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80 Cards in this Set
- Front
- Back
What does a forming a corporation do
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1. creates a public record of incorporatio; 2. binds the parties to the corporate law of the incorporating stte 3. documents by optional terms the parties may have chosen |
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what are the three significant questions: |
1. what provisions must be included in the articles of incorporation? 2. what optional provisions can be included in the articles? 3. In what state should corporation be incorporated? |
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3 steps of forming a corporation |
1. preparing articles of incorporation(corporate charter) according to the requriements of state law 2. Signing of the articles by one or more incorporators, 3. submitting signed articles to teh state's secretary of state for filing |
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What must be included in the articles of incorporation |
1.Name of the corporation- must state complete name and reference to its corporate status. 2. REgistered Office and Agent - must state the corporations registered office for service of process and for senfing offical notices, must name an agent as well 3. Capital structure - specify the securites the corporation can issue to raise capital. (the various classes of authorized shares; the number of shares of each class; and the privileges, rights, limitations, and preferences of each class) 4. Purpose and Powers of the Corporation may needd to state teh corporateions purposes and pwoers, purposes clause is far less important than it once was. modern presumption is that the corporation can engage in any lawful business. 5.Size and composition of board - many statutes no longer require that the articles name the intial directors. like 6. optional provisions - the articles can contain a broad range of other provisions to "customize" the corp. opt i(voting provisions, membership requirements,, managment provisions)n and opt out clauses 7. |
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what do the bylaws do? |
describe such matters as the functions of each corporate office, how shareholders' and directors' meetings are called and conducted, teh formalities of shareholder voting, the qualifications of directions, the functions of board committees, and procedures for and limits on issuing and transferring shares |
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internal affaris doctrine |
permtis the parties to fix the law that applies to the corporate relationship, wherever litigation is brought. under this dotrine state courts are boudnt to accept the rules of the incorporating state. |
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psuedo foreign corporations |
when corporationdoes a significant amount of its ubsiness in a certain state but is incorporated else where (E.g. Cali has a 50% rule |
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Why Delaware for National Businesses |
Delaware's Statute is designed to give management flexibility in structuring and running the business the delaware courts and corporate bar are highly experienced and sophisitcateed in corpporate law maters a large body of case law interperts the delaware statute, thus providing certainty the delaware legislature is aleader in corporate law reform and regularly amends the delaware corporations statute as new needs and problems arise. |
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ultra vires doctrine |
invalidates corporate transactions beyond the powers stated in the corporation's charter. only applies when 1. teh articels specifically restrict corporate activites 2. the corporation engages ina ctivities not directly related to profit seeking, such as excessive charitable giving 3. the board of directors take actions that undermine shareholder power. |
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What are the 3 exclusive means of enforcement of the limitations of articles |
1. Shareholder suit: can sue to enjoin the corporation from entering into or continuing in an unauthorized transaction.(3rd party must be present in court, and knew about the corporate incpacity) 2.Corporate suit against directors and officers- 3.Suit by state attorney genereal- can seek involuntary judicial dissolution of the corporation has engaged in unauthorized transactions. |
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What are the 3 sources of corporate financincg |
1. Equity financing- can issue shares of stock. 2. debt financing 3. corporate financing. |
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When are equity shares authorized??? issued?? |
authorized when the articles permit the board to issue them issued- when sold to shareholders |
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treasury stock |
shares that are issued but no longer outstanding because they have been repurchased by the corporation. |
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what must one or more classes of shares have |
voting power and final liquidation rights, |
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Equity ingredients |
1. Dividends 2. Liquidation rights on dissolution 3. voting rights- empower shareholders to vote on governance matters, including the election of directors and the approval of signigcant corporate transactions proposed by the board, such as the amendment of the articles, the creation of new classes of shares, mergers and sales of all teh corporations assets 4. conversion rights- right to convert their share shares into anotehr security of the corporation. 5.redemption rights- force corporation to reproduce their shares 6. preemptive rights- allows shareholders to acquire shares when the corporation issues new shares. this protects existing shareholders proportional ownership |
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a class of stock |
the different recipes of the equity ingredients( common stock to nonvoting, nonparticipating cumulative convertible redeemable preferred stock" |
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series |
the subclasses that sepreate the rights of shares that share the same class. |
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what are the aspects of common shares |
represent the corporation's residual ownership interests- whats left of the income stream after all other "senior" financial claims have been satisfied . stand last in line. dividends not guaranteed they make up for this with the right to vote, sell, or sue |
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ESOP |
Employee stock ownership plans- gives employees a stake in the company, the employers contributions to the esop are tax deductable and the higher level of employee ownership may protect incumbent management |
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stock options |
a contractual right to purchase shares at a specified date in the future at a specifid price. |
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Preferred Shares ASPECTS |
1. hybrid between debt and common shares 2. earn fixed dividends and are entitled to fixed liqudidation rights 3. seniro to common shares , but junior to debtholders and creditors. 4. the decision to pay dividends on preferred shares is within the boards discretion, and nonpayment is not an act of default. 5/have carrying forward rights to carry the obligation and acculmate the payments 6. participation rights- the right to participate w/ common shares in any dividends declared on the common 7. do not have voting rights, but can beobtained through statute or articles (many states grant right to vote on fundamental transactions--- such as mergers or amendments to teh articles that elimnate or dilute preferred shares' seniority. 8. may have conversion and redemption rights. |
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what is the important question in issuing equity securities |
whether the stock is fully paid and nonassessable? |
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par value |
1. artificial dollar amount in the articles of incorporation; it has no relationship to the market value of the shares 2. it represents the amount that must be paid so the shares can be issued as "fully paid and nonassessable" 3. acts as a price floor |
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no par stock |
when stock is issued without par, shareholders are liable to the corporatio or its creditors omly to tje extemt tjey jave mpt [aod "the consideration fo rwhich the shares were authorized to be issued . . . or specified in tehir subscription agreement"? |
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"Fully paid and non assessable" |
must also be issued for the proper kind of consideration, (mainly if the board considers it adequate) if the shares are issued for future services or promissory notes, all that is required is that the shareholders be advised before the next shareholder's meetings |
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an advantage of debt financing |
clarity |
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Aspects of debt securities |
short term debt- to be paid within a year long term debt- more permanent part of the capital structure. dont have rights of voting, conversion, or redemption but these things can be incorporated fiduciary duties not owed to debtholders |
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bonds |
long term debt security- usually secured by a specific corporate assets, such as a new hospital wing |
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debentures |
unsecured long term debt |
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leverage |
debt financing is providing some of the corporations capital. the greater the ratio of debt to equity, the greater the leverage. higher financing increases chances for potential large returns and losses |
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difference between interest payments and dividends |
IPs are tax deductable |
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Signs of Real debt vs. De facto equity |
Financial returns: RD- fixed DF- Variable Payment from earnings RD- Must be paid regardless of earnings DF- dividends are paid from earnings Corporate managemen RD- Debt holders not engaged in management DF- Debt holders manage the business Capitalization RD- llow debt-equity ratio suggests "real debt" DF- higher debt-equity ratio makes more likely debt characterized as equity |
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Securities ACt of 1933 |
requrires issuers of securities to rpovide investors with detailed information about the company, its management, its plans and finacnes, and the securities offered. |
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firm commitment offerings |
how securities are typically sold from issuer (Creaeter of security) to underwriters (wholesalers) to dealers(retailers) who sell them to investors (consumers) |
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Exemptions to section 5 of the securities acts |
transactions in tradinig markets
nonpunlic offerings intrastate offerings by local issuers to local investors small offerings,as defined by SEC rules crowdfunding offerings, as defined by SEC Rules |
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Intrastate Offerings |
to permit local offerings tha tare subject to state jurisdiction any offering made and sold only to residents within a single state . |
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Nonpublic offering |
Most important exemption exists in 2 gorms (1) the 4(a)(2) statutory exemption and the regulation exemption(506 of Regulation D) |
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statutory Exemption |
4(a)(2) Qualified investors- each investor must meet a sldiing scale rtest that factors both her ability toe valuate the investment (given her business and investment sophisticaiton) and the availability of informatio (based on both hr access to it and its actual disclosure)- fend for themselves restricted securiittes-if qualified investors sell to unqualifeid investors who cannot fend for themselves. for this reason restrictions sold in a private placement are known as restricted securities, and issuers will often seek to preserve their exemption by placing contractiual restrictions on the transfer of securities Strict compliance- private offerings can be made under the statute only to investors and offerees with the requisite sophistication and access to info. a sale to just one unqualified investor causes the exemption to be lost |
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Regultion D- SEC regulatory exemption. |
exemptions turn on 1. dollar amount of offering 2 the number and kind of investors who participate in offering 3. whether regulation D offering is part of larger offering 4. the kind of advertisments usued 5. kind of info provided investors. |
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underwriter |
any person who purchases shares from an issuer "with a view to their further distribution or who offers or sells shares for an isssuer in connection witha distribution.. in short an agent |
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rule 144 |
SEC permits the resale of restricted shares and resales by control persons into public markets without registration under an important sage harbor rule. |
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rule 504 |
small offerings subejct to state blue sky law nonpublci companies can seel up to $1mil in securiites in any 12-month year. there is no limit on the number or kinds of inverstors or any disclosure requiement. but general advertising and solicitation are not permitted. securities are rewstricted. to avoid these marketing restrictions they can register the offering with a state blue sky law that reuires public filinig and delivery to investors of a disclosure document or limit offering to accredited investors |
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rule 505 |
medium sizedofferings subject to sec conditions. companies can sell up to $5mil in securities in any 12 month period. no general advertisisnig or solicitations are permitted unlimited accredited investors, but there ca be no more than 35 nonaccredited investors. and they all must receive speciified written disclosure and an opportunity to ask questions |
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Civil Liability under securities act |
Statutory rescission for violations of ss5 antigraud liability for false registration statement antifraud liability for false hoods in oublic offering |
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ss5.3.1 Section 12(a)(1)- Rescission for Violations of ss5 |
anny securities offered or sold in voolation of sss5 may be rescinded te get money back with interest 12(a)(1) makes it strict liability as well. |
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5.3.2 Section 11- Damages for Deceptive Registration Statements |
allows recover damages from issuer if the registration statement contains any falsehoods, or half truths, may be limited if purchased knowing of falsehood. |
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Shareholders' Role in Corporate Governance |
little republic The shareholders (corporations electorate) elect directors annually and vote on fundamental corporate transactions. nominal owners of the corporation, do not participate in managing the corporations business or affairs. The board of Directors (the corporations legislative organ)- is the locus of corporate authority. "All corporate powers shall be exercised by or under the authority of , and the business and affairs of the corporation managed under the direction of, its board of directors" The officers (the corporations bureacuracy) are delegated the day to day management of tehcorporationand are answerable to the board. all authority to act for (and to bind) the corporation originates in the board of directors |
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corporate law protects shareholders through what |
3 principal mechanisms voting rights litigation rights to enforcement accountability liquidity rights to sell their shares |
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what's needed to call a special meeting? |
10 percent shareholderm |
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what does the MBCA require of consent |
that it be unanimous |
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what can shareholdres remove under the MBCA |
directors but not officers(board's decision) |
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who can adopt amendments to the articles? |
the board adopts amendments for approval by teh shareholders |
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under the MBCA who can amend the bylaws |
the shareholders have an inherent power to, but if the bylaws give power to the board it;s just coterminous. |
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what does the MCBA say about excerpts for records from corporate -meetings |
permittable if specific enough and for proper cause. |
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how is the board selected under the MBCA |
straight voting each year |
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how does the cumulative voting formula work |
E=(N x S)/(D+1)+1 e=# of shares needed to elect desired number of directors N= # number of directors that shareholder desires too elect s= # of shares authorized to vte D= # of directors |
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where must staggered board be provided for? |
in the articles not the bylaws |
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What are the Rule 14a-8 procedures |
any shareholder who owns 1% or $2k worth of a public company's shares for at least 1 year may submit a proposal it must be in the form of a resolution that the shaerholder intends to introduce at the sharesholders' meetiing must be submitted generally atleast 120 calendar days before the date proxy materials were sent for the last year;s meeting. management has 14 days to provide a reason for rejection and a chance to correct if rejecting. |
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what are the purposes of the SEC created exclusions for proposals |
Proposals inconsistent with centralized management- interfere with the traditional struction of corporate governance: proposals that intefere with management proxy solicitation proposals that are illegal, deceptive, or fraudulent. |
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Propos inconsistent w/ centralized management- |
not "proper subject" for shareholder voting under state law not significantly related -must relate to operations that account for atleast 5% of total assets or otherwise significantly related ordinary business operations- can exclude that relate to the ordinary business operations |
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proposals that interfere with managements proxy solicitations |
related to nomination or election to office of a specific nominee conflicts with managements proposals duplicative recidivist |
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10.2.2 elememnts of action of proxy fraud |
Misrepresentation or Omission Statement of Opinion, Motives, or reasons Materiality |
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What is necessary if you bring a state suit for proxy fraud? |
show intenitonally misrepresented, shareholders collectively relied on the representation, they wouldve voted differently, the representation caused shareholder loss. may have to make a demand or have an excuse for why 1 wasn't made. |
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What are the fiduciary duties? |
Duty of care Duty of Loyalty Duty of Good Faith |
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duty of care |
addresses the attentiveness and prudence of managers in performing their decision-mkaing and oersight funcitons. |
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the business judgment rule |
presumes directors carry out theri rfuncitons sing odod faith , after sufficient investigation, and for acceptable reasons. unless the presumption is overcome, courts abstain from second gussing wellmeaning business decisions even when they are flops. |
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what does corporate law do to protect well meaning directors, |
exculpation provisions in the corporations articles, statutory and contractual indemnificaiton, and directors' and officers' insurance |
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DUTY of loyalty. |
adresses fiduciaries' conflicts of interest and requires fiduciaries to put the corporation's interests ahead of their own--- that is. fiduciaries cannot serve two masters. corporate fiduciaries breach tehir duty of loyalty when they divert corporate assets, business opportunities or proprietary information for personal gain |
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flagrant diversion |
can be as simple as a corporate official stealing tangible corporate assets breach of loyalty - unauthorized and the corporation recieved no benefit in the transaction. |
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self dealing |
dwhen a fiduciary enters into a transaction with the corporation on unfair terms, the effect is the same fi heb had appropriated the difference between the transaction's fair value and the transaction's price. a parent corporation that controls a partiall owned subsidiary can breach its duty to the minority shareholders of the subsidiary if the parent prefers itself at the expense of the minority |
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executive compensation |
when a director or officer sells his executive services tot he corporation diversion can occur if the executives comp, exceeds the fair value of his services. |
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Using corporate opportunity |
when a corporate fiduciary seizes for herself a desirable busines sopportunity that the corporation may have taken and prfoite d from, |
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disclosure to shareholder |
who provide false or deceptive info to shareholders and they rely to their detriment, not only undermine corporate credibility and transparency, but frustrate shareholders' expectations of fiduciary honesty and accountability. duties of disclosure arise when directors seek a shareholder vote, and when corporate officials communicate to stock trading markets. |
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trading on inside information |
when a fiduciary is aware of confidential corporate information--such as the impending takeover of another company- and he buys the target's stock, diversion can occur if the traing interferes with teh corporations takeover plans. also happens if he trades with the company's shareholders using inside info |
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selling out |
a corporate official who accepts a bribe to sell her office beraches a duty to the corporation. a controllign shareholder who sells his contorlling interest to a new owner who then diverts corporate assets to herself exposes the remaing shareholder to the new owner's looting. |
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Entrenchment |
USES THE CORPORATE governance machinery to protect his incumbency effectively diverts control from the shareholders to himself. undermines the disciplining effect on mangement of a robust market in corporate control. |
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judicial enforcement of duties |
generally brought through derivative suits by shareholders |
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3 duties of management in publci corporations or 3 principal functions |
Enterprise decisions concerning operational and business matters second, directors act on ownership issues, -mergers or takeover defenses third-directors are respoosnibfe for oversight of the corporation such as reviewing senior exectuvies performacne and ensure the coproations compliance with legal norms. |
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independnet directors |
do not have an emplyoment relationship with the corporation. supposed to monitor and oversee corporate management. |
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Sarbanes -Oxley |
specifies the responsibilities of independnet directors on the audit committees of public corporations. audit committtees must be composed entirely of independent directors, as defined by the SEC. all reporting companies must dislcose whether at least one member of the audit committee is af inacnial expert. |