CORPORATIONS OUTLINE Spring 1991 Conceived by: Kell Bodholt & Jeff Alexander TABLE OF CONTENTS I.TYPES OF CORPS 1 II.INCORPORATOR 23B.02.010 1 A.23B.01.250 - FILING DUTY OF THE S OF S 1 B.23B.01.200 - FILING REQUIREMENTS 1 C.FILING FEES - 23B.01.220 - $175 2 D.SIGNIFICANCE OF FILING 2 E.WHEN DOES THE FILING BECOME EFFECTIVE - 23B.01.230 2 III.ARTICLES OF INCORPORATION 23B.02 3 A.A of I must set forth 3 1.CORPORATE NAME - 23B.02.020 (1)(a) 3 2.NUMBER OF SHARES THE CORP. IS AUTHORIZED TO ISSUE 23B.02.020 (1)(b) 4 3.STREET ADDRESS 23B.02.020 (1)(c) 5 4.CHANGING REGISTERED AGENT - 23B.05.020 5 5.SERVICE ON CORP - 23B.05.040 5 6.NAME AND ADDRESS OF EACH INCORPORATOR - 23B.02.020 6 C.AUTOMATIC RULES THAT WILL APPLY UNLESS THE A OF I PROVIDE OTHERWISE. - 23B.02.020 (3) 6 D.AUTOMATIC RULES THAT WILL APPLY UNLESS THE A OF I OR BYLAWS PROVIDE OTHERWISE - 23B.02.020 (4) 6 E.MUST SPECIFICALLY INCLUDE TO APPLY - 23B.02.020 (5) 7 F.MUST SPECIFICALLY INCLUDE TO APPLY - 23B.02.020 (6) 7 G.23B.02.020 (7) 7 H.IN GENERAL 7 IV.BYLAWS - 23B.02.060 8 V.MEETINGS 9 A.Organizational Meeting 9 1.23B.02.050 - ORGANIZATION OF CORPORATION 9 2.BOARD MEETINGS 9 a.23B.08.200 - MEETINGS AND ACTION OF THE BOARD 9 b.23B.08.210 ACTION WITHOUT A MEETING 9 c.23B.08.220 - NOTICE OF MEETING 10 VI.SHAREHOLDER MEETINGS 11 A.23B.07.010 - ANNUAL MEETINGS 11 B.SPECIAL MEETINGS 11 C.23B.07.030 - COURT ORDERED MEETINGS 11 D.23B.07.040 - ACTION WITHOUT MEETINGS 11 E.23B.07.050 - NOTICE OF MEETING 12 F.23B.01.410 - GENERAL NOTICE PROVISIONS 12 G.23B.07.060 - WAIVER OF NOTICE 13 H.23B.07.200 - SHAREHOLDER LIST FOR MEETING 13 I.23B.07.070 - RECORD DATE 13 VII.CORPORATE POWERS - ULTRA VIRES - 23B.03.010 15 B.GENERAL POWERS - 23B.03.020 15 C.23B.03.040 - ULTRA VIRES 15 D.Theodora Holding v. Henderson 16 1.IS MAKING A CHARITABLE CONTRIBUTION ULTRA VIRES? 16 2.WHAT DETERMINES THE REASONABLENESS OF A CHARITABLE CONTRIBUTION? 16 3.SHOULD A CORPORATION MAKE CHARITABLE DONATIONS AT ALL? 16 VIII.PROMOTOR LIABILITY 19 A.WHAT IS A PROMOTOR? 19 B.Two General Questions 19 C.SIGNATURE OF THE PROMOTOR 19 D.PROMOTOR LIABILITY 19 E.DOES THE PROMOTOR HAVE A RESPONSIBILITY TO THE CORP? TO SH? 20 IX. DEFECTIVE INCORPORATION 22 A.23B.02.040 - LIABILITY FOR PRE-INCORPORATION TRANSACTIONS 22 X.PIERCING THE CORPORATE VEIL 24 A.In General 24 B.REASONS TO MAKE THE S/H LIABLE 24 C.THEORIES TO PIERCE UNDER TORT AND CONTRACT 24 D.TO WHAT EXTENT CAN YOU LIMIT CORPORATE LIABILITY 25 XI.SHARES 29 A.In General 29 B.EQUITY OWNERSHIP 29 C.ISSUING SHARES AND JUNK 29 XII.RESTRICTIONS OF TRANSFERABILITY OF SHARES 33 A.23B.06.270 - RESTRICTIONS OF TRANSFERABILITY 33 XIII.DISTRIBUTIONS 35 A.TO DETERMINE IF A DISTRIBUTION WOULD HAPPEN, LOOK @ THE TIME OF TRANSACTIONS - REDEMPTION 35 B.23B.06.400 - DISTRIBUTIONS TO SHAREHOLDERS 35 C.Protection/Defenses of B of D - 23B.08.300 - General 35 D.Types of Distributions 35 E.HOW TO FORCE A DIVIDEND PAYMENT 35 XIV.DEBT/EQUITY FINANCING 38 XV.23B.06.300 SHAREHOLDERS PREEMPTIVE RIGHTS 41 A.In General 41 B.23B.06.300 S/H Preemptive Rights 41 C.WHY DO YOU GET PREEMPTIVE RIGHTS IN THE FIRST PLACE? 41 D.Katzowitz v. Sidler 41 E.Book Value per share only matters at dissolution. 41 XVI.QUORUM AND VOTING 44 A.23.B.07.250 - QUORUM AND VOTING FOR SHAREHOLDERS 44 B.VOTING AGREEMENTS - 23B.07.310 44 C.VOTING TRUSTS - 23B.07.300 44 XVII.ELECTING DIRECTORS 46 A.23B.08.030 - NUMBER AND ELECTION OF DIRECTORS 46 B.MAJORITY/STRAIGHT VOTING 46 C.CUMULATIVE VOTING 46 D.FORMULA FOR CUMULATIVE VOTING 46 E.HOW TO MAKE CUMULATIVE VOTING WORTHLESS 46 F.REMOVAL OF DIRECTORS - 23B.08.080 46 XVIII.PROXIES 50 A.23B.07.220 - PROXIES 50 B.Ho to dispose of proxy 50 C.Proxies last 11 months 50 D.23B.07.240 - CORP. ACCEPTANCE OF VOTES 50 E.Auger v. Dressel 50 F.Salgo v. Matthews 50 XIX.DEADLOCK 52 XX.AUTHORITY OF DIRECTORS & OFFICERS 55 XXI.DIRECTORS 56 A.23B.08.300 - GENERAL STANDARDS FOR DIRECTORS 56 B.23B.08.320 - LIMITATION OF LIABILITY OF DIRECTORS 56 C.23B.08.010 - REQUIREMENT FOR AND DUTIES OF BOARD OR DIRECTORS 57 XXII. OFFICERS 58 A.23B.08.400 - OFFICERS 58 1.Officers are described according to the bylaws or appointed by B of D in accordance with the bylaws. 58 2.23B.08.410 - DUTIES OF OFFICERS 58 3.Officer are agents of the corp. therefore, agency principles apply. 58 4.Under 23B.01.400(21) Secretary 58 5.An officer can appoint more officers 58 6.23B.16.010 - CORPORATE RECORDS 58 7.Black v. Harrison; Lee v. Jenkins; In re Drive-In Corp 58 8.23B.08.420 - STANDARDS OF CONDUCT FOR OFFICERS 58 XXIII. BUSINESS JUDGMENT RULE 60 A.In General 60 B.BJR - A JUDICIALLY CREATED PROCEDURAL RULE 60 C.BJR - Forms a Rebuttable Presumption 60 D.The BJR DOES NOT APPLY TO: 60 E.23B.08.010 - REQUIREMENTS FOR AND DUTIES OF THE B OF D. 60 F.23B.08.250 - Creation of a Committee 61 G.Litwin v. Allen 61 H.Shlensky v. Allen 61 I.Smith v. Van Gorkum 61 J.Three Scenarios in Dealing with the BJR 61 K.Analysis 62 L.S/H Remedies 62 XXIV. SELF DEALING 64 A.In General 64 B.BJR DOES NOT APPLY TO SELF-DEALING TRANSACTIONS 64 C.ANALYSIS - 23B.08.700(1) CONFLICTING INTEREST & 23B.08.710 JUDICIAL ACTION 64 D.S/H REMEDIES - HOW TO VOID OUT THE SELF-DEALING TRANSACTION 65 XXV. CORPORATE OPPORTUNITY 67 A.In General 67 B.Guth v. Loft 67 C.Minnesota - Miller Test 67 D.Oregon - Klinicki Test 67 E.DAMAGES - REMEDY 68 F.ANALYSIS 68 I. TYPES OF CORPS A. For-Profit - must make an election as to which type of corp you want. (must meet the specific requirements of the IRS code to elect one.) 1.S-Corps - Corp. not treated as an individual. Tax consequences run through to the S/H on a pro rata basis. 2.C-Corps - Tax liability falls upon the corp., not the individual S/H. Chapter C of the IRS Code governs. 3.Partnerships - not a person for tax purposes. Liability flows through to the partners as in S- corps. B. Not-For-Profit C. Militia D. Co-ops E. Banks and Insurance companies F. Professional Service Corps II. INCORPORATOR 23B.02.010 (DEF): anyone can be an incorporator (must be 18 year of age) by delivering A of I to the S of S. A. 23B.01.250 - FILING DUTY OF THE S OF S - if a document delivered to the office of the S of S for filing satisfies the requirements of 23B.01.200 the S of S shall file it - must meet 23B.01.200 1.What is filing? a.The S of S files it stamping or endorsing "file" plus; b.Name, Official Title and date of filing. (1)Stamped = day month & year (2) Original & copy c.Original remains with the S of S as a public document. (1)the copy is forwarded to the domestic or foreign corp or its representative. B. 23B.01.200 - FILING REQUIREMENTS 1.The documents filed must meet the requirement of Articles of Incorporation under 23B.02.020. 2.The document must contain information required by this title or other information as well. 3.Document must be typewritten or printed and legible, or other standard that may be required by the S of S. 4.Must be written in English. a.must executed by: (1)Chairperson of the B of D. (2)President (3)Officers (4)Or an incorporator if the corp has not been formed or there are no directors. (5)If in receivership, by the receiver, trustee or court appointed fiduciary. b.The person executing shall: (1)sign and opposite the signature the name and the capacity in which he is signing. c.May contain: (1)corporate seal (2)attestation by the secretary (3)acknowledgment, verification, or proof d.under 23B.01.210 - must comply with the form if supplied by the S of S. e.Must deliver the original and one copy or conformed copy (duplicate originals no longer required) C.FILING FEES - 23B.01.220 - $175 D. SIGNIFICANCE OF FILING 1.Corporate existence begins on the date of the filing of the A of I. 23B.02.030. 2.Filing of A of I in CONCLUSIVE PROOF that the incorporators have satisfied all conditions precedent to incorporation, except in a proceeding by the state to cancel\revoke incorporation or involuntarily dissolve the corp. E. WHEN DOES THE FILING BECOME EFFECTIVE - 23B.01.230 1.Except as provided in (2), Document is effective on the date filed by the S of S and at the time on that date specified on that document. a.If no time is specified then the document is effective at the close of business on the date it was filed. 2.If delayed effective time and date, then effective on the date specified. If no time is specified on that date then it will become effective on the close of business on that day. a.Delayed effective date may not longer than 90 days after the date filed. 3.If documents are in order the A of I become effective and relate back to the receiving date. Note: One day turn around service - delivery of documents to the S of S. Deliver to Oly. for expedited review for a fee. ***RELATED ISSUES*** Defective Incorporation Promoter Liability Dissolution-articles achieved by fraud? III. ARTICLES OF INCORPORATION 23B.02 A. A of I must set forth: 1.CORPORATE NAME - 23B.02.020 (1)(a) a. must contain the word "corporation", "incorporated", "company", "limited" or the abbreviation. Ltd., Co., Inc., Corp. 23B.04.010 (1) (a) b.must not contain language stating or implying that the corp is organized for a purpose other that those permitted by 23B.03.010 and its A of I. c.must not contain any of the following words: "bank", "banking", "banker", "trust", "cooperative", or combination of the words "industrial", and "loan", or any combination of any 2 or more words "building", "savings", "loan", "home", "association", and "society", or any other words or phrases prohibited by statute. d.must be distinguishable upon the records of the S of S - must be distinguishable in a linguistic sense. Can't be deceptively similar. (1)Ask for 3 names (2)S of S will look at domestic corps and foreign corps to make sure it qualifies to do business in the state. (3)may exclusively reserve a name for 180 days 23B.04.020. PATTERN ANSWER - REGISTERED NAME Under 23B.04.020 (1) foreign or domestic corporations may register their names in Washington to preserve its corporate identity in the state. __________ has/has not properly reserved the name under 23B.04.020(1). Such name registrations are subject to an annual renewal. All corporate names must be distinguishable on the face of the S of S records. Here it is/is not proper as: 1. Was/was not properly renewed. 2. Was/was not distinguishable on the face of the records of the S of S. Here.... PATTERN ANSWER - IMPROPER NAME - DOES THE ACT APPLY The fact that ___________ is included in the corporate name raises the issue of whether the Washington Business Corporations Act applies. 23B.040.010 (1) (c) holds that _____ is not a proper name for the corporation. If ____ is included in the name then the corporation is not properly governed by this act. PATTERN ANSWER - RESERVATION OF NAME The fact that _________ has attempted to reserve its name with the S of S raises the issue of Corporate Name Reservation. 23B.04.020 (1) allows a corporation to reserve a name for 180 days (6 months) before incorporation. Here, the _____ name has/has not been properly reserved as ________ . Therefore it is/is not reserved for its exclusive use. 2.NUMBER OF SHARES THE CORP. IS AUTHORIZED TO ISSUE 23B.02.020 (1)(b) a.A of I must prescribe the class of shares and the number of share in that class. (1)23B.06.030 "issued" and "outstanding" = in the hands of the shareholder (a)issued shares are outstanding until reacquired, redeemed, converted or canceled. (b)authorized shares are both issued (sold) and outstanding (not sold yet) authorized = issued (2)"authorized & unissued" = in the hands of the corp. (3)Convertible Stock - can be changed from one class to another (a)mandatory - B of D can convert at any time (b)S/H at election of (majority) to change class. (c)convertible classes must have something in common w/ each other name, description but other differences. (4)Promotional Stock (a)O.K. in Wa.-governed by state securities laws. (b)Price can't be more than 15% less than the normal sales price. (c)Must disclose this to those paying full price. (d)Includes any stock issued for anything. (e)This includes all stock for consideration other than cash or promissory notes. The purpose is to protect people paying cash. (f)Some corps have amended A of I to eliminate "par." Others still have effect. If you don't pay the price- the creditors can come and get it. (5)Terms of Classes or Series - 23B.06.020 (a)A of I provide the B of D determines the right limitations of the class of share before issuance. (b)One or more series within a class must designate the number shares within that series before issuance. *ask if we need to know about classes and series of shares. PATTERN ANSWER - SHARES The fact that the articles do not include the number of shares that the corporation is authorized to issue raises the issue of proper incorporation. 23B.02.020 (1)(b) requires that such information be included in the articles of incorporation. Here, the articles do not mention this, thus they are faulty. (See Defective Incorporation if not properly done.) 3.STREET ADDRESS 23B.02.020 (1)(c) Street Address of the corporations initial registered office and name of initial registered agent at that office, pursuant to 23B.05.010; a.office must be at the specific geographic location - must have a street address -no p.o. box numbers. b.office doesn't need to be connected with the actual business of the corp. c.A registered agent may be: (1)Individual residing in the registered office. (2)A domestic corp or a not-for-profit domestic corp whose business office is the registered office. (3)Foreign Corp or a not-for-profit foreign corp authorized to conduct business in this state whose business office is the registered office. (4)Must consent to being a registered agent and filed with S of S. PATTERN ANSWER - STREET ADDRESS OF REGISTERED AGENT The fact that the article do not contain the street addresses and name of the registered agent raises the issue of proper incorporation. 23B.02.020 (c) specifically requires that such information be included. Post office boxes are not acceptable. This is mandatory information. As the A of I do not include such information, they are faulty. ( See Defective Incorporation if not) 4.CHANGING REGISTERED AGENT - 23B.05.020 a.must file change with the S of S. 5.SERVICE ON CORP - 23B.05.040 a.Service & notice is made upon the registered agent. b.If no agent or unascertainable then the S of S serves as an agent. (standard is reasonable diligence is the standard). PATTERN ANSWER - SERVICE ON A CORPORATION - S OF S AS AGENT Generally service on a corporation is had upon its registered agent. But where, as here, the plaintiff can show (1) the failure to appoint a registered agent; (2) the failure of the registered agent to maintain an office; or (3) that the registered agent could not be found with reasonable diligence, the S of S may be used as a agent for service. Here... Thus, service was/was not proper 6.NAME AND ADDRESS OF EACH INCORPORATOR - 23B.02.020 (1)(d). a.Must be in accordance with 23B.02.010 B.A of I or the bylaws must either specify the number directors or specify the process by which the number of directors will be fixed unless the A of I dispense w/ a B of D under 23B.08.010. - THIS IS MANDATORY. 23B.02.020 (2) PATTERN ANSWER - Mandatory Provisions for A of I The fact that the A of I do not include ______ raises the issue of proper incorporation/defective incorporation. 23B.02.020 (1), (2), set out mandatory information that is to be included in the articles. Here, the corporation was not properly incorporated ___________ (list part missing) Was not included in the articles. Such information is mandatory required by statute. C. AUTOMATIC RULES THAT WILL APPLY UNLESS THE A OF I PROVIDE OTHERWISE. - 23B.02.020 (3) 1.B of D may adopt bylaws effective only in emergencies. 2.Every corp has the purpose of engaging in any lawful business under 23B.03.010. 3.A corp has perpetual existence under 23B.03.020. 4.Corp has the same powers as an individual to carry out the business affairs under 23B.03.020. D. AUTOMATIC RULES THAT WILL APPLY UNLESS THE A OF I OR BYLAWS PROVIDE OTHERWISE - 23B.02.020 (4) 1.These are rules that will automatically apply unless the Bylaws or the A of I provide otherwise. PATTERN ANSWER: - AUTOMATIC UNLESS SPECIFICALLY OMITTED The fact that ________ is not included in the articles/bylaws of incorporation raises a question of whether such a requirement is proper. Under 23B.02.020 (5), (6), (7) is or is not an optional provision in the bylaws/articles. (+) 23B.02.020 ____ specifically states that ____ is appropriate. It is thus a proper requirement. (-) _______ is not specifically authorized by 23B.02.020. It may not be proper. E. MUST SPECIFICALLY INCLUDE TO APPLY - 23B.02.020 (5) 1.Theses must specifically be put into the A of I to apply. 2.23B.02.020 (5)(c) - any provision under the A of I that is not contrary to law. 3.23B.02.020 (5)(d) - any provision under this title or permitted to be set forth in the bylaws = optional - may contain the same things as the bylaws. F. MUST SPECIFICALLY INCLUDE TO APPLY - 23B.02.020 (6) 1.These must be put into the A of I or Bylaws to apply. a.Restriction on the transfer or registration of tranfer of the corps shares. b.S/H's may participate in a meeting of S/H's by any means of communication by which all persons participating in the meeting can hear each other. 23B.07.080. c.A quorum of the B of D may consist of as few as 1/3 of the number of directors under 23B.08.240. G. 23B.02.020 (7) 1.The articles of incorp. need not set forth any of the corp. powers enumerated in this title. H. IN GENERAL 1.A of I control over Bylaws 2.Must have 2/3 approval of S/H to change the A of I. 3.Generally, the Bylaws can be changed by the B of D. 4.A of I are public records, bylaws are not ***RELATED ISSUES*** Bylaws Incorporation Defective Incorporation IV.BYLAWS - 23B.02.060 1.Incorporators or B of D shall adopt initial bylaws for the corp. 2.A of I or Bylaws must either specify the number of directors or specify the process by which the number of directors will be fixed, unless the A of I dispense with the B of D pursuant to 23B.08.010 3.AUTO PROVISION - Unless A of I/Bylaws provide otherwise a corporation is governed by the following provisions. 23B.02.060 (3) (a-l). 4.Bylaws may provide any provision not in conflict with law or A of I for managing the business and regulating the affairs of the corporation, including but not limited to the following ... 5.Bylaws may also include information detailed in 23B.02.020 (4), (6). Unless otherwise provided in the A of I/Bylaws, a corporation is governed by 23B.02.020 (4), (6). 6.It can make a difference where you put things a.A of I can only be changed if 2/3 of S/H agree. b.Bylaws can be changed at any time by the B of D. (1)If you don't want things easily changed then put things in A of I. c.A of I are filed with the S of S - a public document. d.Bylaws are not filed with anyone. e.The two work in tandem ***RELATED ISSUES*** Articles of Incorporation 23B.02.020 (4), (5), (6). V. MEETINGS A. Organizational Meeting 1.23B.02.050 - ORGANIZATION OF CORPORATION a.What is Done? (1)Within 90 days after the date the A of I were filed the initial directors meet: (a)Appoint Officers (b)Adopt Bylaws (c)Open Bank Accounts (d)Appoint CPA (e)Approve Contracts. (2)In minutes "resolved" means an action taken. 2.BOARD MEETINGS a.23B.08.200 - MEETINGS AND ACTION OF THE BOARD (1)May hold regular meetings ( or special ) in or out of state. 23B.08.200 (1). (2)Regular Meetings (a)held on a regular basis - The bylaws set forth the time for regular meetings - usually meets once quarterly. (3)Special Meetings (a)Other than regular meetings (b)Don't have to be in the same room, city, or country to hold a meeting. i)23B.08.200 (2) - must be able to hear each other during the meeting. (deemed present) b.23B.08.210 ACTION WITHOUT A MEETING ( in a closely held corporation ). (1)Unless provided otherwise by A of I, or Bylaws; (a)Must have all members of the board (b)Must be by one or more written consents describing the action taken. (c)Signed by each director before or after. (d)Deliver to the corporation for inclusion into the minutes/corporate records. (2)Why Unanimous? (a)No discussions (b)Not applicable where a meeting occurred (c)unanimous written consent = meeting (3)Action is effective when the last director signs the consent unless a later date is specified. (4)Consent = meeting vote (5)Can withdraw consent if done before the last consent form is received. c.23B.08.220 - NOTICE OF MEETING (1)23B.08.220 (1) - Unless the A of I or Bylaws provide otherwise, Regular Meetings may be held without notice of time date place or purpose. (2)23B.08.220 (2) - Unless otherwise provided by A of I/Bylaws Special Meetings must be preceded by at least two days notice of date, time, place of meeting. Purpose does not have to be specified. (a)Thus, actually three days because you don't count the meeting day. VI. SHAREHOLDER MEETINGS A. 23B.07.010 - ANNUAL MEETINGS 1.Shall hold an annual meeting at a fixed time & date according to bylaws. 2.In or out of state at a place stated in or fixed in accordance with bylaws. a.If no place is stated, then at the corps principle office. 3.Failure to hold meetings does not affect the validity of any corp. act. a.It is probably mandatory. "Shall hold" doesn't mean clearly mandatory. If meetings are not held then there is no real consequences. B. SPECIAL MEETINGS a.Any meeting other than an annual meeting (1)Must be specifically called 1.23B.07.020 - SPECIAL MEETINGS a.On the call of the B of D or those by A of I or bylaws. b.10% of S/H votes may demand a meeting at a specific date, time and place. C.23B.07.030 - COURT ORDERED MEETINGS 1.Court may order a meeting a.On application of any S/H. b.Who signed a demand for a special meeting under 23B.07.020 if: (1)Notice of the meeting was not given 30 days after the demand. (2)The special meeting was not held in accordance with the demand. 2.May also try a Writ of Mandamus = compels performance of duties of administrators. a Legal not an Equitable Writ. a.Asking them to execute their duties does not address discretionary conduct. b.Mandamus may have no authority - must be a ministerial / technical act. D. 23B.07.040 - ACTION WITHOUT MEETINGS 1.Action permitted to be taken at S/H meetings may be taken without a meeting if taken by all S/H entitled to vote (this a unanimous provision). 2.Action must be; a.Evidenced by one or more written consents describing the action taken. b.Delivered to the corp. for inclusion in the minutes. 3.Record date is the date the first S/H signs the consent. 4.Consent may be withdrawn only by providing a written notice of withdrawal before all consents are received by the corp. 5.Action is effective when all consents are received by the corp. unless a later effective date is specified. 6.THIS CONSENT HAS THE EFFECT OF A MEETING. 7.Written notice of the proposed action, containing the same material must be sent to nonvoting S/H at least 10 days before the action is taken. E. 23B.07.050 - NOTICE OF MEETING 1.S/H must be notified of ("shall give notice") of; a.Date b.Time c.Place d.Of annual and special meeting. e.Not fewer than 10 nor more than 60 days before but if (Four Fundamental Changes); (1)Amending A of I. (2)Merging or share exchange. (3)Sale of assets or (4)Dissolution (a)Not fewer than 20 days nor more than 60 days. 2.No purpose statement required unless the act or A of I requires it. 3.Notice of Special Meetings must include description of purpose. 4.Unless bylaws require otherwise Special S/H meetings adjourn to a different date, time or place need not be given if given before adjourn. Must be given to effect a new record date under 23B.07.070. F. 23B.01.410 - GENERAL NOTICE PROVISIONS 1.Must be in writing for S/H meeting but oral notice of director's meeting is o.k. 2.Written notice may be transmitted by; a.Mail b.Private carrier or personal delivery. c.Wire or Fax. d.Publication in newspaper of general circulation if the other are impractical. e.Oral notice may be communicated by telephone, if impractical by TV or radio. 3.Notice is effective when mailed with first class postage, prepaid, deposited. Addressed to the S/H's according to current corp. records. 4.Except as provided by (3), notice is effective at the earliest of the following; a.When received. b.5 days after deposit in mail as evidenced by the post mark. 5.Date on return receipt if registered or certified mail. 6.Oral notice effective when communicated if comprehensible. 7.If 23B.01.410 or A of I/bylaws provide otherwise then the above requirements govern. G. 23B.07.060 - WAIVER OF NOTICE 1.May waive before or after meeting. a.Waiver must be in writing, signed by the S/H and delivered to corp. for inclusion in minutes. 2.Attendance is a waiver of lack of notice unless an objection is raised at the beginning of the meeting. 3.Waives consideration of matters not in notice unless objection is raised prior to its discussion. H. 23B.07.200 - SHAREHOLDER LIST FOR MEETING 1.S/H of record = registered S/H. 2.Corp. must maintain a list of S/H showing as of record date. a.List must contain; (1)Names on the record date who are entitled to notice. (2)Arranged by voting group with in each, by class or series of shares and show address, and number of shares held by each S/H. b.Must be available for inspection. c.Corp. owes responsibility only to registered S/H's. I. 23B.07.070 - RECORD DATE 1.Bylaws can set any date to determine who the record S/H are and the notice they get - a cut off date. This is an arbitrary decision. 2.If not otherwise fixed under this section, or under a court ordered meeting (23B.07.030). The record date is the day before notice is sent for the meeting. 3.Ownership for notice purposes. a.Registered ownership (1)Only one required to be recognized by the corp (owner listed on certificate). b.Beneficial ownership (1)Transfer provisions for stock are on the back of a certificate. (2)You are the beneficial owner if it is transferred on the back before you send the share and before you are sent a new one to become the record owner. (3)Most people who ;pay the market never become record owners - takes 6-8 weeks to change. PATTERN ANSWER - SHAREHOLDER'S MEETINGS/NOTICE/ELIGIBILITY The fact that ______ wants to call a special/regular meeting raises the issue of PROPER NOTICE/ELIGIBILITY ____. Thus ____ can bring an action against ____ for ____. ***RELATED ISSUES*** Voting & Sub issues Quorum VII. CORPORATE POWERS - ULTRA VIRES - 23B.03.010 A. Any lawful purpose can be the purpose. A of I don't need to say any thing about the purpose unless they want to narrow the purpose. 1.May want to narrow to maintain the focus of the corp. 2.Can't operate or enter into binding contracts beyond the scope of A of I. 3.Common law defense to disaffirm contracts or actions by the corp. a.Places the affirmative burden with those dealing with the corp. to check the corporate charter to insure power is authorized. b.Look at the statement of purpose in the A of I. (1)Ultra vires is a concept that can never focus on illegal activity. B. GENERAL POWERS - 23B.03.020 1.Corp has perpetual duration and succession in corp. name. 2.Unless A of I provides otherwise, every corp. has the same power as an individual. 3.What about an ultra vires act? a.A lawful act which is unauthorized by the A of I. b.SELF-IMPOSED RESTRICTION (1)Applies only where there is a narrow statement of purpose in the A of I. 4.Not all unreasonable acts are ultra vires, but all ultra vires acts are unreasonable. a.If something is ultra vires, you never get to the question of reasonableness. b.If not ultra vires, then you can look at the question of reasonableness. 5.Damages - in equity a.Injunction b.An accounting. C. 23B.03.040 - ULTRA VIRES 1.An ultra vires action can only be challenged by; a.Proceeding by the S/H against the corporation to enjoin the act. (INJUNCTION). b.Proceeding by the corporation directly or derivatively or through a fiduciary agent (trustee/receiver) an incumbent or former director, officer, employee or agent of the corp. c.Proceeding by the Atty. General under 23B.14.300, Judicial Dissolution. Failure to pay tax, S/H, Director deadlock, obtained articles by fraud, by a creditor, voluntary dissolution proceeding. D. Theodora Holding v. Henderson 1.IS MAKING A CHARITABLE CONTRIBUTION ULTRA VIRES? a.No but double check your A of I for authority. b.Unless specifically forbidden by the A of I, then every corp. can make charitable contributions. c.Purposes = A of I. (1)Purpose goes to how you make the money. Purpose statements are positive not restrictive. d.Powers = bylaws. (1)Power goes to how you spend money and how you make it. Powers are positive, unless the place limits on the powers it has. (2)Ultra vires goes to purposes not power. e.23B.03.020(2)(o) allows donations for the public welfare, or charitable, scientific or educational purposes. (1)Therefore, they are not ultra vires. 2.WHAT DETERMINES THE REASONABLENESS OF A CHARITABLE CONTRIBUTION? a.IRS guideline if > 5% of gross income you will lose the tax deduction. b.Cost-benefit ratio: What is the cost-benefit to the corp. by making the donation? 3.SHOULD A CORPORATION MAKE CHARITABLE DONATIONS AT ALL? a.Corps. owe responsibilities to 4 groups; (1)Shareholders (fiduciary) (2)Society (a)Exchange for a relaxation of ultra vires. (3)Consumers. (4)Employees. ***RELATED ISSUES*** Articles of Incorporation Business Judgment Rule PATTERN ANSWER - DEFENSE OF ULTRA VIRES The fact that ___ is a corporation whose purpose under the articles is ___ and contracted with ____ to ____ raises the issue whether ___ was acting ultra vires. The injured party may seek to apply ultra vires as a means of recovering damages or avoiding the contract. Ultra vires action occurs when the corporation acts beyond the purposes of its charter; when the purposes clause is narrower than the activities actually engaged in by the corp. According to 23B.03.010, corporations may be organized for any lawful purpose except banking or insurance. In addition according to 23B.03.010 the articles shall set forth the purpose(s) for which the corp. is organized. Under 23B.03.040 no act of a corporation and no transfer of property to or by a corporation shall be invalid by reason of the fact that the corporation was without capacity or power to do such an act or engage in such transfer except; (1) In an action by a S/H to enjoin if all the parties to the contract are before the court and if the court deems the proceeding equitable. The court may then set aside and enjoin the performance of the contract and allow compensation for loss or damage sustained by either party, (2) By the corporation directly or through S/H in a derivative suit against the incumbent or former officers or directors of the corp.; in such a situation the transaction stands, but the officer/director may be held personally responsible for damages, (3) In an action brought by Atty. Gen. to dissolve the corp. or to enjoin the corp. from the transaction of unauthorized business. Here...and state whether ___ has a cause of action to keep corp. from doing such again. PATTERN ANSWER - ULTRA VIRES/CHARITABLE CONTRIBUTION The fact that ___ corporation made a charitable contribution to another corp. raises the issue of ultra vires. Ultra vires action occurs when a corp. acts outside its purpose stated in the articles. The powers provision of 23B.03.020(2)(o) gives the corp. the power to make donations for the public welfare or for charitable, scientific, or educational purposes. This can be limited by the articles according to 23B.03.010, but the statute by itself does not limit the amount to be donated. Under 23B.03.020(2)(a) a corp. power to act may be challenged in a proceeding by a S/H against the corp. to enjoin the act. Here, an ultra vires argument may be made to enjoin the corp. from donating. However, ultra vires usually will not work because of a general purposes statement in the articles. Here... The court will next look to the reasonableness of the donation. Theodora v. Henderson. In evaluating the reasonableness of the donation the court will determine; (1) if the donation was in the best interest of the corp., (2) will balance the cost to the corp. v. benefit incurred. Here... The decision of the board whether to make the donation will be protected by the Business Judgment Rule, unless the complaining party can show the directors breached their fiduciary duty in violation of 23B.08.300, the donation will stand. The court will look whether the board acted in; (1) good faith, (2) in a manner the director reasonable believes to be in the best interest of the corp., (3) with such care including reasonable inquiry, as a ordinarily prudent person in a like position would use in similar circumstances. Here... In addition 23B.08.300(2) provides the board is entitled to rely on information, reports, opinions or statements, including financial statements prepared or presented by; (1) officers, employees whom the director believes to be reliable and competent (inside corp); (2) counsel, CPA's, etc.. as to matters as the director believes to be with in such persons professional or expert competence (outside corp.); (3) a committee of the board of directors of which the director is not a member if the director reasonably believes the committee merits competence. Here, ___ has a cause action against ___. ___ could argue that the cost to the corp. giving a donation to __ out weights the benefits of the tax deduction, good will, societal benefits, etc...and that the donation was unreasonable violating the directors standard of care under 23B.08.300. Also the directors first obligation is to pay dividends to S/H's since the corp. is in business for profit to insure S/H's have a return of their investment. VIII. PROMOTOR LIABILITY A. WHAT IS A PROMOTOR? 1.A person who acting alone or in conjunction with one or more persons, directly or indirectly takes initiative in founding and organizing the business or enterprise of an issuer. B. Two General Questions 1.How can the promotor avoid personal liability? 2.For those who are dealing with a promotor, how to ensure payment, how and from who? a.There are two time periods to consider: (1)Before the Corp is formed and; (2)After the corp is formed. C. SIGNATURE OF THE PROMOTOR 1."On Behalf of the corp to be formed" By: ________________________________ a.The specific agency language may vary - be sure to say that the corp. is not yet formed but will be. D. PROMOTOR LIABILITY 1.Doctrine: Promotor is personally liable, unless the promotor affirmatively establishes; a.Contracting party knows that the corp does not yet exist (no misleading). b.Promotor must show that the contracting party agreed to look solely to the corp for performance, not to the promotor. 2.TO BE SURE IN AVOIDING PROMOTOR'S LIABILITY, PUT IN THE CONTRACT THAT THE SELLER AGREES TO LOOK SOLELY TO THE CORP IN ORDER TO AVOID PERSONAL LIABILITY. a.This establishes intent. b.NEED A SPECIFIC MANIFESTATION THAT THE SELLER TO THE CORP. WILL LOOK SOLELY TO THE CORP IN ORDER TO AVOID PERSONAL LIABILITY FOR THE PROMOTOR c. Must shoe affirmative evidence of this. 3.IN THE PRE-INCORPORATION PERIOD, THE PROMOTOR IS PERSONALLY LIABLE ON ALL CONTRACTS UNLESS THE PROMOTOR CAN SHOW THAT THE SELLER AGREED TO LOOK SOLELY TO THE CORPORATION FOR PERFORMANCE. a.The burden is on the promotor to prove this b.This is essentially an extension of an offer to the corp after it is formed. (1)Therefore if you are a seller be careful on delivery until the corp has accepted (2)If you deliver and therefore is rejected you have problems. (3)Cannot lock a corporation into an agreement until it is formed c.Generally, part of being a promotor is agreeing to personal liability. 4.WHAT IF THE CORP ACCEPTS THE OFFER? a.By adding on the corp. to the K, the promotor is off the hook. (1)Seller must agree to let the promotor off the hook - must be a novation. (2)Most sellers most likely will not agree to let go of the personal liability of the promotor. (a)Remember the 75% failure rate 5.HOW TO PREVENT PERSONAL LIABILITY OF THE PROMOTOR? a.Set-up corp adequately as possible - can always amend A of I later if unclear. b.If formed, question of agency and authority - See Directors and Officers infra. E. DOES THE PROMOTOR HAVE A RESPONSIBILITY TO THE CORP? TO SH? 1.TWO VIEWS - NOT IRRECONCILABLE a.Frick v. Howard - Promoters owe a fiduciary duty to future creditors and S/H. (1)Must give the corp the benefit of the bargain - otherwise fraud b.Promoters owe a duty to the initial S/H only. (1)When you anticipate future S/H then you owe a duty to them too. (2)This does not include future creditors. c.Look at the time when they came in.. (1)Were the S/H worried about the transaction when they bought into it? If so, then they are probably liable to future S/H. ***RELATED ISSUES*** Incorporation Defective Incorporation PATTERN ANSWER - PROMOTERS LIABILITY The fact that _______, a promotor, entered into a contract with _______ before the corporation was properly formed raises the issue of promoters liability. A promotor is a person who, acting alone or in conjunction with one or more other persons, directly or indirectly takes initiative in founding and organizing the business or enterprise of an issuer. According to Stanley v. Boss, a promotor, though he may assume to act on behalf of the projected corp and not himself, will be personally liable to third parties when signing on behalf of a corp not yet formed even the contract will benefit the corp. The only way the promotor can escape liability in this context is for him to show; (1) the plaintiff agreed to look solely to the new corp for payment, (2) the promotor did not have any duty toward the plaintiff to form the corp and give the corp the opportunity to assume and pay the liability. The burden is on the promotor to show that the contracting party looked solely to the corp. The court will look to the contract to look to the contract to see what the parties intended. In so doing, the court will consider the fact that the corp. did not exist and had no capacity to enter into the contract. Accordingly, when it comes into existence it is an "offer" which the corp may or may not accept. In addition, the plaintiff will contend that the promoters signature manifests the intent to hold the promotor liable because of his representative capacity. However, the promotor has not represented anyone because there is no one to represent. (promotor: is not a contract, but merely an offer if supported by reasonable time and consideration) A subsequent formation of a corp and acceptance of contract does not relieve the promotor of his liability under the contract. Rather, the corp and promotor are jointly and severally liable. Quaker Hill v. Parr. However, a promotor can be released from liability by novation. Here, both the corp and the third party must agree to let the promotor off the hook. If the promotor assumes to act for a corp without the authority to do so, he shall be liable for all debts and liabilities arising thereof. 23B.02.040. PATTERN ANSWER - DUTY OF PROMOTOR TO SUBSEQUENT SHAREHOLDERS ________ may bring an action against ________ for breach of fiduciary duty to subsequent S/H. A promotor owes a fiduciary duty to the corp. which he is forming. Frick v. Howard. However, there is a split in authority as to whom this fiduciary duty extends. In Old Dominion v. Lewisohn, the court held that their was not duty to subsequent S/H if the transaction was carried out on the basis of full disclosure. In Old Dominion the court held if it is anticipated at the time of transaction, there would be additional S/H, then the fiduciary duty extends. (This view stresses uniformed S/H brought in after wrong has been perpetrated). (Go through the Self Dealing Analysis): (1) Fiduciary duty; (2) Promotor is on both sides of the transaction; (3) Full disclosure, and; (4) Fairness. Here.... IX. DEFECTIVE INCORPORATION A. 23B.02.040 - LIABILITY FOR PRE-INCORPORATION TRANSACTIONS 1.All persons purporting to act as or on behalf of a corp, knowing that there was no incorporation, are jointly and severally liable for liabilities created while acting except for any liability to any person who also knew that there was no incorporation. a.How signed is important in this analysis: (1)Promoters Signature By: /s/ John Morey Maurice On behalf of a corp to be formed (2)Dummy's Signature By: /s/ Seanna Crowley President 2.In order to avoid personal liability you MUST ACT IN GOOD FAITH AND WITHOUT KNOWLEDGE THAT THE CORP DOES NOT YET EXIST BECAUSE OF FAULTY ARTICLES ETC. a.But if you know that there is no corp and you act like there is one you are jointly and severally liable. ***RELATED ISSUES*** Incorporation Promotor Liability PATTERN ANSWER - DEFECTIVE INCORPORATION The fact that ________ (something wrong in the incorporation process) raises the issue of whether the corp. exist to shield _______ from joint and several liability for _______. Under 23B.02.030 filing of A of I is conclusive evidence that the corp exists. The corp. comes into existence only when approved by the S of S. If an individual or group of individuals assumes to act as a corp. before the certificate has been issued, joint and several liability attaches. The certificate of incorporation provides the cut-off point; before it is issued the individuals and not the corp are liable for any debts incurred as a result thereof. Robertson v. Levy; 23B.02.040. According to this statutory provision you either have a corp or you don't. Protection under de facto and incorporation by estoppel have been eliminated. Thus, a different result in Washington because the language of the statute, "except for any liability to any person who also knew that there was no incorporation." (Look to see what the plaintiffs knew; was there an attempt to organize in good faith; was the person misinformed; what was the client told by the attorney). Here.... (Remember if you have a statutory scheme to eliminate de facto/estoppel. Person still has a chance togo toe equity. Protection extended to those acting in good faith & w/o knowledge) * Therefore, the person acting on behalf of the corp. being formed should wait until period of risk is over before entering into transactions on behalf or the corp. (Remember, if it is a de jure corp., all elements have been met; a corp in law. Once it exists, the state can only challenge its existence. X. PIERCING THE CORPORATE VEIL A. In General 1.S/H liability is limited to the amount of the investment. Some arguments might say that the corp is an agent for the S/H who are the principles. This is an agency end-run - not a piercing move. (going around the veil rather than through it) a.Only responsibility is to pay the price for the shares. Once paid the stock is fully paid and non-assessable. 23B.06.220 infra. b.Piercing the corporate veil removes the limited liability status of the S/H. 2.Tough Burden - by a preponderance 3.Under capitalization is stronger in tort - policy reason B. REASONS TO MAKE THE S/H LIABLE - courts allow three situation for which the corp entity may be disregarded. 1.Contract a.a consensual agreement 2.Tort a.not a consensual arrangement] b.not investigated prior to the incident c.probably easier to pierce here because of absence of consent. d.the policy is that the tort feasor should be responsible for their own negligence. 3.Government Agency Policy a.not actually a piercing move, the government is just refusing to recognize corp. existence. C. THEORIES TO PIERCE UNDER TORT AND CONTRACT - cumulative effect is best 1.Under capitalization or Inadequate Capital Contribution. a.Under capitalization or inadequate capitalization is only effective where there is a requirement that the corp be adequately capitalized. b.There is no such requirement in Wash. Thus, not enough in Wash. 2.Compliance with Corporate Formalities = ALTER EGO a.Corp has a distinct existence outside of its S/H. b.Failure to comply will result in a piercing. c.Happens where you cannot tell the difference between the roles. (1)Can't tell where the individual responsibility end and where the corporate responsibility picks up. d.If no distinction is drawn then the court will not draw a distinction to protect you. e.Beware of a sole proprietorship 3.What about bad management? a.Not sufficient by itself, a part of the risk you take. 4.Single Shareholder? a.Insufficient by itself, but if acting unreasonably, the court will look at it more closely. 5.Fraud, deceit, misrepresentation, and siphoning funds = Intentional Misconduct/Active Misconduct? a.A reason for under or inadequate capitalization. b.This is sufficient to pierce alone - the only one (1)Go after those S/H who caused the problem = Active S/H. (a)Probably the officer and directors (2)The passive S/H are protected as there is not active participation in the bad acts - no active misconduct. 6.Negligence a.When sole proprietors incorporate and continue to run their business as if it were a sole proprietorship. They refuse to run the business through the corporate entity (remember Maurice's Farm Story) (1)Must separate personal business from the corporate business - ALTER EGO (2)Must observe the corporate formalities as far as meetings etc. (3)The actions by one not observing these formalities can make that person personally liable. If they don't make the distinction the court will not do it for you. 7.JMM - the only real way to argue a tort is policy consideration, not by contract - see Consolidation Argument. infra. D. TO WHAT EXTENT CAN YOU LIMIT CORPORATE LIABILITY - Consolidation Argument - A TORT ARGUMENT Walkovsky v. Carlton Tort Case (against public policy) 1.Get all of the assets under one corp 2.Analysis - tie together a.stock ownership b.management operations c.purposely trying to limit the liability by limited assets of each individual enterprise. (1)Insulating the ownership d.In limited basis in a publicly held corp. e.To avoid sale put a "stop transfer" order on the records w/ the court f.Look to the transfer cert. to see who the transfer agents are. PATTERN ANSWER - PIERCING THE CORPORATE VEIL According to 23B.06.220, a purchaser from a corporation of its own shares is not liable to the corporation or its creditors w/respect to the shares except to pay the consideration for which the shares were authorized to be issued. Thus, a corporation is an entity, separate & distinct form its officers & stockholders, & its debts are not the individual indebtedness of its stockholders. Piercing the corporate veil is an equitable doctrine that forces limited liability status to give way in order to hold S/H's individually liable for corporate obligations. Equity allows for 3 situations. in which the corporate entity may be disregarded: contracts, torts, governmental agency policy. Here...(state which situation is present & go through on of the following analyses). (1) Contracts: There must be a compelling reason for equity to do way w/ the public policy of the legislature in allowing limited liability. In the contract area, nobody is forcing you to enter into a contract w/ the corp. and you know it is a limited liability vehicle so therefore to pierce the corp. veil, you must show a combination of things; a.Inadequate capitalization or under capitalization: This fact, standing alone is not a basis for S/H liability, since there is not minimum capital requirement in the act. No one forced the party to contract w/ a corp, a limited liability vehicle according to public policy. Thus, the party must be able to show that there was active misconduct. Bartle v. Home Owners. It is up to the contracting party to investigate the financial situation of the corp. b.Fraud, Misrepresentation, Deception & Illegality: An example includes officers & directors who are S/H's siphoning money; unauthorized distribution. This argument is much stronger. No Ct. would say this is not a grounds for piercing. However, distinguish this from bad management, which standing alone is not enough. (Look for siphoning of funds). (Fraud combined w/ bad management is sufficient.) c.Alter Ego Standing alone, if the officers, directors & S/H's are all the same people, will not give rise to piercing. However, each must recognize the different roles of each. Thus, the privilege of limited liability is only available if the corp. follows formalities. However, if any individual fails to separate his funds from the corporations, the court will most likely pierce. Failure to follow court formalities is sufficient conduct to pierce. (Alter Ego conveys the idea that you are mixing all the rules together; if done with fraud, you will pierce. Negligence may justify). Look for failure to follow minimum standards of drawing distinctions; did they maintain separate entities and distinctions. If you do not operate as a corp and make that distinction, why should anyone else hold the corp out as such. 2. Torts In this situation, piercing is more likely to be used by an equity court since there is no voluntary dealing by the injured third party. There are also compelling policy reasons for doing so: Injured parties should be made whole, Strict Liability and Products Liability etc. Also, one should look to the legislature to get their opinion on the matter. Look at the policy considerations. Here.... (a)Consolidation (Single Enterprise Theory): Here, a plaintiff may argue that when separate corps are under common ownership they should be treated as a single enterprise and the plaintiff should be allowed to recover from the parent co. For tax purposes the corps file consolidated tax returns. In Walkovsky v. Carlton, the plaintiff attempted to use this theory, but the court failed to apply it due to failure to state a claim upon which relief may be granted. [12(b) (6)]. Argue: Pooling the assets of the separate corps in order to make the plaintiff whole, outweigh the public policy of limited liability. On paper separate corps, but in practice really one entity. In reality, for operating purposes pooled everything. Based on the foreseeability of harm, good possibility that harm will incur. (Policy question: To what extent should it be allowed to use a corp when there is a likelihood of injury.) 3. Government Agencies Government may disregard the corp entity at their whim. The question is not piercing the corp veil but whether the statutes or regs will recognize the corp. If corp is formed is formed for a legitimate purpose, properly formed and operated as a corp, the government cannot refuse to recognize its existence. The government will recognize a corp set up merely as an income shelter to get SS benefits. However the IRS can look to what she receives to determine if it is reasonable. Stark v. Flemming;Roccograndi v. Unemployment Comp Board. The government will not recognize for unemployment benefits when the corp lays off in rotation. Remember Main Reasons For Piercing: (1)Under Capitalized and Alter Ego. (2)Fraud through act of misconduct; and (3)Fact which outweigh policy of limited liability * If the corp under the common ownership of at least 80% - all of separate entity considered as 1 single consolidating tax return. XI. SHARES A. In General 1.Share/Stock v. Securities a.Shares/Stock (1)Refers to equity only (2)Ownership in corp. (3)Corp law b.Securities (1)Federal/State security law. (2)Includes equity (shares) and debt) 2.Where do corps get operating funds? a.Internal sources (1)Profits (2)Capital Contributions b.External Sources (1)Equity - shares (2)Debt - borrow $. (a)From S/H - gives the S/H a secured interest. If the corp fails, the S/H becomes a creditor and in a better position to that $ than to her investment. (b)Institutions (3)Debentures, Promissory notes & bonds 3.Types of Shares a.Common designation b.Preferred Designation c.Must name, designate & describe each class in a closely held corp - a rare thing. B. EQUITY OWNERSHIP 1.23B.01.400 (22) - SHARES = the units into which the proprietary interest in a corp are divided. 2.23B.01.400 (2) - AUTHORIZED SHARES = the shares of all classes of a domestic or foreign corp is authorized to issue. 3.A mandatory content of the A of I is the number of share authorized to be issued - 23B.02.020 (b). C. ISSUING SHARES AND JUNK 1.Washington Statute for Shares in a corp a.23B.06.010 - AUTHORIZED SHARES (1)A of I must prescribe the classes of shares and the number of shares of each class that the corp is authorized to issue. (a)Must give a DISTINGUISHING DESIGNATION (a name) - must describe the characteristics of each class i)Preferences ii)limitations iii)relative rights iv)for a series a)a division of a class b)a time designation (2)A of I must either (a)one class to have unlimited voting rights or (b)a class to have the right to the net assets on dissolution of the corp. (3)Differences between different classes and series (a)Voting rights may vary i)election of directors ii)amend by A of I iii)Types of other issues to be voted on (b)Type of stock that may be redeemable (corp buys back the stock) types of redemption - specified in A of I. i)corp has absolute right to redeem: S/H forces corp to buy it back ii)For cash iii)designated amount b.23B.06.030 - ISSUED AND OUTSTANDING SHARES (1)empowers the corp to issue an inventory (2)issuing = initial sale (3)"issued & outstanding" = shares that have been issued (4)Unissued = those that are still on the shelf (5)Amend A of I to make more stock c.23B.06.210 - ISSUANCE OF SHARES (1)Powers granted to the B of D may be reserved to the S/H by the A of I. (2)Issuance of shares must be authorized by the B of D. (a)Must be issued for consideration: i)Tangible or Intangible Property a)Goodwill = the value of a business beyond FMV of its assets. (The ultimate intangible property) ii)Cash iii)Promissory Note iv)Services Already performed v)future services vi)Issue benefit to the corp: a)makes a charitable contribution of shares which benefits the corp. b)trouble figuring out the value of intangible gifts. vii)New act changes the focus a)eliminates all reference to price b)eliminates making a determination of FMV. (3)Requires that the B of D decide adequacy in good faith. (a)Want more good faith -FMV is a judgment call. (b)Adequacy is easier to determine. (c)A conclusive determination. (d)Limits the attack on the amount. i)Really can only challenge whether the determination of adequacy was done in good faith. (e)Valuation of intangibles is tough i)May have to justify in the future. ii)Ways to value; a)Use future services to make-up a deficiency. b)Price + value + good faith = adequacy. (4)When a promissory note is used, the shares can be placed in escrow until the note is paid. (a)A great deal of flexibility. (5)Fully paid and nonassessable? 23B.06.210(5) = liability language. (a)Assessable means that those who levy the assessments can ask for more. (b)Nonassessable means that you don't have to pay anymore. d.23B.06.220 - LIABILITY OF SHAREHOLDERS - a S/H is only liable to the extent that he paid for the stock and no more. e.23B.06.250 - CERTIFICATES (1)Need not be represented by a "certificate". See 23B.06.250. (2)Required minimum info on certificate (a)Name of issuing corp. (b)Name of person to whom issued. (c)Number and class of shares and series designation. (3)Requires summary of future issuances, services. (4)Each certificate must be; (a)Signed, manually of facsimile. (b)Bear the corp. seal or facsimile. f.23B.06.260 - SHARES WITHOUT CERTIFICATES - Unless otherwise provided, (1)A letter, a written representation of the 23B.06.250 info is sufficient - keep the letter! (2)Written notice of 23B.06.250 info to S/H. PATTERN ANSWER - ISSUANCE OF SHARES Under 23B.06.210 the power to issue shares may be reserved to the S/H/s in the articles. However, this is an optional provision & if it is not specifically stated in the articles, the powers granted in 23B.06.210 will be given to the directors. Here... (Assuming Directors): Thus, any issuance of shares must be authorized by the B of D. Shares may be issued for consideration consisting of any tangible property (real or personal) or intangible property (acquiring good will, trademark, copyright, patent). According to 23B.06.210 (2) consideration may also consist of a benefit to the corp. including cash, promissory notes, services performed, K's for services to be performed... Under 23B.06.210 a good faith determination by the B of D that the consideration received or to be received for the shares to be issued is adequate is conclusive as it related to the validity of the shares issued, & if they are fully paid & non assessable. Hence, if made in good faith, it is conclusive in terms of the adequacy of consideration. This section gives flexibility to the directors because the valuation of intangibles (good will)is a difficult thing. "Fully paid & nonassessable" relates to the fact that the only responsibility the S/H has is to pay the price set. This is critical to the concept of limited liability. The S/H's risk is paying for the stock. XII. RESTRICTIONS OF TRANSFERABILITY OF SHARES A. 23B.06.270 - RESTRICTIONS OF TRANSFERABILITY 1.Restrictions may be placed on registration and transfer of shares by; a.The A of I. b.Bylaws. c.Shareholder agreement (between S/H themselves or between S/H and corp.) 2.Restrictions do not effect shares issued before restriction was adopted unless, holders of the shares are parties to the restriction agreement or voted in favor of the restriction. 3.Valid if its existence is noted on the front or back of the certificate in a conspicuous location or contained in the information statement required by 23B.06.260(2). a.23B.01.400(3)-""Conspicuous" means so written that a reasonable person against whom the writing is to operate should have noticed it. eg., printing in italics, boldface or contrasting color, or typing in capitals or underlined is conspicuous. 4.Reasons for restrictions a.Maintain the corp status when it is dependant on the number or identity of its S/H (closely held). b.Preserve exemptions under federal or state securities laws. c.For any other reasonable purpose. 5.Restrictions may; a.Require the S/H to first offer to the corp. b.Obligate the corp to acquire them. c.Require approval form the corp before transfer. d.Prohibit any transfer if not manifestly unreasonable. 6.Notes: ARE THE RESTRICTIONS REASONABLE a.Where there is not statute governing the courts fill in. b.Restrictions must be reasonable. c.Restrictions must be disclosed. (1)Origination. (2)Can be imposed by federal & state securities law. (3)By S/H agreements (4)By corp. and S/H together. (5)In the context of a closely held corp. 23B.06.270. (a)Can arise in a limited basis in a publicly held corp. (6)To avoid sale put a "stop transfer" order on the records w/ the court. (7)Look to the transfer cert. to see who the transfer agents are. PATTERN ANSWER - STOCK TRANSFER RESTRICTIONS The fact that ___ wants to enforce a stock transfer restriction raises the issue of the validity of the stock transfer restrictions. The A of I, bylaws, an agreement among S/H's, or an agreement between S/H's & corp. may impose restriction on the transfer or registration of transfer of shares of the corp. 23B.06.270(1). To determine the validity of the restrictions, one must determine whether the restriction is reasonable. (or fits into specific reasonable category of 23B.06.270(3) -> to maintain the corp's status when it is dependent on the # or identity of its S/H's). S/H's must have notice of the restriction. Thus, the restriction must be noted conspicuously on the front or back of the certificate. 23B.06.270(2). (Remember, conspicuous is defined as that which is written that a reasonable person against whom the writing is to operate should have noticed it - > italics, boldface, contrasting color, capitals, underlined 23B.01.400(3). Under 23B.06.270(4) a restriction on the transferor registration of transfer of shares may: (1) Obligate the S/H to offer the opportunity to acquire restricted shares to the corp; (2) Obligate the corp.to purchase; (3) Require prior approval by directors, officers or S/H's & will be upheld if not manifestly unreasonable. (4) Can restrict transfer of shares to designated persons. XIII. DISTRIBUTIONS A. TO DETERMINE IF A DISTRIBUTION WOULD HAPPEN, LOOK @ THE TIME OF TRANSACTIONS - REDEMPTION B. 23B.06.400 - DISTRIBUTIONS TO SHAREHOLDERS 1.The B of D may make distributions to S/H. 2.But no distributions if; a.Making the distribution would result in an inability to pay corp. debts as they become due. (1)Insolvency = no access to assets. b.Can't make a distribution of liabilities would exceed assets. 3.B of D may base their determination on financial statements based on accounting principals and principals that are reasonable or on a fair valuation or other reasonable method. C. Protection/Defenses of B of D - 23B.08.300 - General Standards for directors. 1.Acted in Good Faith. a.Test for Bad Faith - is the policy of the directors dictated by their personal interests rather than the corp. welfare? 2.Acted w/ reasonable information in making the decision - See Business Judgment Rule infra. D. Types of Distributions 1.Dividends 2.Liquidations. 3.Distribution of stock 4.Redemption of stock. E. HOW TO FORCE A DIVIDEND PAYMENT 1.Show that the director has violated his statutory duty to pay a dividend in the absence of a legitimate business interest. The IRS may help by looking at excessive compensation under IRS Code 162. ***RELATED ISSUES*** Business Judgment rule. PATTERN ANSWER - CORPORATE DISTRIBUTIONS The fact that ___ corporation made ___ distributions to S/H's raises the issue of corporate distributions. According to 23B.06.400, subject to restriction by the articles of incorp & the limitation in (2), a B of D may authorize & the corp may make distributions to its S/H's. No distribution may be made if, after giving it effect,either (2a) the corp. would not be able to pay its debts as they become due in the usual course of business; or (2b) the corp's total assets would be less than the total sum of its liabilities (plus the amount which would be needed to satisfy any S/H's preferential rites in liquidation were the corp. to liquidate at the time of the distribution. Here... According to Gottfried v. Gottfried, a B of D cannot refuse to pay dividends if the money available unless they act in good faith & have legitimate business interests for doing so. (Approx. to pay debts, expansion, etc.) However, a non- employee S/H will contend that the director, has violated his statutory duty to pay a dividend in the absence of a legitimate business interest. Look to sue for excessive compensation that directors paid to themselves. (IRS mite help in looking at reasonableness -> excessive compensation not allowed as deductions under IRC 162). If compensation is proved as excessive, it must be returned to the corp., not to S/H. The Ct. will then characterize as a constructive dividend, which in turn entitles you to your proportional share. Although Cts. are reluctant to substitute its judgment for the B of D, they will do so if its is established that the B of D didn't act inaccord. w/statutory standards, or exercise of reasonable judgement. Argue active intention to deny dividends. However, according to the BJR, it is presumed that the directors acted in good faith, in the best interests of the corp. & w/such care as a prudent person in a like position would use under similar circumstances. Thus, it is incumbent on the injured party to show that the directors violated their standard of care under 23B.08.300. (Look for whether policy of director's is dictated by personal interests rather than the corp. welfare or look for self-dealing). (Argue freeze-out - > reducing level of stock you own, or since no market then you are trying to persuade us to sell dirt cheap. No one wants to come into a minority position.) Self-Dealing: personal transaction w/ corp. & you serve on board.not void, but subject to scrutiny should have arms length dealing because your on both sides. Argue: Ct. can come in and substitute its judgment. Dodge v. Ford Motor Co., directors did not make reasonable business decision, did not exercise indep. business judgment they were mere pawns. Ask: Did directors act reasonable in making decision, not if the decision itself was reasonable. Does not matter if you would reach a different decision. This gave the ct. entry -> foul up at directors level. Benefits to directors themselves via. salaries, bonus, violated fid. relationship to S/H's as a whole. (good faith, fair dealing, reasonable care, indep. judgment, no conflict of interest and full disclosure). Directors salary increased while dividends decreased (if all salaries held for the last years level, may be the ct.would hold differently.) The board has a statutory responsibility to use indep. judgment and reasonable care. It owes this duty to all S/H's. XIV. DEBT/EQUITY FINANCING A. Debt = take out loans 1.Equity a.Capital Contributions in exchange for equity in the corp. 2.Inexperienced corps generally go to the investors a.Those who buy stock are creditors too. b.Not necessarily in the same percentage. c.Better to be in the position of a secured S/H. This is a way of protecting yourself. 3.Leverage = borrowing money to buy a corp at a high rate of interest and look to the corp to generate cash sufficient to pay the loan back. B. LOOKS LIKE DEBT, BUT ARE THEY TREATING IT AS A DEBT? 1.VALID OR INVALID DEBT? a.Interest payments on loan payments are generally deductible. The IRS will determine if it is a valid debt. b.The IRS will disallow the interest deduction if it is deemed invalid debt. c.Return of capital is not taxable to the S/H lender, thus there are tax advantages for the lender as well. d.The IRS may characterize the payment as contribution to capital on the equity side. C.  385 IRC(b) - FACTORS TO BE CONSIDERED IN DETERMINinG: 1.Debt a.A written unconditional promise to pay - looks like debt. b.On demand or a specified date of payment c.Consideration/sum certain @ a fixed rate of interest - almost like a negotiable instrument. 2.Equity a.Is the debt subordinated to other debt - i.e., Secured? (1)Is there a reasonable expectation of repayment? (2)In not - probably not a debt (3)Is there a preference for this debt above others? 3.DEBT/EQUITY RATIO a.Equity = the amount of money received plus after tax earnings b.Debt = how much money borrowed c.Is there a reasonable expectation that the corp can carry the debt load? i,e., does it have sufficient equity to have a reasonable expectation of paying off the debt? A RED LIGHT! (1)Acceptable ratios vary from industry to industry. d.Must look to the IRS like a smart loan that the corp took out. 4.ARE BOTH THE BORROWER & CREDITOR TREATING THE TRANSACTION LIKE A DEBT? (1)Demand for payment..... a.Problems can arise where S/H are creditors also (1)If the demand for payment is met then O.K. b.When the corp only pays the loan when the money is available then it looks like a dividend and not a loan. c.RISK OF BUSINESS STANDARD - S/H place their money in a corp (investment) at the risk of the business. Lenders, on the other hand, will seek a more reliable return. ***RELATED ISSUES*** The Business Judgment Rule PATTERN ANSWER - DEBT/EQUITY FINANCING There are usually tax advantages for noncorporate S/H's to lend a portion of their investment to the corp rather than to contribute it outright. Interest payment on debt are deductible by the borrower whereas dividend payments on equity securities are not. Further, repayment of a debt is non- taxable return of capital while a purchase or redemption of equity securities by the corp. may be a fully taxable dividend. When a S/H lends a portion of his investment to the corp. he is in effect reserving the option of recovering this portion tax free at some later date if the corp is successful. The fact that ______ wants _______ to be classified as a _______ rather than ________ raises the issue of financing characterization. Slappery Drive ; Obre Alban Tractor Co., listed factors to be considered in discerning whether financing is debt or equity. The court should look at the following factors: Both parties must treat the loan as a debt: (1) Is the transaction in the form of a valid loan, as distinguished from a capital contribution. (2) Was there a promissory not w/ interest? Debt is an unconditional promise to repay on demand or specified date and at a fixed rate of interest. (3) Even if it looks like debt, how are they in fact treating the transaction? a. are payments made regularly. In Slappery, the principles wanted payment when they had the money to pay - this was not debt. (4)Debt/Equity Ratio = The mathematical ratio between a corps liabilities and S/H equity. If there is no likelihood of being paid then it is probably not debt but will be consider capital contribution. Significance of the ratio: the greater the equity, the greater the likelihood it will be repaid. If the corp had greater debt than equity then it is what is known as a "thin corp". (5) Is debt subordinate so far to other corp. debt, that there is no reasonable expectation of getting paid? - The debt may be tied to the ultimate success of the corp. But the interest must be generally paid every month irrespective of whether corp is succeeding. Is it so subordinated - OR - Is there a preference over other debt. Must be a reasonable loan. Remember The corp would rather get loans that stock purchases because interest payments on loans are deductible, dividend payment are not. Ask Is the challenged transaction a contribution to capital masquerading as debt? Argument in Slappery The transactions were in substance capital contributions: (1) Would a normal investor undertake risk for so limited a return? Here... (2) Failure to insist that corps pay the interest; (3) Corp. books reflected contributions as $ _______ paid in capital and $ ________ paid in surplus. (Remember nothing wrong with selling land to a corp, but if you sell, you must treat as a bona fide sale.) (4) When a corp contributor seeks no interest, it becomes clear compensation, what he seeks is equity interest; share of the profits or the rise in value of his share holdings. (5) Here, individuals sought payments of principle or interest only when corp's had plenty of cash. Obviously they did so because they were more concerned with their share holdings rather than being creditors. (6) Conduct belies any intention to structure affairs as parties to debt transaction. Here, the parties intended to structure their relationship in a manner placing funds at prolonged risk of the business; they intended decisions whether to pay/receive money according to decision usually associated dividend distributions. To the extent that intent is relevant, it favors equity classification. Counter - Here, the intended structuring occurred with the type arrangement that qualifies for taxation as debt. The actual manner not the form qualifies as debt. XV. 23B.06.300 SHAREHOLDERS PREEMPTIVE RIGHTS A. In General 1.Inherent Property Rights. Give the S/H the opportunity to purchase newly issued shares in order to maintain ownership in the same percentage that they held before the sale or issue. 2.Under 23B.02.020(3)(l) - Auto Provision that unless A of I provide otherwise, a S/H has and may waive a preemptive right to acquire the corps unissued shares as provided in 23B.06.300. B. 23B.06.300 S/H Preemptive Rights 1.Unless the A of I provide otherwise, the S/H havepreemptive rights. (must be specifically omitted by the A of I). 2.S/H may waive the preemptive right if in writing then irrevocable. 3.No preemptive rights with respect to: a.Shares given for services rendered b.Conversion, consideration other than cash c.Shares issued pursuant to initial plan of financing d.Shares sold otherwise than for money C. WHY DO YOU GET PREEMPTIVE RIGHTS IN THE FIRST PLACE? 1.A part of your ownership rights 2.Can be taken away by the A of I or by amendment of A of I. a.Only prospective operation b.Now it is a statutory right - not inherited (1)can be limited or eliminated c.Remember you need 2/3 of S/H to amend the A of I. d.No preemptive rights to S/H not paying cash D. Katzowitz v. Sidler 1.1/3 ownership in stock of the several corps that tare owned over 25 years - old friends fighting - Katzowitz didn't want to issue 50 more shares. So, he losses. See below 2.Katzowitz 5 + 0 = 5 Sidler5 + 25 = 30 Lasker5 + 25 = 30 15 65 a.Corp wanted to issue shares in lieu of the money it owed. b.23B.06.210 - ISSUANCE OF SHARES - specifically allows this (1)It is a benefit to the corp. (2)It takes away the debt that is owed. E. Book Value per share only matters at dissolution. Assets - Liabilities # of Issued & Outstanding Shares 15 x 1800 = 27,000 { # shares x $ } 27,000 + { 5K - 2,5K } = { assets - liabilities } 29,500 / 65 = $500 { Book Value } ***RELATED ISSUES*** Business Judgment Rule Corporate Distributions PATTERN ANSWER - SHAREHOLDERS PREEMPTIVE RIGHTS Under 23B.06.300 unless the articles provide otherwise, the S/H's of a corp have a preemptive right, granted on uniform terms & conditions prescribed by the board, to provide a fair & reasonable opportunity to exercise the rite, to acquire proportional amounts of the corp's unissued shares upon the decision of the board to issue them. Thus, unless otherwise in the articles, anytime the shares are not issued & the board decides to sell, existing A/H's have the right to buy enough to keep proportional ownership. (here...(is something in articles)) However, 23B.06.300(3)(a-d) provides there is no preemptive right w/respect to: (1) Shares issued as compensation to directors, officers, agents or employees of the corp., or its subsidiaries or affiliates; (2) Shares issued to satisfy conversion or option rights created to provide compensation to directors, officers, agents or employees of the corp. or its subsidiaries of affiliates; (3) Shares issued pursuant to the corp's initial plan of financing. (4) Shares sold otherwise than for money. Also, under 23B.06.300(2), a S/H may waive the S/H's preemptive right. (1) Argue preemptive rights. (2) Make argument independent of preemptive rights S/H has a current vested property right in book value; S/H has right not to have my shares diluted. The S/H always has this right, it is an inherent, fixed & immutable right. (Key in Katzowitz (commissions to be paid before dissolution) -> they were contemplating dissolution). At the time they offered these extra shares, they were contemplating dissolution. Argue fraud on part of directors -> tie into 23B.08.300-BUSINESS JUDGMENT RULE. Counter to #2 Board: How can y have a fixed inherent right to book value, when book value changes every day. You are relying upon the vesting of some type of property right that is too remote until that actual moment in time. Katzowitz (Argue: Limited to closely held) Preemptive right safeguard 2 interests of stockholders: Dilution of equity in corp. & protection against dilution of their proportionate voting control. Directors being fid. of the corp., must in issuing new stock, treat existing S/H's fairly. The power to determine price must be exercised for the benefit of the corp. & in the interest of all stockholders. Issuing stock for less than fair value can injure existing S/H's by diluting their interest in the corp.'s surplus in current and future earnings and in the assets upon liquidation. Normally, a publicly held corps. a S/H is protected from his loss of equity in dissolution when stock is offered at less than fair value because S/H has rights he can exercise or sell. But in closely held corps. with only a limited market for its shares S/H's who do not want to invest or do not have the money can have their equity diluted to a vanishing point. They could never find a buyer, and even if they could, they would have to sell at an inadequate price. Outsiders never want to acquire minority interest. (1) If issuing price is marketable lower than book value, in a close corp. when remaining S/H's / Directors benefit from the issuance a case of judicial relief is established. (2) Burden of proof is on directors to show issuing price falls with in some range justified on the basis of valid bus. reasons. Argue: (a) diverting prop. form corp. and issuance of securities is an oppressive device permitting dilution of equity of minority, (b) a S/H has a right to maintain his proportionate equity in a corp. by purchasing additional shares, (c) the right not to purchase additional shares without being confronted with dilution of his existing equity if no valid bus. justification exists, freeze out violates fid. duty. Counter: If a publicly held corp. argue Katzwoitz is limited to its facts, i.e., a closely held corp. Argue a valid bus. justification exists. Should only apply to corps with preemptive rights. This case does not deal with preemptive rights because ___ had opportunity and right to buy shares. Therefore, no freeze out. XVI. QUORUM AND VOTING A. 23.B.07.250 - QUORUM AND VOTING FOR SHAREHOLDERS 1.23B.07.25(1) - Unless provided otherwise A of I or the act a majority constitutes a quorum. 2.23B.07.270 - Articles may provide for a greater (up to 100%) or lesser quorum but not less than 1/3 of the votes entitled to be cast for S/H's. 3.Once a share is represented for any other purpose that to object to holding the meeting or transacting business it is deemed present for quorum purposes for action on that matter, or unless new record date is set for that adjourned meeting. a.Distinguished from director - when the director storms out, dissents, abstains from voting either at the beginning of the meeting, or if it is recorded in the minutes or if he delivers written notice of his dissent or abstention, he takes the quorum with him. 23B.08.240(4) - Quorum and voting for directors. 4.Unless provided otherwise majority rules, unless a greater number is required by the articles. 5.Amendment of the articles to change quorum or voting requirements must meet the same voting requirements required under those in effect. B. VOTING AGREEMENTS - 23B.07.310 1.Under 23B.07.200 only shareholders of record are entitled to vote. a.2 or more S/H's may agree in writing for the manner in which they will vote their shares. (1)Not subject to the provisions of a voting trust. 23B.07.300. (2)Voting agreements created under this section are specifically enforceable. C. VOTING TRUSTS - 23B.07.300 - giving trustee (record owner) the right to vote for another. 1.Give a list to the corp. which set outs the provisions of the trust, its purpose, and the fact that they are transferring their shares to trustee. a.Signed, names and addresses of all beneficial owners,number and classes of shares each owns, and deliver copies to corps. principal office. 2.Becomes effective on the date the first shares subject to the trust are registered in the trustee name. a.Valid for no more than 10 years after its effective date. b.May extend for additional terms for not more than 10 years each. 3.Transferred certificates must be surrender and new ones issued to the trustee (indicating voting trust). 4.Under Brown v. McLanahan, the trustee owes a fid. duty to the beneficial owners. 5.Reasons for voting trusts; a.Stability & continuity. b.Prevent rivals from gaining control. c.Protect interests of minority S/H's d.Purpose of financing. e.Reorganization after bankruptcy. f.Consolidation, merger or expansion. XVII. ELECTING DIRECTORS A. 23B.08.030 - NUMBER AND ELECTION OF DIRECTORS 1.B of D must consist of one or more individuals with the number specified in or fixed in accordance with the A of I or Bylaws. 2.S/H's elect directors at each annual S/H's meeting, unless they are staggered under 23B.08.060. B.MAJORITY/STRAIGHT VOTING 1.Elect each director by a majority vote - directly. C.CUMULATIVE VOTING (for electing directors only) 1.Makes it possible for minority S/H to elect directors. 2.Preemptive rights important here. D.FORMULA FOR CUMULATIVE VOTING 1. S + 1 = # votes placing your person on D+1 the board. S = # of votes to be cast. D = Directors. 1.Figure out how many votes (a)(# of shares) x (# of directors) = (b)how many votes necessary to elect a specific candidate. 2.Corp. w/1 vote/share 3.100 shares issued and outstanding. 4.5 directors. 5.35 shares = JMM 6.S = # of votes to be cast .: 100 x 5 = 500 500/5+1 + 1 =84 votes required to get on the board. 35 x 5 = 175 =Total votes that JMM has thus. 84 x 2 = 168. So JMM has enough power/votes to elect 2 directors. E. HOW TO MAKE CUMULATIVE VOTING WORTHLESS 1.Staggered election of directors a.If only one is being elected, then cumulative voting doesn't work. 2.23B.08.060 - STAGGERED TERMS FOR DIRECTORS a.In order to have both cumulative voting and staggered election, must have at least 9 directors and 3 elected each year to a 3 years term. F. REMOVAL OF DIRECTORS - 23B.08.080 1.S/H can remove directors w/out cause w/straight voting. 2.W/Cumulative voting a.Have a "recall" election. b.Director will remain on the board if he receives the same # of votes for support that it took to elect him. 23B.08.080(3). G. 2 ISSUES TO LOOK FOR IN A VOTING QUESTION 1.Preemptive rights. 2.Cumulative voting. H. Ringling Brothers 1.Where there is a SH agreement and there is a potential for deadlock, give the arbitrator a proxy to vote the disputed shares but; a.Limit & structure the proxy and b.Beware of holes in agreements to submit to arbitration to avoid problems. I. HOW DO DIRECTORS MAKE DECISIONS? 1.Question to ponder - How many directors does it take to make a corp. decision? a.Types (1)Formal - action with a meeting. (2)Informal - without a meeting. 2.Where a B of D acts separately and w/o a meeting in passing a resolution, the B of D's actions will not be upheld. Baldwin v. Canfield. a.No authority outside of the B of D - individual authority. 3.A single director may not bind the corp. to a contract. Mickshaw v. Coke ratification by the B of D is required. a.Director's action coupled w/ the knowledge & acquiescence of all other board members is ok, even though not explicit authorization. (1)Knowledge of one director is presumed to flow to the board as a whole. 4.A majority of directors may not transact absent formal meeting was held Hurley v. Ornsteen. a.General authority (1)Normal day-to-day acts. (2)Need specific authority for extraordinary acts. PATTERN ANSWER - DIRECTORS ACTION (SEE MEETING SECTION) Directors derive their authority to act for the corp. from 23B.08.010, which states: all corp. powers shall be exercised by or under the authority of, and the business & affairs of a corp. shall be managed under the direction of a B of D, subject to any limitation set forth in the articles of incorp. The board may delegate their power but no the responsibility. 23B.08.010(3). PATTERN ANSWER - REMOVAL OF DIRECTOR - 23B.08.080 Directors may be removed, at a special meeting of S/H's called expressly for that purpose. The director may be removed w/ or w/o cause unless the articles provide only for cause. PATTERN ANSWER - NUMBER OF DIRECTORS NEEDED TO ACT AS A BOARD According to 23B.08.240, the act of the majority of the directors present at a meeting at which a quorum is present, shall be the acto of the board of directors. But, if a director or an officer has a direct or indirect interest in the transaction w/the corp., the transaction must be authorized, approved or ratified by the vote of the directors w/no direct or indirect interest in the transaction. The act of the majority of disinterested directors, is the act of the board of directors. (look for this w/self-dealing). PATTERN ANSWER - PRESUMED ASSENTED UNLESS DISSENTED - 23B.08.240 A director who is present at a meeting shall be presumed to assented to the action unless his dissent is entered in the minutes of the meeting or if he filed written dissent to such action before adjournment or w/in a reasonable time thereafter: There are 2 types of actions taken by directors: formal, per statute, and informal outside the statute. The most important rule to remember is that the board must act as a collective board, not individually. Formal Actions 23B.08.200 Regular meetings of the board or of any designated committee may be held w/ or w/out notice as prescribed in the bylaws. Attendance of a director or a committee member at a meeting shall constitute a waiver of notice of such meeting unless attendance is for the express purpose of objecting. Members of the board of directors or committee may participate in a meeting by any means of communication by which all directors participating can hear each other during the meeting. Action without a meeting - 23B.08.210 A board may formally act w/out a meeting if a consent in writing, setting forth the action is signed by all (contrast this written unanimous consent w/meeting & w/out requirement for unanimous vote). Informal Action (act outside statutory framework) Here, there is no meeting & no written unanimous consent so to make such actions binding on the corp, cts will apply equity & look for the following; (1) Ratification by acquiescence->here each director must have knowledge of all material facts w/some manifestation of consent. Hurley v. Ornstein (2) Estoppel, unjust enrichment. (3) Argue ___ did not confer upon them any power to bind the corp outside of a comparatively narrow circle of functions specially pertaining to their offices. Counter: An implied delegation of authority to an agent may arise from a course of conduct showing that a principal has repeatedly acquiesced. Therein & adopted acts of the same kind. But scope of agent's authority is limited. However, to that which falls w/in the general class of acts done by him over a considerable period of time. * If all directors know of the informal action then a majority of the directors can approve of the action. * If there is no meeting then the standard call for a unanimous vote (in writing) to curtail the majority of directors from circumventing the 3rd. director & taking him out of the action. XVIII. PROXIES A. 23B.07.220 - PROXIES 1.S/H may vote shares in person or by proxy. a.Proxy = a person, the agent - appoint the proxy to vote your shares. 2.Like the appointment of any other agent. 3.Proxy appointment is effective when the form is received. *If proxy given under a S/H agreement, then a proxy w/an interest and irrevocable. B. Ho to dispose of proxy 1.Appoint new proxy. 2.Show up yourself to vote. 3.Certain proxies cannot be revoked a.Those coupled w/an interest. Irrevocable until interest ceases. C. Proxies last 11 months unless a time is specified. 1.Will not cover 2 annual meetings. 2.23B.07.220(3) - may provide for a longer period of time. D. 23B.07.240 - CORP. ACCEPTANCE OF VOTES 1.If the name on the proxy corresponds to the name of the S/H must accept in good faith. 2.If not corresponding, may accept if; a.S/H of record is an entity, an agent may sign. b.PR of S/H of record, may request evidence of fid. status acceptable to the corp. c.Receiver in Bankruptcy - corp. may request status of proceedings acceptable to it. d.Corp. can reject if reasonable basis to doubt the validity of signature or authority. (1)Corp or officer not liable if rejects in good faith and in accordance w/statute. E. Auger v. Dressel: S/H who elect directors have the inherent right to remove them for cause. F. Salgo v. Matthews 1.No agent's agent or subagent w/ proxies, must get a court order where proxy wants to appoint another proxy. 2.May a corp. require that its shares be voted only by their beneficial owner? No a.Quo warranto - in the case of an official it may be brought to cause him to forfeit his office for misconduct. (1)Ousts the wrongdoer. (2)Prevents improper exercise of power lawfully possessed. (3)Prevent from usurping a power which they do not have. b.Eligibility to vote @ corp. elections is determined by the corp. records rather than by the ultimate judicial decision of beneficial title. (1)May be voted on only by legal owner as shown on records or by authorized agent. XIX. DEADLOCK A. Deadlock 1.Try to avoid a deadlock when you set up a corp. a.Set-up odd number of directors. b.Avoid unanimous decisions requirement where possible. c.Set-up so that the directors are elected by cumulative voting (proportional voting). d.Biz doesn't stop when there is a deadlock, just can't create new policy. B. Each group owns 50% of stock. No new directors. C. What is the timing of prohibited distribution? 23B.06.400 1.Did the distribution trigger a prohibited result? Insolvency or Bankruptcy 2.Timing - decide when (judged by type of) payment is made to see if there is prohibited result. 3.Debt - Payment: redemption - sale or promissory note. D. Argument: Ways to get around deadlock w/out actually agreeing. 1.Duty to act w/in fid. duties. 2.Get injunction to prevent action or to enjoin. 3.Find liable for actions 4.Sep-up odd# of directors by amending A of I. 5.Lehrman v. Cohen a.Deadlock again - Giant foods b.Breakdown Family 1 Class 1 Elect 2 directors Family 2Class 2Elect 2 directors AofI amend.Class ADElect 1 director c.This was supposed to have avoided the problem of deadlock but there was a dispute b/w the families on expansion, 1 wanted to get rid of the AD stock. d.3 Arguments to get rid of AD stock (1)Voting Trusts (a)Didn't follow the statute as it went longer than 10 yrs - lasted 14 yrs. (b)Didn't really meet the statutory criteria for the voting trust. (c)No separation of beneficial ownership and record ownership - RETAINED ALL RIGHTS. (2)Violation of Public Policy (a)Lacked substantial participation in proprietary interest in the corp. (b)No dividends. But no requirement for this right to vote = proprietary interest. (c)No requirements that classes share the same right. (3)Only function of the stock was to break deadlocks .: illegal as a delegation of directors (a)Argument is that this is voluntary not bought. Therefore, not against public policy. His decision is reached independently even though a time breaker (like a trustee). E. Dissension & Deadlock supra 1.4 methods of resolution a.Negotiation b.Legal action c.Arbitration d.Dissolution *Must consider S/H, employees, creditors, customers & the public. F. To avoid deadlock: 1.Look at the terms of the directors. 23B.08.050. a.Term of initial directors expires at the first S/H's meeting b.Terms of all other directors expire the next S/H's meeting unless staggered. c.Unless staggered under 23B.08.060, S/H's can fill the vacancy to avoid the deadlock situation. d.Director continues to serve until the director's successor is elected. 2.23B.08.100 - VACANCY ON B OF D a.Unless provided otherwise by A of I, vacancy (includes an increase of directors) on board can be filled by; (1)Shareholders (2)Board of directors (a)If directors in office constitute fewer than a quorum of the board, they may fill the vacancy by voting a majority of the votes. (disposes of quorum req) 3.Gearing v. Kelly a.A court may deny a director's equitable suit to nullify a director's election where the requisite quorum was not present where the complaining director refused to attend so as to cause a failure of quorum. b.Under 23B.08.100(c) they could have elected a new director. Ex:7 directors, thus quorum = 4. However, 4 directors resign. leaving 3 directors. Therefore no quorum. Remaining directors may fill position by a majority vote of 3 directors. 4.In re Radom & Neidorff a.Successful music promotion Co. - partner dies, surviving partner and widow feuding. b.A court should not allow a dissolution where the two sole S/H are feuding and where the corp. is successful. 5.23B.14.300 - JUDAICAL DISSOLUTION - GROUNDS a.AG can bring the action by a proceeding by a S/H (closely held) if it is established that; (1)S/H's as a whole are deadlocked and have failed to elect successor directors for 2 consecutive secessions. (2)Cts are reluctant to dissolve profitable corps. (3)Show why it is equitable for the court to bring corp. to an end. i.e., what harm is occurring. PATTERN ANSWER - DEADLOCK the fact that the B of D cannot reach an agreement regarding ____ raises the issue of deadlock. There are 4 methods of resolving deadlock: negotiation, legal action, arbitration and dissolution. Here a dissolution is/is not appropriate as it appears that the issue can/cannot be resolved as... XX. AUTHORITY OF DIRECTORS & OFFICERS A. Traditional Roles of Shareholders and Directors. 1.S/H (owners) elect and remove the directors (corp) who appoint the officers (agents). 2.What are the sources of authority for the B of D & officers? a.A of I b.Bylaws c.Officers (1)Directors actions for officers. (2)Past practice, custom & usage. d.Apparent and actual authority. e.How do you know if person has authority. (1)Look for specific language in the bylaws. (2)Get specific authorization from the B of D. f.Actual Authority (1)Can ascertain objectively the authority through the; (a)A of I (b)Bylaws (c)Meetings (d)Unanimous written consent (2)Not a question of belief. g.Apparent Authority (1)Past conduct (2)What can a president reasonably do (3)Engage in usual & ordinary activities but not unusual & extraordinary (4)Depends upon belief. XXI. DIRECTORS A. 23B.08.300 - GENERAL STANDARDS FOR DIRECTORS 1.Not agents of the S/H 2.Act in good faith. 3.As a prudent person in a like position. 4.In a manner the director reasonable believes to be in the best interest of the corp (using a reasonable belief and independent judgment). a.Where the distinction is not maintained, personal liability may be had through a piercing. 5.The directors are entitled to rely on information, opinions, reports, statements including financial statements if prepared or presented by officers or employees if believed to be competent a.Legal counsel, CPA's or persons with professional or expert competence. b.Committee of B of D which director not of member of and believes to be competent. 6.Director is not acting in good faith if knowledge concerning the matter and makes reliance otherwise permitted under subsection (2). 7.Director is not liable if he complies with the act. B. 23B.08.320 - LIMITATION OF LIABILITY OF DIRECTORS 1.May eliminate or limit personal liability of directors so long as this doesn't apply to; a.Intentional misconduct (fraud). b.Knowing violation of law. 2.If the S/H's are acting as directors, they are held to the same standard as directors. McQuade v. Stonham. 3.If there is a statutory policy that says the function of the actors of a corp. should be kept separate, then there may be harm to other relying on the statute in the future. a.Look at harm to public, S/H's, or directors powers. Clark v. Dodge. b.If all S/H's agree and no harm is done to a minority S/H's and no violation of bylaws, A of I or State bus. corp. act then ok (1)Slight deviations are permitted. c.Analysis: (1)Look to see if all S/H agreed. (2)Any harm to creditors, public or minority S/H. (3)Any violations of "clearly mandatory" provisions. d.Zion v. Kurtz: S/H's can agree to give minority S/H's powers of directors. C. 23B.08.010 - REQUIREMENT FOR AND DUTIES OF BOARD OR DIRECTORS 1.Except as under (3) each corp. must have a B of D - not mandatory. 2.all corp. powers shall be exercised by or under the authority of...managed under the direction of the B of D subject to limitations in the A of I; a.Corporate powers is any action taken to achieve the bus. purpose. b.Powers must be authorized by the B of D and limited by the A of I. 3.May dispense with or limit the authority of B of D by so describing in the A of I who will perform some or all of the duties of the B of D. 4.Read 23B.08.010 in conjunction with 23B.08.300. PATTERN ANSWER - DIRECTORS STATUTORY DUTY ___ can bring an action against ___ for breach of a director's statutory duty, the standard of which is set forth is 23B.08.300 states that a director shall perform such duties of a director in good faith, in a manner such director believes to be in the best interests of the corp, & w/such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. Under 23B.08.300 a director is entitled to rely on information, opinions, experts or statements including financial statements & other financial data, in each case by; (1) 1 or more officers or employees of the corp. whom the director believes to be reliable & competent in the matter presented. (2) Counsel, CPA's or other persons as to matters which the director believes to be w/in such person's professional or expert confidence;or (3) A committee of the board upon which the director is not a member if the director reasonable believes committee merits confidence. A director is not liable for any action taken as a director, or any failure to take any action, if the director performed the duties of the director's office in compliance w/23B.08.300. 23B.08.320: The standard of care under 23B.08.300 is the negligence standard. However, according to 23B.08.320 the standard can be raised to intentional misconduct or a knowing violation of a law. (only applies where plaintiff being sued for monetary damages. XXII. OFFICERS A. 23B.08.400 - OFFICERS 1.Officers are described according to the bylaws or appointed by B of D in accordance with the bylaws. a.Officers get authority from the B of D, B of D get authority through the act or through the A of I. b.Don't necessarily have to have officers. 2.23B.08.410 - DUTIES OF OFFICERS a.Duties are set out in the bylaws b.Duties are prescribed by the B of D. c.Therefore,authority for officers derives from the B of D or the Bylaws. 3.Officer are agents of the corp. therefore, agency principles apply. 4.Under 23B.01.400(21) Secretary means corp officer to whom the B of D has delegated responsibility under 23B.08.400(3) for custody of the minutes of the B of D and the S/H and for authenticating records of the corp. a.The records that officers are responsible for keeping include: (1)Names of S/H (2)Names of Directors (3)Action taken at the meeting in the minutes either directly or by unanimous written consent, or when the B of D has authorized someone to act on behalf of the corp. 5.An officer can appoint more officers/assistant officers if authorized by the bylaws or the B of D. a.The same individual may hold more than one position. 6.23B.16.010 - CORPORATE RECORDS a.Corp shall keep permanent records of all B of D, S/H, Committee meetings and all actions taken. 7.Black v. Harrison; Lee v. Jenkins; In re Drive-In Corp - officer cannot act contrary to the bylaws and thus bind the corp to a contract. a.Apparent Authority may exist however under agency law (1)Custom and Usage (2)Past Practice (3)Reliance (4)Ratification 8.23B.08.420 - STANDARDS OF CONDUCT FOR OFFICERS a.Officers shall discharge their duties (1)In good faith (2)With the care of the ordinarily prudent person in a like position. (3)In a manner the officer reasonably believes to be in the best interest of the corp. PATTERN ANSWER - OFFICERS ________ can bring an action against _______ for breach of a officers fiduciary duty, the standard of which is set forth in 23B.08.410. 23B.08.410 states that an officer shall perform the duties of an officer in good faith, in a manner such officer believes to be in the best interest of the corp, and with such care, including reasonable inquiry, as the ordinary prudent person in a like position would under similar circumstances. Here..... Officer may rely on information, opinions, reports, or statements, including financial statements and other financial data. 23B.08.420(2). XXIII. BUSINESS JUDGMENT RULE A. In General 1.Directors owe a fiduciary duty to the corp and its S/H. 2.First step, is to determine if the action is one where the director owes a fiduciary duty. B. BJR - A JUDICIALLY CREATED PROCEDURAL RULE 1.Asserted by the director usually in a derivative action to show that he has acted in compliance with his statutory standard of care in transacting business. 2.If the director is successful in the suit he can escape personal liability C. BJR - Forms a Rebuttable Presumption that the Director has done his/her job with the standard of care required by statute. 1.In order to get the protection of the BJR the Director MUST SATISFY A THRESHOLD QUESTION a.Presumably in their answer the director will state that he/she has informed themselves of all the reasonably available material information at the time of the transaction. 2.If the presumption applies then the burden of proof is on the plaintiff to introduce enough evidence to overcome the presumption. 3.Once sufficient evidence is brought forth by the plaintiff then the burden will shift back to the Director to prove compliance with the his statutory standard of care. D. The BJR DOES NOT APPLY TO: 1.A self-dealing transaction 2.The usurpation of a Corporate Opportunity E. 23B.08.010 - REQUIREMENTS FOR AND DUTIES OF THE B OF D. 1.If the director delegates the responsibility or authority of transacting business then he/she will still be held to the standard of care 23B.08.300. a.Good Faith b.Care of an ordinary and prudent person in a like position. c.In a manner the director reasonably believes to be in the best interest of the corp. d.Independent judgment and discretion 2.In discharging the duties of the director a director is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial statements if prepared or presented by: a.Officer and employees whom the directors believes to be reliable and competent in the matter presented. b.Legal counsel, CPA's or other persons the director reasonably believes are within the persons professional or expert confidence. c.Information may come from a committee in which the director is not a member whom he believes is reasonably competent. 3.A director is not acting in good faith if he has knowledge concerning the matter in question and then reliance otherwise permitted by (2) 4.Director is not liable if for any action as a director or failure to take any action if in compliance with this section. F. 23B.08.250 - Creation of a Committee 1.Must be approved by the greater of a.a majority of all directors when the action is taken b.the number of directors required by the A of I or by laws. c.A committee may not (1)authorize distributions (2)fill vacancies (3)amend the A of I. (4)adopt,amend, repeal the bylaws G. Litwin v. Allen 1.The standard of care here is the ordinary care of the reasonably prudent banker. 2.THE WASH ACT DOES NOT APPLY TO BANKERS OR INSURANCE COMPANIES. H. Shlensky v. Allen 1.A derivative action is not proper when the allegations of the plaintiffs does not allege fraud, illegality, or conflict of interest depending on the standard of bad faith. I. Smith v. Van Gorkum 1.The court held the director to a gross negligence standard. 2.WHETHER OR NOT THE COURT MADE AN INFORMED BUSINESS JUDGMENT IS THE QUESTION HERE. 3.An informed business judgment is to be made of the basis of the information reasonably available at the time. 4.The director only owes a fiduciary duty to those who own the corp and now want to sell it. 5.Wash recognizes the BJR but the act does not define it. Smith v. Van Gorkum will apply to Wash situations like this in Wash. because there are no cases. Argue a gross negligence standard. J. Three Scenarios in Dealing with the BJR 1.Could automatically apply according to statute 2.It Won't apply because of the type of the transaction. a.Self-Dealing b.Corporate Opportunity 3.It will apply to the types of situations the court says it will apply to. K. Analysis 1.Is there a fiduciary relationship? 2.Is it the type of transaction to which the BJR applies? 3.Does the director meet the threshold question a.Did the director make an informed business judgement? b.What information was available at the time of the decision? c.NEED - REASONABLY AVAILABLE MATERIAL INFORMATION. d.Wash recognizes BJR but does not define, therefore, Van Gorkum will probably be cited here. 4.To what std of conduct will the directors be held? a.Statutory std. b.Or may loosen std in A of I, but can't limit these w/intentional or misconduct. c.Be sure that facts indicate liability as director not as officer. d.Each director must be judged by the std individually. e.23B.08.320 - Limitation of liability of directors. 5.What was the decision? a.Directors will be judged not on the correctness of the decision but on how the decision was reached. 6.What Process was used to reach the decision? Was the std violated? a.Must have reasonably material available material information in Wa? b.What did you do w/the information? (1)Will presume that you got the reasonably material available information and that you acted properly on it. L. S/H Remedies 1.Undo the deal - impossible once the deal has begun. 2.Get the difference between the price sold and FMV. PATTERN ANSWER - BUSINESS JUDGMENT RULE The BJR is raised by ___'s decision to ___. In most situations, where the B of D has made a decision, the courts will apply the BJR. This rule creates a presumption that the directors have made their decision in a proper and informed way with in the standard of care under 23B.08.300. The BJR is a procedural rule which requires that the person challenging the board action(s) over come the presumption and show that the board breached their fid. duty owed to the corp. Threshold question for application: However, before the presumption will apply, a threshold question must be addressed by the directors: Whether the directors informed themselves as to all information that was reasonable available to them. However, if the transaction complained of involves self- dealing on the part of one or more of the directors, then validity of the transaction has the burden of proving intrinsic fairness unless the material facts of the transaction and the directors or officers interest was disclosed or known to the B of D, and the board authorized, approved or ratified the transaction OR the material facts of the transaction and the directors or officers interest has disclosed or known to the S/H's entitled to vote and they authorized, approved or ratified the transaction. Here...(apply the conclusion form the self dealing analysis and say "since no full disclosure, burden is on director which he cannot rebut since I have concluded he breached his duty...in addition, since pro statement to shareholders omitted material facts, he again is sol.) Here...(state which situation is present and which standard to apply, then apply). XXIV. SELF DEALING A. In General 1.A transaction between a fiduciary in his personal capacity and the corp. for which he works. In Wa you must have (a) fairness and (b) full disclosure. a.Failure to disclose is intrinsically unfair. b.Courts will determine self dealing on a case- by-case, "close scrutiny basis" 2.A judicial rule, but there are some statutes on procedure. 3.The transactions here a voidable, not void. 4.Court rationale - arm's length transaction. 5.Self dealing apples to; a.Officers, directors, controlling S/H's. (1)Controlling S/H owes a fiduciary duty to the minority S/H - can't just benefit the majority and not the minority S/H. 6.Employment K's and loans to corp, if fair are not self dealing. Marciano v. Nakash. 7.Corps can engage in self dealing - it is not limited to individuals. Sinclair v. Levien. a.there is a fiduciary relationship between the parent and subsidiary corp. b.Here, self dealing exists where the parent subsidiary does not get. (1)If both get it ->no self dealing. (2)Keep proportions in mind (who owns how much of what). B. BJR DOES NOT APPLY TO SELF-DEALING TRANSACTIONS 1.Directors must affirmatively show that they have complied w/the self dealing rules. There is no presumption that they have. C. ANALYSIS - 23B.08.700(1) CONFLICTING INTEREST & 23B.08.710 JUDICIAL ACTION 1.IS THERE A FIDUCIARY RELATIONSHIP BETWEEN THE PARTIES. 2.IS THERE A TRANSACTION BETWEEN THEM & THE CORP. a.Must be intrinsically fair to the corp. (1)Satisfy 23B.08.300 - definition of intrinsic fairness. (2)If intrinsically fair, then in best interest of corp. b.Must be a full disclosure of all material fact (that which the ordinarily prudent person considers important) to the board. (1)Failure to disclose in and of itself unfair in Wa. (2)Material facts; (a)Value of property (b)Potential conflicts of interest (c)Details of the deal c.Must have an APPROVAL of the deal by disinterested majority. 23B.08.700(a). * some jurisdictions only require intrinsic fairness or full disclosure, Wa requires both - State Ex Rel Hayes v. Keypoint Oyster. (failure to disclose is in itself unfair). D. S/H REMEDIES - HOW TO VOID OUT THE SELF-DEALING TRANSACTION 1.Sue for unfairness .: voiding the action. 2.Hold those directors who have approved the deal personally liable. 3.Impose a constructive trust. 4.May try a theory of waste. a.Difficult b.Addressed in the fairness issue c.No need to look at the approval. 5.Unreasonableness 6.Fraud (difficult). PATTERN ANSWER - SELF DEALING THE BUSINESS JUDGMENT RULE DOES NOT APPLY TO SELF DEALING TRANSACTIONS. ___ can bring an action for self dealing against ___ for ___(state the trans). Self dealing will be found when a fiduciary enters into a transaction with the corp. and thereby personally benefits. The issue arises in situations, as here, where a fiduciary enters a transaction with a corporation while acting as a fiduciary and such transaction is found to violate either statutory or common law requirements of intrinsic fairness. The transaction is not void, but voidable. In order to avoid liability for self dealing he fiduciary must show that the transaction was approved by the board or the shareholders with board review. Fiduciary: The first element the court must find is that the person entering into the transaction with the corporation owes the corp. a fiduciary duty. Hayes v. Keypoint Oyster. Directors and officers have fid. duties with respect to their relationship with the corp. Controlling shareholders have fid. duties with respect to the minority shareholders. Here... Board Review: If the fiduciary can show that the transaction was upon board review, approved by the board of directors or by the shareholders, upon disclosure of all material facts then the burden of proof is on the plaintiff to show that the transaction was not fully disclosed or intrinsically unfair. In Wa, all material facts must be disclosed and be intrinsically fair. Keypoint Oyster. Here... A. Board of Directors: Material facts were disclosed and the board of directors authorized the transaction by a majority vote of the disinterested directors (quorum). The self dealer cannot vote on the transaction. 23B.08.720(2). B. Shareholders: The material facts were known to the shareholders and they authorized the transaction by majority vote (quorum). The self dealer cannot vote his shares. 23B.08.730. If the fiduciary shows appropriate board review then the burden of proof is on the plaintiff to show that the transaction was never-the-less not fair and not fully disclosed. Here... Shareholder's Remedies: If a self dealing transaction has occurred the shareholders may pursue the following remedies: (1) an action for unfairness thereby voiding the transaction; (2) an action to hold the approving directors personally liable; (3) imposition of a constructive trust; (4) waste - this is very difficult to prove; (5) an action for unreasonableness; and (6) fraud, which is difficult to prove. Here... XXV. CORPORATE OPPORTUNITY A. In General 1.Officers and Directors only - no cases where the controlling S/H are officers and directors 2.Where a business opportunity has been usurped by one with a fiduciary relationship for his own benefit at the expense of the corp or deprives the corp from a financial interest in the deal. 3.No statutory process of procedure 4.Actually preventing the corp from an opportunity a.Self-Dealing 5.DOES A FIDUCIARY RELATIONSHIP EXIST? a.Was the director or officer acting in their corporate capacity when they learned of the business opportunity and do they owe the duties of good faith, fair dealing, and full disclosure to the corp. 6.DID A CORPORATE OPPORTUNITY EXIST? a.THE LOGICAL RELATIONSHIP BETWEEN THE EXISTING AND AND REASONABLY PROSPECTIVE BUSINESS. 7.DOES THE CORP HAVE THE RESOURCES AVAILABLE TO MAKE USE OF THE OPPORTUNITY? a.Financial b.Fundamental and practical resources like facilities and personnel. B. Guth v. Loft 1.LINE OF BUSINESS TEST a.Is there a reasonable relationship between the opportunity and the existing business. C. Minnesota - Miller Test 1.Refines the line of business test 2.Adds the resource requirement 3.STEPS: a.IS THE OPPORTUNITY REASONABLY RELATED TO THE EXISTING BUSINESS OR; (1)Reasonably relation indicates the potential for a future business presented by the opportunity b.HAVE THE RESOURCES TO DO SO? - Financial Technical, Personnel (1)Assumption that if the corp has the money that it may be able to develop the opportunity, but must be able to do so within a reasonable amount of time. D. Oregon - Klinicki Test 1.Makes a difference based upon which position you hold - fiduciary relationship 2.3 STEPS: a.Line of Business Test - reasonably related opportunity to the existing corp. b.FULL DISCLOSURE (1)The manner in which the opportunity came up and was presented to the director makes a difference. (2)Binds 2 classes of people (a)Principle senior executive of director: An opportunity communicated either i)connection w/ performance or obligations OR circumstances that would reasonably lead her to believe that the person offering the opportunity expects her to offer it to the corp or ii)Through use of corporate information or property if reasonably expected to believe would be of interest to the corp (b)Principle senior executive or director who is a full time employee i)An opportunity that he knows or reasonably should have known is closely related to the existing business. (3)NOTE - fiduciary is not used (4)NOTE - There is no reference to people who are officers. c.Court limits this decision to a closely held corp d.There is no personal liability E. DAMAGES - REMEDY 1.A constructive trust is imposed by the court for the corp F. ANALYSIS 1.IS THERE A FIDUCIARY RELATIONSHIP? 2.IS IT A CORP OPPORTUNITY? PATTERN ANSWER - CORPORATE OPPORTUNITY _______ can bring an action against _________ for diverting a corporate opportunity. Corporate opportunity applies when an opportunity is communicated to the corp from outside to a person in a fiduciary relationship to the corporation in their fiduciary capacity. Guth v. Loft; Miller v. Miller; Klinicki v. Lundgren. The 3 step analysis here is: (1) was the person to whom the opportunity was presented in a fiduciary relationship to the corp (majority S/H, directors [23B.08.300], officers [23B.08.410,420], corporate attorneys etc. - fiduciary relationship determined by their job description); (2) was the opportunity in fact a corporate opportunity; and (3) if there is a corporate opportunity present can the fiduciary none-the-less take advantage of the opportunity? In Guth v. Loft, if the opportunity is in the same Line of Business that the corporation is engaging in or is likely to engage in, then it is a corporate opportunity. Under the test here..... Under Miller v. Miller, the Line of Business Test is refined by adding resource requirements. There is a presumption that the corporation has the financial resources to pursue the opportunity. If the corporation does not have the financial resources, it is required to marshal them within a reasonable amount of time. The resource requirement also includes personnel and tactical abilities. There is the assumption that if the corporation has the money to do so, or can acquire the money within a reasonable time, that these additional requirements can be met. Here, this decision is made by the person considering the opportunity. Thus.... Oregon Test - Klinicki v. Lungren/American Law Institute Standard: Under this test, full disclosure binds 2 classes of people. Principle senior executives and directors. This is further modified by whether they are also full-time employees. Full time employees must disclose opportunities that are related to the business in which the corporation is engaged. However, principle senior executive or any directors who are not full time employees must disclose opportunities presented in connection with performance of their obligations or under the circumstances that should reasonably lead them to believe the opportunity came about through the use of corporate information or property. Under this test, the decision is made by the board whether to keep the opportunity or to pass. Here...... Here, ________ is in a fiduciary relationship with ________. In addition since ______ is a full time employee if the opportunity is presented to him at any time, some courts hold that this is enough. Other courts may be slightly stricter and require that the opportunity must come to him in connection with performance of his duties and the person offering the opportunity expects that the defendant _______ will off it to the corp. Here...... Most Importantly, to determine whether this is in fact a corp opportunity, one must look at whether there is a logical relationship between the opportunity or a prospective business of the corp. REMEMBER financial and technological resources to exploit. Here..... Even if a corporate opportunity, ________ may take advantage of the opportunity if there is full disclosure of all material facts, that _______ acted fairly and the opportunity was offered to the corp. and was rejected. Klinicki Here..... If it is found that a fiduciary diverted a corporate opportunity, equity will impose a constructive trust for the benefit of the corp. Miller; Klinicki. NOTE: Even if I conclude that there is no corp opportunity problem and that the fiduciary can engage in the transaction, check for a self-dealing problem = Even if _______ did not breach a fiduciary duty vis-a-vis the corporate opportunity, ______ can bring an action against ________ for self dealing.... (Feasibility studies for personal investment cannot be funded by the corporation).