an employee trades on info used in violation of the employees fiduciary duty to his employer. An employees duty to abstain or disclose with respect to his ER does NOT extend to the general public.

However, the Insider Trading and Securities Fraud Enforcement Act of 1988 makes any person who violates rule 10b-5 by trading while in possession of material, nonpublic info liable to any person who, contemporaneously to the transaction, purchased or sold securities of the same class. Liability is limited to the defendants profit or avoided loss. 2 Mail and wire fraud the application of the federal mail and wire fraud statute to this situation lessens the importance of the misappropriation theory in imposing criminal liability under rule 10b-5. 3 Special rule for tender offers once substantial steps toward making a tender offer have begun, it is a fraudulent, deceptive, or manipulative act for a person possessing material information about the tender offer to purchase or sell any of the targets stock, if that person knows that the info is nonpublic and has been acquired from the bidder, the target, or someone acting on the bidders or the targets behalf. d Disclose or Abstain nondisclosure by a person with a duty to disclose violates rule 10b-5 only if he trades Cady rule 8.LIABILITY OF NONTRADING PERSONS FOR MISREPRESENTATION a nontrading corp or person who makes a misrepresentation that could cause reasonable investors to rely thereon in the purchase or sale of securities is liable under rule 10b-5, provided the scienter requirement is satisfied. 9.LIABILITY OF NONTRADING CORPORATION FOR NONDISCLOSURE the basic principle is disclose or abstain.

Thus, a nontrading corp is generally not liable under rule 10b-5 for nondisclosure of material facts. a Exceptions a corp has a duty to 1 Correct misleading statements even if unintentional 2 Update statements that have become materially misleading by subsequent events 3 Correct material errors in statements by others e.g, analysts report about the corp, but only if the corp was involved in the preparation of the statements and 4 Correct inaccurate rumors resulting from leaks by the corp or its agents. 10.TIPPEE AND TIPPER LIABILITY a person, not an insider, who trades on info received from an insider is a tippee and may be liable under rule 10b-5 if he received info through an insider who breached fiduciary duty in giving the info, AND the tippee knew or should have known of the breach Dirks a Breach of Insiders Fiduciary Duty whether an insiders fiduciary duty was breached depends largely on whether the insider communicated the info to realize the gain or advantage.

Accordingly, tips to friends or relatives and tips that are a quid pro quo for a past or future benefit from the tippee result in fiduciary breach.

Note that if a tippee is liable, so is the tipper. 11. TEMPORARY INSIDERS corporate info legitimately revealed to a professional or consultant e.g accountant working for the corp may make this person a fiduciary of corp 12.AIDERS AND ABETTORS liability cannot be imposed solely because a person aided and abetted the violation of the rule. 13.APPLICATION OF RULE 10B-5 TO BREACH OF FIDUCIARY DUTY BY DIRECTORS, OFFICERS, AND CONTROLLING SHAREHOLDERS. a Ordinary Mismanagement a breach of fiduciary duty not involving misrepresentation, nondisclosure, or manipulation does NOT violate rule 10b-5 b Misrepresentation or Nondisclosure if this is the basis of a purchase from or sale to the corp by a dir or officer, the corp can sue the fiduciary under rule 10b-5 and also for breach of fiduciary duty. If the corp doesnt sue, a minority sh can maintain a derivative suit on the corporations behalf. c Purchase or Sale By Controlling Shareholder when a corp purchases stock from or sells stock to a controlling sh at an unfair price, and material facts arent disclosed to minority shs, a derivative action may lie if the nondisclosure caused a loss to the minority shs. The plaintiffs must establish causation by showing that an effective state remedy e.g injunction was foregone because of nondisclosure. 14.BLUE CHIP RULE PRIVATE PLAINTIFF a plaintiff can bring a private cause of action only if he actually purchased or sold the relevant securities.

Sale includes an exchange of stock for assets, mergers and liquidations, contracts to sell stock, and pledges.

The SEC can bring action under rule 10b-5 even though it has neither purchased or sold securities. 15.DEFENSES a Due Diligence if a plaintiffs reliance on a misrepresentation or omitted fact could have been prevented by his exercise of due diligence, recovery may be barred.

Mere negligence does NOT constitute a lack of due diligence, although a plaintiffs intentional misconduct and his own recklessness if D was merely reckless will bar recovery. b In pari delicto a private suit for damages under rule 10b-5 will be barred if 1 The plaintiff bears substantially equal responsibility for the violations, AND 2 Preclusion of the suit would not significantly interfere with the enforcement of securities law. 16.REMEDIES a Out-of-pocket Damages this is the difference between the price paid for stock and its actual value. 1 Compare benefit-of-the-bargain damages these are measured by the value of the stock as it really is and the value it would have had if a misrepresentation had been true. 2 Standard measure of conventional damages out-of-pocket damages is the standard measure in private actions under rule 10b-5 benefit-of-the-bargain damages are usually not granted. b Restitutionary Relief this may be sought instead of conventional damages 1 Rescission returns the parties to their status quo before the transaction 2 Rescissionary or Restitutionary damages money equivalent of rescission 3 Difference between conventional damages and Restitutionary relief out-of-pocket damages are based on the Ps loss, while Restitutionary relief is based on the Ds wrongful gain. Rescission or Rescissionary damages may be attractive remedies when the value of the stock changed radically after the transaction.

However, Restitutionary relief is usually unavailable in cases involving publicly held stock. c Remedies Available to the Government although the SEC cannot sue for damages, it can pursue several remedies including special monetary remedies 1 Injunctive Relief the SEC often seeks injunctive relief accompanied with a request for disgorgement of profits or other payments that can be subject to criminal sanctions fines and jail sentences and civil penalties up to three times the profit gained or loss avoided . 17.JURISDICTION, VENUE, AND SERVICE OF PROCESS suits under 10b-5 are based on the 1934 Act, and exclusive jurisdiction is in the federal district courts.

State claims arising out of the same transactions may be joined with the federal claim under the supplemental jurisdiction doctrine.

Venue can be wherever any act or transaction constituting a violation occurred, or where the D is found or transacts business.

Process can be served where the D can be found or where he lives. 18.STATUTE OF LIMITATIONS the 1934 Act contains no SOL however, the SCt has held that private actions must be brought within one year after discovery of the relevant facts and within three years following accrual of the cause of action.

The tolling doctrine is inapplicable. a Exceptions the time limitations dont apply to all rule 10b-5 private actions, e.g SEC limitations period of five years for private suits by contemporaneous traders against purchasers or sellers who violate rules regarding trades while in possession of material, nonpublic information.

Further, the SEC is not subject to any limitations period in civil enforcement actions.

D.SECTION 16 OF THE 1934 ACT Section 16 concerns purchases followed by sales, or sales followed by purchases, by certain insiders, within a six-month period. 1.FIRMS AND SECURITIES AFFECTED UNDER SECTION 16 Section 16 applies to those firms and securities that must be registered under section 12 of the 1934 act. a Reason 16 a references registered securities under S12 S12 a and 12 g create the registration requirement for securities S12 g creates an asset 1 mln total and distribution 500 to 700 depending on timing 16 b references such officers, etc which refers to sub a b Note trading in all of a corps equity securities is subject to section 16 if any class of its securities is registered under section 12. 2.DISCLOSURE REQUIREMENT Section 16 a requires every beneficial owner of more than 10 of the registered stock and directors and officers of the issuing corp to file periodic reports with the SEC showing their holdings and any changes in their holdings. a Who is an Officer 16a-1f issuers president, principal financial director, principal accounting officer, any vice-president of the issuer in charge of a principal business unit, any other officer who performs similar policy-making functions for the issuer. 3.LIABILITY to prevent the unfair use of information, section 16 b allows a corp to recover profits made by an officer, dir, or more-than-10 beneficial owner on the purchase and sale or sale and purchase of its securities within a six-month period. a Coverage Section 16 b does NOT cover all insider trading and is NOT limited to trades based on inside info. The critical element is short-swing trading by officers, dirs, and more-than-10 beneficial owners. 1 Note beneficial owner must own 10 or more BOTH at he time of sale and purchase to be liable under 16 b . b Calculation of short-swing profit the profit recoverable is the difference between the price of the stock sold and the price of the stock purchased within six month before or after the sale. 1 Multiple transactions if there is more than one purchase or sale transaction within the six-month period, the transactions are paired by matching the highest sale price with the lowest purchase price, the next highest price with the next lowest price, etc. a court can look six month forward or backward from any sale to find a purchase, or from any purchase to find a sale c Who May Recover the profit belongs to the corp alone.

Although not a typical derivative action, if the corp fails to sue after a demand by a sh, the sh may sue on the corps behalf.

The cause of action is federal, so there is no posting of security requirement, and no contemporaneous sh requirement.

Remedy 1 All sales and purchases within 6 months are included 2 Damages calculated as to maximize the gain to he company 3 Match highest sale price against lowest purchase price within relevant period continue until you can go no further. d Insiders insiders are officers named officers and those persons functioning as officers , dirs actually serving or who authorized deputization of another , and beneficial owners of more than 10 of the shares.

Insider status for officers and dirs is determined at the time they made a purchase or sale. Transactions made before taking office is NOT within section 16 b , but those made after leaving office are subject to the statute if they can be matched with a transaction made while in office.

Liability is imposed on a beneficial owner only if he owned more than 10 of the shares at the time of both the purchase and sale. e Purchase or Sale this includes any purchase of stock.

Unorthodox transactions that result in the acquisition or deposition of stock e.g merger for stock, redemption of stock are also purchases and sales.

E.SECTION 16 B COMPARED TO RULE 10B-5 a Covered Securities Section 16 b applies to securities registered under the 1934 act rule 10b-5 applies to all securities. b Inside Information Section 16 b allows recovery for short-swing profits regardless of whether they are attributable to misrepresentations or inside info rule 10b-5 recovery is available only where there was a misrepresentation or a trade based on inside info. c Plaintiff recovery under section 16 b belongs to the corp, while rule 10b-5 recovery belongs to the injured purchaser or seller. d Overlapping Liability it is possible that insiders who make short-swing profits by use of inside info could be liable under both section 16 b and rule 10b-5. F.COMMON LAW LIABILITY FOR INSIDER TRADING insider trading constitutes breach of fiduciary duties owed to the corp, so the corp can recover profits made from insider trading a Common Law Liability Compared To Section 16 b Liability both common law and section 16 b liability run against insiders and in favor of the corp. However, unlike section 16 b , the common law theory applies to all corps not just those with registered securities , recovery can be had against any corporate insider, the purchase and sale is NOT limited by a six-month period, and the transaction must be based on the inside info. b Common Law Liability Compared to Rule 10b-5 Liability the theories of recovery are similar except that under the common law recovery runs to the corp not to the injured purchaser or seller , there is no purchaser or seller requirement, and noninsiders tippees have not yet been held liable.

VII.RIGHTS OF SHAREHOLDERS A.VOTING RIGHTS 1.RIGHT TO VOTE IN GENERAL shs may generally vote for the election and removal of dirs, to amend the articles or bylaws, and on major corporate action or fundamental changes. a Who May Vote the right to vote is held by shs of record as of the record date b Restrictions on Right shares may be either voting or nonvoting, or have multiple votes per share. 2.SHAREHOLDER MEETINGS generally, shs can act only at meetings duly called and noticed at which a quorum is present. a Compare informal action statutes permit sh action without a meeting if there is unanimous written consent of all shs entitled to vote. 3.SHAREHOLDER VOTING a Straight Voting this system of voting allows one vote for each share held and applies to all matters other than director elections, which may be subject to cumulative voting. Certain fundamental changes e.g merger frequently require higher shareholder approval. b Cumulative Voting For Director this system allows each share one vote for each director to be elected, and the votes may be cast all for one candidate or divided among candidates as the sh chooses, thereby helping minority shs to elect a dir. Cumulative voting may be mandatory or permissive. 4.VOTING BY PROXY a proxy authorizes another person to vote a shareholders shares. The proxy usually must be in writing, and its effective period is statutorily limited unless it is validly irrevocable. a Revocability a proxy is normally revocable by the sh at any time, although it may be made irrevocable if expressly stated and coupled with an interest in the shares themselves.

Absent written notice to the corp, the death or incapacity of a sh does NOT revoke a proxy. a sh may revoke a proxy by notifying the proxy holder, giving a new proxy to someone else, or by personally attending the meeting and voting. b Proxy Solicitation almost all shs of publicly held corps vote by proxy.

Solicitations of proxies are regulated by the Securities Exchanges Act of 1934 Section 14a, federal proxy rules and, in some cases, state law. Federal proxy rules apply to the solicitation of all proxies of registered securities, but NOT to nonmanagement solicitation of 10 or fewer shs. The term solicitation is broadly interpreted by the SEC to include any part of a plan leading to a formal solicitation, e.g inspection of shareholder list. 1 1992 amendments the SEC revised the proxy rules to make it easier for shs to communicate with each other.

Significant changes include a safe harbor for communications that dont involve solicitation of voting authority, relaxation of requirements involving broadcast of published communications, relaxed preliminary filing requirements for solicitations, and removing communications between shs concerning proxy voting from definition of solicitation. 2 Requirement of Full Disclosure the proxy rules require full and accurate disclosure of all pertinent facts and the identities of all proxy participants, disclosure of compensation paid to certain officers and dirs, and disclosure of conflict-of-interest transactions involving more than 60, 000. 3 Inclusion of Shareholder Proposal shareholder proposals must be included in corporate proxy materials if the proponent is a record owner or beneficial owner of at least 1 or 1000 worth of securities entitled to vote on the matter.

The proposal must not exceed 500 words.

I Exceptions a proposal need NOT be included if it is not a proper subject for shareholder action, would be illegal, is false or misleading, seeks redress of a personal claim, relates to operations accounting to less than 5 of the corps total assets and is not otherwise related to the corps business, concerns a matter beyond the corps power to effectuate, relates to ordinary business operations, relates to an election to office, is counter to a proposal submitted by the corp at the same meeting, is moot or duplicate, deals with the same subject matter as a very unsuccessful prior proposal, or relates to specific amounts of cash or stock dividends. ii Private right of action a private right of action is available to a sh whose proposal was rejected by the corp on the ground that it fails within one of the exceptions. iii Providing shareholder lists a sh has a right to obtain a list of shs or to have his communication included with the corporate proxy materials. 4 Remedies for violation of proxy rules these include suit by the SEC to enjoin violations or to set aside an election and individual suits, class actions, or derivative suits by the shs In a private suit, the P must show materiality and causation, but causation is normally presumed from materiality.

Fairness to the corp is NOT a defense to a violation of proxy rules . The court may rescind corporate action resulting from a misleading proxy solicitation or award damages. c Expenses Incurred In Proxy Contests corporate funds may be used by management with respect to reasonable proxy solicitation expenses incurred in order to obtain a quorum for the annual meeting or regarding controversy over corporate policy as opposed to a personnel controversy . The corp may, with sh approval, voluntarily pay the reasonable expenses to insurgents who win a proxy contest involving policy. 5.OTHER METHODS TO COMBINE VOTES FOR CONTROL CLOSE CORPORATIONS other methods include shareholder voting agreements which may be enforced by specific performance, agreements regarding greater-than-majority approval, shareholder agreements binding the discretion of dirs, and voting trusts.

B.RESTRICTIONS ON TRANSFER OF SHARES although most frequently used in close corps, stock transfer restrictions may also be imposed by larger corps e.g to restrict ownership to employees . The two most common types of restriction are a right of first refusal and a mandatory sell-buy provision. Restrictions must be reasonable and will be strictly construed. a Notice Requirements a lawful stock transfer restriction is of no effect unless noted conspi.