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GEORGIA CORPORATIONS PROFESSOR ANNE TUCKER

GEORGIA STATE UNIVERSITY

BASIC CORPORATE FORMATION & ORGANIZATION

Chapter Roadmap

• Formation • Articles of Incorporation • Pre-incorporation activities and Liability • Securities (Stock) • Organizational Meeting • Bylaws

Introduction: Corporate Form Overview/Key Characteristics

Exam Tip 1: Examiners may look for general information on the benefits and disadvantages to choosing the corporate form.

• Advantages

o Limited shareholder liability o Centralized management o Transferability of shares- you can sell them, inherit them, assign them o Raise capital/money from investors

• CONS

o Double taxation

Corporation incurs liability for taxes on any earned income After taxes, the corporation's net income can be distributed to shareholders who are

liable for individual income tax on the distributed profits

o Formalities

A. Formation

Exam Tip 2: This has been a hot topic on former exams.

1. Procedures

a. Filing Articles of Incorporation - Must include:

1) __________________of the corporation

2 | © 2017 Themis Bar Review, LLC | GA Corporations

• The corporation’s name must contain the word “corporation,” “company,” “incorporated,” “limited,” or an abbreviation thereof

• Signals there is limited liability to the public

2) Number of ____________________shares

3) Name/address of

• Initial registered office/agent • Any incorporators

4) Principal office mailing address (if different from registered agent)

5) Optional provisions

Example 1: Stating the duration or term of life of the corporation; scope of business operations

b. Filing requirements

1) Articles of Incorporation (AI) must be__________________ in English

2) Signed

3) Filed with the Secretary of State along with filing fees

c. Consequences of filing the AI

1) De jure corporation, i.e., properly formed and recognized under the law

2) UOA (unless otherwise agreed) default statutory rules/powers of the corporation

[Mnemonic = Please Say Proper English Language Before Entering Modern Museums]

• Purpose - to pursue a lawful business • _________- Corporation can sue or be sued • Purchase Property

Editor's Note 1: The professor skipped the "purchase property" power.

• Enter into contracts • ____________money or borrow money • Be an investor in another type of business • Establish the directors • Make/amend______________ • Make donations or charitable contributions

2. Ultra vires action

o When a corporation acts ____________________its recognized powers

GA Corporations | © 2017 Themis Bar Review, LLC | 3

Usually outside the restricted powers listed in AI or bylaws since statutory authority is broad

o Remedy if a corporation takes an ultra vires act

a) A shareholder or the state attorney general can file suit to__________________the corporation’s ultra vires action;

b) The corporation can seek to enjoin its corporate agent who is pursuing an ultra vires act

3. Promoter

o Starts the formation process

Solicits investors - raise _____________ Files the AI Incorporator signs the AI - a promoter can also be an incorporator or can hire third party

to be incorporator Initial contracts - Entering into a lease, contracting with employees, services, supplies

o Individual liability for pre-incorporation acts

Exam Tip 3: This has been frequently tested on prior exams.

When promoter acts on behalf of a corporation before it is formed, the promoter is _________________________________________ liable for all pre-incorporation activities

• Promoter acts in individual capacity, so individually liable

Promoter can eliminate liability for pre-incorporation acts if corporation

i) Adopts the pre-incorporation activity

ii) Ratifies the pre-incorporation activity

iii) Voluntarily reimburses the promoter OR

iv) Enters into a ____________with a third party

o Novation - an official agreement between all the parties releasing the promoter from liability

v) Accepts the benefits of the pre-incorporation activity

Example 2: A promoter who hires an attorney to draw up the formation documents for a new corporation incurs fees for this service. Then, before the corporation is created, the promoter executes a lease on behalf of the to-be-formed corporation and so faces liability on the lease with the third party. If the corporation occupies the office space after the corporation has been formed, the corporation has arguably accepted the benefit of the pre-incorporation


activity and thus become liable for the act. But the only way the promoter would completely eliminate liability would be if the corporation entered into a ____________with the landlord that released the promoter from the liability. Promoter's liability for attorney's fees incurred for pre-incorporation work would only be eliminated by a novation. (It would be difficult to make the argument that the corporation benefited from the work, because the benefit occurred before the corporation was formed. Need to have an adoption, a ratification, or voluntary ____________by the corporation of the promoter.)

4. Defective incorporation

o If there was a___________________________attempt to properly form the corporation

De facto corporation - if a party acts on behalf of the corporation, believing that the corporation is properly formed, or in a good faith attempt to form the corporation, then that party has ____________________liability - as if the corporation was properly formed.

Example 3: If you file articles of incorporation for Barely Legal Law Services, Inc. but accidentally type in “Barely Legal Saw Services, Inc.” what happens? As long as you have a good faith belief that you properly formed the corporation and you attempted to, the individual standing behind the corporation would still enjoy limited liability.

Corporation by estoppel - still requires good faith attempt to properly form the corporation but prevents the____________________________ from denying corporate existence of an entity they previously contracted with.

Example 4: If I am one of the owners of the defectively formed Barely Legal Saw Services, Inc., and I enter into a lease on behalf of the new law firm, the landlord cannot later get out of the lease or try to hold the individual shareholders personally liable for the terms of the lease on the grounds that there was a defect in the incorporation. The landlord contracted with the corporation so cannot now deny its existence because of a technical error.

o If there was no good faith effort to form the corporation and there is a defect, there is no shield of liability and personal liability attaches to anyone who acted on behalf of the corporation or is an owner in the corporation.

Note 1: If there was a defect with the filed articles of incorporation, you may file Articles of ___________________________with the Secretary of State that will cure the defect.

B. Raising capital

• Cash contribution (but can be property,_____________________ intellectual property) - typically ________________or an equity ownership in the corporation


• Definitions

o Stock subscription - Agreement to purchase stock in a corporation when it comes into existence

Example 5: Promoter enters into subscription agreements with investors before the company is formed.

o Authorized stock - Maximum number of shares allowed under the AI to be sold o Issued stock - Authorized stock that has actually been _____________ o Outstanding stock - Authorized stock that has not been sold

Example 6: If a corporation has 100 shares of authorized stock and a subscription agreement for 60 shares of stock, once the subscription agreement is recognized there are _______shares of issued stock and_______shares of outstanding stock out of the _______shares of authorized stock.

Note 2: If the corporation wants to increase or change the number of authorized stock, it can do so by_________________________the AI.

o Common stock - class of stock that has unrestricted ___________________and financial rights

Georgia law requires that there be stock that has unrestricted voting and stock that has unrestricted financial. Usually, common stock combines those two elements.

• Different classes and series of stock

o Different classes

Example 7: A company might have Class A preferred voting stock and Class B common stock. Class B common stock has unrestricted voting and unrestricted financial rights. Class A preferred would have extra voting rights but no additional financial rights. This might be used as a mechanism to retain control. For example, if an entrepreneur started a new business and solicits investors; the investors and entrepreneur are given common stock in percentage with their ownership interest in the company. The entrepreneur might be given additional shares of Class A preferred stock which comes with voting rights so that the entrepreneur can retain control over the direction of the business.

Example 8: A company has Class A preferred voting stock issued in three series- Class A1, A2, and A3, for three different founding investors. With each class of stock the company could attach certain rights, e.g., electing a seat on the board of directors. The different series within the class would ensure that each founding investor in the company would have at least one seat on the board of directors.


C. Federal Securities Laws

• Create additional layer of governance over sale and transfer of stock. • Implicated whenever a company makes an initial public offering (IPO)

o Offer stock for sale on a national or public exchange

• Required documents

1) Registration statement filed with the___________

2) Prospectus to potential shareholders/financial disclosures and statements about the types of_______________involved

• Filing registration statement exposes the corporation and those who ____________the statement to liability for any ___________________statement or material ____________________within the registration statement

o Issuing corporation o Board of directors o Signers o Experts, e.g., accountants who audited the financial statements

D. Other Considerations in Forming the Corporation

5. Organizational meeting

o Initial board of directors are elected (if not already stated in the AI) o Board will generally elect or appoint the initial o __________________adopted

These establish the governance framework for the corporation UOA - Bylaws is where other agreements are that change the default statutory rule

6. Amending Articles of Incorporation

o Requires both board of directors and a majority of the shareholders to approve any changes in the AI

SHAREHOLDER VOTING, INFORMATION, AND LIABILITY

Chapter Roadmap

• Voting • Information • Liability

A. Introduction to Shareholders (SH)

• SH are the owners/investors in a corporation.


o Limited role in corporation relative to board of directors

Public company (shares listed on a national exchange, e.g., NY Stock Exchange)

• SH is one out of millions - dispersed and diverse SH • Less incentive to monitor, less weight given their vote

Small, private company

• Limited number of investors with greater ability to impact outcome or success of company

• Greater say in management votes • SH likely to work for the company as employee, officer, and/or director

B. Shareholder Rights - Meetings and Voting

1. Annual Meetings

o Statutorily required o _________________set time and place o Purpose - ________________board of directors (SH main function)

Also can vote on other matters requiring SH approval, e.g., amending AI or approving a merger

Exam Tip 4: Purpose of the annual meeting was subject of exam question.

o Failure to hold annual meeting - SH can seek _________________________ compelling meeting

2. Special Meetings

o Extra meetings called by the board of directors OR by a SH or group of SH with _______% or more ownership of the corporation

o Purpose - generally to ________________________a transaction or corporate action requiring SH consent, e.g., amending the AI or approving a merger

3. Alternative to SH voting at a meeting

o SH may take action that could have been undertaken at a meeting by __________________ written consent

4. Notice

o Shareholders entitled to vote at a meeting must be given notice of either type of meeting. o Unless otherwise stated in bylaws, notice must be given between 10 and 60 days before a

meeting o Notice must include time, date, and place of meeting. If it is a _________________meeting,

notice must include the______________________of the meeting. o A shareholder may __________________notice in writing.


5. Voting

o Straight voting - one _______________= one ____________

Can be other voting arrangements, e.g., preferred stock - owner may be given additional votes for each share of preferred stock

Example 9: One share of preferred stock garners five extra votes

Any additional voting arrangements must be established in the_____________________

o SH Record List - Establishes who has voting rights for each of the shares of ______________ stock in a company

o Record Date - Bylaws also establish the _____________________________, the cutoff date for when you can qualify to be on SH record list.

o Quorum - Minimum number of SH that must be present for vote to be binding

UOA default rule - there must be a majority of the ________________number of SH Can be modified by AI or ___________________

Exam Tip 5: Past exams have asked about how to structure meetings and requirements for making a SH vote binding.

o Once quorum is established, must establish that a particular resolution or election passed

Default standard is majority approval of the SH_________________ in order for a vote to pass

Approval requirement can also be changed in the AI or bylaws If there are special classes of stock or series of stock, bylaws will state which classes

qualify for quorum and majority approval

6. Proxy voting

o SH appoints a representative to vote their shares on their behalf o Proxy votes count for both approval and quorum minimums

Exam Tip 6: Questions on proxy voting have appeared on past exams.

7. Cumulative Voting

Example 10: Straight voting review: If there are seven board member seats up for election and you own 10 shares of stock and SH B owns nine shares. For each seat, if you put your 10 votes against B's nine votes, you always win and you would control the seven board member seats.

o Cumulative voting: Total number of board seats available multiplied by the number of shares held by a particular SH.

Example 11: There are seven board member seats up for election and you own 10 shares of stock. You would have 7 x 10 = 70 votes to cast in the election. Because there are seven available seats, the seven highest vote-earners would


be the seven directors elected. If SH B owns nine shares, you will still win and control the board - not every seat, but some seats.

Example 12: If SH B own 15 shares, SH B would have 105 shares to cast. Under cumulative voting, you could take your 70 shares and either put all 70 votes on one particular seat, ensuring control of at least one seat, or you could split your votes and put 35 votes on two separate seats. By apportioning your votes, you can ensure that one or two of the candidates make it into the top seven vote-getters.

o Cumulative voting benefits the___________________________SH.

8. Plurality voting

o Plurality - the highest vote earner, even if not a majority, will be sufficient to win.

9. Staggered term boards

o Board members are elected for two or three year terms; 1/2 or 1/3 of the board is elected every year ("rolling director election")

o Provides for some continuity on the board from election to election; institutional knowledge o Deterrent to hostile takeover

10. Voting agreements

o Vote Pooling Agreement - a________________________between SHs on how they will vote their shares in future elections

Binding Enforceable Not self-executing (can be breached)

• Damages • Raises question about election results

Key features

• Typically used by minority SH to ensure some representation on the board • Especially helpful with_________________________voting • Maximum duration -_____ years

o Voting Trust - A trust formed by SH to which SHs transfer legal ownership, not beneficial ownership, of their shares.

___________________votes the shares in accordance with the terms of the trust. Key features

• A writing • _______________and __________________ with the corporation


• Maximum duration - _____years

11. Management Agreements

o Deviation from default management statutes for corporations

In the AI articles of incorporation or Written unanimous agreement of SH Maximum duration - _____ years

Note 3: Cannot be applied to ____________________ompanies.

o Management agreements can include:

Elimination of the BOD; restrictions on its powers Authorization or making of distributions (i.e., paying dividends) Division of property rights; division of voting power; division of authority between SH

and board.

C. Shareholder Rights: Information

• Information rights necessary to protect voting and financial rights • SH can access corporate records, books, meeting minutes

o Must provide ___________________notice to the corporation

________days advance notice Establish a proper_____________________________

• Reasonably related to SH interest in the company, not purely harassment

• What can shareholders get automatically? (Think A,B,C,D,E,F,G)

a. Articles of incorporation

b. Bylaws

c. Contact information for________________directors

d. Director resolutions re share classification

e. Three prior years of SH meeting___________________

f. Filing (most recent) of annual registration with the Secretary of State

g. Governance related SH resolutions that modify classifications of __________________

• Remedies for failure to allow SH access

o SH can petition the court for enforcement of his inspection rights

• Special requirements for public companies


o Under the SEC, publicly held corporations are required to supply shareholders with an annual audited financial statement.

D. Shareholder Rights: Limited Liability

• As a general rule shareholders are not personally liable for the debts or torts of the corporation • Piercing the corporate veil (PCV) - Exception - If PCV, then a corporation’s separate legal

existence is disregarded, and the SH held personally________________for corporation's_______________and torts - if corporation is found to be the alter ego of the individual SH.

Exam Tip 7: Topic appeared in prior exam questions.

• Burden of proof - Borne by person claiming to hold an individual SH liable under PCV

o Fact sensitive analysis and a high standard burden

• Elements used to demonstrate alter ego

o Underfunding of corporation o Formalities observed (meetings, maintaining records, holding elections) o SH transactions with corporation in self dealing manner o SH uses corporate assets for own expenses (loans from the till, new car, mortgage payment) o Siphoning off corporate assets o Using the corporate form to avoid liability to other creditors (transferring encumbered

assets to the corporation) o Exercising significant ________________________________________________ over the

corporation o Defrauding or misleading corporate creditors

• Controlling shareholders (an exception to limited liability)

o Individual or group with:

Control 50% plus one of the corporation shares OR Have/has largest controlling stake so that they cannot be outvoted (may be less than

50%) OR Holder of a________________power, i.e., can direct the outcome of a vote

o Fiduciary duty of controlling SH to treat other SH ______________________and equitably is triggered when:

1) Selling ownership interest to an outsider

2) Freezing out a minority SH (firing, excluding from board, excluding them from corporate decisions)

3) Receiving a benefit denied to the other shareholders


A controlling shareholder must _______________________information important to a SH vote that a reasonable person would find valuable or face liability for nondisclosure.

SHAREHOLDER FINANCIAL RIGHTS & LITIGATION

Roadmap

• Shareholder (may be abbreviated as SH) financial rights • SH right to sell securities/stock • SH litigation rights

o Direct vs. Derivative Suits

A. Shareholder’s Financial Rights

1. Residual Claims

o SH equity ownership in corporation entitles them to claim any assets remaining in the corporation when it is liquidated or sold after all the _______________have been paid

Example 13: If a liquidating corporation had $100K left in the corporation after all its debts were paid, A as a 20% SH would receive $ 20,000, B as a 50% SH would receive $50,000, C as a 15% SH would receive $15,000, and D as a 5% SH would receive $5,000.

o Residual claims only triggered when company is sold or liquidated

2. Distributions

o Board of directors (BOD) authorized transfer of corporate property to SH in pro rata distribution, i.e., in accordance with SH ownership interest

o Cash distributions are ______________________ o Distributions can also be in the form of corporate property, additional shares of stock,

options, grants, or dividends

3. Free transferability of shares

o Generally, SH can sell their stock to anyone at any price. o Three limitations on selling stock:

1) Private restrictions or agreements

2) Fiduciary duties in close corporations among controlling SH

3) Federal securities laws

o If a corporation wants to issue restricted transfer or sale of shares what must it do?

Transferability restriction must conspicuously noted on the ______________certificate


• Restriction on sale only enforceable with ___________________ to both the SH and the third party

o Common restrictions in restricted stock include:

______________________for the transfer from the corporation or its SH _______________ for the corporation or its SH to buy the stock Right of first refusal to the corporation or its SH to purchase the stock before selling it to

a third party Buy-sell agreement Restricted transfer to designated SH classes or persons

Example 14: You can only sell to other SH with Class A stock

o These restrictions are most commonly used in _________________or private corporations

4. Buy-sell (Buyout) agreements

Exam Tip 8: This topic was the subject of a prior exam question.

o Agreements between SHs, between SH and the corporation, with either the corporation or its SH being obligated to buy the stock under the terms of the agreement

o Triggering events

Death of a SH Retirement __________________ Bankruptcy Termination of employment Voluntary desire to leave with _________________

o Right to buy or sell can be mandatory, _____________________, or right of refusal o Can be vested in other SH or the corporation o Necessary when there is no ready market for shares of closely held corporations, can

prevent unintended consequences

Example 15: Three SHs own and operate a real estate appraisal company. SH 1 is 30 years old and just starting off with a young family. SH 2 is 45 years old and has a well-established career. SH 3 is 60 years old and divorced. A buy sell agreement may be helpful to address some of the following issues: In the event of SH 1's divorce, a buy-sell agreement would prevent SH 1's spouse from becoming a SH as a result of a divorce settlement; in the event SH 2 needs to sell shares to avoid bankruptcy, the agreement would prevent holding up the shares in a bankruptcy proceeding; in the event SH 3 wants to fund retirement and terminate management responsibilities, the buy-sell agreement would help prevent shares coming under the control of corporate outsiders.


5. Restriction on transferability for controlling SH

o When a controlling SH sells her interest in a closely held corporation to a third party, the sale may trigger______________________ duties owed to ________________________ SH

Note 4: Federal Securities laws impact certain sales of securities, especially interstate sales.

B. Shareholder Litigation Rights

6. Direct vs. Derivative suits

o Direct suits redress a unique harm/injury ___________________

Example 16: SH prevented from exercising voting rights; not provided with meeting notice; denied a distribution

Example 17: Tort claim arising out of tortious conduct of the corporation

o Derivative Suits

Redress harm to corporation and injury to ____________________ Any recovery goes to _________________________and not the individual SH

• SH may be able to recover attorney's ___________

Requirements

• Holding and Standing

o SH bringing the suit must be a SH at the time of the alleged wrongdoing, at the time of filing the suit, and throughout the _______________ of the suit

o SH must adequately and fairly represent corporate interests

• Demand - SH must make a written demand on the corporation to take corrective action and/or asking the _____________________to file a lawsuit

• Time period to wait - SH must wait______days or until the board acts before the SH files derivative suit

o Exception -_______________________________________with 90 day delay

Note 5: Georgia is a universal demand jurisdiction, i.e., a demand is required in every derivative lawsuit, in every case. There are________exceptions. Concepts of demand futility or demand excuse do not apply.

Legal Standards - Once a demand has been made, the corporation can either accept demand (takes corrective action and SH is done) or reject demand (SH can give up or can file derivative suit claiming____________________________________________

• Demand refusal receives the protection of the _____________________________


(BJR), and courts will dismiss derivative suits alleging wrongful refusal if the corporation can demonstrate a good faith determination after reasonable investigation that derivative suit is NOT in the _____________________________ of the corporation made by:

o Majority of disinterested directors if there is a ______________________ o Majority vote of a ____________________________of two or more

independent directors OR o A panel of one or more independent persons appointed by the_____________

THE BOARD OF DIRECTORS

Roadmap Boards of Directors (BOD)

• Board Composition • Board Action • Business Judgment Rule • Duty of Care • Duty of Loyalty

o Conflict of Interests o Corporate Opportunity o Competition

• Additional Powers

A. Introduction

• The board of directors (BOD) is exclusively vested with the ______________________________ of the corporation’s business and affairs.

B. Board Composition

• Number of board members

o Established in AI or _______________ o Must be at least__________- usually more - typically an odd number

• Qualifications

o Default rules

Natural person 18 years of age or older ____________________ a Georgia resident ____________________ a shareholder

• UOA in AI or bylaws


• Elected by SH

Exam Tip 9: This was the subject of a past exam question.

o Elected by SH at the _______________meeting

• Terms - __________year UOA (e.g., staggered boards) • Removal/Replacement

o Resignations - Board members may resign o Removal

______________________________cause UOA in AI or bylaws

• Staggered board - removal with cause only • Only SH votes can remove a director

o Normally at a _________________meeting called for that purpose

• UOA - Vacancies filled by

o Vote of SH or o By existing board member

C. Board Actions

Exam Tip 10: This topic was the subject of a prior bar exam question.

• Meeting Requirements

o Regular meetings or o Special meetings with ____________

Notice can be waived by signed written waiver OR Attendance at the meeting

o Board members can appear in person or by telephone o Boards can act by_______________________written consent to the action in lieu of a

meeting

UOA in AI or bylaws

Note 6: BOD action/vote often documented with a formal BOD______________________________which states what the board considered and what the board ultimately decided.

• Voting requirements

o Quorum Rules

UOA, a quorum is a majority of all directors in office

o Proxy rights - No proxy rights for BOD (must appear in person or by telephone)


Exam Tip 11: Shareholders have a proxy right. Directors do not. This was tested on a prior exam.

o Approval - UOA, the assent of a majority of the directors present at the time the vote takes place is necessary for board approval.

Example 18: Under the default rules, 5 of 9 directors present is the minimum quorum and 3 of those 5 directors is the minimum majority that could vote to approve a transaction. That vote would be documented in a board resolution so that the parties would know how the BOD formally decided to act.

o Are voting agreements among directors permissible?________Each director is expected to exercise independent judgment each time they vote because they owe ________________ duties.

• Committees - The board of directors may take action through one or more committees if the committee is created with a__________________of directors and one or more directors serves on the committee.

o BOD committees cannot

Substitute for shareholder approval Fill BOD vacancies Amend the _____________________________________ Adopt, amend or repeal the_______________ Approve a plan of merger that would not otherwise require a SH vote

o Sarbanes Oxley Act committees for public companies

Must have audit committee

• Oversees the corporation’s outside auditors and their submission of financial statements to the public and SEC

• Audit committee must be composed of ____________________________directors (not employed by the corporation)

D. Fiduciary Duties

• Business Judgment Rule (No second guessing by the court allowed!)

o _________________________ presumption that a director reasonably believed that his actions were in the best interests of the corporation.

o Rebuttable if can show that:

1) Director did not act in good faith by hostile/discriminatory act against___________________shareholders or by obtaining an exclusive _____________

2) Director was not reasonably informed before voting


3) Director is related to or under control of another with material interest in the transaction

4) Director does not exercise _________________________in the face of a known reasonable duty to act

5) Director received a financial benefit to which he was not entitled, or any other breach of his duties to the corporation.

o Georgia courts interpreting the rebuttable presumption require “fraud, bad faith, or an abuse of discretion” to overcome the business-judgment rule. Mere negligence or carelessness is insufficient.

• Duty of Care (DOC)

o Standard: Directors have a duty to act with the care of an ordinarily________________ person in a______________position and under ______________________circumstances.

o Director entitled to rely on the reports, statements and opinions of the following unless :

Officers and_________________________ Experts - e.g. legal counsel, accountants, investment bankers Board__________________________

o DOC in practice

Fact intensive inquiry - facts must demonstrate more than mere negligence or carelessness

Exculpatory provisions

• Authorized in Georgia • AI may include provision that eliminates personal liability for breach of the DOC

• Duty of Loyalty (DOL)

o Standard: A director has a duty to act in a manner that the director reasonably believes is in the best interests of the corporation.

A director breaches this duty by placing his own interests before those of the corporation in order to benefit.

1) Conflict of interest transactions - Director stands on both sides of the transaction (i.e., both ____________________and seller).

Example 19: Corporation X is interested in acquiring a warehouse owned by Corporation Y. If Shannon is director in corporation X and she owns an interest in Corporation Y, she has a __________________________________in the purchase of the warehouse and so would be an "interested director" as both buyer and seller. Financial interest in the outcome may influence Shannon's vote and so there may be a conflict of interest under the duty of loyalty. This


would also apply if Shannon were a director, employee, or agent of either corporation.

Example 20: Familial transactions would include corporate dealings with "related persons" including: director's immediate family, spouse, children, and _____________________(anyone who shares the house); estate/trust of which the director is a substantial beneficiary; trust/estate, conservatee, etc of which the director is a fiduciary.

Safe Harbor - If a director engages in self-dealing, then the director violates the duty of loyalty and the transaction is outside of the business judgment rule unless the safe harbor applies

Requirements for safe harbor -

• ___________________________of the material facts including conflict of interest AND approval vote by committee or majority of disinterested directors OR majority of shares entitled to vote (except those of the interested director)

• OR Transaction is___________to the corporation

o Fair process - untainted by director's conflict of interest o Fair _____________

Remedies

• If shown to be in safe harbor, the transaction may not be enjoined or give rise to __________________________

• If outside the safe harbor, party can ________________or seek to rescind the transaction or may seek damages

2) Corporate Opportunity - A director violates the duty of loyalty by appropriating a corporate opportunity rather than first offering the opportunity to the corporation.

How to identify? The opportunity in question must the following elements:

• Line of Business - consistent with the corporation's line of business and of practical ___________________________to the corporation

• Interest or Expectancy - either legal or ________________________interest • Financial ability - Corporation is financially able to undertake the business

opportunity.

What is the Director’s obligation if there is a corporate opportunity?

• Offer it to the corporation • Only pursue it if the corporation declines it

Example 21: Corporate Catering Corp. (CCC) provides catering for corporate meetings and events. Caren is a director of CCC and also an employee who


handles client contacts. MegaCorp, a long standing client of CCC, contacts Caren and asks her if she is interested in providing catering and event services for their upcoming anniversary party, but they make it clear that they would like to work with Caren individually and not CCC, like they have for the last 3 years. Caren, as a director, owes duties to CCC. Is this a corporate opportunity the taking of which would breach her DOL? Analysis: (i) Is the catering opportunity within CCC's line of business?____________ They provide catering services. (ii) Does CCC have an interest or expectancy, a legal or equitable claim? Not_________________ but equitable since they've worked with Mega for three prior years. (iii) Does CCC have the financial ability to participate? Without facts suggesting otherwise, yes.

3) Competition - UOA, a director cannot compete with the corporation while serving as a director.

E. Additional Powers

• Authority to issue__________________________

1) What are distributions? Transfer corporate property to SH (e.g., cash dividends)

2) When are directors liable for distributions?

• If distribution causes corporate______________________________(i.e., unable to pay off debts when due)

• If directors________________________breach a fiduciary duty • If distribution is___________________________

3) Who else might be liable for distributions?

• SH who knowingly takes an unlawful distribution

o SH may have to return the distribution

• Inspection Rights - for any purpose related to performance of directorial duties • Appoint Corporate Officers

INDEMNIFICATION, OFFICERS & THE SEC

Roadmap

• Director Indemnification • Officers Role in the Corporation

o Agency authority o Fiduciary duties o Special rules for officers of Public Companies—SOX o Personal liability


• Federal Securities Laws

A. Director Indemnification

Directors named in lawsuit for their corporate actions may seek indemnification for expenses and judgments.

1. Mandatory indemnification

o A corporation is required to indemnify a director for any __________________ expenses, including court costs and attorney’s fees, incurred in the____________________defense of a proceeding against the director in his role as a director.

Must be successful on the ___________claim

o In addition, a corporation must indemnify a director when ordered by the _________________

2. Prohibited indemnification

o A corporation is prohibited from indemnifying a director against liability arising from the receipt of an___________________personal benefit.

Example 22: Shannon in the Board of Director chapter who had a conflict of interest as a director of Corporation X buying a warehouse owned by Corporation Y in which she was a significant shareholder. She obtained a benefit that would prohibit her from receiving indemnification if the benefit resulted in liability in a lawsuit.

Example 23: Caren misappropriated a corporate opportunity when she secured a job with MegaCorp to cater their anniversary party. If she incurred an improper benefit and incurred liability in a lawsuit, she would be unable to receive indemnification.

3. Permissive indemnification

o A corporation ____________indemnify a director, even in an unsuccessful defense of a suit if:

Either the director acted in ___________________with a reasonable belief that his conduct while acting in his official capacity was in the __________________________of the corporation, OR

The director’s conduct while not acting in his official capacity was at least ________________________to the best interests of the corporation AND

The indemnification is approved by

a) Majority of disinterested___________________or committee of such,

b) Uninterested shareholders, OR


c) Independent counsel chosen by the disinterested directors.

Note 7: If it is a derivative suit, then permissive indemnification only goes to ___________________, NOT to any judgment awarded against the Director.

4. Shareholder approved indemnification

o Without regard to earlier limits, shareholders may agree to expand the scope of indemnification, even in advance, in the AI, bylaws, contract, current shareholder _______________________, to indemnify directors in additional circumstances excluding conflict of interests, competition, opportunity, intentional violations of law and improper dividends.

5. Advancing expenses

o Corporations may advance (pay expenses early) if:

Director affirms a good faith belief that he met standards of conduct for indemnification

• All advances subject to _________________________if necessary

B. Officers and Other Employees

6. How are officers appointed?

Officers are appointed by the BOD.

7. What officers are required under Georgia law?

o Look to AI or __________________. Georgia does not require a set number or specify which officers a corporation must have.

o Only requirement - at least_________ officer who can prepare minutes and authenticating the records of the corporation.

8. Where should you look to understand a particular corporation’s officers and duties?

o Look to the bylaws and BOD resolutions

9. Officers can bind the corporation in tort and contract as agents of the corporation

o Must act with authority

1) Actual authority - _____________________authority with explicit communication to do X

• Can be found in job description, bylaws, BOD resolution

2) Implied authority - Authority to do tasks necessary and______________________to fulfill express authority tasks

Example 24: If officer is expressly authorized to enter into a lease on behalf of the corporation, the officer has the implied authority to take all the subsidiary and necessary steps to enter into the lease, e.g., negotiating the terms, signing


the agreement, advancing a payment, hiring an attorney to review the document, etc.

3) _________________________authority- Third party's belief that officer has authority to undertake tasks based on how the corporation_________________________the officer (past actions, title)

10. Fiduciary duties

o Duty of care and duty of ___________________ o Any other duties enumerated in AI or bylaws o Officers of public companies owe special duties under Sarbanes Oxley reporting

requirements such as:

CEO/CFO must certify the accuracy of reported financial statements filed with the SEC

• They face penalties for _________________

11. Officers’ personal liability

Exam Tip 12: This has been a hot topic on past exams.

o Generally no personal liability to third parties merely for the performance of duties as a corporate officer

Can be liable to a third party if the officer has committed an individual____________

Example 25: If a corporate president signs a contract as the company president and on behalf of the corporation, corporation is liable on the contract unless there is a basis for assigning direct liability against the president, e.g., president made a misrepresentation in entering into the contract.

C. Federal Securities Laws - Impose additional obligations on officers and directors

• Rule 10b-5 action

o Any SH has a potential 10b-5 claim based on the purchase and sale of stock and other securities

o To bring suit, must meet eight required elements

1) Claims must be filed in federal court

2) Plaintiff must have purchased or sold a ______________________

• Usually stock in a company but can be any investment if the profits are dependent on the work/input of others

• Sale may be voluntary or forced as a result of a ___________________

3) Interstate commerce

• Technology and publically traded stock; interstate mail


4) Fraudulent or deceptive conduct

• ____________________statements and material ________________________ are sufficient to satisfy this prong

Example 26: Company denies impending merger negotiations when already underway (untrue statement)

Example 27: Failing to disclose adverse events like negative drug trials (material omission)

Note 8: Untrue statements and material omissions do not include __________________

Example 28: Our stock should be strong for the next two years! (opinion)

5) Conduct relates to ______________________information

• Material - anything reasonable investor would find important in decision to buy or sell stock

6) Acted with scienter, i.e., with intent or recklessness regarding the statements or unfair practices

7) Reliance

• Justifiable reliance on the defendant's fraudulent conduct, OR • ___________________on the market

o Dispersed securities ownership (i.e., millions of owners in public companies) o Not everyone reads/knows everything at the time that they buy or sell stock. o While individuals may be unaware of false statements, market makers (i.e.,

brokers, analysts) who do have access to the information and they take actions that set the stock price

o So an individual buys or sells after a false/misleading statement artificially inflated or decreased the stock price because "market makers" were aware and relied on the information.

8) Harm

Note 9: 10b-5 applies to both public and private companies but is most often applied with public companies. They are easier to prove because of filings etc. public companies are required to make.

• Insider trading as a specific form Rule 10b-5 liability

o Insider cannot trade on confidential material information o Disclose or abstain rule: Either make the insider information public or abstain from trading

on it


o Traditional insiders include officers, _____________________, and employees of the corporation

o Constructive insiders are service providers such as lawyers, accountants, consultants, other independent contractors with access to material nonpublic information

o Tippees are ________________________________who are given nonpublic information by an ________________and the third party________________or should have known that the information was provided in violation of the insider's duty.

Example 29: You are a general counsel for a public company and you get material nonpublic information. You cannot tell your mom to trade based on this knowledge because she be a "tippee" prevented from trading or face insider liability.

o Misappropriator - A person who uses _________________________ information to trade stock or other securities in violation of a ________________________duty of confidentiality owed to the corporation.

Example 30: A law partner who accessed material nonpublic information through firm files about his partner's client and then traded based on that knowledge was held liable for misappropriation.

• Section 16(b) liability for officers and directors - prohibition on short-swing profits

o Insider may have to ___________________short swing profits o Elements

__________________corporation on a national exchange with $______ million in assets or more

Corporate directors, officers and SH with ______% ownership or more Purchase and sales within a _____month window that generated profits

o To encourage compliance, corporate_______________________must file a report with the SEC regarding any changes in their stock ownership

Example 31: On January 1, President sells 200 shares of ABC Corporation’s stock for $500 each that she had purchased several years before for $100 each. On May 1, President purchases 200 shares of stock for $400 each. President has a short-swing profit of $20,000 (i.e., the sale of 200 shares at $500 each, less the purchase of 200 shares at $400 each).

MERGERS & ACQUISITIONS

Roadmap

• Mergers • Asset Acquisitions


• Stock Acquisitions • Dissenting SH Appraisal Rights

A. Mergers

1. Introduction

o Merger is the combination of two or more corporations such that only ________corporation survives.

o The surviving corporation (big fish) is usually called the __________________. o The terminating corporation (little fish eaten by big fish) is usually called the

________________ o Consequence? All assets _________________________________owned by the target

corporation are automatically transferred to the acquirer/survivor. o Corporations can merge with other corporations, LLCs, partnerships, etc

2. Statutory procedures to complete a merger

o The BOD of ____________corporation must approve of the merger; o Notice must be given to SH, and the notice must include a summary of the plan of

merger/consolidation; o The SH of each corporation must usually approve the merger; and

Quorum and majority approval default rules apply Typically a special meeting

o File required documents (e.g., plan of merger, amended AI) with the_________________ o Exceptions to requirements for SH voting:

NO SH voting if:

• Parent/subsidiary (short-term) mergers: A parent corporation that owns at least ______% of the voting power of each class of outstanding stock of a subsidiary may merge with the subsidiary without the approval of the BOD or the SH of the subsidiary (corporation owned by another corporation; puppeteer and marionette).

• Mergers where the resulting corporation has the same AI, and the same number of ___________________________shares with similar rights do not require approval by the shareholders of the surviving corporation.

B. Asset Acquisitions

• Definition. A corporation sells corporate assets to an acquirer. • Procedures

o Generally NO transferring/seller corporation SH approval if:

______________________ or Liquidating Corporations - advisable to meet liabilities or corporation formed to be liquidated


• Can be all or substantially all assets

_____________________corporations transfer to a subsidiary corporation

• Can be all or substantially all assets

Any transaction that is less than all or substantially all assets; and Mortgage, pledge, or encumber property.

o All or substantially all assets

Fair value of assets sold is greater than _________ fair value of all corporation assets Corporate revenue by sale of assets is greater than__________ of corporation's total

revenue

o Consequences if sale is all or substantially all

Approval of___________________________SH required

• Special meeting with notice

Liability

• ________________________corporation is liable for debts on assets transferred unless released by third party

• Transferor/acquirer corporation is not automatically liable unless specifically assumes responsibility

C. Stock Acquisition

• Definition. When a corporation acquires stock in another corporation and secures control without effectuating a statutory merger.

• Procedures

o Stock Swap - Corporation A offers Corporation B Shareholders stock in Corporation A in exchange for giving up their stock in Corporation B. Generally, no __________________participation.

Share Exchange where one corporation acquires all outstanding shares of one or more classes or series of stock in another corporation.

Note 10: Both BODs approve and target SH (i) approve and (ii) get dissenting rights. NO acquiring SH approval required.

o Stock Purchase - A corporation may purchase stock in another corporation on the open market or via______________________________

Tender offers - Open offers to all SH of target corporation to buy X amount of stock at X price (usually above market price - a premium)


• What is the benefit of using a stock acquisition? Whether swap or purchase it avoids negatives with target BOD; bypasses and goes straight to SH

Note 11: Usually a hostile takeover in which target BOD opposes the transaction.

• What additional SEC rules apply to stock acquisitions?

o A person who acquires more than ______% ownership stake in public company must file a statement with the SEC that discloses the ownership interest.

D. Dissenting SHs’ Right of Appraisal

• Defining Appraisal Rights. A shareholder who objects to a fundamental corporate change may be able to force the corporation to buy his stock at a________________________as determined by an appraisal

• When do SH have appraisal rights? (My Silly Sister Ate an Apple)

Mergers (including short form mergers with parent/subsidiary)

Share exchange

____________of all or substantially all assets.

_________________________to AI is material and adversely affects share rights

Any corporate action pursuant to a SH vote if GBCC/AI, bylaws, or BOD resolution gives right to dissent

• Qualifying SH

o VOTE - Must have right to vote on the change or be a minority shareholder in a short-form parent/subsidiary merger

o NO READY MARKET to sell stock - so, no public company SH can participate in dissenters' rights

• Procedure for Exercising Dissenter's Rights

o ___________________to Corporation. SH must provide written notice of intent to seek appraisal rights delivered __________________ the SH vote on the proposed action.

o No favorable vote - SH cannot vote in favor of the action—must abstain or vote no. o Dissenter's Notice - Within 10 days after SH vote, corporation must provide notice on

procedures to demand payment to all SH who provided notice of intent and did not vote in favor of the action

o Demand for payment - SH must comply with the demand procedures in the Dissenter’s Notice.

o FMV - The corporation must offer to pay FMV (“________________________________“), plus accrued interest, within the later of 10 days after (i) the corporate action was taken or (ii) the demand for payment was received.


o SH dissatisfied with offer by corporation. The SH may reject the FMV offer from the corporation and provide_______________________ of the SH’s own estimate of FMV. If the parties cannot agree on the FMV, the action goes to court within 60 days after receipt of the payment demand.

• Appraisal rights are the exclusive remedy of dissenting SH unless:

o Corporation failed to follow__________________________ procedures o SH vote approving transaction tainted by fraud/deceptive practices

TERMINATING THE CORPORATION

Roadmap

• Voluntary Dissolution • Involuntary Dissolution • Administrative Dissolution

A. Overview

A corporation may terminate its status as a corporation either ________________________by agreement or ____________________by court order or state action.

1. VOLUNTARY DISSOLUTION

o Procedure BEFORE the Issuance of Stock.

_______________________vote of the incorporators or initial directors File Articles of Dissolution with the secretary of state

o Procedure AFTER the Issuance of Stock

BOD adopts _______________________to dissolve the corporation Majority SH approve the dissolution, and File notice with secretary of state of intent to dissolve

o Effect of Dissolution

What is winding up? Time period when corporation exists after agreement to dissolve to wind up/close out/liquidate business

What does winding up include?

• Collecting_________________- accounts receivable, etc. • Disposing of/selling property • Discharging/paying all ______________ • Distributing property to SH on ________________basis I.e., in accordance with

ownership percentage • Anything else necessary to liquidate


How can dissolution be revoked? At any time before filing articles of dissolution, corporation may file a statement of _____________________________with secretary of state

Priority of Distributions in Dissolution

i) Creditors

ii) ______________________SH - SH with preferred shares of stock granting priority

iii) All other SH

When are articles of dissolution effective?

• After winding up, the corporation delivers articles of dissolution to the secretary of state. Once it files those articles, the corporation shall cease to exist, except for purposes of legal actions.

2. INVOLUNTARY DISSOLUTION

o Who can bring a claim?

One or more SH with _______________________of outstanding stock and alleging

• Waste • Director or those in control are acting with ______________________________ • Irresolvable director _______________________ with irreparable injury or inability

to conduct corporate affairs, or • Unresolved ________deadlock over director elections.

Judgment Creditor of an insolvent corporation _____________________________________ for fraudulent AI or ultra vires actions

(exceeds corporate authority)

o What power does the Court have in dissolution proceedings?

Broad ______________________powers - appoint receiver, custodian, order dissolution, oversee winding up

3. ADMINISTRATIVE DISSOLUTION

o When can the Secretary of State seek administrative dissolution?

When there has been a registration or fee default by a corporation that remains uncured for ________days

o How can the corporation be reinstated?

Cure defect within____________________of administrative dissolution and provide notice and an application for reinstatement to the secretary of state


SPECIAL CORPORATE ENTITIES

Chapter Roadmap

• Closely Held and Statutorily Close Corporations • Foreign Corporations • Professional Corporations • S Corporations • LLCs

A. Closely Held Corporations

Exam Tip 13: This has been a hot exam topic on prior exams.

1. Definition

o Limited number of owners o Privately held

2. Identifying features

o Not publically traded on national stock exchange o Owned by __________________________of shareholders who often have a pre-existing

familial or personal relationship o Some or all of the SH may be__________________by the corporation and/or serve as

_________________________________ o The shares are not readily transferable because ___________________________________

This gives rise to the phrase "locked into closed corporation but frozen out of benefits," used to describe minority SH in close corporations who cannot sell or exit the company and are excluded from participating in management.

3. Fiduciary duties

o SH in close corporations owe heightened fiduciary duties because of:

____________________transferability Unique _______________relationship among SH

B. Statutorily Close Corporations

1. Definition

o Corporation that formally elects to be organized as and governed as a statutory close corporation.

2. Statutory Close Corporation Formation Requirements

o Statement in AI that it is a statutory close corporation o ________or fewer SH


o Conspicuous transfer restrictions statement on share certificate issued by statutory close corporations limiting transfer to:

The corporation’s right of first refusal Members of SH immediate family or an estate executor Trust of which SH’s immediate family members are beneficiaries Other SH of the same share class in the corporation In the case of a merger or consolidation

3. Other Features of Statutory Close Corporation/Unique Abilities

o By written unanimous agreement, SH can_________________________________the BOD. o No requirement for an______________________________ unless requested by a SH o No_________________are required if the AI or a Shareholder Agreement address

governance. o Fundamental corporate changes such as mergers or asset transfers require ____________

SH approval (super majority) o Corporation can cease being a statutorily close corporation by amending AI with two-thirds

SH approval (super majority)

C. Foreign Corporations

1. Definition

o Corporation incorporated in another state like Delaware (not Georgia) is doing business in Georgia

o Foreign corporation must register with the Georgia secretary of state and get a certificate of _____________________

D. Professional Corporations (PC)

Exam Tip 14: This has been a hot topic on previous exams.

1. Definition

o Corporation is organized to provide a specific type of ________________________service

2. Requirements to Form PC

o Common qualifying professions in Georgia include: (Lonely Mermaids Always Acquire Psychotic Violin Habits)

L- Law M- Medicine and surgery A - __________________________and related services A - Accounting P - Psychology V - Veterinary services


H - Harbor piloting

o Designation in the ___________that it is professional corporation

At least one member of the board of directors and the president of the PC must be licensed in the profession

o SH must be licensed in the profession o SH transfers are restricted to others licensed in the profession

3. Professional liability

o PCs limit vicarious liability arising from malpractice by ______________professionals in the corporation.

o Individuals are always liable for______________________malpractice.

E. S Corporation

1. Definition

o Corporation electing to be taxed as a ___________________________________

Corporation does not pay income tax; taxable income of the corporation is passed through to SH and they pay individual income tax on profits.

Other corporations are referred to as "C" Corporations

2. Requirements

o The Corporation files an IRS form and is approved by the IRS o No more than_________ SH, and the SH must be:

I - Individuals T - Trusts/estates U- US citizens or resident aliens

o Only_____________________of stock o ________________________approval by SH (to be an "S" Corporation)

F. LLCs (Limited Liability Company)

1. Definition

o An unincorporated entity that combines features of a partnership (like management and taxation) with features of a corporation (like limited liability)

2. Governing Law: Georgia Limited Liability Company Act

3. Formation

Exam Tip 15: This has been a hot topic on past exams.

o File Articles of___________________________(not incorporation) with the Georgia secretary of state that include:


Name of the LLC including ___________________________ to signal to the public that it is an LLC

Name of the organizers Street address Principal place of business

o Most LLC also have a written operating agreement (corporate equivalent: ______________)

4. Investing in and Managing an LLC

o Owners/investors are called ________________________(corporate equivalent: SH)

Members have ________________________(like SH in a corporation) Members are always liable for ________________________

o UOA, new members can only be admitted by______________________ consent of members

Transfers without unanimous consent only transfer____________________rights, but no _______________________rights.

o UOA (look to AO or Operating Agreement), _____________________manage the business and affairs of the LLC (like a __________________________)

This is a called a__________________________LLC. What vote is needed to approve an action? ____________________________ Members involved in management are ___________________of the LLC. _____________________owe fiduciary duties - duty of loyalty; duty of care

• Duty of loyalty - Requires there be no divided loyalty between the individual's interest and the corporation, i.e., you cannot put your individual interest ahead of the LLC

• Duty of care requires acting in a manner believed in good faith to be in best interest of the LLC with care of ordinarily _______________________person

The duties are subject to tailoring in the Articles of____________________________ or the_______________________________Agreement.

• What do we mean by tailoring? Expanded, restricted, defined by triggering events

o LLC can elect to become manager-managed in AI or Operating Agreement

How do we describe this type of management? _____________________________(like corporation)

If there is more than one manager, how are decisions made? _____________________ approval vote of managers

Here, the _____________________________are agents of the LLC (not the members) and managers owe fiduciary duties of DOL and DOC to the LLC (members do not)


o UOA in the Articles of Organization or the Operating Agreement, members share profits and losses ________________________

5. Exiting an LLC and Other Majority Events

o Member Termination

Members are terminated from the LLC if:

• Exit conditions of the Articles of Organization or Operating Agreement are met

Example 32: Retirement, set term of five years, loss of employment, etc.

• Removal is allowed only pursuant to the Articles of Organization or Operating Agreement

• Member transfers/attempts to transfer interests without___________________ consent

• Death or incompetence of a member

Absent a pre-negotiated right set out in the Articles of Organization or Operating Agreement, members of an LLC cannot voluntarily _________________________ the LLC

o LLC Mergers

LLCs can merge with other LLC or other business entities ( including corporations)

o LLC dissolution occurs

In accordance with the Articles of Organization or Operating Agreement Unanimous consent of all members Judicial/involuntary dissolution granted by a court

Note 12: Under this LLC form, there is heavy reliance on the agreement of the parties and freedom of contract. (Articles of Organization/ Operating Agreement)

[END OF HANDOUT]

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