Corporations
Prof. Garbrecht, Fall 1999
OUTLINE
I.
Introduction
A. Choice of Entity – not one form of business entity is best for all situations.
1. Sole Proprietorship
2. Partnership
a. general partnership
b. limited partnership
3. Corp – fictitious being, independent of owners, that can conduct business in its own name.
a. C (Regular) corp
b. S Corp
4. Limited Liability Company
B. Non-Tax Considerations
1. Limited Liability – third parties cannot sue owners directly but can only sue entity. Insulate personal assets
from claims.
2.
Relative Ease & Expense of Organization & Operation – steps to set up an entity and the fees involved.
3.
Profit/Loss Division – flexibility to alter.
4.
Management Structure – flexibility to alter.
5.
Capital Structure – flexibility to alter. Who are investors? Look to liquidation considerations.
C. Tax Considerations
1. Pass Through Income Taxation – taxpaying entity (C corp.) with “double taxation” v. tax reporting entity
(partnerships, S Corp, LLC). Does entity have to file own income tax return?
2.
Self-employment Tax – 15.3% of $72,6000 & 2.9% of all above. Which entitles throw off income subject to
s.e. tax?
3.
Fringe Benefits – deductible medical insurance; cafeteria plan, profit-sharing, retirement.
D. Sole Proprietorship
1. Non-Tax Considerations
a. Limiting characteristics – two individuals other than husband & wife cannot create; does not have limited liability (personal assets are subject to tort claims). Negative.
2.
b.
Ease & expense – easy & inexpensive to create b/c no filing & no fees to pay. Positive.
c.
Profit/Loss – not applicable b/c distribute p/l to self only.
d.
Management – proprietor manages himself.
Tax Considerations:
a. Pass-Through Tax – no entity to tax on & no consideration of double taxation. Positive.
b.
Self-employment & SS tax – Negative.
c.
Fringe Benefits – Can business pay premium for owner’s insurance & deduct it? Can only deduct 45%.
Negative. Also, no cafeteria plan.
3.
Income Tax Rates:
1998 Taxable Income
$ 0 - 25,350
$25,351 – 61,400
$61401 – 128,100
$128,010 – 278,400
$278,401 & above
E. General Partnership
1. Non-Tax Considerations
Tax Rate
5%
28%
31%
36%
39.6%
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2.
3.
a.
Unlimited Liability for all obligations under partnership – joint & several liability for all partners. Negative.
b.
Ease & Expense – don’t have to have written agreement to form partnership. Created easily b/c no filing
w/ state. Need to keep books & records & file income tax reports for partnership. Positive.
c.
Profit/Loss – flexibility on allocations. Positive.
d.
Management – each partner has a say in partnership. Can be structured in any way. Positive.
e.
Capitol – flexible. Positive.
Tax Considerations:
a. pass-thru – positive; tax reporting entity – each partner receives a statement of income they receive from
partnership, which goes on the Schedule # of the 1040 income tax form. No tax on entity itself.
b.
Self-employment & SS tax – same as sole proprietor. Negative.
c.
Fringe Benefits – deductible insurance premiums of partner’s insurance – 45% deduction. Will be 100%
in year 2002. No cafeteria plan. Negative.
OK statutes:
a.
§81 – Cert where fictitious name used – Filing – Exemption - requirement of fictitious name certification – state full names of all
partners, their addresses, and address of all partners.
A. Except as otherwise provided by law, every partnership transacting business in this state under fictitious name, or designation
not showing names of persons interested as partners in business, must file for recording w/ Sec of State, a cert, stating names
in full of all members of partnership, their places of residence & mailing addresses, & mailing address & physical office address of partnership.
B. Provisions of § A shall not apply to partnerships or limited partnerships which are transacting business under name filed w/
Sec of State in compliance w/ other law.
C. Limited Partnership
4. Non-Tax Considerations
a. Liability - have to have at least one general partner who is unlimitedly liable for all obligations. Can
have numerous limited partners. General partner can be another partnership, a corp, or an LLC. Does not
have to be an individual. Positive & negative, depending on whether evaluating individual is limited or
general partner.
5.
6.
b.
Management – Limited partner cannot participate in management of partnership. Otherwise, management of partnership is same as general partnership. Positive characteristic.
c.
Ease & expense – more difficult than organizing a general partnership. $100 filing fee. Indifferent in
whether a negative or positive characteristic b/c falls in middle of ease & expense range.
d.
Profit/Loss – same as general partnership. Positive.
(1) General Rule – passive losses cannot offset active income; can offset passive income.
e.
Capitol – same as general partnership. Positive.
Tax Considerations – (taxation set forth in Chapter K of Internal Revenue Code):
a. Pass-thru - positive characteristic
b.
Self-employment tax – statutorily defined limited partnership income is not self-employment income;
except for the general partner. Positive for limited partners, but Negative for general partner.
c.
Fringe benefits – Negative – no cafeteria plan.
Notes from Text pp. 144-165:
a. Highest priority in selecting business form is manner in which income of (or loss from) business is taxed
under IRS code.
b. All businesses compute taxable income by deducting expenses of doing business from receipts.
c. Two distinct methods of taxing business income:
(1) corp taxation – historically treated as separate taxable entities w/ own set of rules & own tax schedules. Tax structure is generally mildly progressive w/ additional income taxed at increasingly higher
effective rates.
a. capital assets – assets held for profit making or investment purposes & not for personal use.
Today, long term capital gains or losses are defined as gains or losses on assets held for more
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than one year, and the maximum tax rate on long term capital gains is 20%. Short term capital
gains are taxed at ordinary income tax rates.
(2) partnership taxation
d.
7.
Business Basics for Law Students: Essential Terms & Concepts:
(1) “basis” – investment the seller of property has in property.
(2) Substituted basis – property acquired by gift, basis in the hands of the donee is usually the same as
in the hands of the donor.
(3) Stepped up basis – property acquired by inheritance, basis is generally fair market value of assets on
the death of decedent.
(4) Adjusted basis – basis of property, (1) plus capital improvements made by seller, purchase commissions originally paid by seller, legal costs for defending or perfecting title; (2) minus returns of capital, particularly depreciation claimed as tax deductions, depletion, deducted casualty losses, insurance reimbursements, etc.
(5) Amount realized – cash received for property on a sale or fair market value of property received in
exchange for property.
(6) Gain – transaction equals amount realized minus adjusted basis.
(7) Loss – adjusted basis is greater than amount realized.
OK statutes:
a.
§363 – Cases Not Provided For – In any case not provided for in this act, provisions of OK Revised Uniform Partnership Act govern.
b.
§1-401 – Partner’s Rights & Duties - (f) management of partnership.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
c.
Each partner is deemed to have an account that is:
(1) credited w/ amount equal to money plus value of any other property, net of amount of any liabilities, partner contributes
to partnership & partner’s share of partnership profits; &
(2) charged w/ amount equal to money plus value of any other property, net of amount of any liabilities, distributed by partnership to partner & partner’s share of partnership losses.
Each partner is entitled to equal share of partnership profits & is chargeable w/ share of partnership losses in proportion to
partner’s share of profits.
Partnership shall reimburse partner for payments made & indemnify partner for liabilities incurred by partner in ordinary
course of business of partnership or for preservation of its business or property.
Partnership shall reimburse partner for advance to partnership beyond amount of capital partner agreed to contribute.
Payment or advance made by partner which gives rise to partnership obligation under sub§ (c) or (d) of this § constitutes loan
to partnership which accrues interest from date of payment or advance.
Each partner has equal rights in management & conduct of partnership business.
Partner may use or possess partnership property only on behalf of partnership.
Partner is not entitle to remuneration for services performed for partnership, except for reasonable compensation for services
rendered in winding up business of partnership.
Person may become partner only w/ consent of all partners.
Difference arising as to matter in ordinary course of business of partnership may be decided by majority of partners. Act outside ordinary course of business of partnership & amendment to partnership agreement may be undertaken only w/ consent of
all partners.
This section does not affect obligations of partnership to other persons under § 13 of this act.
§ 303 – Name – allows partnership to file document w/ Sec of State of authority of certain partners.
Name of each limited partnership as set forth in its cert of limited partnership:
1. Shall contain words “limited partnership” or abbreviation “L.P.”;
2. May not contain name of limited partner unless:
a.
it is also name of general partner or corp name of corp general partner, or
b. business of limited partnership had been carried on under that name before admission of that limited partner; &
3. a. May not be same as or indistinguishable from:
(1) names upon records in Office of Sec of State of then existing limited partnerships whether organized pursuant to
laws of this state or registered as foreign limited partnerships in this state; or
(2) names upon records in Office of Sec of State of corps organized under laws of this state then existing or which existed at any time during preceding three years, or
(3) names upon records in Office of Sec of State of foreign corps registered in accordance w/ laws of this state then existing or which existed at any time during preceding three years, or
(4) trade names or fictitious names filed w/ Sec of State, or
(5) corp, limited liability company or limited partnership names reserved w/ Sec of State, or
(6) names of then existing limited liability companies whether organized pursuant to laws of this state or registered as
foreign limited liability companies in this state.
c.
Provisions of subparagraph a of this paragraph shall not apply if one of the following is filed w/ Sec of State:
(1) Written consent of other limited partnership, corp or holder of trade name, fictitious name or reserved corp or limited partnership name to use same of indistinguishable name w/ addition of one or more words, numerals, numbers
or letters to make that name distinguishable upon records of Sec of State, except that addition of words, numerals,
numbers or letters to make name distinguishable shall not be required where such written consent states that consenting entity is about to change its name, cease to do business, w/draw from state or be wound up, or
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(2)
d.
§ 309 – Cert of limited partnership – form limited partnership must file certificate w/ Sec of State.
A.
B.
e.
Certified copy of final decree of ct of competent juris establishing prior right of such limited partnership or holder
of limited partnership name to use such name in this state.
In order to form limited partnership, cert of limited partnership must be executed & filed in Office of Sec of State. Cert shall
set forth:
1. Name of limited partnership;
2. Address of office & name & address of agent for service of process as required pursuant to § 305.
3. Name & business address of each general partner;
4. Term of existence of limited partnership which may be perpetual; &
5. Any other matters general partners determine to include therein.
Limited partnership is formed at time of filing of cert of limited partnership in Office of Sec of State or at any later time specified in cert of limited partnership if, in either case, there has been substantial compliance w/ requirements of this section.
§ 312 – Execution of certificates - requirements for cert.
A.
B.
C.
D.
Each certificate required by §§ 309-317 of this title to be filed in Office of Sec of State shall be executed in following manner:
1. Original cert of limited partnership must be signed by all general partners;
2. Cert of amendment must be signed by at least one general partner & by each other general partner designed in cert as
new general partner;
3. Cert of cancellation must be signed by all general partners;
4. Cert, cert of amendment, or cert of cancellation signed on behalf of corp shall be signed by pres or by v-p & shall be not
be required to be attested or sealed; &
5. Signatures on any cert need not be acknowledged.
Any person may sign cert by atty-in-fact but power of atty to sign cert relating to admission of general partner must specifically describe admission.
Execution of cert by general partner constitutes affirmation under penalties of perjury that facts stated therein are true.
Any signature on any instrument authorized to be filed w/ Sec of State under any provisions of this act may be facsimile.
f.
§ 314(c)(1) – filing fee – For filing cert of limited partnership, fee of $100.
g.
§ 320 – Liability to third parties - important provision – limited partner not liable unless also a general
partner or participates in management of partnership.
A.
B.
C.
D.
h.
Except as provided in sub§ D, limited partner is not liable for obligations of limited partnership unless he is also general partner or, in addition to exercise of his rights & powers as limited partner, he participates in control of business. However, if limited partner participates in control of business, he is liable only to persons who transact business w/ limited partnership reasonably believing, based upon limited partner’s conduct, that limited partner is general partner.
Limited partner does not participate in control of business w/in meaning of sub§ A solely by doing one or more of following:
1. Being contractor for or agent or employee of limited partnership or general partner or being officer, dir, or s/h of general
partner that is corp;
2. Consulting w/ & advising general partner w/ respect to business of limited partnership;
3. Acting as surety for limited partnership or guaranteeing or assuming one or more specific obligations of limited partnership, or acting as endorser of its obligations, or providing collateral for its borrowings;
4. Taking any action required or permitted by law to bring or pursue derivative action in right of limited partnership;
5. Requesting or attending meeting of partners;
6. Proposing, approving, or disapproving, by voting or otherwise, one or more of following matters:
a.
dissolution & winding up of limited partnership or continuation of business of limited partnership upon occurrence
of any event which otherwise requires winding up & termination of its affairs,
b. sale, exchange, lease, mortgage, pledge or other transfer of all or substantially all assets of limited partnership,
c.
incurrence of indebtedness by limited partnership other than in ordinary course of business,
d. change in nature of business,
e.
admission or removal of general partner,
f.
admission or removal of limited partner,
g. transaction involving actual or potential conflict of interest b/w general partner & limited partner or limited partners,
h. amendment to partnership agreement or cert of limited partnership;
i.
matters related to business of limited partnership not otherwise enumerated in this sub§, which partnership agreement states in writing may be subject to approval or disapproval of limited partners, or
j.
any other matter required by law or regulation to be submitted to vote of limited partners;
7. Winding up limited partnership pursuant to § 347; or
8. Exercising any right or power permitted to limited partners under Okla Revised Uniform Limited Partnership Act & not
specifically enumerated in this sub§.
Enumeration in sub§B does not mean that possession or exercise of any other powers by limited partner constitutes participation by him in business of limited partnership.
Limited partner who knowingly permits his name to be used in name of limited partnership, except under circumstances permitted by subparagraph a of paragraph 2 of §303, is liable to creditors who extend credit to limited partnership w/o actual
knowledge that limited partner is not general partner.
§330 – Sharing profits & losses - profit/loss allocation – flexible – set out in partnership agreement.
Profits & losses of limited partnership shall be allocated among partners, & among classes of partners, in manner provided in writing in partnership agreement. If partnership agreement does not so provide in writing, profits & losses shall be allocated on basis of
value, as stated in partnership records required to be kept pursuant to § 306, of contributions made by each partner to extent they
have been received by partnership & have not been returned.
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i.
§331 – Sharing distributions - distributions – look to partnership agreement.
Distributions of cash or other assets of limited partnership shall be allocated among partners & among classes of partners in manner
provided in writing in partnership agreement. If partnership agreement does not so provide in writing, distributions shall be made
on basis of value, as stated in partnership records required to be kept pursuant to § 306, of contributions made by each partner to extend they have been received by partnership & have not been returned
j.
§327 – Voting by General Partner – Partnership agreement may grant to all or certain identified general partners the right
to vote on per capita or any other basis, separately or w/ all or any class of limited partners on any matter.
D. Corps – for state-law purposes, corp is a corp w/ no distinction b/w types. For federal & income tax purposes,
there are two types of corps: C Corps & S Corps.
1. § 1006 – Cert of incorp - contents.
A.
B.
Cert of incorp shall set forth:
1. Name of corp which shall contain one of the words “association”, “company”, “corp”, “club”, “foundation”, “fund”, “incorpd”, “institute”, “society”, “union”, “syndicate”, or “limited” or one of abbreviations “co”, “corp”, “inc.”, “ltd.” Or words
or abbreviations of like import in other languages provided that such abbreviations are written in
Roman characters or letters, & which shall be such as to distinguish it upon records in Office of Sec of State from:
a.
names of other corps organized under laws of this state then existing or which exited at any time during preceding three
years, or
b. names of foreign corps registered in accordance w/ laws of this state then existing or which existed at any time during
preceding three years, or
c.
names of then existing limited partnerships whether organized pursuant to laws of this state or registered as foreign limited partnerships in this state, or
d. trade names or fictitious names filed w/ Sec of State, or
e.
names of then existing limited liability companies whether organized pursuant to laws of this state or registered as foreign limited liability companies in this state;
2. Address, including street, number, city & county, of corp’s registered office in this state, & name of corp’s registered agent at
such address;
3. Nature of business or purposes to be conducted or promoted. Shall be sufficient to state, either alone or w/ other businesses or
purposes, that purpose of corp is to engage in any lawful act or activity for which corps may be organized under general corp
law of Okla., & by such statement all lawful acts & activities shall be w/in purposes of corp, except for express limitations, if
any;
4. If corp is to be authorized to issue only one class of stock, total number of shares of stock which corp. shall have authority to
issue & par value of each of such shares, or a statement that all such shares are to be w/o par value. If corp is to be authorized
to issue more than one class of stock, cert. of incorp shall set forth total number of shares of all classes of stock which corp
shall have authority to issue & number of shares of each class, & shall specify each class shares of which are to be w/o par
value & each class shares of which are to have par value & par value of shares of each class. Provisions of this paragraph
shall not apply to corps which are not organized for profit & which are not to have authority to issue capital stock. In case of
such corps, fact that they are not to have authority to issue capital stock shall be stated in cert of incorp.
5. Name & mailing address of incorporator or incorporators.
6. If powers of incorporator or incorporators are to terminate upon filing of cert. of incorp, names & mailing addresses of persons
who are to serve as dirs until first annual meeting of s/hs or until their successors are elected & qualify; &
7. If corp. is not for profit:
a.
that corp. does not afford pecuniary gain, incidentally or otherwise, to its members as such,
b. names & mailing address of each trustee or dir,
c.
number of trustees or dirs to be elected at first meeting; &
d. in event corp. is church, street address of location of church.
The restriction on affording pecuniary gain to members shall not prevent not-for-profit corp. operating as cooperative from rebating excess revenues to patrons who may also be members.
In addition to matters required to be set forth in cert. of incorp pursuant to provisions of sub§ A, cert. of incorp may also contain any
or all of the following matters:
1. Any provision for management of business & for conduct of affairs of corp., & any provision creating, defining, limiting &
regulating powers of corp., dirs, & s/hs, or any class of s/hs, or members of nonstock corp, if such provisions are not contrary
to laws of this state. Any provision which is required or permitted by any provision of OGCA to be stated in bylaws may instead by stated in cert of incorp;
2. Following provisions, in substantially following form: “Whenever compromise or arrangement is proposed b/w this corp & its
creditors or any class of them &/or b/w this corp & its s/hs or any class of them, any ct of equitable juris w/in State of Okla.,
on application in summary way of this corp or of any creditor or s/h thereof or on application of any receiver or receivers appointed for this corp under provisions of §1106 or on application of trustees in dissolution or of any receiver or receivers appointed for this corp under provisions of §1100, may order meeting of creditors or class of creditors or class of creditors, &/or
of s/hs or class of s/hs of this corp, as case may be, to be summoned in such manner as ct directs. If majority in number representing ¾ in value of creditors or class of creditors, &/or of s/hs or class of s/hs of this corp, as case may be, agree to any compromise or arrangement & to any reorganization of this corp. As consequence of such compromise or arrangement, compromise or arrangement & reorganization, if sanctioned by ct to which application has been made shall be binding on all creditors
or class o creditors, &/or on all s/hs or class of s/hs, of this corp, as case may be, & also on this corp.”
3. Such provisions as may be desired granting to holders of stock of corp, or holders of any class or series of class thereof,
preemptive right to subscribe to any or all additional issues of stock of corp of any or all classes or series thereof, or to any securities of the corp convertible into such stock. No s/h shall have any preemptive right to subscribe to additional issue of stock
or to any security convertible into such stock unless, & except to extent that, such right is expressly granted in cert. of incorp.
Preemptive rights, if granted, shall not extend to fractional shares.
4. Provisions requiring, for any corp action, vote of larger portion of stock or any class or series thereof, or of any other securities
having voting power, or larger number of dirs, than is required by provisions of OGCA.
5. Provision limiting duration of corp’s existence to specified date; otherwise, corp shall have perpetual existence.
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6.
C.
2.
Provision imposing personal liability for debts of corps on its s/hs of members to specified extent & upon specified conditions;
otherwise, s/hs or members of corp. shall not be personally liable for payment of corp’s debts, except as they may be liable by
reason of own conduct or acts;
7. Provision eliminating or limiting personal liability of dir to corp. or its s/hs for monetary damages for br/ fiduciary duty as dir,
provided that such provision shall not eliminate or limit liability of dir:
a.
for any br/ of dir’s duty of loyalty to corp or its s/hs; or
b. for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; or
c.
under § 1053 of this title; or
d. for any transaction from which dir derived improper personal benefit.
No such provision shall eliminate or limit liability of dir for any act or omission occurring prior to date when such provision
becomes effective.
It shall not be necessary to set forth in cert of incorp any of powers conferred on corps by provisions of Okla General Corp Act.
C Corp
a. Non-tax considerations
(1) Limited Liability – s/hs have limited liability – Positive characteristic. Two situations where s/hs
can be liable beyond their investment into the corp:
(a) “close corp”, whose s/hs sign personal guarantees on loans others make to corp, such that, if
corp doesn’t pay, guaranteeing s/h must pay;
(b) creditor has grounds for “piercing corp veil” & making s/hs liable for corp debts.
(2) Ease & Expense – mandatory provision of cert. of incorp. May include provision of putting liability
onto s/hs. Appropriate term in Oklahoma is “shareholder” not “stockholder.” Filing cert of incorp
w/ sec of state; fee (§ 1142(A)(9)) – 1/10th of 1% of all authorized capitol or $50 maximum. Could
be 50,000 shares at $1 par value or 500,000 shares at $.10 par value. Must issue stock for at least par
value. Ease & Expense is a negative for corps b/c most difficult to form. Franchise fee – tax on doing business as corp.
(3) Profits/Losses – must distribute according to cert. of incorp. Separate classes of stock w/ different
share in profits. Negative in that to do “funky sharing” must be creative & include in cert. of incorp.
(4) Capital structure – positive when compared to S corp. Can cerate any structure really as long as included in certificate.
(5) Management – positive characteristic. Elect officers responsible for managing day to day activities.
Control of corp affairs is centralized in BOD & officers they appoint. This allows specialization;
managers can be managers whether or not they have money to invest in corp & investors need only
provide money & not management skills.
b.
Tax Considerations:
(1) Corp Tax Rate:
$ 0 – 50,000
50,001 – 75,000
75,001 – 100,000
100,001 – 335,000
15%
25%
34%
39%
(2) Income tax – negative – double taxation – corp earnings taxed at corp income tax rate before any
distributions. If corp distributes dividends, s/h pays individual income tax rate on dividends. Earnings, then, are subject to double taxation. Income splitting – C Corp bonuses out & leaves some income in corp. & take advantage of low rates. For example, have $75,000 in profit. C Corp pays
$13,750 in taxes. Individual (sole proprietor, LLC, S Corp) – pays $18,113 in taxes.
(3) Fringe Benefits – positive – any ins premium payments made on behalf of s/hs, fully deductible.
(4) Self employment tax & SS Benefits – positive b/c dividend payments are not subject to selfemployment tax. Treated only as investment income.
3.
S Corp
a. Non-tax considerations
(1) Limited Liability – positive – no distinction b/w S & C Corps.
(2) Ease & Expense – same as C Corp. Negative. File form w/ IRS in addition to C Corp paperwork in
state. Federal employer ID# - needed by all entities.
(3) Profit/Loss – one class of stock only. Distribute shares equally. Negative. Different voting rights
do not create different stock classes.
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(4) Capitol structure – cannot have more than 75 s/hs & cannot have other entity as s/h. Negative.
b.
Tax Considerations:
(1) Income Tax – pass-thru tax. Positive. Concerned w/ phantom income. Phantom income – when
corp acquires large amount of capital from earnings w/o distributing dividends or otherwise, gov will
charge taxes & make corp distribute, unless can show need for capital.
(2) Fringe Benefits – negative. Cannot deduct s/h insurance premiums – limited to 45% deduction. No
cafeteria plan.
(3) Self-employment tax – not subject to self-employment tax by statute.
E. Limited Liability Companies – OK Limited Liability Act. Owners of LLC are called members. Members can
manage LLC directly or elect managers who manage.
1. Non-tax considerations
a. Limited Liability – §2022 – member/manager not liable for obligations of company solely by reason of
being member/manager. Can be liable, though, for own negligence & other things. Positive characteristic.
2.
3.
b.
Ease & Expense – §2004 – file articles of organization. Requirements of articles found in §2005.
§2004(a) – one or more persons can form an LLC. If organizational documents specify two or more, organizational documents prevail over statute. §2055 – filing fee is $100. LLC is not subject to franchise
tax. It is treated more like a partnership, which does not have to pay franchise tax. Franchise tax can be
expensive if you have a capitol intensive company. Labor intensive companies, like law firms, don’t
have a problem with franchise taxes. Positive characteristic.
c.
Profits/Losses – Flexible, so positive characteristic.
d.
Capital structure Membership Interests. Flexibility as to no restrictions on who can be members & how
many members. Can have preferred membership interests.
e.
Management – member managed or manager managed. Default – manager managed. Positive.
Tax Considerations:
a. Income tax – Positive. Pass-thru taxation. Treated as partnership for taxation purposes. Tax reporting
entity.
(1) Single-member LLC – not a partnership for income tax reasons. Not treated as an entity but as an
individual and report as a sole proprietorship.
b.
Fringe Benefits – same as for partnerships. Negative, but no big deal.
c.
Self employment tax & SS Benefits – No real guidance here. Proposed regulations had suggested that
look at whether member operates more like general or limited partner & treat accordingly. Regulations,
though, were never passed. Talk to who does your income taxes to see what they recommend. If this is a
key consideration to your client in choosing an entity, should probably choose another. Gray area.
OK statutes
a. §2002 – Purposes of Formation – A limited liability company may be organized under § 2000 et seq.of this title & may
conduct business in any state for any lawful purpose, except that limited liability company may not conduct business as a bank or
domestic insurer.
b.
§2004 – Articles of organization – Filing
A.
B.
c.
§ 2005 – Articles of organization – Contents
A.
B.
d.
One or more persons may form limited liability company upon filing of executed articles of organization w/ Office of Sec of
State.
1. When Office of Sec of State files articles of organization, proposed organization becomes limited liability company under
name & subject to purposes, conditions, & provisions stated in articles.
2. Filing of articles by Office of Sec of State is conclusive evidence of formation of limited liability company.
Articles of organization shall set forth:
1. name of limited liability company;
2. Term of existence of limited liability company which may be perpetual; &
3. Street address of its principal place of business in this state & name & address of its resident agent in this state.
Not necessary to set out in articles of organization any powers enumerated in this act.
§ 2055 – Fees
Sec of State shall charge & collect following fees:
1. For filing original articles of organization, fee of $100.00.
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e.
§2025 – Allocations of Profits & Losses – Distributions
Except as otherwise provided in operating agreement:
(1) Profits & losses of LLC shall be allocated among members in proportion to respective capital interests; &
(2) Distributions of LLC shall be made to members in proportion to their right to share in profits of LLC.
E. How does Self-employment tax affect social security? Self employment tax is computed based on 15% of Self
Income (or share of profits from entity) on first $72,600, which is reduced by all salary income & 2.9% above
$72,600. If receiving social security benefits, may lose benefits if receive too much income. For example if one is
less than 65 years of age & receives $9210 of earned income, there are no reductions in social security. But for
every $2.00 in excess of $9120, they lose $1.00 of benefits. Between ages of 65 & 69, there is a three to one reduction & cap rises to $14,500. Over 70 years of age, there are no reductions in social security, no matter how
much you earn.
II.
Formation of Closely Held Corp:
A. Where to incorp? OGCA is same as Del’s. There is a lot of case law from Del, which is applicable to OK. If
your business is in OK, should just organize in OK.
1. First consideration – state where company is principally organized. Unless can point to specific reason why
not to incorp there or why to incorp elsewhere, just incorp in state of principal business. Some states, such as
California & Texas are expensive to organize in for out of state entities.
a. OK does not require organizing in counties as well as in state, but some states do require this.
B. How to Incorp – File for corp status by following corp statute in state in which you incorp.
1. Check-list for Organizing:
a. Certificate of Incorp – public document;
b. Organizational action of Incorporators – elect dirs;
c. Organizational action of Board of Dirs – elect officers;
d. Bylaws;
e. Subscription Agreements & Stock Certificates – buying shares;
f. S/h Agreement
g. Voting Trust
h. S Election
i. Employer ID #
2.
OK Statues on Organizing Corp
a.
§ 1005 –Incorporators; how corp formed; purpose - any entity or person can incorp. Corp that is an organizer of another corp
can be incorpd in another state & does not have to be approved to do business in OK.
A. Any person, partnership, association or corp, singly or jointly w/ others, & w/o regard to his or their residence, domicile or
state of incorp, may incorp or organize corp pursuant to provisions of OGCA by filing w/ Sec of State cert of incorp which
shall be executed, acknowledged & filed in accordance w/ provisions of § 7 of this act; provided, however, at least three persons, partnerships, associations, or corps, or any combination thereof, shall be required to incorp as a not for profit corp pursuant to provisions of OGCA.
B. Corp may be incorpd or organized pursuant to provisions of OGCA to conduct or promote any lawful business or purposes,
except as may otherwise be provided by Const or other law of this state.
C. Corps for constructing, maintaining & operating public utilities, whether in or outside state, may be organized pursuant to provisions of OGCA, but corps for constructing, maintaining & operating public utilities w/in this state shall be subject to, in addition to provisions of OGCA, special provisions & requirements of Title 17 of Okla States applicable to such corps.
b.
§ 1006 – Contents of Certification of Incorp (required provisions)
(1) name, corp designation;
(2) registered name & registered office – for service of process. Must list county. Agent needs to be located at registered office;
(3) purpose of corp (any lawful business);
(4) capitalization - # of shares authorized. Classes of stock: (1) authorized (corp can issue); (2) issued
(actually distributed by corp); (3) outstanding (those that are held by s/hs); (4) treasury (given back to
corp & held by corp). Voting/non-voting stock.
(5) Name & mailing addresses of incorporators.
c.
§ 1006(B) – Permissive provisions:
(1) preemptive right – allows existing s/hs to maintain same percentage of ownership of company when
company issues new stocks. Default – not included unless specified in certification.
(2) Supermajority vote
(3) Limiting duration of corp. Default – perpetual existence
(4) Personal liability for debts
(5) Eliminating or limiting personal liability for fiduciary duties.
8
d.
§ 1007 – Execution, acknowledgement, filing & effective date of original cert of incorp & other instruments; exceptions.
A.
B.
C.
D.
E.
F.
G.
H.
e.
Whenever any provision of OGCA requires any instrument to be filed in accordance w/ provisions of this § or w/ provisions of
OGCA, instrument shall be executed as follows:
1. Cert of incorp & any other instrument to be filed before election of initial BOD, if initial dirs were not named in cert of
incorp, shall be executed by incorporator or incorporators;
2. All other instruments shall be executed:
a.
by chair or vice-chair of BOD, or by pres, or by v-p, & attested by sec or an assist sec; or by officers as may be duly authorized to exercise duties, respectively, ordinarily exercised by pres or v-p & by sec or assist sec of corp;
b. if it appears from instrument that there are no such officers, then by majority of dirs or by those dirs designated by
bd;
c.
if it appears from instrument that there are no such officers or dirs, then by holders of record, or those designated
by holders of record, of majority of all outstanding shares of stock; or
d. by holders of record of all outstanding shares of stock
Whenever any provision of OGCA requires any instrument to be acknowledged, that requirement is satisfied by either:
1. Formal acknowledgment by person or one of persons signing instrument that it is his or her act & deed or act & deed of
corp, as case may be, & that facts stated therein are true. Acknowledgment shall be made before person authorized by
law of place of execution to take acknowledgments of deeds & who shall affix seal of office, if any, to instrument; or
2. Signature, w/o more, of person or persons signing instrument, in which case signature or signatures shall constitute affirmation or acknowledgment of signatory, under penalty of perjury, that instrument is his or her act & deed of act &
deed of corp, as case may be, & that facts stated therein are true.
Whenever any provisions of OGCA requires any instrument be filed in accordance w/ provisions of this § or w/ provisions of
OGCA, requirement means that:
1. Two signed instruments, one of which may be conformed copy, shall be delivered to Office of Sec of State;
2. All delinquent franchise taxes authorized by law be collected by OTC shall be tendered to OTC;
3. All fees authorized by law be collected by Sec of State in connection w/ filing of instrument shall be tendered to Sec of
State; &
4. Upon delivery of instrument, & upon tender of required taxes & fees, Sec of State shall certify that instrument has been
filed in Sec of State’s office by endorsing upon signed instrument word “Filed”, & date of its filing. This endorsement is
“filing date” of instrument, & is conclusive of date of its filing in absence of actual fraud. Upon request, Sec of State
shall also endorse hour that instrument was filed, which endorsement shall be conclusive of hour of its filing in absence
of actual fraud. Sec of State shall thereupon file & index endorsed instrument.
Any instrument filed in accordance w/ provisions of sub§ C shall be effective upon filing date. Any instrument may provide
that it is not to become effective until specified time subsequent to time filed, but that date shall not be later than 90 days after
date of filing. If any instrument filed in accordance w/ sub§ C provides for future effective date or time & if transaction is
terminated or its terms amended to change future effective date or time prior to future effective date or time, instrument shall
be terminated or amended by filing, prior to future effective date or time, cert of termination or amendment of original instrument, executed in accordance w/ sub§ A, which shall identify instrument which has been terminated or amended & shall state
that instrument has been terminated or manner in which amended.
If another § of OGCA specifically prescribes manner of executing, acknowledging, or filing specified instrument or time when
instrument shall become effective which differs from corresponding provisions of this §, then provisions of other § govern.
Whenever any instrument authorized to be filed w/ Sec of State under any provisions of Title 18 of OK Stats has been so filed
& is inaccurate record of corp action therein referred to, or was defectively or erroneously executed, sealed, or acknowledged,
instrument may be corrected by filing w/ Sec of State cert of correction of instrument which shall be executed, acknowledged
& filed in accordance w/ provisions of this §. Cert of correction shall specify inaccuracy or defect to be corrected & shall be
effective as of date original instrument was filed, except as to those persons who are substantially & adversely affected by correction & as to those persons corrected instrument shall be effective from filing date of corrected instrument.
If any instrument authorized to be filed w/ Sec of State pursuant to any provisions of this title is filed inaccurately or defectively, or is erroneously executed, sealed or acknowledged, or is otherwise defective in any respect, Sec of State shall have no
liability to any person for preclearance for filing, acceptance for filing, or filing & indexing of such instrument.
When authorized by rules of Sec of State, any signature on any instrument authorized to be filed w/ Sec of State under any
provision of this title may be facsimile signature, conformed signature, or electronically transmitted signature.
§1008 – Cert of Incorp; Definition
Term “cert of incorp”, as used in OGCA, unless context requires otherwise, includes not only original cert of incorp filed to create
corp but also all other certs, agreements of merger or consolidation, plans of reorganization, or other instruments, howsoever designated, which are filed pursuant to provisions of §§ 6, 23-26, 32, 76-80, 81-87, or 118 & which have effect of amending or supplementing in some respect corp’s original cert of incorp.
f.
§1010 – Commencement of Corp existence
Upon filing w/ Sec of State of cert of incorp, executed & acknowledged in accordance w/ provisions of § 7, incorporator or incorporators who signed cert, & his or their successors & assigns, from date of such filing, shall be & constitute body corp by name set
forth in cert, subject to provisions of sub§ D of § 7 & subject to dissolution or other termination of its existence as provided for in
OGCA.
g.
§1011 Powers of incorporators
If persons who are to serve as dirs until first annual meeting of s/hs have not been named in cert of incorp, incorporator or incorporators, until dirs are elected, shall manage affairs of corp & may do whatever necessary & proper to perfect organization of corp, including adoption of original bylaws of corp & election of dirs.
h.
§1013 – Bylaws – After stock issued, s/hs have power to amend.
A.
Original or other bylaws of corp may be adopted, amended or repealed by incorporators, by initial dirs if they were named in
cert of incorp, or before corp has received any payment for any of its stock, by BOD. After corp has received any payment
for any of its stock, power to adopt, amend, or repeal bylaws shall be in s/hs entitled to vote, or in case of nonstock corp,
9
B.
i.
in its members entitled to vote; provided, however, any corp, in its cert of incorp may confer power to adopt, amend or repeal
bylaws upon dirs or, in case of nonstock corp, upon its governing body by whatever name designated. Fact that such power
has been so conferred upon dirs or governing body, as case may be, shall not divest s/hs or members of power, nor limit their
power to adopt, amend or repeal bylaws.
Bylaws may contain any provisions, not inconsistent w/ law or w/ cert of incorp, relating to business of corp, conduct of its affairs, & its rights or powers or rights or powers of s/hs, dirs, officers or employees.
§1016 – Specific Powers – (13) upstream/downstream
Every corp created pursuant to provisions of OGCA shall have power to:
1. Have perpetual succession by its corp name, unless limited period of duration is stated in cert of incorp;
2. Sue & be sued in all cts & participate, as party or otherwise, in any judicial, administrative, arbitrative or other proceeding, in
its corp name;
3. Have corp seal, which may be altered at pleasure, & use same by causing it, or facsimile thereof, to be impressed or affixed or
in any other manner reproduced;
4. Purchase, receive, take by grant, gift, devise, bequest or otherwise, lease or otherwise acquire, own, hold, improve, employ,
use & otherwise deal in & w/ real or personal property, or any interest therein, wherever situated & to sell, convey, lease, exchange, transfer or otherwise dispose of, or mortgage or pledge, all or any of its property & assets, or any interest therein,
wherever situated, subject to limitations prescribed by § 2 of Art XXII of Okla Const & § 20 of this act;
5. Appoint or elect such officers & agents as business of corp requires & to pay or otherwise provide for them suitable compensation;
6. Adopt, amend, & repeal bylaws;
7. Wind up & dissolve itself in manner provided for in OGCA;
8. Conduct its business, carry on its operations, & have offices & exercise its powers w/in or w/o this state;
9. Make donations for public welfare or for charitable, scientific or educational purposes, & in time of war or other natl emergency in aid thereof;
10. Be incorporator, promoter or manager of other corps of any type or kind;
11. Participate w/ others in any corp, partnership, limited partnership, joint venture or other assoc of any kind, or in any transaction, undertaking or arrangement which participating corp would have power to conduct by itself, whether or not such participation involves sharing or delegation of control w/ or to others;
12. Transact any lawful business which corp’s BOD shall find to be in aid of gov authority;
13. Make Ks, including Ks of guarantee & suretyship, incur liabilities, borrow money at such rates of interest as corp may determine, issue its notes, bonds & other obligations, & secure any of its obligations by mortgage, pledge or other encumbrance of
all or any of its property, franchses & income, & make Ks of guaranty or suretyship which are necessary or convenient to conduct, promotion or attainment of business of:
a.
corp, all of outstanding stock of which is owned, directly or indirectly, by contracting corp;
b. corp which owns, directly or indirectly, all outstanding stock of contracting corp; or
c.
corp, all outstanding stock of which is owned, directly or indirectly, by corp which owns, directly or indirectly, all outstanding stock of contracting corp, which contracts of guaranty & suretyship shall be deemed to be necessary or convenient to conduct, promotion or attainment of business of contracting corp, & to make other Ks of guaranty & suretyship
which are necessary or convenient to conduct, promotion or attainment of contracting corp;
14. Lend money for its corp purposes, invest & reinvest its funds, & take, hold, & deal w/ real & personal property as security for
payment of funds so loaned or invested;
15. Pay pensions & establish & carry out pension, profit sharing, stock option, stock purchase, stock bonus, retirement, benefit,
incentive & compensation plans, trusts & provisions for any or all of its dirs, officers, & employees, & for any or all of dirs,
officers & employees of its subsidiaries; &
16. Provide ins for its benefit on life of any dirs, officers, or employees, or on life of any s/h for purpose of acquiring at his death
shares of its stock owned by such s/h.
j.
§1027 – BOD; powers; number, qualifications; terms & quorum; committees; classes of dirs; not
for profit corps; reliance upon books; action w/o meeting; etc. - (f) – BOD – consent in lieu of meeting – signing consent form is same as holding meeting – all must sign. (c) Del statute different – bylaws
may provide less than majority but more than 1/3.
A.
B.
C.
Business & affairs of every corp organized in accordance w/ provisions of OGCA shall be managed by or under direction of
BOD, except as may be otherwise provided for in OGCA or in corp’s cert of incorp. If any provision is made in cert of incorp, powers & duties conferred or imposed upon BOD by provisions by OGCA shall be exercised or performed to extent &
by person or persons stated in cert of incorp.
BOD of corp shall consist of one or more members. Number of dirs shall be fixed by or in manner provided for in bylaws,
unless cert of incorp fixes number of dirs, in which case change in number of dirs shall be made only by amendment of cert.
Dirs need not be s/hs unless so required by cert of incorp or bylaws. Cert of incorp or bylaws may prescribe other qualifications for dirs. Each dir shall hold office until successor is elected & qualified or until his or her earlier resignation or removal.
Any dir may resign at any time upon written notice to corp. Majority of total number of dirs shall constitute quorum for transaction of business unless cert of incorp or bylaws require greater number. Except as provided in sub§ G of this §, neither cert
of incorp nor bylaws may provide that quorum may be less than 1/3 of total number of dirs. Vote of majority of dirs present at
meeting at which quorum is present shall be act of BOD unless cert of incorp or bylaws shall require vote of greater number.
BOD may designate one or more committees consisting of one or more of dirs of corp. Bd may designate one or more dirs as
alternate members of any committee, who may replace any absent or disqualified member at any meeting of committee. Bylaws may provide that in absence or disqualification of member of committee, member or members present at meeting & not
disqualified from voting, whether or not member or members constitute quorum, may unanimously appoint another member of
BOD to act at meeting in place of any absent or disqualified member. Any committee, to extent provided in resolution of
BOD, or in bylaws of corp, shall have & may exercise all powers & authority of BOD in management of business & affairs of
corp, & may authorize seal of corp to be affixed to all papers which may require it; but no committee shall have power or authority to:
1. Approve, adopt, or recommend to s/hs any action or matter expressly required by OGCA to be submitted to s/hs for approval; or
10
D.
E.
F.
G.
H.
k.
2. Adopt, amend, or repeal any bylaw of corp.
Dirs of any corp organized in accordance w/ provisions of OGCA, by cert of incorp or by initial bylaw, or by bylaw adopted
by vote of s/hs, may be divided into one, two, or three classes; term of office of those of first class to expire at annual meeting
next ensuing; of second class one year thereafter; of third class two years thereafter; & at each annual election held after classification & election, dirs shall be chosen for full term, as case may be, to succeed those whose terms expire. Cert of incorp
may confer upon holders of any class or series of stock right to elect one or more dirs who shall serve for term, & have voting
powers as shall be stated in cert of incorp. Terms of office & voting powers of dirs elected in manner so provided in cert of
incorp may be greater than or less than those of any other dir or class of dirs. If cert of incorp provides that dirs elected by
holders of class or series of stock shall have more or less than one vote per dir on any matter, every reference in OGCA to majority or other proportion of dirs shall refer to majority or other proportion of votes of dirs.
Member of BOD, or member of any committee designated by BOD, in performance of member’s duties, shall be fully protected in relying in good faith upon records of corp & upon info, opinions, reports, or statements presented to corp by any of cor’s
officers or employees, or committees of BOD, or by any other person as to matters member reasonably believes are w/in officer’s, employee’s, committee’s or other person’s competence & who have been selected w/ reasonable care by or on behalf
of corp.
Unless otherwise restricted by cert of incorp or bylaws:
1. Any action required or permitted to be taken at any meeting of BOD, or of any committee thereof may be taken w/o
meeting if all members of bd or committee, as case may be, consent thereto in writing, & writing or writings are filed w/
minutes of proceedings of bd or committee;
2. BOD of any corp organized in accordance w/ provisions of OGCA may hold its meetings & have an office or offices,
outside this state;
3. BOD shall have authority to fix compensation of dirs; &
4. Members of BOD of any corp, or any committee designated by bd, may participate in meeting of bd or committee by
conference telephone or similar communications equipment by means of which all persons participating in meeting can
hear or otherwise communicate w/ each other. Participation in meeting pursuant to provisions of this sub§ shall constitute presence in person at meeting.
1. Cert of incorp of any corp organized in accordance w/ provisions of OGCA which is not authorized to issue capital stock
may provide that less than 1/3 of members of governing body may constitute quorum thereof & may otherwise provide that
business & affairs of corp shall be managed in manner different from that provided for in this §.
2. Except as may be otherwise provided by cert of incorp, provisions of this § shall apply to such corp, & when so applied,
all references to BOD, to members thereof, & to s/hs shall be deemed to refer to governing body of corp, members thereof & members of corp, respectively.
1. Any dir or entire BOD may be removed, w/ or w/o cause, by holders of majority of shares then entitled to vote at election of
dirs, except as follows:
a.
unless cert of incorp otherwise provides, in case of corp whose bd is classified as provided for in sub§ D of this §,
s/hs may effect such removal only for cause, or
b. in case of corp having cumulative voting, if less than entire bd is to be removed, no dir may be removed w/o cause
if votes cast against dir’s removal would be sufficient to elect dir if then cumulatively voted at election of entire
BOD, or, if there are classes of dirs, at election of class of dirs of which dir is part.
2. Whenever holders of any class or series are entitled to elect one or more dirs by provisions of cert of incorp, provisions
of this sub§ shall apply, in respect to removal w/o cause of dir or dirs so elected, to vote of holders o outstanding shares
of that class or series & not to vote of outstanding shares as whole.
§1073 – Consent of s/hs in lieu of meeting (a) – S/hs can take any action by consent in lieu of meeting.
Don’t need all signatures, just enough to ordinarily pass the vote. (d) – every written consent should bear date of signature.
A.
B.
C.
D.
Except as provided in sub§ b of this § or unless otherwise provided for in cert of incorp, any action require by provisions of
OGCA to be taken at any annual or special meeting of s/hs of corp or any action which may be taken at any annual or special
meeting or s/hs, may be taken w/o meeting, w/o prior notice, & w/o vote, if consent or consents in writing, setting forth action
so taken, shall be signed by holders of outstanding stock having not less than minimum number of votes that would be necessary to authorize or take action at meeting at which all shares entitled to vote thereon were present & voted & shall be delivered to corp by delivery to its registered office in this state, its principal place of business, or an officer or agent of corp having
custody of book in which proceedings of meetings of s/hs are recorded. Delivery made to corp’s registered office shall be by
hand or by certified or registered mail, return receipt requested.
W/ respect to domestic corp w/ class of voting stock listed or traded on national securities exchange or registered under §
12(g) of Securities Exchange Act of 1934, which has one thousand or more s/hs of record, unless otherwise provided for in
cert of incorp, any action required by provisions of OGCA to be taken at any annual or special meeting of s/hs of corp or any
action which may be taken at any annual or special meeting, may be taken w/o meeting, w/o prior notice & w/o vote, if consent or consents in writing, setting forth action taken, shall be signed by holders of all outstanding stock entitled to vote thereon & shall be delivered to corp by delivery to its registered office in this state, its principal place of business, or officer or
agent of corp having custody of book in which proceedings of meetings of s/hs are recorded. Delivery made to cor’s registered office shall be by hand or by certified or registered mail, return receipt requested.
Unless otherwise provided for in cert of incorp, any action required by provisions of OGCA to be taken at meeting of members of nonstock corp, or any action which may be taken at any meeting of members of nonstock corp, may be taken w/o meeting, w/o prior notice & w/o vote, if consent or consents in writing, setting forth action taken, shall be signed by members having not less than minimum number of votes that would be necessary to authorize or take such action at meeting at which all
members having right to vote thereon were present & voted & shall be delivered to corp by delivery to its registered office in
this state, its principal place of business, or an officer or agent of corp having custody of book in which proceedings of meetings of s/hs are recorded. Delivery made to corp’s registered office shall be by hand or by certified or registered mail, return
receipt requested.
Every written consent shall bear date of signature of each s/h or member who signs consent & no written consent shall be effective to take corp action referred to therein unless, w/in 60 days of earliest dated consent delivered in manner required by
this § to corp, written consents signed by sufficient number of holders or members to take action are delivered to corp by delivery to its registered office in this state, its principal place of business, or an officer or agent of corp having custody of book
11
E.
3.
Structure – After filing articles of incorp, must hold an organizational meeting of BOD (if BOD is named in
articles of incorp) or hold an organizational meeting of incorporators (if BOD not named in articles). Steps
taken at this meeting typically include naming dirs (if not named in articles), adopting bylaws, electing corp
officers, adopting corp seal & stock cert, authorizing shares to be issued to stated people at stated price, &
designating corp bank.
a. §1012 Organization meeting of Incorporators or Dirs named in cert of incorp – (c) – written consent
in lieu of meeting counterpart for incorporators.
A.
B.
C.
4.
in which proceedings of meetings of s/hs are recorded. Delivery made to corp’s registered office shall be by hand or by certified or registered mail, return receipt requested.
Prompt notice of taking of corp action w/o meeting by less than unanimous written consent shall be given to those s/hs or
members, as case may be, who have not consented in writing & who, if action had been taken at meeting, would have been entitled to notice of meeting if record date for meeting had been date that written consents signed by sufficient number of holders
or members to take action were delivered to corp as provided in sub§ C of this §. In event that action for which consent is given is action that would have required filing of cert under any other § of this title if action had been voted on by s/hs or by
members at meeting thereof cert filed under other § shall state, in lieu of any statement required by § concerning any vote of
s/hs or members, that written consent has been given in accordance w/ provisions of this §.
After filing cert of incorp, organization meeting of incorporator or incorporators, or of BOD if initial dirs named in cert of incorp, shall be held either w/in or w/o this state at call of majority of incorporators or dirs, as case may be, for purposes of
adopting bylaws, electing dirs if meetings is of incorporators, to serve or hold office until first annual meeting of s/hs or until
their successors are elected & qualify, electing officers if meeting is of dirs, doing any other or further acts to perfect organization of corp, & transacting such other business as may come before meeting.
Persons calling meeting shall give to each other incorporator or dir, as case may be, at least 2 days’ written notice thereof by
any usual means of communication, which notice shall state time, place, & purpose of meeting as fixed by persons calling it.
Notice of meeting need not be given to anyone who attends meeting or who signs waiver of notice either before or after meeting.
Any action permitted to be taken at origanization meeting of incorporators or dirs, as case may be, may be taken w/o meeting
if each incorporator or dir, where there is more than one, or sole incorporator or dir where there is only one, signs instrument
which states action so taken.
Registered Agent
a. §1021 – Registered Office in state; principal office or place of business in state
A.
B.
b.
§1022 Registered agent in state; resident agent
A.
B.
C.
c.
Every corp shall have & maintain in this state a registered office which may, but need not be, same as its place of business;
Whenever term “corp’s principal office or place of business in this state” or “principal office or place of business of corp in
this state”, or other term of like import, is or has been used in corp’s cert of incorp, or in any other document, or in any statute,
it shall be deemed to mean & refer to, unless context indicates otherwise, corp’s registered office. It shall not be necessary for
any corp to amend its cert of incorp or any other document to comply w/ provisions of this §.
Every domestic corp shall have & maintain in this state a registered agent, which agent may be either:
1. Domestic corp itself;
2. Individual resident of state; or
3. Domestic or qualified foreign corp, limited liability company, or limited partnership. Each registered agent shall maintain a business office identical w/ registered office which is open during regular business hours to accept service of process & otherwise perform functions of registered agent.
Every foreign corp transacting business in this state shall have & maintain Sec of State as registered agent in this state. In addition, such foreign corp may have & maintain in this state a registered agent, which agent may be either:
1. Individual or resident of this state; or
2. Domestic or qualified foreign corp, limited liability company, or limited partnership. Each registered agent shall maintain business office identical w/ registered office which is open during regular business hours to accept service of process & otherwise perform functions of registered agent. If such additional registered agent is designated, service of process shall be on such agent & not on Sec of State.
Whenever term “resident agent” or “resident agent in charge of corp’s principal office or place of business in this state”, or
other term of like import which refers to corp’s agent requried by staute to be located in this state, is or has been used in corp’s
cert of incrp, or in any other document, or in any statute, it shall be deemed to mean & refer to, unless context indicates otherwise, corp’s registered office. It shall not be necessary for any corp to amend its cert of incorp or any other document to comply w/ provisions of this §.
§1023 Change of location of registered office; change of registered agent
Any corp, by resolution of BOD, may change location of registered office in this state to any other place in this state. By like resolution, registered agent of corp may be changed to any other person or corp, including itself. In either such case, resolution shall be
as detailed in its statement as is required by provisions of ¶ 2 of sub§ A of § 1006. Upon adoption of such resolution, cert certifying
change shall be executed, acknowledged & filed in accordance w/ provisions of § 1007.
d.
§1024 – Change of address or name of registered agent
A.
B.
Registered agent may change address of registered office of corp or corps for which he is registered agent to another address in
this state by filing w/ Sec of State cert in name of each affected corp, executed & acknowledged by such registered agent, setting forth name of corp represented by such registered agent, address at which registered office for corp has been maintained,
new address to which registered office will be changed as of given date & at which new address such registered agent will
thereafter maintain registered office for corp recited in cert.
In event of change of name of any person or corp acting as registered agent in this state, such registered agent shall file w/ Sec
of State cert in name of each affected corp, executed & acknowledged by such registered agent, setting forth new name of
12
such registered agent, name of such registered agent before it was changed, name of corp represented by such registered
agent, & address at which such registered agent has maintained registered office for corp.
e.
§1025 – Resignation of registered agent coupled w/ appointment of successor
Registered agent of one or more corps may resign & appoint successor registered agent by filing in name of each affected corp a
cert w/ Sec of State, stating name & address of successor agent, in accordance w/ provisions of ¶ 2 of sub § A of § 6. There shall be
attached to each such cert a statement of affected corp ratifying & approving such change of registered agent. Each such statement
shall be executed & acknowledged in accordance w/ provisions of § 7. Upon such filing, successor registered agent shall become
registered agent of each corp which has ratifed & approved each substitution & successor registered agent’s address, as stated in
each cert, shall become adress of each such corp’s registered office in this state. Sec of State shall then issue his cert that successor
registered agent has become registered agent of corps so ratifying & approving such change, & setting out names of such corps.
f.
§1026 – Resignation of registered agent not coupled w/appointment of successor; absence of registered agent
A.
B.
C.
Registered agent of one or more corps may resign w/o appointing successor by filing in name of each affected corp a cert of
resignation w/ Sec of State; but resignation shall not become effective until 30 days after cert filed. Cert shall:
1. Be acknowledged by registered agent;
2. Contain statement that written notice of resignation was given to corp at least 30 days prior to filing cert by mailing or
delivering notice to corp at its address last known to registered agent & specify such address therein; &
3. Set forth date notice was mailed.
1. After receipt of notice of resignation of its registered agent provided for in sub§ A, corp for which registered agent was acting may obtain & designate new registered agent in same manner as provided for in § 1023 of this title for change of registered
agent.
2. If domestic corp fails to obtain & designate new registered agent prior to expiration of 30 days after filing by registered
agent of cert of resignation, Sec of State shall be deemed to be registered agent of such corp until new registered agent is
designated. Office of Sec of State shall charge fee prescribed by § 1142 for acting as registered agent.
After resignation of registered agent has become effective, if no new registered agent has been obtained & designated in time
& manner required, service of legal process against corp for which resigned registered agent had been acting shall be upon Sec
of State.
C. Untra Vires Acts – whether or not action taken by corp is outside its purpose & power. Don’t see many actions
based on this now b/c corps can be organized “for any lawful purpose.”
1. Corp Powers – generally corp purposes & powers are expressly set out in corp’s articles, conferred by statute, or implied powers necessary to carry out express powers.
2.
Kings Highway Corp. v. F.I.M.’s (1966) – applicable to OK b/c of § 1018 – same statue as used in this case.
a. Rule – Actions or defenses based on Ultra Vires acts are void unless asserted: (1) in action brought by s/h
to enjoin corp act or (2) in action by corp against incumbent or former officer of corp or (3) in action
brought by Attorney General.
3.
§1018 – Lack of corp capacity or power, effect; ultra vires
No act of corp & no conveyance or transfer of real or personal property to or by corp shall be invalid by reason of fact that corp was w/o
capacity or power to do such act or to make or receive such conveyance or transfer, but such lack of capacity or power may be asserted:
1. In proceeding by s/h against corp to enjoin doing of any act or acts or transfer of real or personal property by or to corp. If unauthorized acts or transfer sought to be enjoined are being, or are to be, performed or made pursuant to any K to which corp is party,
ct, if all parties to K are parties to proceeding & if it deems same to be equitable, may set aside & enjoin performance of such K, &
in so doing, may allow corp or to other parties to K, as case may be, such compensation as may be equitable for loss or damage sustained by any of them which may result from action of ct in setting aside & enjoining performance of such K. Anticipated profits to
be derived from performance of K shall not be awarded by ct as loss or damage sustained.
2. In proceeding by corp, whether acting directly or thru receiver, trustee, or other legal representative, or thru s/hs in representative
suit, against incumbent or former officer or dir of corp for loss or damage due to his unauthorized act; or
3. In proceeding by Atty Gen to dissolve corp, or to enjoin corp from transaction of unauthorized business.
4.
Theodora Holding Corp. v. Henderson (1969) – statue raised – “make donations for public welfare” – OK
has same statue in § 1069.
a. Test to be applied in passing on validity of gift is that of reasonableness.
b. Holding – relatively small loss of immediate income otherwise payable to s/hs had not been for gift far
outweighed by overall benefit flowing from gift where it serves to benefit those in need of philanthropic
or educational support.
D. Premature Commencement of Business – K entered into before existence of entity
1. Promoters – persons who organize entity. “Person who, acting alone or in conjunction w/ one or more other
persons, directly or indirectly takes initiative in founding & organizing business or enterprise of an issuer.”
a. Fiduciary Duties – full disclosure & fair dealing are required b/w promoters & corp & among promoters
themselves.
b.
Post v. US – promoters stand in fiduciary relationship of utmost good faith & full disclosure to other participants in entity venture.
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c.
Who may attack transactions b/w promoter & corp on grounds that transaction violates promoter’s fiduciary duty? Subsequent investors in corp, general creditors of corp, co-promoters, corp.
d.
Spell out arrangement when entering into K before corp is formed – who is liable now & ultimately, corp
or promoter.
e.
Stanley J. How & Assoc. v. Boss (1963) – Promoter’s signature on K w/ words “for corp to be formed in
future who will be obligor” are not enough to offset rule that person signing for nonexistent corp is normally to be personally liable.
(1) General rule of promoter liability – promoter personally liable on K entered into on behalf of proposed corp. Exception – other party looks to corp or some other fund for payment.
f.
Restatement of Agency – alternatives for promoter liability:
(1) Revocable offer to nonexistent corp which will result in K if corp is formed;
(2) Irrevocable offer for limited time;
(3) Present K binding promoter but w/ agreement that liability will terminate if K is formed;
(4) Present K – promoter remains liable either primarily or as surety.
g.
Quaker Hill, Inc. v. Parr (1961) – Action sought to subject Ds (who signed K) to personal liability in
view of defunct financial condition of corp, based upon fact that corp was not formed at time K was made
& on further ground that Ds as promoters were individually liable.
(1) Maker of promissory note is obligor.
(2) General rule – promoters are personally liable on Ks, though made on behalf of corp to be formed.
Exception – if K is made on behalf of corp & other party agrees to look to corp & not to promoters
for payment, promoters incur no personal liability.
(3) Holding – evidence clearly establishes intent of Ps to K w/ corp & not w/ individual Ds.
(4) Professor believes it significant that P asked for personal balance sheet prior to entering into K. Professor says this is evidence that P intended to hold D personally liable & not hold corp liable.
h.
Coopers & Lybrand v. Fox – burden of proof is on D-promoter to establish release of personal liability
or that exception applies.
i.
Goodman v. Darden – do not have to have express agreement that promoter is not to have personal
agreement. Can look at circumstantial evidence, as long as circumstances are such as to make it reasonably certain that parties intended to & did enter into agreement to release promoter from personal liability.
(1) Mere knowledge that corp is not in existence at time of K does not indicate agreement to release
promoter. Fact that promoter states intent to form corp in order to limit liability is not dispositive of
P’s intent to hold corp & not promoter liable.
j.
McArthur v. Times Printing Co.
(1) General rule – while corp is not bound by engagements made on its behalf by its promoters before
its organization, it may, after its organization, make such engagements its own contracts. Not requisite that adoption or acceptance of Ks by corp be express; may be inferred from acts or acquiescence
on part of corp or its authorized agents, as any similar original K might be shown.
(2) Adoption/Ratification
(a) Corp is free to enter into K after incorp by adoption – becomes K when corp knows of its existence; or by ratification – relates back to date promoter entered K.
(b) Ct rejects notion of ratification b/c it implies an existing person, on whose behalf K might have
been made at the time. There cannot, in law, be ratification of K which could not have been
made binding on ratifier at time it was made.
(c) Language – “ratify, affirm, & adopt” – resolution for corp adopting Ks entered into prior to its
existence.
2.
Defective Corp
a. Robertson v. Levy (D.C., 1964) - D personally liable for agreements entered before cert of incorp was issued b/c he assumed to act as corp w/o authority to do so.
(1) Rule – Based on §§ 50 & 139 of MBC, corp comes into existence only when cert is issued. Before
this, no corp de jure, de facto, or by estoppel exists. Immaterial whether 3 rd person believed he was
dealing w/ corp. If no cert, no corp & person is liable individually.
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(2) De jure corp – results when there has been conformity w/ mandatory conditions precedent established by statute. Not subject to direct or collateral attack.
(3) De facto corp – defectively incorpd. Requisites: (1) valid law under which corp can be lawfully organized; (2) good faith attempt to organize; (3) actual use of corp franchise. De facto corp is a defense that protects shareholders from liability to all parties.
(4) Corp by estoppel – neither de jure nor de facto. Defense that protects shareholders against third parties w/ whom they’ve dealt believing it to be proper corp. No defense to tort claims.
III.
b.
Timberline Equip Co., Inc. v. Davenport (1973) – “persons who assume to act as corp” is interpreted to
include persons who have investment in organization & who actively participate in decisions of organization. Liability not restricted to persons who incurred obligation.
c.
Cantor v. Sunshine Greenery, Inc. (NJ, 1979) – Since Ps looked to corp for liability on lease & since Dcorp had de facto existence, no personal liability on theory of promoter.
(1) Rule – Evidence of de facto corp – bona fide attempt to organize corp before entering K & actual exercise of corp powers by negotiations w/ Ps & execution of K involved in lit.
(2) Rationale – To deny existence of corp, in light of bona fide effort to organize, b/c of mere technicality by delay in filing cert of incorp runs counter to purpose of de fact concept & would accomplish
unjust & inequitable result in favor of Ps contrary to their own contractual expectations.
d.
Basis for reconciling difference b/w Cantor & Robertson is differing statutory provisions. Also, D in
Cantor was unaware at time of K that was not incorpd, but D in Robertson was aware that incorp had
been rejected.
e.
Cranson v. IBM (Ct. App. Maryland, 1964) - B/c D dealt w/ organization as if it were corp & relied on
its credit rather than P’s personal credit, it is estopped to assert that organization was not incorpd at time
typewriters were purchased.
(1) Rationale – Two doctrines give officer limited corp liability:
(a) de facto corp – (1) law authorized incorp; (2) good faith effort to incorp; (3) use or exercise of
corp power.
(b) estoppel to deny corp where person seeking to hold officer liable has contracted w/ association
so as to recognize existence as corp body. Two lines of cases in this area: (1) disregard dealings
of parties & refuse to recognize both doctrines where failure to comply w/ condition precedent to
corp existence; (2) where condition subsequent, apply estoppel doctrine.
f.
Harry Rich Corp. v. Feinberg (1987) – “assume to act” should be construed to permit recovery only
where individual acts w/ actual or constructive knowledge that no corp exists.
g.
Goodwyne v. Moore (1984) – Ps admitted legal existence of corp & were estopped from denying its legal
existence in order to enforce note.
h.
Echol v. Vienna Sausage (1982) – individual held personally liable on “corp obligation” – reserved corp
name but had not taken further steps to complete incorp at time of transaction in question.
i.
“Quo warranto” action – brought by state attacking corp status. De facto corp & corp by estoppel can
be attacked by state in quo warranto actions.
Chapter 6 – Disregard of Corp Entity
A. Piercing Corp Veil – Close Corps – Although s/hs normally shielded from corp obligations, certain instances
where corp entity will disregarded to hold s/h personally liable.
1. Bartle v. Home Owners Coop. (Ct App NY, 1955) - D-corp set up for sole purpose of building homes at cost
for s/hs of another corp. Neither fraud, misrepresentation, nor illegality; t/f D’s purpose in placing its operation into separate corp is w/in limits of public policy & no individual liability b/c no piercing of corp veil.
a. Rule – Law permits incorp of business for very purpose of escaping personal liability. Doctrine of piercing corp veil invoked to protect fraud or achieve equality.
b. Essential question – Did corp participate in fraud or misleading conduct or act causing injury?
2.
Dewitt Truck Brokers v. Fleming Fruit (4th Cir, 1976) - When sole beneficiary of corp’s operations, who
dominates corp, induces creditor to extend credit to corp on assurance of personal responsibility for charges,
sufficient basis for piercing corp veil.
a. Rule – Issue of piercing corp veil is fact specific w/ no articulated list of activities constituting piercing.
Proof of plain fraud is not necessary element in finding piercing. Mere fact that all corp stock is owned
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by one person is not sufficient grounds for disregarding corp. Piercing corp veil holds s/hs liable for
corp’s debts.
3.
4.
b.
“Alter ego” or “instrumentality” theory - Cts look to how corp operated & D’s relationship to that operation.
c.
Circumstances that suggest piercing: (1) corp grossly undercapitalized; (2) failure to observe corp
formalities; (3) non-payment of dividends; (4) insolvency of corp; (5) siphoning funds of corp by dominant s/h; (6) non-functioning of other officers; (7) absence of corp records & (8) corp is façade for operations of the dominant s/h. These factors must be coupled w/ element of injustice or fundamental unfairness.
d.
Burden of proof – rests on party asserting claim of piercing corp veil.
Theory of Piercing Corp Veil – involves issue whether s/h should be held personally liable for corp obligation. Once piercing is found, entity remains operating business & does not dissolve. Cts use theory to impose
or refuse to impose personal liability.
a. Can pierce corp veil towards one creditor w/o piercing it w/ other creditors. Based on making statements
of personal guarantee.
b.
Once corp pierces, who is held responsible? S/hs.
c.
Look at piercing at time of wrong.
d.
Weisser v. Mursam Shoe Corp – corp w/o assets pierces corp veil.
Baatz v. Arrow Bar (S.D., 1990) - D failed to present evidence that individuals treated corp in any way that
would produce injustices & inequitable consequences necessary to justify piercing corp veil. Personal guarantees on corp obligations does not pierce corp veil b/c personal guarantee is contractual agreement & cannot be
enlarged to impose tort liability.
a. General rule – corp is considered separate legal entity until sufficient reason to contrary. When continued
recognition of corp as separate entity would produce injustice & inequitable consequence, ct has sufficient reason to pierce corp veil. Factors indicative of piercing include: (1) fraudulent representation by
corp dirs; (2) under-capitalization; (3) failure to observe corp formalities; (4) absence of corp records; (5)
payment by corp of individual obligations; (6) use of corp to promote fraud, injustice or illegalities.
When ct determines corp veil is pierced, will treat corp & s/hs same.
b. Rationale – Argument that D failed to observe corp formalities b/c business signs did not indicate corp
fails b/c actual corp name is Arrow Bar, Inc. Mere failure upon occasion to follow all forms prescribed
by law for conduct of corp activities will not justify disregarding corp entity.
c.
Difference in tort cases & K cases involving “piercing corp veil” doctrine – In K, P has usually dealt
in some way w/ corp & should be aware corp lacks substance. P assumes risk. In tort, no element of voluntary dealing & question is whether it is reasonable for businessman to transfer risk to members of general public thru device of conducting business in name of corp.
B. Piercing Corp Veil – Parent-Subsidiary Corps – Alter Ego
1. Radaszewski v. Telecom Corp. (8th Cir, 1992) - Doctrine of limited liability is intended to protect parent corp
whose subsidiary goes broke. Doctrine would be destroyed if parent corp could be held liable on basis of errors in business judgment.
a. Tripartite test for piercing corp veil: (1) P must show control, complete domination, not only of finances, but of policy & business practice in respect to transaction attacked so that corp entity had no separate
mind, will or existence; (2) Control must have been used by D to commit fraud or wrong, to perpetrate
violation of statutory or other legal duty, or dishonest & unjust act in contravention of P’s legal rights; (3)
Control & br/ duty must proximately cause injury or unjust lost complained of. *** This test is not as
good, in prof’s opinion, as factors listed in prior cases. ***
b.
Public policy - In general, someone injured by conduct of corp or its employees can look only to assets of
employee or of employer corp for recovery. S/hs & parent corp are generally not liable. Exception –
pierce corp veil & reach assets of s/hs or parent corp. Under-capitalization of subsidiary creates inference
that parent is either deliberately or recklessly creating business that will not pay its bills or satisfy judgments against it. Generally, undercapitalization is evidence on its face of perpetrating fraud. Although
Contrux was undercapitalized, it had $11,000,000 worth of liability insurance so that Telecom was not
improperly motivated in setting up Contrux, in sense of either knowingly or recklessly establishing it w/o
ability to pay tort claims.
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c.
Under-capitalization – Is corp considered undercapitalized where it is formed w/ sufficient capital but
subsequently suffers an operating loss? Two cts have held no.
2.
O’Hazza v. Executive Credit Corp (1993) – corp adequately capitalized when s/hs initially contributed
$10,000 & then loaned $140,000 w/o expectation of repayment.
3.
Walkavszky v. Carlton – taxicab case. Corp for each cab. Obvious that fraudulently set up b/c all corps are
essentially one entity.
4.
Sibling corps – corps w/ common s/h or sets of s/hs. Problem – central corp owns controlling interest in one
or more other corps but handles them so that they cease to represent separate enterprises & become, as business matter, indistinguishable parts of larger enterprise. In such case, liability is based on assets of entire enterprise rather than separate enterprises.
5.
Minton v. Cavaney (1961) – held atty’s estate personally liable on claim of theory of alter ego b/c atty incorpd corp for which no stock was ever issued & into which no capital was ever paid. Rejected defense that
atty was merely temporary or accommodation dir w/ understanding that he would not exercise any duties of
dir.
6.
Fletcher v. Atex, Inc. (2nd Cir, 1995) – B/c of undisputed independence of parent & subsidiary, insufficient
evidence as matter of law to establish degree of domination necessary to disregard D’s corp identity.
a. Rule - Del law permits ct to pierce corp veil where there is fraud or where mere instrumentality or alter
ego of its owner. Under alter ego theory, no requirement to show fraud; P must prove: (1) parent &
subsidiary operated as single economic entity & (2) overall element of injustice or unfairness is present.
b. Rationale – Factors to consider in determining whether subsidiary & parent operate as single entity:
“whether corp was adequately funded for corp undertaking; whether corp was solvent; whether dividends
were paid, corp records kept, officers functioned properly, & other corp formalities were observed;
whether dominate s/h siphoned corp funds; & whether corp simply functioned as façade for dominate
s/h.” Fact that parent & subsidiary corps have common BOD (concept known as “interlocking dirs”)
does not indicate parent control. Cts apply piercing reluctantly & cautiously.
7.
Functions of Subsidiaries - to operate in separate geographic areas, to operate businesses acquired by parent
corp not closely related to principal business, to provide services to other subsidiaries, & to operate in business areas in which corp management believes business may be run more efficiently as subsidiary.
8.
Operating Subsidiaries – Two ways to operate:
a. Separate subsidiary – legal separation & no liability by parent.
b. Division or department of parent corp – no legal separation b/w parent & subsidiary & parent held liable.
9.
Castleberry v. Branscum (Tx, 1986) – Tx adopted piercing corp veil test – corp veil pierced if corp fiction
used as means of perpetrating fraud or as sham to perpetrate fraud, either actual or constructive. Made distinction b/w actions in K & tort. Question of fact for jury rather than question of law for ct.
a. Legislative response – no parent obligation for liability of subsidiary unless P shows owner or parent
caused corp to be used for purpose of perpetrating actual fraud primarily for direct personal benefit; no
obligation for failure to observe corp formalities.
b.
OK does not have statute addressing piercing corp veil as does Tx.
10. Second Cir – in parent/subsidiary cases, corp veil pierced in two situations: (1) to prevent fraud or other
wrong; (2) where parent dominates & controls subsidiary.
11. McKibben v. Mohawk Oil (1983) – Alaska developed piercing standard for parent/subsidiary situations – (1)
parent uses separate corp form to defeat public convenience, justify wrong, commit fraud or defend crime; or
(2) subsidiary is mere instrumentality of parent.
12. US v. Kayser-Roth Corp. (D.R.I., 1989) - Parent corp is liable b/c exercised pervasive control over subsidiary
by: (1) monetary control; (2) restricting budget; (3) subsidiary-gov funneled thru parent; (4) approval for major decisions; (5) approval of capital transfers or expenditures over certain amount. Further subsidiary’s veil
is pierced, not only b/c public convenience, fairness & equity dictate such result, but also due to all encompassing control parent exerted over subsidiary as an owner.
C. Reverse Peircing
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1.
Cargill, Inc. v. Hedge (Minn., 1985) - Owner-occupants of farm do not lose homestead exemption when place
land in family farm corp under theory of piercing corp veil. (Reverse Piercing).
a. Rule – Reverse piercing permitted in only most carefully limited circumstances.
b. Rationale – Homestead exemption is personal & not available to corps. Ct declined to adopt an equitable
interest theory (D’s status as sole s/h gives her an equitable interest in property & allows homestead exemption). Instead, ct found piercing of corp veil. Corp was alter ego for D – maintained some corp formalities but paid no rent to corp for use of farm & used farmhouse as family home. D owned all stock &
family members were corp officers.
2.
Reverse piercing – either corp insider or person w/ claim against corp insider is attempting to have insider &
corp entity treated as single person for some purpose.
3.
Sims v. Western Waste – parent corp argued that it was alter-ego of its subsidiary in action brought by employee of subsidiary. Ct held TX law does not permit parent corp to assert alter-ego theory of piercing corp
veil of subsidiary in order to assert immunity as defense to suit brought by subsidiary’s employee.
D. Other Piercing Situations:
1. Pepper v. Litton (Sup Ct, 1939) – Where controlling s/h serves as dir or officer, owes fiduciary duties to corp
in those capacities. Even where controlling s/h does not serve as dir or officer, he may owe fiduciary obligations to minority s/hs in exercising control. Controlling s/h must refrain from using control to obtain special
advantage or to cause corp to take action that unfairly prejudices minority s/hs.
2.
Stark v. Flemming (9th Cir, 1960) – Sec of State must respect corp & determine reasonable salary in order to
compute social security benefits. Sec entitled to make objective appraisal of dir’s salary – whether reasonable. To determine reasonable salary, ask whether salary paid by like corps in same area.
3.
Roccograndi v. Unemployment Comp. Bd. Review (Penn., 1962) - Corp officers (all family members) hold
meetings during periods of insufficient work to determine by majority vote which family members should be
laid off. Held – Appellants self-employed & unable to claim unemployment benefits.
a. Rule – Corp entity may be ignored in determining whether claimants were “unemployed” or were selfemployed persons whose business proved unprofitable during period during which claim benefits.
E. Circumstances Where Cts Won’t Pierce Corp Veil:
1. Close Corp – Cts honor corp viel as long as no fraud or wrongdoing, business is conducted on corp (not personal) basis, & corp had adequate initial capital.
2.
F.
Parent-Subsidiary Corp – Cts won’t hold parent liable for subsidiary’s obligations if no fraud or wrongdoing, no intermingling of respective business transactions, accounts, & records, subsidiary was adequately financed in light of normal obligations foreseeable in business of its size & character, & parent & subsidiary are
held out to public as separate corps.
Nature of Shareholder – pecking order of s/hs cts will hold liable for corp debts, from most desirable to least desirable:
1. Parent of subsidiary corp – When s/h in question is parent corp, cts are more willing to pierce corp veil than
for individual s/hs.
2. S/hs of close corps – Typically w/ one s/h or family of s/hs – Ct is only likely to pierce corp veil for active investors (those involved in running business), not passive ones (those whose involvement w/ company is merely for investment.
3. S/h of publicly traded co (for whom cts virtually never pierce corp veil).
G. Equitable Subordination – “Deep Rock Doctrine” – addresses situation where controlling s/h makes a loan to
corp, which also has outside creditors. Corp becomes insolvent & is faced w/ bankruptcy or receivership. Principle of equitable subordination says that, if it would be manifestly unfair & inequitable to permit controlling s/h
equal priority, ct will subordinate his loan to other creditors (& even to preferred s/h claims).
1. Unfairness – either fraudulent conduct, mismanagement of corp, or inadequate capitalization.
IV.
Chapter 7 – Financial Matters & Closely Held Corp
A. Debt & Equity Capital
1. Three sources of financing:
a. capital (equity) contributions from owners of firm or from outside investors who become co-owners of
firm;
b. borrowings – from s/hs, private sources, banks or on credit cards;
c. retained earnings (rather than distributing earnings to owners)
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2.
Equity capital – composed of contributions by original entrepreneurs in firm, capital contributed by other investors in exchange for ownership interests, retained earnings.
3.
Debt – must at some point be repaid & interest is to be paid periodically
B. Types of Equity Securities
1. §1032 – Classes & series of stock; rights, etc.
A.
B.
C.
D.
E.
F.
G.
Every corp may issue one or more classes of stock or one or more series of stock w/in any class thereof, any or all of which classes
may be of stock w/ par value or stock w/o par value & which classes or series may have voting powers, full or limited, or no voting
powers, & designations, preferences & relative, participating, optional, or other special rights, & qualifications, limitations, or restrictions thereof, as shall be stated & expressed in cert of incorp or of any amendment thereto, or in resolution or resolutions
providing for issue of stock adopted by BOD pursuant to authority expressly vested in it by provisions of its cert of incorp. Any of
voting powers, designations, preferences, rights, & qualifications, limitations or restrictions of any class or series of stock may be
made dependent upon facts ascertainable outside cert of incorp or of any amendment thereto, or outside resolution or resolutions
providing for issue of stock adopted by BOD pursuant to authority expressly vested in it by provisions of its cert of incorp; provided, that manner in which facts shall operate upon voting powers, designations, preferences, rights, & qualifications, limitations, or
restrictions of class or series of stock is clearly & expressly set forth in cert of incorp or in resolution or resolutions providing for issue of stock adopted by BOD. Power to increase or decrease or otherwise adjust capital stock as provided for in OGCA shall apply
to all or any such classes of stock. Term “facts”, as used in this sub§, includes, but not limited to, occurrence of any event, including determination or action by any person or body, including corp.
Stock of any class or series may be made subject to redemption by corp at its option or at option of holders of stock or upon happening of specified event; provided, however, that at time of redemption, corp shall have outstanding shares of at least one class or series of stock w/ full voting powers which shall not be subject to redemption. Notw/standing limitations stated in foregoing proviso:
1. Any stock of regulated investment co registered under Investment Co Act of 1940, as heretofore or hereafter amended, may be
made subject to redemption by corp at its option or at option of holders of stock.
2. Any stock of corp which directly or indirectly holds license or franchise from gov agency to conduct business or is member of
nat’l securities exchange, which license, franchise, or membership is conditioned upon some or all holders of its stock possessing prescribed qualifications, may be made subject to redemption by corp to extent necessary to prevent loss of license,
franchise, or membership or to reinstate it. Any stock which may be made redeemable under this § may be redeemed for cash,
property, or rights, including securities of same or another corp, at such time or times, price or prices, or rate or rates, & w/
any adjustments, as shall be stated in cert of incorp or in resolution or resolutions providing for issue of stock adopted by BOD
as provided for in sub§A.
Holders of preferred or special stock of any class or of any series thereof shall be entitled to receive dividends at such rates, conditions, & times as shall be stated in cert of incorp or in resolution or resolutions providing for issue of stock adopted by BOD as provided for in sub§A, payable in preference to, or in relation to, dividends payable on any other class or classes or of any other series
of stock, & cumulative or noncumulative as shall be so stated & expressed. When dividends upon preferred & special stocks, if
any, to extent of preference to which stocks are entitled, shall have been paid or declared & set apart for payment, dividend on remaining class or classes or series of stock may then be paid out of remaining assets of corp available for dividends as otherwise provided for in OGCA.
Holders of preferred or special stock of any class or of any series thereof shall be entitled to rights upon dissolution of, or upon any
distribution of assets of, corp as shall be stated in cert of incorp or in resolution or resolutions providing for issue of stock adopted
by BOD as provided for in sub§A.
Any stock of any class or of any series thereof may be made convertible into, or exchangeable for, at option of either holder or corp
or upon happening of specified event, shares of any other class or classes or any other series of same or any other class or classes of
stock of corp, at price or prices or at rate or rates of exchange, & w/ adjustments as shall be stated in cert of incorp or in resolution
or resolutions providing for issue of stock adopted by BOD as provided for in sub§ A.
If any corp shall be authorized to issue more than one class of stock or more than one series of any class, powers, designations, preferences, & relative, participating, optional, or other special rights of each class of stock or series thereof & qualifications, limitations, or restrictions of such preferences or rights shall be set forth in full or summarized on face or back of cert which corp shall issue to represent class or series of stock; provided that, except as otherwise provided for in §1055, in lieu of foregoing requirements,
there may be set forth on face or back of cert which corp shall issue to represent class or series of stock, statement that corp will furnish w/o charge to each s/h who so requests powers, designations, preferences, & relative, participating, optional, or other special
rights of each class of stock or series thereof & qualifications, limitations, or restrictions of preferences or rights. W/in reasonable
time after issuance or transfer of uncertificated stock, corp shall send to registered owner thereof written notice containing info required to be set forth or stated on certs, or w/ respect to this § a statement that corp will furnish w/o charge to each s/h who so requests, powers, designations, preferences, & relative, participating, optional, or other special rights of each class of stock or series
thereof & qualifications, limitations, or restrictions of preferences or rights. Except as otherwise expressly provided by law, rights
& obligations of holders of uncertificated stock & rights & obligations of holder of certs representing stock of same class & series
shall be identical.
1. When any corp desires to issue any shares of stock of any class or of any series of any class of which powers, designations, preferences, & relative, participating, optional, or other rights, of any, or qualifications, limitations, or restrictions thereof, if any, shall
not have been set forth in cert of incorp or in any amendment thereto but shall be provided for in resolution or resolutions adopted
by BOD pursuant to authority expressly vested in it by provisions of cert of incorp or any amendment thereto, cert of designations
setting forth copy of resolution or resolutions & number of shares of stock of class or series to which resolution or resolutions apply
shall be executed, acknowledged, & filed, & shall become effective. Unless otherwise provided in any resolution or resolutions,
number of shares of stock of any series to which resolution or resolutions apply may be increased but not above total number of authorized shares of class, or decreased, but not below number of shares thereof then outstanding, by cert likewise executed, acknowledged, & filed setting forth statement that specified increase or decrease therein had been authorized & directed by BOD. In case
number of shares shall be decreased, number of shares so specified in cert shall resume status which they had prior to adoption of
first resolution or resolutions. Unless otherwise provided in cert of incorp, if no shares of stock have been issued of class or series
of stock established by resolution of BOD, voting powers, designations, preferences, & relative, participating, optional, or other
rights, if any, or qualifications, limitations, or restrictions thereof, may be amended by resolution or resolutions adopted by BOD.
Cert which states that no shares of class or series have been issued, sets forth copy of resolution or resolutions, &, if designation of
class or series is being changed, indicates original designation & new designation, shall be executed, acknowledged, & filed, & shall
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become effective. When no shares of any class or series are outstanding, either b/c none were issued or b/c no issued shares of any
class or series remain outstanding, cert setting forth resolution or resolutions adopted by BOD that none of authorized shares of
class or series are outstanding, & that none will be issued subject to cert of designations previously filed w/ respect to class or series,
may be executed, acknowledged, & filed & when cert becomes effective, it shall have effect of eliminating from cert of incorp all
matters set forth in cert of designations w/ respect to class or series of stock.
2. When any cert filed pursuant to provisions of this sub§ become effective, it shall have effect of amending cert of incorp; except that neither filing of cert nor filing of restated cert of incorp pursuant to §1080 shall prohibit BOD from subsequently
adopting resolutions as authorized by this sub§.
2.
Common shares
a. class of shares – all authorized shares of corp that have identical rights.
b.
Shares – units into which proprietary interests in corp are divided.
c.
Common shares – two characteristics:
(1) entitled to vote for election of dirs & on other matters coming before s/hs;
(2) entitled to net assets of corp (after debts), when distributions are made in form of dividends or liquidating distributions.
d.
Authorized shares - §1006(a)(4) – list total number of authorized shares, list par value & if multiple
classes of stock, must list attributes of each class.
(1) §1142(A)(9) – filing fee $50 or 1/10th of 1% of authorized par value – t/f should not have more than
$50,000 of authorized par value shares.
e.
Outstanding shares – issued to some person or persons
f.
In OK, can have either certificated or uncertificated shares (refers to actual stock certificate)
(1) §1039 – Stock certificates, uncertificated shares - authorizes uncertificated shares. BOD must
vote not to issue certificates, but s/hs can still demand certificate. When certificated, must be signed
by certain officers.
Shares of corp shall be represented by certificates, provided that BOD of corp may provide by resolution or resolutions that
some or all of any or all classes or series of its stock shall be uncertificated shares. Notw/standing adoption of such resolution,
shares represented by certificate shall not become uncertificated shares until such cert is surrendered to corp. Every holder of
stock in corp shall be entitled to have cert signed by, or in name of, corp by chairman or vice-chairman of BOD, or pres or v-p,
& by treasurer or assistant treasurer or secretary or assistant secretary of such corp certifying & representing number of shares
owned by him in such corp. Subject to applicable provisions of UCC-Investment Securities, such entitlement shall apply
equally to holder of uncertificated shares, notw/standing adoption of resolution by BOD providing for issuance of uncertificated shares, who makes written requires of corp. Any or all signatures on cert may be facsimile. In case any officer, transfer
agent, or registrar who has signed or whose facsimile signature has been placed upon cert shall have ceased to be such officer,
transfer agent or registrar before such cert is issued, it may be issued by corp w/ same effect as if he were such officer, agent or
registrar at date of issue.
(2) Certain issues arise when shares are uncertificated.
3.
g.
US Sup Ct outlined characteristics of common stock:
(1) right to receive dividends contingent upon apportionment of profits;
(2) negotiability;
(3) ability to be pledged or hypothecated;
(4) conferring of voting rights in proportion to number of shares owned;
(5) capacity to increase in value
h.
According to professor s/h rights are:
(1) entitled to dividends from earnings (distributions out of earnings)
(2) entitled to net distribution (after creditors are paid) on liquidation
(3) entitled to control – exercising right to vote
i.
financial interests in common shares in corp are open-ended – as business prospers, corp assets benefit
holders of common shares.
j.
Dividend – distribution from current or retained earnings.
k.
Other rights of common s/hs: right to inspect books & records, right to sue on behalf of corp, right to financial info.
l.
Many corps begin w/ modest amount of capital raised by sale of stock.
Preferred Shares – shares entitle holders to some preference or priority in payment as against holders of
common shares.
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a.
b.
§1032(A) – grant power of “blank check preferral” – cert of incorp gives dirs authority to issue preferred
stock & they can make all decisions regarding rights of preferred stock shareholders – whether voting or
not whether preference in distributions, etc.
priority can be either in payment of dividends (receive dividends b/4 common s/hs) or in making distributions in liquidation (receive distributions b/4 common s/hs) or both.
c.
§1032(C) – Ok statute for preferred stock (above).
d.
Cumulative dividend – if preferred dividend is not paid in given year, it accumulates & must be paid before any dividend may be paid on common shares in later year.
e.
Noncumulative dividend – not carried over from one year to next.
f.
Partially cumulative dividend – cumulative to extent there are earnings in the year & noncumulative w/
respect to any excess dividend preference.
g.
Voting – preferred shares are usually nonvoting shares.
h.
Participating Stock – after pay dividend, can share any left over revenue.
i.
Non-participating Stock – entitled to specified dividend payment & specified liquidation preference &
nothing more no matter how profitable the corp.
j.
Redemption Rights - § 1032(B) – corp has option to redeem shares owned by s/hs or s/hs have right to
demand redemption, usually at price fixed by articles of incorp at time class of preferred stock was created.
(1) Stock redemption – corp buys back its stock. Must have pool from which it redeems.
(a) income tax – characterize redemption:
i. dividend-type redemption – ordinary income to individual & no offset.
ii. Dividend receipt deduction – Deduction allowed corp s/h for dividends received from domestic corp. Corps allowed deduction of 70% for dividends unless corp owns more than
80% of stock of distributing corp, deduction allowed is 80%.
iii. Exchange-type treatment – disproprotionate distribution or redemption – distinguish from
pro rata redemption.
(2) Flexibility – all stock can be made redeemable at option of s/h or upon happening of specific events
or at corp’s option.
k.
Conversion - §1032(E) – authorizes convertibility feature of stocks – from preferred to common shares.
l.
Protective Provisions – sinking fund provisions – require corp to set aside certain amount each year to
redeem specified portion of preferred stock issue.
m. Classes of Preferred – w/ different dividend rates, diff rights on dissolution & diff priorities.
n.
Classes of Common Shares – by appropriate provision in articles of incorp, classes vary in terms of
management, financial or voting rights.
C. Issuance of Shares: Herein of Subscriptions, Par Value, & Watered Stock
1. Share Subscriptions & Agreements to Purchase Securities
a. Traditional method of raising capital for new venture was by public subscriptions pursuant to which persons agreed to purchase specified # of shares contingent upon specified amount of capital being raised.
b.
Modern practice is to use simple contractual agreements to purchase securities rather than formal subscription agreement.
2.
Authorization & Issuance of Common Shares Under Model Act
a. May not be desirable to authorize vastly more shares than corp plans to issue for two reasons:
(1) limiting number of shares may protect minority s/hs;
(2) some states impose taxes based on authorized shares
3.
Par Value & Stated Capital
a. Par Value – does not have to have relation to actual value of stock.
(1) Originally had considerable importance b/c was widely viewed as amount for which shares would be
issued.
(2) §1006 (A)(4) – stock can be w/ or w/o par value (above).
21
(3) §1033 – Issuance of stock, lawful consideration; fully paid stock
A.
Consideration for subscriptions to, or purchase of, capital stock to be issued by corp shall be paid in such form & in such
manner as BOD shall determine. In absence of actual fraud in transaction, judgment of dirs as to value of such consideration shall be conclusive. Capital stock so issued shall be deemed fully paid & nonassessable if:
1. entire amount of such consideration has been received by corp in form of cash, services rendered, personal property, real property, leases of real property, or combination thereof; or
2. not less than amount of consideration determined to be capital has been received by corp in such form & corp has
received binding obligation of subscriber or purchaser to pay balance of subscription or purchase price.
(4) §1034 – Consideration for stock - (A) – can’t issue shares for less than par value.
A.
B.
C.
D.
Shares of stock w/ par value may be issed for such consideration, having value not less than par value thereof, as is determined from time to time by s/hs if cert of incorp so provides.
Shares of stock w/o par value may be issued for such consideration as is determined from time to time by BOD, or by
s/hs if cert of incorp so provides.
Treasury shares may be disposed of by corp for such consideration as may be determined from time to time by BOD, or
by s/hs if cert of incorp so provides.
If cert of incorp reserves to s/hs right to determine consideration for issue of any shares, s/hs, unless cert requires greater
vote, shall do so by vote of majority of outstanding stock entitled to vote thereon.
b.
Hannewald v. Bryan’s Inc. (N.D., 1988) - Bryans’ failure to pay for their shares in corp makes them personally liable for corp’s debt to Hanewald. S/h is liable to extent of diff b/w par value & amount actually
paid & to extent only as is necessary to pay creditors.
(1) Rule- s/hs’ initial capital investments protect their personal liability in corp enterprise. Generally,
s/hs are not liable for corp debts beyond capital they have contributed to corp.
c.
§1037 – Partly paid shares
Any corp may issue whole or any part of its shares as partly paid & subject to call for remainder of consideration to be paid therefor. Upon face or back of each stock cert issued to represent any such partly paid shares, or upon books & records of corp in case
of uncertificated partly paid shares, total amount of consideration to be paid therefor & amount paid thereon shall be stated & corp
shall comply w/ applicable provisions of § 8-103 of Title 12A of OK Stat. Upon declaration of any dividend on fully paid shares,
corp shall declare dividend upon partly paid shares of same class, but only upon basis of percentage of consideration actually paid
thereon.
d.
§1043 – Liability of s/h or subscriber for stock not paid in full - (c) – person buying partly paid shares
is not liable for remaining balance of shares if person buys w/o knowledge or notice of partial payment.
A.
B.
C.
D.
E.
F.
When whole of consideration payable for shares of corp has not been paid in, & assets shall be insufficient to satisfy claims of
creditors, each holder of or subscriber for such shares shall be bound to pay on each share held or subscribed for by him the
sum necessary to complete amount of unpaid balance of consideration for which such shares were issued or to be issued by
corp.
Amounts which shall be payable as provided in sub§ A may be recovered as provided for in § 124 of this act, after writ of execution against corp has been returned unsatisfied as provided for in that §.
Any person becoming assignee or transferee of shares or of subscription for shares in good faith & w/o knowledge or notice
that full consideration therefor has not been paid shall not be personally liable for any unpaid portion of such consideration,
but transferor shall remain liable therefor.
No person holding shares in any corp as collateral security shall be personally liable as s/h but person pledging such shares
shall be considered holder thereof & shall be so liable. No executor, administrator, guardian, trustee or other fiduciary shall be
personally liable as s/h, but estate or funds held by such executor, administrator, guardian, trustee or other fiduciary in such fiduciary capacity shall be liable.
No liability under provisions of this § or under provisions of § 124 shall be asserted more than six years after issuance of stock
or date of subscription upon which assessment is sought.
In any action by receiver or trustee of insolvent corp or by judgment creditor to obtain assessment under provisions of this §,
any s/h or subscriber for stock of insolvent corp may appear & contest claim or claims of such receiver or trustee.
e.
Watered stock – issued for value less than par value; technically, issued for property worth less than par
value.
f.
Bonus stock – issued for no value.
g.
Discount shares – issued for cash but less than par.
h.
Treasury shares – corp reacquires shares after lawfully issued, may resell shares at any price b/c these
remain “issued” even though held in corp’s treasury. Have an intermediate status – not viewed as “outstanding” for purposes of dividends, quorum, & voting purposes, but viewed as “issued” so that “reissuance” does not violate restrictions imposed by par value statutes.
i.
§1044 - Payment for stock not paid in full – dirs can demand payment at any time.
Capital stock of corp shall be paid for in such amounts & at such times as dirs may require. Dirs, from time to time, may demand
payment, in respect of each share of stock not fully paid,of such sum of money as necessities of business, in judgement of BO
D, may require, not exceeding in whole balance remaining unpaid on such stock, & such sum so demanded shall be paid to corp at
such times & by such installments as dirs shall direct. Dirs shall give written notice of time & place of such payments, which notice
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shall be mailed at least 30 days b/4 time for such payment, to each holder of or subscriber for stock which is not fully paid at his
last-known post office address.
j.
§1045 - Remedies for failure to pay for stock - action at law, or sell at public sale delinquent shares.
When any s/h fails to pay any installment or call upon his stock which may have been properly demanded by dirs, at time when such
payment is due, dirs may collect amount of any such installment or call or any balance thereof remaining unpaid, from said s/h by
action at law, or shall sell at public sale such part of shares of such delinquent s/h as will pay all demands then due from him w/ interest & all incidental expenses, & shall transfer shares so sold to purchaser, who shall be entitled to cert therefor. Notice of time &
place of such sale & sum due on each share shall be given by advertisement at least one week before sale, in newspaper of county in
this state where such corp’s registered office is located, & such notice shall be mailed by corp to such delinquent s/h at his lastknown address, at least 20 days before the sale. If no bidder can be had to pay amount due on stock, & if amount is not collected by
action at law, which may be brought w/in county where corp has registered office, w/in one year from date of bringing such action
at law, said stock & amount previously paid in by delinquent s/h on stock shall be forfeited to corp.
4.
Eligible & Ineligible Consideration for Shares
a. §19 of MBCA – where investors determine that Promoter’s future services are not of benefit for which he
was issued stock, they may permit corp to cancel shares issued to Promoter, thus allowing investors to
avoid dilution of their interests in corp.
b. Shares issued under promissory not prohibited.
c. Note secured by valid first trust lien on real estate permissible consideration.
5.
Par Value in Modern Practice
a. Under current practice, par value serves only minor function & is in no way indication of price at which
shares are issued.
D. Debt Financing
1. Evidence of indebtedness usually referred to as “securities” are bonds & debentures. Unconditional promises
to pay stated sum in future & to pay interest periodically.
a. debenture – bond not secured by any property.
2.
b.
Bearer bonds – bonds & debentures were historically payable to bearer – interest coupons reflecting periodic obligation to pay interest were attached.
c.
Registered bond – one that has been registered in name of specific individual & from which coupons
have been removed – interest paid directly to registered owner.
d.
Zero coupon bonds – pay no interest at all – sell at substantial discount from face value & upon maturity
holder receives face value. Attractive investments primarily for tax-exempt or tax deferred entities.
e.
Junk bonds – widely used in takeovers, are simply below investment-grade debt instruments.
f.
Usually advantageous to engage to some extent in debt financing. Minimization of income taxes or maximization of profits.
Concept of Leverage
a. Debt owed to third persons creates leverage. Leverage is favorable to borrower when borrower is able to
earn more on borrowed capital than cost of borrowing.
E. Issuance of Shares by Going Concern – Preemptive Rights & Dilution
1. Preemptive Rights – s/h’s preemptive rights is right to subscribe to that amount of shares in new issuance
that will preserve his existing proportionate interest in corp. In this way, preemptive rights protect w/h’s voting % & proportionate interest in corp’s net worth.
2.
Stokes v. Continental Trust Co. (NY, 1906) – S/h has inherent right to proportionate share of new stock issued for money only & not to purchase property for purpose of corp or to effect consolidation & while s/h can
waive that right, cannot be deprived of it w/o his consent except when stock is issued at fixed price not less
than par, & he is given right to take at that price in proportion to his holding.
3.
Katzowitz v. Sidler (NY, 1969) – It is no argument to offering stock below fair value that s/h had opportunity
to purchase additional shares at discount rate b/c s/hs have right to not purchase additional shares w/o dilution
of his existing interest in corp. S/h can demand offering be fixed at fair value. Judicial review in this area is
limited to whether under all circumstances, including disparity b/w issuing price of stock & its true value, nature of corp, business necessity for establishing offering price at certain amount to facilitate raising new capital, & ability of s/hs to sell rights, additional offering of securities should be condemned b/c dirs in establishing sale price did not fix it w/ reference to financial considerations w/ respect to ready disposition of securities.
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a.
Fair value – when issuing price of stock is shown to be markedly below book value in close corp & when
remaining s/h-dirs benefit from issuance, case for judicial relief based on below fair value price is met.
Dirs must show that issuing price falls w/in range which is justified on basis of valid business reasons.
b.
book value – look at corp books. Assets - liabilities = equity ÷ by # of issued shares = book value.
c.
Pre-emptive rights safeguard two distinct interests of s/hs: (1) right to protection against dilution of equity in corp & (2) protection against dilution of proportionate voting control.
d.
“Opt out & Opt in” options - § 1006(B)(3) – OK is an “opt-in” state in that default is that if pre-emptive
rights are not spelled out in cert, cannot have such rights.
e.
Dirs of corp have no discretion in choice of to whom to distribute corp’s earnings & assets.
f.
Issuing new stock for less than fair value can injure existing s/hs by diluting their interest in corp’s surplus, in current & future earnings & in assets upon liquidation.
g.
Remedies – When recognized, preemptive rights can be enforced either by: (1) suit for specific performance to compel issuance to P of authorized shares in amount necessary to retain proportionate interest;
(2) damages computed on basis of diff b/w subscription price of that amount of newly issued shares &
their market value; or (3) ct of equity enjoining corp from issuing shares in violation of preemptive rights.
F. Distributions from Corp
1. Gottfried v. Gottfried (1947) – Mere existence of adequate corp surplus is not sufficient to invoke ct action to
compel a dividend. Must also be bad faith on part of dirs.
a. Relevant factors of bad faith: intense hostility of controlling faction against minority; exclusion of minority from employment by corp; high salaries or bonuses or corp loans made to officers in control; fact that
majority group may be subject to high personal income taxes if substantial dividends are paid; existence
of desire by controlling dirs to acquire minority stock as cheaply as possible.
b.
Essential test of bad faith - whether policy of dirs is dictated by personal interests rather than corp welfare.
2.
Dodge v. Ford Motor Co. (Mich., 1919) – BOD are charged w/ primary purpose of operating corp at primary
benefit of s/hs.
Assets
Liabilities
Cash/Bonds
$54,000,000
Liabilities
$18,000,000
Other Assets
78,000,000
S/h Equity
$132,000,000
Common Stock
2,000,000
Surplus
112,000,000
$132,000,000
3.
Okla Statutes
a. §1079 – Reduction of Capital - requirement that can’t redeem stock or pay dividend if corp is insolvent
& cannot pay debt. Intended to protect creditors.
A.
B.
b.
Corp, by resolution of BOD, may reduce its capital in any of following ways:
1. By reducing or eliminating capital represented by shares of capital stock which have been retired; or
2. By applying to otherwise authorized purchase or redemption of outstanding shares of its capital stock some or all of capital represented by shares being purchased or redeemed, or any capital that has not been allocated to any particular class
of its capital stock; or
3. By applying to otherwise authorized conversion or exchange of outstanding shares of its capital stock some or all of
capital represented by shares being converted or exchanged, or some or all of any capital that has not been allocated to
any particular class of its capital stock, or both, to extent that such capital in aggregate exceeds total aggregate par value
or stated capital of any previously unissued shares issuable upon such conversion or exchange; or
4. By transferring to surplus:
a.
some or all of capital not represented by any particular class of its capital stock; or
b. some or all of capital represented by issued shares of its par value capital stock, which capital is in excess of aggregate par value of such shares; or
c.
some of capital represented by issued shares of its capital stock w/o par value.
Notw/standing other provisions of this §, no reduction of capital shall be made or effected unless assets of corp remaining after
such reduction shall be sufficient to pay any debts of corp for which payment has not been otherwise provided. No reduction
of capital shall release any liability of any s/h whose shares have not been fully paid.
§1077 – Amendment of cert of incorp after receipt of payment for stock; nonstock corps - eliminating preemptive rights by amendment. BOD must decide that eliminating preemptive rights is in best interests of corp & s/hs must vote to approve. Protections to eliminate preemptive rights.
24
A.
B.
c.
1. After corp has received payment for any of its capital stock, it may amend its cert of incorp, from time to time, in any & as
many respects as may be desired, so long as its cert of incorp as amended would contain only provisions as it would be lawful
& proper to insert in original cert of incorp filed at time of filing of amendment; & if change in stock or rights of s/hs, or exchange, reclassification, subdivision, combination, or cancellation of stock or rights of s/hs is to be made, provisions as may be
necessary to effect the change, exchange, reclassification, subdivision, combination, or cancellation. In particular, & w/o limitation upon general power of amendment, corp may amend its cert of incorp, from time to time, so as:
a.
to change its corp name,
b. to change, substitute, enlarge, or diminish nature of business or its corp powers & purposes,
c.
to increase or decrease its authorized capital stock or to reclassify same, by changing number, par value, designations, preferences, or relative, participating, optional, or other special rights of shares, or qualifications, limitations,
or restrictions of such rights, or by changing shares w/ par value, or shares w/o par value into shares w/ par value
either w/ or w/o increasing or decreasing number of shares or by subdividing or combining outstanding shares of
any class or series of class of shares into greater or lesser number of outstanding shares,
d. to cancel or otherwise affect right of holders of shares of any class to receive dividends which have accrued but
have not been declared,
e.
to create new classes of stock having rights & preferences either prior & superior or subordinate & inferior to
stock of any class then authorized, whether issued or unissued, or
f.
to change period of its duration.
2. Any or all changes or alterations provided for in ¶ 1 of this sub§ may be effected by one cert of amendment.
Every amendment authorized by provisions of sub§A shall be made & effected in following manner:
1. If corp has capital stock, its BOD shall adopt resolution setting forth amendment proposed, declaring its advisability, &
either calling special meeting of s/hs entitled to vote in respect thereof for consideration of amendment or directing that
amendment proposed be considered at next annual meeting of s/hs. Special or annual meeting shall be called & held upon notice. Notice shall set forth amendment in full or brief summary of changes to be effected thereby, as dirs shall
deem advisable. At meeting, vote of s/hs entitled to vote thereon shall be taken for & against proposed amendment. If
majority of outstanding stock entitled to vote thereon, & majority of outstanding stock of each class entitled to vote
thereon as class, has been voted in favor of amendment, cert setting forth amendment & certifying that amendment has
been duly adopted in accordance w/ provisions of this § shall be executed, acknowledged, & filed & shall become effective.
2. Holders of outstanding shares of class shall be entitled to vote as class upon proposed amendment, whether or not entitled to vote thereon by provisions of cert of incorp, if amendment would increase or decrease aggregate number of authorized shares of class, increase or decrease par value of shares of class, or alter or change powers, preferences, or
special rights of shares of class so as to affect them adversely. If any proposed amendment would alter or change powers, preferences, or special rights of one or more series of any class so as to affect them adversely, but shall not so affect
entire class, then only shares of series so affected by amendment shall be considered separate class for purposes of this
¶. Number of authorized shares of any such class or classes of stock may be increased or decreased, but not below number of shares thereof then outstanding, by affirmative vote of holders of majority of stock of corp entitled to vote irrespective of provisions of this ¶, if so provided in original cert of incorp, in any amendment thereto which created class or
classes of stock or which was adopted prior to issuance of any shares of class or classes of stock, or in any amendment
thereto which was authorized by resolution or resolutions adopted by affirmative vote of holders of majority of class or
classes of stock.
3. If corp has no capital stock, then governing body thereof shall adopt resolution setting forth amendment proposed & declaring its advisability. If at subsequent meeting, held upon notice stating purpose thereof & given in accordance w/
provisions of § 1067, majority of all members of governing body shall vote in favor of amendment, cert thereof shall
become effective. Cert of incorp of corp w/o capital stock may contain provisions requiring amendment thereto to be
approved by specified number or percentage of members or of any specified class of members of corp in which event
only one meeting of governing body thereof shall be necessary, & proposed amendment shall be submitted to members
or to any specified class of members of corp w/o capital stock in same manner, so far as applicable, as is provided in this
§ for amendment to cert of incorp of stock corp; & in event of adoption thereof, cert evidencing amendment shall be executed, acknowledged, & filed & shall become effective.
4. Whenever cert of incorp shall require action by BOD, by holders of any class or series of shares, or by holders of any
other securities having voting power, vote of greater number or proportion than is required by provisions of OGCA,
provision of cert of incorp requiring greater vote shall not be altered, amended, or repealed except by greater vote.
5. Resolution authorizing proposed amendment to cert of incorp may provide that at any time prior to effectiveness of filing of amend w/ Sec of State, notw/standing authorization of proposed amendment by s/hs of corp or by members of
nonstock corp, BOD or governing body may abandon proposed amendment w/o further action by s/hs or members.
§1080 Restated cert of incorp
A.
B.
C.
Corp, whenever desired, may integrate into single instrument all provisions of its cert of incorp which are then in effect & operative as result of there having up to that time been filed w/ Sec of State one or more certs or other instruments pursuant to
any sections referred to in § 1008, & it may at same time also further amend its cert of incorp by adopting restated cert of incorp.
If restated cert of incorp merely restates & integrates but does not further amend cert of incorp, as up to that time amended or
supplemented by any instrument that was filed pursuant to any sections mentioned in § 1008, it may be adopted by BOD w/o
vote of s/h, or it may be proposed by dirs & submitted by them to s/hs for adoption, in which case procedure & vote required
by § 1077 for amendment of cert of incorp shall be applicable. If restated cert in incorp restates & integrates & also further
amends in any respect cert of incorp, as up to that time amended or supplemented, it shall be proposed by dirs & adopted by
s/hs in manner & by vote prescribed by § 1077, if corp has not received any payment for any of its stock, in manner & by vote
prescribed by § 1076.
Restated cert of incorp shall be specifically designated as such in its heading. It shall state, either in its heading or in introductory paragraph, corp’s present name, &, if it has been changed, name under which it was originally incorpd, & date of filing of
its original cert of incorp w/ Sec of State. If adopted by BOD w/o vote of s/hs, unless adopted pursuant to provisions of §
1076, it shall state that it only restates & integrates & does not further amend provisions of corp’s cert of incorp as up to that
time amended or supplemented & that there is no discrepancy b/w those provisions & provisions of restated cert. Restated cert
of incorp may omit:
25
1.
D.
E.
d.
§1120 Renewal, revival, extension & restoration of cert of incorp
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
4.
Such provisions of original cert of incorp which named incorporator or incorporators, initial BOD, & original subscribers
for shares; &
2. Such provisions contained in any amendment to cert of incorp as were necessary to effect change, exchange, reclassification or cancellation of stock, if such change, exchange, reclassification or cancellation has become effective.
Any such omissions shall not be deemed further amendment.
Restated cert of incorp shall be executed, acknowledged & filed in accordance w/ provisions of § 7. Upon filing w/ Sec of
State, original cert of incorp, as up to that time amended or supplemented, shall be superseded. From that time forward, restated cert of incorp, including any further amendments or changes made thereby, shall be cert of incorp of corp, but original
date of incorp shall remain unchanged.
Any amendment or change effected in accordance w/ restatement & integration of cert of incorp shall be subject to any other
provisions of OGCA, not inconsistent w/ provisions of this §, which would apply if separate cert of amendment were filed to
effect such amendment or change.
Term cert of incorp includes charter of corp organized pursuant to provisions of any law of this state.
Any corp, at any time before expiration of time limited for its existence & any corp whose cert of incorp has become forfeited by law for nonpayment of taxes & any corp whose cert of incorp has expired by reason of failure to renew it or whose cert
of incorp has been renewed, but, thru failure to comply strictly w/ provisions of OGCA, validity of whose renewal has
been brought into question, may at any time procure extension, restoration, renewal or revival of its cert of incorp, together
w/ all rights, franchises, privileges & immunities & subject to all its duties, debts & liabilities which had been secured or
imposed by its original cert of incorp & all amendments thereto.
Extension, restoration, renewal or revival of cert of incorp may be procured by executing, acknowledging & filing cert in accordance w/ provisions of §7.
Cert required by provisions of sub§ C shall state:
1. Name of corp, which shall be existing name of corp or name it bore when its cert of incorp expired, except as provided
for in sub§F;
2. Address, including street, city & county of corp’s registered office in this state & name of registered agent at address;
3. Whether or not renewal, restoration or revival is to be perpetual & if not perpetual time for which renewal, restoration or
revival is to continue &, in case of renewal before expiration of time limited for existence, date when renewal is to
commence, which shall be prior to date of expiration of old cert of incorp which it is desired to renew;
4. That corp desiring to be renewed or revived & so renewing or reviving its cert of incorp was organized pursuant to laws
of this state;
5. Date when cert of incorp would expire, if such is case, or such other facts as may show that cert of incorp has become
forfeited or that validity of any renewal has been brought into question; &
6. That cert for renewal or revival is filed by authority of those who were dirs or members of governing body of corp at
time its cert of incorp expired or who were elected dirs or member of governing body of corp.
Upon filing of cert in accordance w/ provisions of § 7, corp shall be renewed & revived w/ same force & effect as if cert of incorp had not become forfeited, or had not expired by limitation. Such reinstatement shall validate all Ks, acts, matters &
things made, done & performed w/in scope of its cert of incorp by corp, its officers & agents during time when its cert of incorp was forfeited or after its expiration by limitation, w/ same force & effect & to all intents & purposes as if cert of incorp
had at all times remained in full force & effect. All real & personal property, rights & credits, which belonged to corp at time
its cert of incorp became forfeited, or expired by limitation & which were not disposed of prior to time of its revival or renewal shall be vested in corp after renewal or revival, as fully & amply as they were held by corp at & before time its cert of incorp became forfeited, or expired by limitation, & corp after its renewal & revival shall be as exclusively liable for all Ks, acts,
matters & things made, done or performed in its name & on its behalf by its officers & agents prior to its reinstatement, as if
its cert of incorp has at all times remained in full force & effect.
If, after 3 years from date upon which cert of incorp became forfeited for nonpayment of taxes or expired by limitation, name
of corp is unavailable upon records of Sec of State, then in such case corp to be renewed or revived shall not be renewed under
same name which it bore when its cert of incorp became forfeited, or expired but shall adopt or be renewed under some other
name & in such case cert to be filed under provisions of this § shall set forth name borne by corp at time its cert of incorp became forfeited, or expired & new name under which corp is to be renewed or revived.
Any corp that renews or revives its cert of incorp pursuant to provisions of this § shall pay to this state amounts provided in §§
1201-1214 of Title 68. No payment made pursuant to this sub§ shall reduce amount of franchise tax due pursuant to provisions of §§ 1201-1214 of Title 68 for year in which renewal or revival is effected.
If sufficient number of last acting officers of any corp desiring to renew or revive its cert of incorp are not available by reason
of death, unknown address or refusal or neglect to act, dirs of corp or those remaining on bd, even if only one, may elect successors to such officers. In any case where there shall be no dirs of corp available to renew or revive cert of incorp of corp,
s/hs may elect full BOD, as provided by bylaws of corp, & bd shall then elect such officers as are provided by law, by cert of
incorp or by bylaws to carry on business & affairs of corp. Special meeting of s/hs for purposes of electing dirs may be called
by any officer, dir or s/h upon notice.
After renewal or revival of cert of incorp of corp shall have been effected, except where special meeting of s/hs has been
called in accordance w/ provisions of sub§ H, officers who sign cert of renewal or revival shall, jointly, immediately call special meeting of s/hs of corp upon notice, & at special meeting s/hs shall elect full BOD, which bd shall then elect such officers
as are provided by law, by cert of incorp or bylaws to carry on business of corp.
Whenever it shall be desired to renew or revive cert of incorp of any corp organized pursuant to provisions of OGCA not or
profit & having no capital stock, governing body shall perform all acts necessary for renewal or revival of charger of corp
which are performed by BOD in case of corp having capital stock. Members of any corp not for profit & having no capital
stock who are entitled to vote for election of members of its governing body, shall perform all acts necessary for renewal or
revival of cert of incorp of corp which are performed by s/hs in case of corp having capital stock. In all other respects, procedure for renewal or revival of cert of incorp of corp not for profit or having no capital stock shall conform, as nearly as may be
applicable, to procedure prescribed in this § for renewal or revival of cert of incorp of corp having capital stock.
Wilderman v. Wilderman (Del., 1974) – where one party in effect sets his own compensation, he then has
burden of establishing its fundamental fairness – Inherent Fairness.
26
a.
BOD determines authorized salaries. In determining fairness of salary, person receiving salary has burden to show its fairness where that person decides amount of salary. Factors to consider in determining
fairness of salary:
(1) evidence of similarly-situated corp executives;
(2) whether IRS would allow corp to deduct amount of salary as reasonable;
(3) whether salary bears reasonable relation to corp’s success;
(4) whether salary increases are geared to increases in value of services rendered;
(5) amount of challenged salary compared to other salaries paid by corp.
Redemption (Exchange Treatment)
Amount realized ($$)
Less: Adjusted basis (original investment)
Recognized Gain
(times) Capital Gains Rates
Tax
Dividend
Amount distributed
(times) Ordinary Income tax rate
Tax
5.
Distribution – transaction in which corp repurchases its own stock. This is a redemption “essentially equivalent to a dividend” for tax purposes.
6.
Investment – transaction in which corp purchases stock issued by another corp.
7.
IRS code – rules for when distributions will be treated as dividend or as exchange treatment.
8.
Donahoe v. Rodd Electrotype (Mass, 1975) - Paying larger per share to buy out majority shares than to buy
out minority s/h may be justified b/c majority block is worth more. However, must treat all s/hs same in redeeming stock.
a. Equal Treatment Doctrine – in close corp, there must be equal treatment of all s/hs or, at least, all s/hs
must be afforded equal opportunities. Donahoe held that controlling s/hs of close corp who cause corp to
acquire some shares must see that minority s/hs have equal opportunity to sell proportionate number of
shares to corp at identical price.
b. General duty to which s/hs & partners are held – “utmost good faith & loyalty” or strict good faith
standard.
c. General duty of corp dirs – good faith & inherent fairness standard of conduct. Less stringent that s/h
& partner duty.
d. S/hs can agree in advance to allow redemptions by majority s/hs.
9.
Delaware does not follow Donahue & OK then probably would not either (although no current case law on
the subject). Proper standard under Del’s view is the entire fairness test of Wilderman. Del holds that s/hs do
not have to be treated equally for all purposes, & in particular that different categories of s/hs in close corps
do not have right to be treated equally in terms of corp arrangements affecting liquidity of their stock.
10. Crowley v. Communications for Hospitals, Inc. – applying Donahue, held that large remuneration paid to
controlling s/hs in order to “zero out” a C corp’s taxable income while not making any payments to minority
s/hs violated Donahue fiduciary duties.
G. Legal Restrictions on Distributions
1. OK statutes
a. §1052 – Declaration & payment of dividends.
No corp shall pay dividends except in accordance w/ provisions of OGCA. Dividends may be paid in cash, in property, or in shares
of corp’s capital stock. If dividend is to be paid in shares of corp’s theretofore unissued capital stock, BOD, by resolution, shall direct that there be designated as capital in respect of such shares an amount which is not less than aggregate par value of par value
shares being declared as dividend, & in case of shares w/o par value being declared as dividend, such amount as shall be determined
by BOD. No such designation as capital shall be necessary if shares are being distributed by corp pursuant to split-up or division of
its stock rather than as payment of dividend declared payable in stock of corp.
b.
§1049 – Dividends; payment; wasting asset corps. (A) may pay dividends of capital stock either out of
surplus or out of net profits from this & last year. Nimble dividends provision. If preferred stock provision – effects dividend payments. Also, some certs of incorp provide that must maintain certain net worth
before dividend distributions made.
A.
Dirs of every corp, subject to any restrictions contained in its cert of incorp, may declare & pay dividends upon shares of its
capital stock either out of surplus, as defined in & computed in accordance w/ provisions of §§ 1035 & 1079, or in case there
is no surplus, out of its net profits for fiscal year in which dividend is declared or preceding fiscal year (Nimble dividend). If
capital of corp shall have been diminished by depreciation in value of its property, or by losses, or otherwise, to amount less
than aggregate amount of capital represented by issued & outstanding stock of all classes having preference upon distribution
of assets, dirs of corp shall not declare & pay out of net profits any dividends upon any shares of any classes of its capital
stock until deficiency in amount of capital represented by issued & outstanding stock of all classes having preference upon dis-
27
B.
c.
tribution of assets shall have been repaired. Nothing in this sub§ shall invalidate or otherwise affect note, debenture, or other
obligation of corp paid by it as dividend on shares of its stock, or any payment made thereon, if at time note, debenture, or obligation was delivered by corp, corp had either surplus or net profits as provided in this sub§ from which dividend could lawfully have been paid.
Subject to any restriction contained in its cert of incorp, dirs of any corp engaged in exploitation of wasting assets including,
but not limited to, corp engaged in exploitation of natural resources or other wasting assets, including patents, or engaged
primarily in liquidation of specific assets, may determine net profits derived from liquidation w/o taking into consideration depletion of such assets resulting from lapse of time, consumption, liquidation, or exploitation.
§1035 – Determination of amount of capital; capital, surplus & net assets defined. Net assets (aka
s/h equity) –amount by which total assets exceeds total liabilities.
Any corp, by resolution of its BOD, may determine that only part of consideration which shall be received by corp for any of shares
of its capital stock which it shall issue from time to time shall be capital; but in case any shares issued shall be shares having par
value, amount of part of such consideration so determined to be capital shall be in excess of aggregate par value of shares issued
for such consideration having par value, unless all shares issued shall be shares having par value, in which case amount of part of
such consideration so determined to be capital need be only equal to aggregate par value of such shares. In each such case BOD
shall specify in dollars part of such consideration which shall be capital. If BOD shall not have determined, at time of issue of any
shares of capital stock of corp issued for such or w/in 60 days after issue of any shares of capital stock of corp issued for property
other than cash, what part of consideration for such shares shall be capital, capital of corp in respect of such shares shall be an
amount equal to aggregate par value of such shares having par value, plus amount of consideration for such shares w/o par value.
Amount of consideration so determined to be capital in respect of any shares w/o par value shall be stated capital of such shares.
Capital of corp may be increased from time to time by resolution of BOD directing that portion of net assets of corp in excess of
amount so determined to be capital be transferred to capital account. BOD may direct that portion of such net assets so transferred
shall be treated as capital in respect of any shares of corp of any designated class or classes. Excess, if any, at any given time, of
net assets of corp over amount so determined to be capital shall be surplus. “Net assets” means amount by which total assets exceed total liabilities. Capital & Surplus are not liabilities for this purpose.
2.
Net assets less capitol equals surplus. BOD determines amount of capitol.
a. Example:
(1) 200,000 shares of $.10 par value stock issued for $1.00 per share. $20,000 goes into common stock
capitol. $180,000 is “paid-in surplus.”
(2) 500,000 shares of $.10 par value of common stock authorized. 200,000 shares issued for $1.00 per
share. The corp made $50,000 for the year. It wants to distribute $75,000 in dividends.
Net profits Common stock capitol Paid in surplus -
$ 50,000
$ 20,000
$180,000
(3) Same facts but w/ par value of $1.00 a share.
Net profits $ 50,000
Common stock capitol - $200,000
(4) Same facts but corp borrowed $100,000 during year
Profits $50,000
Liabilities $100,000
Common stock capitol - $200,000
b.
BOD can declare & pay dividends out of: (1) surplus, or (2) earnings for this & last year (nimble dividend provision)
c.
§1035 – Net assets (assets – liabilities) – Capital = Surplus. No guidance in OK on whether net assets is
fair market value or book value.
d.
Example 1: 500,000 shares of $.10 par value common stock authorized. 200,000 shares issued for $1.00
per share. Corp makes $50,000 earnings first year. Wants to pay $70,000 in dividends.
Assets
Liabilities/Stock Equity
Cash $200,000
liability
$0
Earning $50,000
stock equity
$20,000 (capitol from par value)
$250,000
paid-in surplus $180,000
$200,000
earned surplus
$50,000
$250,000
$250,000 – 20,000 = $230,000 (surplus out of which corp can pay $70,000 dividends.
e.
Example #2 – Same facts as above, except $1.00 par value
Assets
Liabilities/Stock Equity
Cash
$200,000
liability
$0
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Earning $50,000
$250,000
stock equity
paid in surplus
earned surplus
$200,000 (capitol)
$0
$50,000
$250,000
Cannot pay dividends of $70,000 b/c legally would only be able to pay $50,000 in dividends. ($250,000
– 200,000 = $50,000).
If you have no par stock & do not designate otherwise, all would go into common stock capitol.
f.
Example #3 – Same facts as above, except borrowed $100,000.
Assets
Liabilities/Stock Equity
Cash
$200,000
liability
$100,000
Loan
$100,000
stock capitol
$200,000
Earning $50,000
paid in surplus $0
$350,000
earned surplus $50,000
$350,000
Net assets - $350,000 – 100,000 = $250,000 – 200,000 = $50,000.
(assets) - (liability) = net assets – capitol = surplus
g.
Example #4 – Same facts as above, except $.10 par value & deficit of $300,000 in earned surplus,
$150,000 bank debt and $100,000 in current year earnings.
Assets
Liabilities/Stock Equity
Cash
$200,000
liability
$150,000
Loan
$150,000
stock capitol
$20,000
Earning ($200,000)
paid in surplus $180,000
$150,000
earned surplus ($200,000) (- $300,000 (deficit) +
100,000 current year)
$150,000
Net assets - $150,000 – 150,000 = $0
– 20,000 = ($20,000).
(assets) - (liability) = net assets – capitol = surplus
Although cannot pay dividends out of surplus b/c it is a negative amount, can pay it out of current year’s
earnings b/c of nimble dividend provision.
h.
Example #5 (preferred stock) – Same facts as above, except 1000 shares of $100 par value preferred
stock. Liquidation preference of $100 per share, but no dividend preference.
Assets
Liabilities/Stock Equity
Cash
$300,000
liability
$150,000 (bank debt)
Loan
$150,000
preferred stk capitol
$100,000
common stock capitol
$20,000
Earning ($200,000)
paid in surplus
$180,000
$250,000
earned surplus
($300,000)
current year earning
$100,000
$250,000
$100,000 - $120,000 = ($20,000)
net assets – capital = surplus
No surplus to pay dividend. There are current year earnings so looks like can pay nimble dividend but
cannot b/c of § 1049(a) restriction on not paying dividends until deficiency in amount is cured. This example is deficient b/c of liquidation preference. Need sufficient net assets to pay liquidation provision. If
no sufficient funds after dividend paid, capital is impaired. Same result if have dividend provision. Remember – have to pay other creditors first.
i.
§1049(a) – If have preferred class of stock, “dirs of corp shall not declare & pay out of net profits any
dividends upon any shares of any classes out of its capital stock until deficiency in amount of capital represented by issued & outstanding stock of all classes having a preference upon distribution of assets shall
have been repaired.”
(1) restriction on paying nimble dividends on common stock – defeats purpose of preferred stock. Look
to sufficient net assets to cover liquidation preference.
29
j.
§1041 – Corp’s powers respecting ownership, voting, etc. of its own stock; rights of stock called for
redemption - ability to redeem stock – cannot redeem if would impair corp.
A.
B.
C.
D.
k.
Every corp may purchase, redeem, receive, take or otherwise acquire, own, hold, sell, lend, exchange, transfer, or otherwise
dispose of, pledge, use & otherwise deal in & w/ its own shares; provided, however, that no corp shall:
1. Purchase or redeem its own shares of capital stock for cash or other property when capital of corp is impaired or when
purchase or redemption would cause any impairment of capital of corp, except that corp may purchase or redeem out of
capital any of its own shares which are entitled upon any distribution of its assets, whether by dividend or in liquidation,
to preference over another class or series of its stock, or, if no shares entitled to preference are outstanding, any of its
own shares if such shares will be retired upon their acquisition & capital of corp reduced in accordance w/ provisions of
§§ 1078 & 1079. Nothing in this sub§ shall invalidate or otherwise affect a note, debenture, or other obligation of corp
given by it as consideration for its acquisition by purchase, redemption, or exchange of its shares of stock if at time such
note, debenture, or obligation was delivered by corp its capital was not then impaired or did not thereby become impaired;
2. Purchase, for more than price at which they may then be redeemed, any of its shares which are redeemable at option of
corp; or
3. Redeem any of its shares unless their redemption is authorized by sub§ B of § 1032 & then only in accordance w/ provisions of that § & cert of incorp.
Nothing in this § shall be construed to limit or affect corp’s right to resell any of its shares theretofore purchased or redeemed
out of surplus & which have not been retired, for consideration fixed by BOD or by s/hs if cert of incorp so provides.
Shares of its own capital stock belonging to corp or to another corp, if majority of shares entitled to vote in election of dirs of
other corp is held, directly or indirectly, by corp, shall neither be entitled to vote nor be counted for quorum purposes. Nothing in this § shall be construed as limiting right of any corp to vote stock, including, but not limited to, its own stock, held by
it in fiduciary capacity.
Shares which have been called for redemption shall not be deemed to be outstanding shares for purpose of voting or determining total # of shares entitled to vote on any matter on & after date on which written notice of redemption has been sent to holders thereof & sum sufficient to redeem those shares has been irrevocably deposited or set aside to pay redemption price to
holders of shares upon surrender of certs.
Example #6 – 500,000 shares at $1.00 par. 200,000 shares sold at $1.00. Preferred stock 100 shares at
$100 par.
Assets
Liabilities/Stock Equity
Cash
$300,000
liability
$0
preferred stk capitol
$100,000
Earning ($200,000)
common stock capitol
$200,000
$100,000
earned surplus
($300,000)
current year earning
$100,000
$100,000
Can’t redeem if capital is impaired. Even though impaired under this example, can redeem preferred
stock under § 1041a.
l.
§1053 – Liability of Dirs for unlawful payment of dividend or unlawful stock purchase or redemption; exoneration from liability; contribution among dirs; subrogation - Dir’s Liability & Illegal Redemption – willful or negligent illegal dividend or illegal redemption – makes dir jointly or severally liable for harm. Six year statute of limitations from payment of illegal dividend/redemption. Absolve liability by dissenting from decision to give illegal dividend/redemption. (c) – provides for subrogation
against s/h who receives illegal payment w/ knowledge of its illegality.
A.
B.
C.
m.
In case of any willful or negligent violation of provisions of §§ 41 & 52, dirs under whose administration same may happen
shall be jointly & severally liable, at any time w/in 6 yrs after paying any unlawful dividend or after any unlawful stock purchase or redemption, to corp, & to its creditors in event of dissolution or insolvency, to full amount of dividend unlawfully
paid, or to full amount unlawfully paid for purchase or redemption of corp’s stock, w/ interest from time such liability accrued.
Any dir who may have been absent when same was done, or who may have dissented from act or resolution by which same
was done, may exonerate himself from such liability by causing his dissent to be entered on books containing minutes of proceedings of dirs at time same was done, or immediately after notice of same.
Any dir against whom claim is successfully asserted under provisions of this § shall be entitled to contribution form other dirs
who voted for or concurred in unlawful dividend, stock purchase or stock redemption.
Any dir against whom claim is successfully asserted under this § shall be entitled, to extent of amount paid by him as result of
such claim, to be subrogated to rights of corp against s/hs who received dividend on, or assets for sale or redemption of, their
stock w/ knowledge of facts indicating that such dividend, stock purchase or redemption was unlawful pursuant to OGCA.
1051 – Liability of dirs as to dividends or stock redemptions - no liability if honest error in the books.
Member of BOD, or member of any committee designated by BOD, shall be fully protected in relying in good faith upon records of
corp & upon such info, opinions, reports or statements presented to corp by any officers or employees, or committees of BOD, or by
any other person as to matters dir reasonably believes are w/in such officer’s, employee’s, committee’s or other person’s competence & who have been selected w/ reasonable care by or on behalf of corp, as to value & amount of assets, liabilities &/or net profits of corp, or any other facts pertinent to existence & amount of surplus or other funds from which dividends might properly be declared & paid, or w/ which corp’s stock might properly be purchased or redeemed.
V.
Chapter 8 – Management & Control of Closely Held Corps
S/hs
30

Board of Dirs

Officers

Corp
elect
elect
run (day to day)
A. Traditional Roles of S/hs
1. Scope of S/h power – limited role in corp:
a. Selecting BOD & removing dirs
b. Approving fundamental changes in corp structure, like amending articles, mergers, dissolution
c. Adopting, amending & repealing bylaws (power usually shared w/ dirs)
d. S/h-sponsored resolutions requesting dirs take certain actions
e. Action concerning how s/hs carry out their limited role.
f. Also have right to inspect corp records & books, including s/h register (limited, though, to reasonable
time for inspection & must have proper purpose that relates to corp of s/h concerns)
2.
Three s/h rights: (1) dividends; (2) liquidation; (3) control. Chapter addresses s/h control.
3.
McQuade v. Stoneham (NY, 1934) - S/hs entered agreement making following promises: That they would
use best efforts for all three to (1) continue as dirs & (2) continue as officers. Held – K void & illegal so far as
it precludes BOD, at risk of incurring legal liability, from changing officers, salaries, or policies or retaining
individuals in office, except by consent of contracting parties.
a. Rule – S/hs can unite to elect dirs. Dirs, though, cannot unite to elect officers. S/hs may not, by agreement among themselves, control dirs in exercise of judgement vested in them by virtue of their office to
elect officers & fix salaries. Policy behind this – s/hs as general rule do not have fiduciary duty to corp
but dirs do.
4.
Clark v. Dodge – does not follow McQuade & instead establishes exception where K does not harm anyone.
If enforcement of K damages nobody – not even in any perceptible degree the public – no reason for holding
it illegal. Slight impingement on others is OK. Requirement of good faith by s/hs. “As parties to action are
complete owners of corp, no reason why exercise of power & discretion of dirs cannot be controlled by valid
agreement b/w themselves, provided that interests of creditors are not affected.”
5.
Long Park v. Trenton – complete sterilization of powers of dirs voids K. Where K completely restricts powers of dirs over management of principal business of corp, K is void.
6.
How to change from partnership to corp:
a. 2-step process – liquidate partnership & have partners invest liquidated assets into stock for new corp.
b. merge – file certificate of merger
7.
Galler v. Galler (Ill., 1964) – Power to invalidate agreements on grounds of public policy is so far reaching &
easily abused that it should be called into action to set aside agreements b/w parties dealing on equal terms only in cases where corrupt or dangerous tendency clearly & unequivocally appears on face of agreement itself.
Exception to general rule found in those cases where agreement, though fair on its face, is part of corrupt
scheme & is made to disguise real nature of transaction.
a. Close corp – stock held in few hands & rarely sold – not openly marketable. S/h agreements giving s/hs
certain powers, such as to appoint dirs, are justified in close corps b/c s/hs have more vested interest in
their investment than s/hs of large publicly held corps.
b.
8.
Ok does not have a close corp provision. Note 3 on pg. 414 explains Delaware’s close corp provision.
§1055 – Restriction on transferability of shares - legend for selling shares.
A.
B.
Written restriction on transfer or registration of transfer of security of corp, if permitted by this § & noted conspicuously on cert representing security or, in case of uncertificated shares, contained in notice sent pursuant to provisions of sub§ F of § 32, may be enforced against holder of restricted security or any successor or transferee of holder including executor, adminstrator, trustee, guardian or other fiduciary entrusted w/ like responsibility for person or estate of holder. Unless noted conspicuously on cert representing
security or, in case of uncertificated shares, contained in notice, a restriction, even though permitted by this §, is ineffective except
against person w/ actual knowledge of restriction.
Restriction on transfer or registration of transfer of securities of corp may be imposed either by cert of incorp or by bylaws or by
agreement among any number of security holders or among such holders & corp. no restriction so imposed shall be binding w/ respect to securities issued prior to adoption of restriction unless holders of securities are parties to agreement or voted in favor of restriction.
31
9.
Zion v. Kurtz – s/hs can agree that no business or activities of corp can be conducted w/o consent of minority
of s/hs. Such agreements are enforceable even though all formal statutory obligations are not taken. [Even
though corp did not file as close corp as Delaware statutes provide, corp was treated as close corp b/c s/hs entered into agreement that only s/hs of close corp can enter].
a. Dissent – against public policy. Corp must specifically file application for close corp status to be treated
as such.
10. Nixon v. Blackwell – Del ct refused to apply Del close corp statute to corp that had not officially elected to be
close corp.
11. Matter of Auer v. Dressel - C/a brought to compel corp pres to comply w/ positive duty imposed on him by
corp bylaws, to call special meeting at request of majority of s/hs for four stated purposes, one of which is to
vote on filling vacancy in dir position. Purpose of meeting sought is to hear charges against dirs, remove
them if charges are true, to amend by-laws to elect successor dirs.
a. Holding – S/hs should be allowed to vote on stated proposals. Since s/hs have right to elect dirs & to remove them on proven charges, it follows that they should have power to amend by-laws to elect successors of such dirs as shall be removed after hearing.
b. Reasoning – Important right of s/hs in having power to request special meetings is of little practical value
if corp management can ignore their requests.
B. S/h Voting & S/hs’ Agreements
1. §1027 - above
- (B) – single man BOD. Cert of incorp can fix # of dirs but should do this instead in bylaws. Only way to
change number if in cert is through formal amendment.
- Quorum – if cert & bylaws are silent, majority constitutes quorum. Majority of total #, even those unfulfilled dir positions.
- (E) – written consent in lieu of meeting. (4) Conference call meetings.
- (H) – Removing dirs – by vote of majority of shares w/ or w/o cause. Class A s/hs can remove class A
dirs – Class by class removal.
2.
§1068 – Vacancies & newly created dirships - vacancies filled by majority of dirs in office, even if less than
quorum.
A.
B.
C.
D.
3.
1. Unless otherwise provided in cert of incorp or bylaws:
a.
Vacancies & newly created dirships resulting from any increase in authorized # of dirs elected by all s/hs having right to
vote as single class may be filled by majority of dirs then in office, although less than quorum, or by sole remaining dir;
&
b. Whenever holders of any class or classes of stock or series thereof are entitled to elect one or more dirs by provisions of
cert of incorp, vacancies & newly created dirships of such class or classes or series may be filled by majority of dirs
elected by such class or classes or series thereof then in office, or by sole remaining dir so elected.
2. If at any time, by reason of death or resignation or other cause, corp should have no dirs in office, then any officer or any s/h
or an executor, administrator, trustee or guardian of s/h, or other fiduciary entrusted w/ like responsibility for person or estate
of s/h, may call special meeting of s/hs in accordance w/ provisions of cert of incorp or bylaws, or may apply to dis ct for decree summarily ordering election as provided in § 56.
In case of corp dirs of which are divided into classes, any dirs chosen under sub§ A of this § shall hold office until next election of
class for which such dirs shall have been chosen, & until successors shall be elected & qualified.
If, at time of filling vacancy or any newly created dirship, dirs then in office shall constitute less than majority of whole bd, as constituted immediately prior to any such increase, dis ct, upon application of any s/h or s/hs holding at least 10% of total # of shares at
time outstanding having right to vote for such dirs, may summarily order election be held to fill vacancies or newly created dirships,
or to replace dirs chosen by dirs then in office, which election shall be governed by provisions of § 56.
Unless otherwise provided in cert of incorp or bylaws, when one or more dirs shall resign from BOD, effective at future date, majority of dirs then in office, including those who have so resigned, shall have power to fill such vacancy, vote thereon to take effect
when such resignation shall become effective, & each dir so chosen shall hold office as provided for in this § in filling other vacancies.
Proxy Voting
a. Salgo v. Matthews (TX, 1973) – Ps were s/hs who disagreed w/ management control & sought to have
proxy votes counted in election to vote on new management.
(1) Proxy – giving someone else right to vote one’s shares. Record owner has right to vote b/c beneficial
owner is “of no consequence.” Beneficial owner can protect his interest by requiring transfer on
books or by demanding proxy from record owner, & if voluntary compliance is not forthcoming, relief is available by injunction or mandamus.
(2) Rule – Eligibility to vote at corp elections is determined by corp records rather than by ultimate judicial decision of beneficial title of disputed shares. Beneficial ownership of stock does not carry w/ it
right to vote w/o having shares transferred on books.
(3) Holding – Corp must determine who is authorized to vote shares by record owner.
32
b.
§1057(B) – proxy authorization – Each s/h entitled to vote at meeting of s/hs or to express consent or dissent to corp action in writing w/o meeting may authorize another person or persons to act for s/h by proxy, but no proxy shall be voted or acted
upon after three years from its date, unless proxy provides for longer period.
c.
§1064(C) – stock ledger is only evidence of record stock owners – Stock ledger shall be only evidence as to who
are s/hs entitled to examine stock ledger, list required by this § or books of corp, or to vote in person or by proxy at any meeting of
s/hs.
d.
§1039 – uncertificated shares – s/hs can still demand certificate. (above)
e.
§1061 – Quorum & required vote for stock corps – majority if not provided otherwise. Certificate can
designate quorum as long as not less than 1/3.
Subject to provisions of OGCA, in respect of vote that shall be required for specified action, cert of incorp or bylaws of any corp authorized to issue stock may specify number of shares &/or amount of other securities having voting power holders of which shall be
present or represented by proxy at any meeting in order to constitute quorum for, & votes that shall be necessary for, transaction of
any business, but in no event shall quorum consist of less than 1/3 of shares entitled to vote at meeting. If absence of such specification in cert of incorp or bylaws of corp:
1. Majority of shares entitled to vote, present in person or represented by proxy, shall constitute quorum at meeting of s/hs;
2. In all matters other than election of dirs, affirmative vote of majority of shares present in person or represented by proxy at
meeting & entitled to vote on subject matter shall be act of s/hs;
3. Dirs shall be elected by plurality of votes of shares present in person or represented by proxy at meeting & entitled to vote on
election of dirs.
4. Where separate vote by class or classes is required, majority of outstanding shares of such class or classes, present in person or
represented by proxy, shall constitute quorum entitled to take action w/ respect to that vote on that matter & affirmative vote
of majority of shares of such class or classes present in person or represented by proxy at meeting shall be act of class.
4.
f.
Shares of stock are always registered in name of specific person on records of corp. Such person is record holder. Corp may treat record owner as owner of shares for purposes such as voting, payment of
dividends or distributions, & determining to whom shares have been transferred.
g.
a.
Beneficial owner – person who is actual owner of stock.
Where record owner & beneficial owner are different people, beneficial owner can compel record owner
to execute a proxy appointment in name of beneficial owner so that owner may vote shares as she desires.
Cumulative v. Straight Voting
a. cumulative voting – number of total votes s/h can cast is computed & each s/h is permitted to distribute
these votes as he sees fit. (i.e. all votes can go to one candidate.) Increases minority participation on
BOD.
(1) §1059 – cumulative voting – designed to allow minority representation. If not provided in cert of
incorp, no cumulative voting allowed.
Cert of incorp of any corp may provide that at all elections of dirs of corp, or at elections held under specified circumstances,
each holder of stock or of any class or classes or of a series or series thereof shall be entitled to as many votes as shall equal
number of votes which, except for such provision as to cumulative voting, he would be entitled to cast for election of dirs w/
respect to his share of stock multiplied by number of dirs to be elected by him, & that he may cast all such votes for single dir
or may distribute them among number to be voted for, or for any two or more of them as he may see fit.
(2) Example – A has 18 shares & B has 82 shares, for a total of 100 shares. They are electing five dirs.
(a) If straight voting, all 5 of Bs will be elected.
(b) If cumulative voting, A has 90 votes (18 x 5) & B has 410 votes (82 x 5). Can allocate these any
way they want. As long as A allocates all 90 to one candidate, is assured of electing him.
(3) Example – A has 60 shares (300 votes) & B has 40 shares (200 votes). B gains control b/c A votes
straight (60 votes to each of 5 candidates). B divided his votes as 67 for one candidate, 66 for another, 65 for yet another & elects these three.
(4) Formula for number of shares needed to elect one dir:
S (# of shares)
X=
---------------------------+1
D (number of dirs) + 1
(5) Formula to get certain number of dirs on the board:
NS
2(100)
----------+1
--------------- +1 = 34.33
D+1
5+1
b.
straight voting – s/h can cast as many votes as he holds shares for each proposal up for vote.
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5.
c.
Staggering Terms of Dirs – fewer dirs elected at any one time, greater number of shares needed to assure representation. Consequently, majority may seek to amend articles or bylaws to stagger terms of dir
in order to cut down impact of minority’s cumulative voting rights.
(1) Humphrys v. Winous Co, (Ohio, 1956) – Absent specific statute prohibiting staggered term of dirs
where cumulative voting mandatory, staggering permitted.
(a) Holding –. Statute guarantees to minority s/hs only right of cumulative voting & does not necessarily guarantee effective exercise of right to elect minority representation on BOD.
(b) Reasoning – Methods used to undermine cumulative voting: (1) where right to vote cumulatively is permissive, corp charters can be amended to replace cumulative voting w/ straight voting;
(2) removing minority-elected dirs w/o cause; (3) reducing number of dirs.
d.
§ 1027 (H) – authority to remove dirs (above);
- (H)(1)(a) – guarantees prevention of removing dir w/o vote of s/h who voted him in.
- (D) – staggered board elections.
- (H)(1) – if have staggered bd, as general rule, can’t remove dirs except for cause.
Proxies
a. Old American Life Ins. Co (OK) – proxy cannot be sold for consideration on a K.
b.
Proxy appointment is usually revocable whether or not it is stated to be irrevocable.
(1) “proxy coupled w/ an interest” – situations in which common law cts recognized irrevocable proxies.
(2) Haft v. Haft – Original doctrine – in order to support irrevocability of proxy, holder had to have interest in stock itself, but there are other interests that could legitimately be contractually protected by
grant of irrevocable proxy. Potential split b/w interests of voter & interests of residual owners may
develop when proxy is irrevocable.
(3) § 1057(E) – irrevocable if stated as such & is coupled w/ interest sufficient to support irrevocable
power.
E.
c.
6.
Duly executed proxy shall be irrevocable if it states that it is irrevocable & if, & only as long as, it is coupled w/ interest
sufficient in law to support irrevocable power. Proxy may be made irrevocable regardless of whether interest w/ which it
is coupled is interest in stock itself or interest in corp generally.
§1057(B) (above) – authorizing proxy to act on s/h’s behalf. 3-year limit unless provided otherwise.
Restrictions on Stock
a. Reasons for Restrictions on Stock Transfers:
(1) closely held corps – want to know fellow s/hs
(2) S-Corps – requirements against impermissible s/hs & limit number of s/hs.
b.
Ringling Bros-Barnum & Bailey v. Ringling (Del, 1947) – Two s/hs agreed to always vote shares in
consensus & if they could not agree then would take disagreement to an assigned arbitrator. This case
arose over a dispute b/w them concerning voting for dirs.
(1) “Further Assurances Clause” – s/hs will do whatever is necessary for corp.
(2) Pooling Agreements – agreements whereby s/hs attempt to bind each other as to how they should
vote their shares. Generally valid where (1) it’s in writing as to what matters it covers; (2) it doesn’t
defraud other s/hs or creditors; (3) it complies w/ state statutes & public policy.
(3) Holding – Failure of D to exercise voting rights in accordance w/ arbitrator’s decision was br/K. Arbitrator’s directions were part of a single plan for voting shares of both parties to agreement, calculated to utilize advantage of joint action which would bring about election of additional dir.
(4) Reasoning – Neither statute nor case law support D’s contention that agreement is illegal & revocable by way of doctrine that there can be no agreement or any device by which voting power of stock
may be irrevocably separated from ownership of stock. Doctrine does not exist. Ct found agreement
reasonable b/c it did not enable parties to take unlawful advantage of outside s/h or of any other persons nor did it offend public policy.
c.
Schrieber v. Carney– Two principles which appear in traditional vote-buying cases: (1) vote-buying is
illegal per se if its object is to defraud or disenfranchise other s/hs. (2) Vote-buying is illegal per se as
matter of public policy b/c each s/h should be entitled to rely upon independent judgment of his fellow
s/hs.
d.
§1073 (above) – consent in lieu of meeting – don’t need unanimous s/h agreement to have consent in lieu
of meeting. Dirs must have unanimous agreement for consent in lieu of meeting.
34
e.
§1056 – Meetings of S/hs - (B) – has not been amended as has Delaware statute – Del statute allows
unanimous written consent to serve as substitute for meeting.
A.
B.
C.
D.
E.
f.
Meetings of s/hs may be held at such place, either w/in or w/o this state, as may be designated by or in manner provided for in
bylaws or, if not so designated, at registered office of corp in this state.
1. Unless dirs are elected by written consent in lieu of annual meeting as permitted by this sub§, annual meeting of s/hs shall
be held for election of dirs on date & at time designated by or in manner provided for in bylaws. S/hs may, unless cert of incorp otherwise provides, act by written consent to elect dirs; provided, however, that if consent is less than unanimous, action
by written consent may be in lieu of holding annual meeting only if all dirships to which dirs could be elected at annual meeting held at effective time of action are vacant & are filled by action.
2. Any other proper business may be transacted at annual meeting.
Failure to hold annual meeting at designated time or to elect sufficient number of dirs to conduct business of corp shall not affect otherwise valid corp acts or work forfeiture or dissolution of corp except as may be otherwise specifically provided for in
OGCA. If annual meeting for election of dirs is not held on date designated therefor or action by written consent to elect dirs
in lieu of annual meeting for period of 30 days after date designated for annual meeting or if no date designated, for period of
13 months after latest to occur of organization of corp, its last annual meeting, or last action by written consent to elect dirs in
lieu of annual meeting, dis ct may summarily order meeting be held upon application of any s/h or dir. Shares of stock represented at meeting, either in person or by proxy, & entitled to vote thereat, shall constitute quorum for purpose of meeting,
notw/standing any provision of cert of incorp or bylaws to contrary. Dis ct may issue orders as may be appropriate, including,
w/o limitation, orders designating time & place of meeting, record date for determination of s/hs entitled to vote, & form of
notice of meeting.
Special meetings of s/hs may be called by BOD or by person or persons as may be authorized by cert of incorp or by bylaws
All elections of dirs shall be by written ballot, unless otherwise provided for in cert of incorp.
Voting Trusts – s/h transfers legal title in shares to trustee, who has power to vote shares as specified in
document creating trust. S/h retains beneficial ownership of shares (dividends, etc)
(1) Requirements:
(a) Trust can’t be “secret” – must be filed w/ company & available for inspection by other s/hs
(b) Must be in writing
(c) Must list matters trustee can vote on
(d) Must have limited term
(e) Voting right must be separated from other incidents of ownership
(f) Must have proper purpose
(2) Brown v. McLanahan (4th Cir. 1945) – pertains to equitable rights attaching to certain voting trust
certificates representing preferred stock.
(a) Rule – Trustee for different classes of stock cannot act to benefit of one class to detriment of another.
(b) Held - Trustees’ actions in amending corp charter was invalid for three reasons: (1) Beyond
powers vested in trustees to vote to diminish the preferred stock voting power; (2) Abuse of trust
to use voting power to which they were entrusted to advantage of debenture s/hs & at same time
to disadvantage of preferred s/hs; (3) Abuse of trust to use voting power for own benefit where
they had duty to act in interests of corp above all.
(3) §1063 – Voting trusts & other voting agreements – transfer voting shares into trust. In return receive voting trust cert. Retain economic rights (dividends) to stock & only forfeit voting rights.
A.
B.
C.
D.
One or more s/hs, by agreement in writing, may deposit capital stock of original issue w/ or transfer capital stock to any
person or persons, or corp or corps, authorized to act as trustee, for purpose of vesting in person or persons, corp or
corps, who may be designated voting trustee, or voting trustees, right to vote thereon for any period of time determined
by agreement upon terms & conditions stated in agreement. Agreement may contain any other lawful provisions not inconsistent w/ its purpose. After filing copy of agreement in registered office of corp in this state, which copy shall be
open to inspection of any s/h of corp or any beneficiary of trust under agreement daily during business hours, certs of
stock or uncertificated stock shall be issued to voting trustee or trustees to represent any stock of original issue so deposited w/ trustee or trustees, & any certs of stock or uncertificated stock so transferred to voting trustee or trustees shall be
surrendered & canceled & new certs or uncertificated stock shall be issued therefor to voting trustee or trustees. In cert
so issued, if any, it shall be stated that it is issued pursuant to agreement & that fact shall also be stated in stock ledger of
corp. Voting trustee or trusteees may vote stock so issued or transferred during period specified in agreement. Stock
standing in name of voting trustee or trustees may be voted either in person or by proxy. In voting stock, voting trustee
or trustees shall incur no responsibility as s/h, trustee, or otherwise, except for trustee’s own individual malfeasance. In
any case where two or more persons are designated as voting trustees, & right & method of voting any stock standing in
their names at any meeting of corp are not fixed by agreement appointing trustees, right to vote stock & manner of voting
it at meeting shall be determined by majority of trustees, or if they be equally divided or right & manner of voting stock
in any particular case, vote of stock shall be divided equally among trustees.
Any amendment to voting trust agreement shall be made by written agreement, copy of which shall be filed in registered
office of corp in this state.
Agreement b/w 2 or more s/hs, if in writing & signed by parties thereto, may provide that in exercising any voting rights,
shares held by them shall be voted as provided by agreement, or as parties may agree, or as determined in accordance w/
procedure agreed upon by them.
This § shall not be construed to invalidate any voting or other agreement among s/hs or any irrevocable proxy which is
not otherwise illegal.
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(4) Lehrman v. Cohen (Del, 1966) - Two classes of stock w/ identical rights except held by two families. Created new class of stock w/ no economic dividends & no participation in any corp business
except for election of one dir.
(a) Rule – Criteria of voting trust: (a) voting rights of stock are separated from other attributes of
ownership; (b) voting rights granted are intended to be irrevocable for definite period of time; (c)
principal purpose of grant of voting rights is to acquire voting control of corp.
(b) Holding – (1) New class is not voting trust b/c it fails to meet test criteria for such. Creation of
new class did not separate voting rights the other classes of stock from other attributes of these
classes. (2) New class does not violate public policy b/c public policy disfavors separation of
vote from stock – not from stock ownership & b/c nothing requires that all stock of Del corp
have both voting rights & proprietary interests in corp. (3) Purpose of new class is not illegal as
against public policy for being designed to break deadlocks. Conversely, it is in line w/ public
policy in so doing.
(c) Rationale – In any recapitalization creating additional voting stock, voting power of previously
existing stock is diminished; but voting trust does not necessarily result.
g.
Stroh v. Blackhawk – still valid stock even though no economic benefits.
h.
Providence & Worchester v. Baker – upheld s/h voting arrangement structured as follows: (I) one vote
per share for each share up to 50; (II) one vote for every 20 shares in excess of 50; (III) no s/h could vote
more than ¼ of all shares. Held these restrictions did not limit power of persons to cast large numbers of
votes by proxy but rather limited voting power of individual owners of stock.
i.
Williams v. Geier – can draft tenure into stock
j.
Ling & Co. v. Trinty Sav & Loan Assoc (Sup. Ct. TX, 1972)
(1) Conspicuousness – requirement that restriction on stock transfers be “noted conspicuously” on cert
means only that it reasonably appear from face of cert that shares are subject to some sort of transfer
restriction. Restriction itself need not be set forth in full text.
(2) Reasonableness – Not unreasonable to place restriction on transfer requiring giving other shareholders opportunity of first purchase on stock w/o proof of number of s/hs to whom notice must be given.
k.
In closely held corps, 2 most common types of restrictions are buy-sell agreements & option agreements.
Option does not guarantee specific price but buy-sell agreement does. Other restrictions:
(1) right of first refusal
(2) consent power – make transferability totally dependent upon BOD’s decision. Consent power may
be valid where: (1) bylaws state that consent will not be unreasonably w/held; (2) nature of business
merits restriction
(3) buyback right
l.
Buy-Sell Agreements
(1) Fender v. Prescott – involved buy-sell agreement under which either party could offer to buy out the
other & thereupon, offeree had option to elect to be either purchaser or seller in accordance w/ terms
of offer. This is called a “cut throat” buy-sell agreement. Purpose is to put fair price on stock b/c
don’t know whether you will end up being seller or buyer & also puts finality to deal.
(a) traditional view – share transfer restrictions constitute restraint on alienation & should be strictly construed.
(2) Bruns v. Rennebohm Drug Store – important to specify clearly & unambiguously essential attributes of restrictions – whether purchase is optional or mandatory, who may or must purchase, sequence in which must purchase, manner in which price is determined, time period to purchase, &
events triggering purchase.
(3) Joslin v. S/h Services Group –legend on cert (“NONE OF THE SHARES EVIDENCED BY THIS
CERTIFICATE SHALL BE SOLD, TRANSFERRED, PLEDGED OR ASSIBNED W/O PRIOR
WRITTEN COSENT OF COMPANY”) prevented any unauthorized person from acquiring any interest in shares & made unauthorized transfers void b/c each holder had actual notice that transfer
was prohibited.
(4) Rodney Waldbaum, Buy-Sell Agreements –demise of small closely held corps frequently follows
death of one s/h, largely b/c of absence of effective & fair buy-sell agreement. W/o such agreement,
conflict of interest arises b/w surviving s/hs who have corp interests in mind & inherited s/hs who
wish to see profit in selling shares.
36
(a) Two magic ingredients in buy-sell agreements which solves conflict of interest: (1) bargaining
positions are equal since no s/h knows whether he will be buyer or seller. (2) Once agreement,
everyone knows where he stands & can plan accordingly.
(b) Finding fair price – four ways to determine price:
i. use book value of shares as of date of death;
ii. use fixed price set out in agreement – certificate of agreed value;
iii. have price fixed by appraisal at death;
iv. use self-adjusting formula. Concept of EBITDA – earnings before interest, taxes, depreciation & amortization.
(c) Two basic agreements:
i. cross-purchase agreement – each s/h agrees to personally purchase his proportionate share
of stock of other s/hs in event of their death, & binds his estate to sell his own shares to surviving s/hs.
- disadvantages – (1) shares of deceased s/h must be paid for w/ after-tax dollars of surviving s/hs; (2) obligation to purchase usually falls heavily upon s/hs least able to bear
it
ii.
stock-redemption agreement – corp becomes party to agreement & agrees to redeem or
purchase shares of first s/h to die & each of remaining s/hs binds his estate to sell shares he
owns to corp.
- advantages – (1) corp earnings & profits used for benefit of s/hs w/o usual dividend or
tax cost result; (2) easier to handle w/ large number of s/hs.
- Disadvantage – will corp have sufficient funds to buy the shares upon s/h’s death? Solutions – (1) s/hs could agree to change corp capitalization to create required surplus;
(2) agree to contribute sufficient additional capital to allow redemptions; (3) agree to
purchase such shares as corp is unable to redeem.
(5) §2703(b) of Internal Revenue Code – In order for buy-sell price to establish value of shares for estate tax purposes (1) price must be either fixed or determinable & must have been reasonable when
made; (2) estate must be obligated to offer to sell shares at agreed price; (3) obligation must have
been binding on decedent during lifetime; (4) agreement must be bona fide business arrangement; (5)
agreement must not be device to pass decedent’s share to natural objects of his or her bounty for less
than adequate & full consideration in money or money’s worth; & (6) at time agreement was entered
into it must be comparable to those of similar agreements entered into by persons in an arm’s length
transaction.
(6) Two basic questions in cases of buy-sell agreements – (1) Is there any reason to refuse to enforce
buy-sell agreement at price that is so low that it bears no relationship to the potential value of shares?
(2) May corp enforce such buy-sell agreement selectively, applying it in case of shares owned by
persons other than family members, but not in cases of shares owned by family members?
C. Deadlocks
1. Gearing v. Kelly (NY Ct of App., 1962) – Action to set aside dir election. Mrs. Meachum purposely did not
attend meeting at which elections occurred so that there would not be quorum.
a. Rule – Ct may order new election “as justice may require.”
b. Holding – Failure of Mrs. Meachum to attend dirs’ meeting bars calling new election.
c.
2.
OK §1068(A)(1)(a) (above) – Gearing election would be alright under OK law b/c only need majority of
total # in office for quorum. Only three in office at time of Gearing election –two present would clearly
constitute a majority.
OK §1070 – Contested election of dirs; proceedings to determine validity - (A) – allows s/h, dir, or officer
to bring application to determine validity of election. (B) – application to determine validity of other disputed
votes, other than elections.
A.
Upon application of any s/h or dir, or any officer whose title to office is contested, or any member of corp w/o capital stock, dis ct
may hear & determine validity of any election of any dir, member of governing body, or officer of any corp, & right of any person
to hold such office, &, in case any such office is claimed by more than one person, may determine person entitled thereto; & to that
end make such order or decree in any such case as may be just & proper, w/ power to enforce production of any books, papers &
records of corp relating to issue. In case should determine that no valid election has been held, dis ct may order election be held in
accordance w/ provisions of §§ 56 or 60. In any such application, service of copies of application upon registered agent of corp
shall be deemed to be service upon corp & upon person whose title to office is contested & upon person, if any, claiming such office; & registered agent shall forward immediately copy of application to corp & to person whose title to office is contested & to
person, if any, claiming such office, in a postpaid, sealed, registered letter addressed to such corp & such person at their post office
37
B.
3.
addresses last known to registered agent or furnished to registered agent by applicant s/h. Ct may make such order respecting further or other notice of such application as it deems proper under circumstances.
Upon application of any s/h or any member of corp w/o capital stock, dis ct may hear & determine result of any vote of s/hs or
members, as case may be, upon matters other than election of dirs, officers or members of governing body. Service of application
upon registered agent of corp shall be deemed to be service upon corp, & no other party need be joint to order for ct to adjudicate
result of vote. Ct may make such order respecting notice of application as it deems proper under circumstances.
In re Radom & Neidorff, Inc. (1954) – Brother & sister owned equal shares of corp & were divided as to interests of corp. Brother brought action to dissolve corp. Corp profits continued to increase.
a. Rule – Statute provides that if dirs are deadlocked or s/hs deadlocked in electing dirs, holders of one-half
of stock entitled to vote at election of dir may present verified petition for dissolution of corp.
b. Held – No absolute right to dissolution but is granted only when competing interests are so discordant as
to prevent efficient management & object of corp existence cannot be attained.
c. Prof’s analysis – (1) corp is worth more if not dissolved; (2) costly tax considerations if dissolved.
D. Modern Remedies for Oppression, Dissension, or Deadlock
1. Involuntary dissolution was original statutory remedy for deadlock situations where corp was on dead center
& participants had no way to resolve situation.
a. Broadened to include oppression, significant misconduct by dirs or by those in control & misapplication
or wasting of assets.
b.
Modern broadening has developed in two respects: (1) kinds of conduct w/in closely held corp that are
viewed as oppressive have been broadened analogizing closely held corp to partnership; (2) remedies
available to minority s/hs broadened in states whose statutes still state that dissolution is remedy for such
conduct.
2.
Davis v. Sheerin (Ct App Tex., 1988) – (1) Tx cts, under their general equity power, may decree a “buy-out”
in appropriate case where less harsh remedies are inadequate to protect rights of parties. (2) Although no
findings of malicious suppression of dividends or excessive salaries, ct found that conspiring to deprive ownership of stock, especially when corp records clearly indicate such ownership is clearly oppressive conduct.
This, along w/ acts of willful br/ of fiduciary duty & undisputed evidence indicating that P would be denied
any future voice in corp, are sufficient to support TC’s conclusion of oppressive conduct & likelihood that it
would continue in future.
a. Rule – Oppressive conduct is described in expansive terms & cts determine whether acts complained of
serve to frustrate legitimate expectations of minority s/hs, or whether acts are of such severity as to warrant requested relief.
3.
Why is buyout less harsh remedy than liquidation? Liquidation stops business, so that corp will lose customer credibility, tax considerations, & company is worth less.
4.
OK §1094 – Dissolution of joint venture corp having 2 s/hs. - Involuntary Dissolution of Corp. 50-50 s/hs
may file petition to discontinue corp. Permissible statute – not required. Limited application. Rarely suits
under it.
5.
Gidwitz v. Lanzit Corrugated Box Co. – “oppressive” does not carry “essential inference of imminent disaster; it can contemplate continued course of conduct.”
6.
Rexford Rand Corp. v. Ancel – minority s/hs also owe duties to majority & br/ of duties may be viewed as
oppressive. Ct found minority s/h had oppressed majority b/c after corp dissolved, minority bought rights to
corp name & held it for ransom from majority.
7.
Abreu v. Unica Indus. Sales, Inc. (App. Ct. Ill., 1991) - Held – (1) No strict requirement of impartiality in
appointing provisional dir b/c legislature specifically excluded explicit language of impartiality. Factors that
TC may balance in evaluating candidates for provisional dir include: degree & quality of past involvement in
corp; understanding of corp’s history & current situation; experience & abilities in providing cooperative &
unifying element; need for immediate appointment; degree of impartiality; & above all, true interest in viability & advancement of corp as entity & not allegiance to one deadlocked faction. Provisional dir appointed by
T.C. met these requirements b/c had worked for company for many years & held leadership position of GM of
Operations. These qualifications outweighed his being son-in-law of president. (2) Any decision regarding
selecting new auditor should have been reserved for full BOD & not made unilaterally by management
through provisional dir. Also, ct found BOD’s vote to reimburse P invalid & ordered proposal be put to vote
that incorps proper procedure. Otherwise, provisional dir had not abused statutory or ct-appointed duties.
a. Rule – (1) Provisional dir is appointed as alternative remedy to judicial dissolution in times of corp strife
to help guide company through crisis toward goal of stabilization & prosperity. In appointing provisional
38
dir, ct takes into consideration best interests of corp, not those of any warring factions in corp. (2) Generally accepted that unless corp bylaws provide otherwise, it is improper for management of corp to directly
hire auditors whose mission it is to evaluate management’s performance. Provisional dirs are officers of
ct & serve at discretion & direction of ct.
b.
Auditors are a check on management & t/f should not be appointed & controlled by management.
c.
Dirs need to act reasonably & having sufficient info prior to voting is way to act reasonably. T/f where
dir does not have sufficient info or sufficient time to research, he may refuse to vote & request deferment
of vote to later date.
E. Action by Dirs – Only individuals can serve as dirs, not other entities. Dirs are not entitled to compensation unless they render extraordinary services.
1. Primary Function of Dirs – to manage corp’s business – Four components:
a. make policy decisions for corp
b. appoint corp’s officers (& determine their compensation)
c. monitor performance of corp officers
d. declare dividends
2.
Baldwin v. Canfield (Minn., 1879) – BOD had no authority individually to act in signing deed w/o assembling into bd meeting. T/f dirs took no action as brd w/ reference to sale of property or execution of deed &
their individual actions are a nullity.
a. Rule – Governing body of corp are agents of corp only as bd & not individually.
b.
In OK, any transaction w/ real estate, corp must acknowledge transaction. Should use statutorily provided form for acknowledgement. If property of transaction is located in another state, can use form of
acknowledgement required in that state or that of OK. Also, consent in lieu of meeting today constitutes
proper approval by BOD. But may not now need to have proper approval for real estate transactions (I
did not understand what he was saying here – why not proper approval??).
3.
Mickshaw v. Coca Cola Bottling Co. (Penn., 1950) – If circumstances warranted inference that corp, by previous authorization, or by subsequent ratification, or by acquiescence w/ knowledge of facts, approved published offer for increased compensation, ct thinks it may be assumed that dir could bind his company by oral
proposal of substantially same terms to same persons.
a. Rule – Control of business of a private corp is vested in its BOD.
4.
Cooke v. Lynn Sand & Stone Co. (App Ct. Mass, 1994) - P was dir, officer & s/h of closely held corp. He
sued to enforce employment K. BOD did not vote on employment K. Company was sold & new company refused to recognize employment K.
a. Held – K invalid & should be denied enforcement b/c it was executed in violation of fiduciary duties &
duty of candor he owed to corp. Secret employment Ks cannot be validated by reference to resolution of
BOD, adopted to authorize pres & vice pres to sign Ks in name of corp when they believed such action to
be in its best interests. Such was intended to apply to Ks w/ third parties, not b/w insiders.
5.
Old case (did not give name or year) – buying assets & corp name is one of the assets. If someone is injured
in slip & fall under “same roof” concept, can hold buyer liable before closing of deal. In prof’s opinion, this
is bad case law & should be statutorily reversed.
F. Authority of Officers
1. Officer Function – implement policy decisions of BOD.
a. Circumstances where officer may bind corp:
(1) when officer has pre-existing authority to do so (whether express, implied, inherent, or apparent);
(2) when corp ratifies transaction (or was otherwise estopped from denying it, even though oficer lacked
authority to bind corp to transaction.
2.
§ 1028 – Officers, titles, duties, selection, term; failure to elect; vacancies
A.
B.
C.
D.
Every corp organized in accordance w/ provisions of OGCA shall have such officers w/ such titled & duties as shall be stated in bylaws or in resolution of BOD which is not inconsistent w/ bylaws & as may be necessary to enable it to sign instruments & stock
certificates. One of officers shall have duty to record proceedings of meetings of s/hs & dirs in book to be kept for that purpose.
Any number of offices may be held by same person unless cert of incorp or bylaws provide otherwise.
Officers shall be chosen in such manner & shall hold offices for such terms as are prescribed by bylaws or determined by BOD or
other governing body. Each officer shall hold his office until his successor is elected & qualified or until his earlier resignation or
removal. Any officer may resign at any time upon written notice to corp.
Corp may secure fidelity of any or all officers or agents by bond or otherwise.
Failure to elect officers shall not dissolve or otherwise affect corp.
39
E.
3.
§1031 Indemnification of officers, dirs, employees & agents; insurance
A.
B.
C.
D.
E.
F.
G.
H.
J.
K.
4.
Any vacancy occurring in any office of corp by death, resignation, removal or otherwise, shall be filled as bylaws provide. In absence of such provision, vacancy shall be filled by BOD or other governing body.
Corp shall have power to indemnify any person who was or is party or is threatened to be made party to any threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, or other than action by or in right of
corp, by reason of fact that person is or was dir, officer, employee, or agent of corp, or is or was serving at request of corp as dir, officer, employee, or agent of another corp, partnership, joint venture, trust, or other enterprise, against expenses, including attys’ fees,
judgments, fines & amounts paid in settlement actually & reasonably incurred by person in connection w/ action, suit, or proceeding
if person acted in good faith & in manner person reasonably believed to be in or not opposed to best interests of corp, & w/
respect to any criminal action or proceeding, had no reasonable cause to believe conduct was unlawful. Termination of any action,
suit or proceeding by judgment, order, settlement, conviction, or upon plea of nolo contendere or its equivalent, shall not, of itself,
create presumption that person did not act in good faith & in manner which person reasonably believed to be in or not opposed to
best interests of corp, &, w/ respect to any criminal action or proceeding, had reasonable cause to believe that conduct was unlawful.
Corp shall have power to indemnify any person who was or is party or is threatened to be made party to any threatened, pending, or
completed action or suit by or in right of corp to procure judgment in its favor by reason of fact that person is or was dir, officer,
employee, or agent of corp, or was serving at request of corp as dir, officer, employee, or agent of another corp, partnership, joint
venture, trust, or other enterprise against expenses, including attys’ fees, actually & reasonably incurred by person in connection w/
defense or settlement of action or suit if person acted in good faith & in manner person reasonably believed to be in or not opposed to best interests of corp & except that no indemnification shall be made in respect of any claim, issue, or matter as to
which person shall have been adjudged to be liable to corp unless & only to extent that ct in which action or suit was
brought shall determine upon application that, despite adjudication of liability but in view of all circumstances of case, person is fairly & reasonably entitled to indemnity for expenses which ct shall deem proper.
To extent that present or former dir or officer of corp has been successful on merits or otherwise in defense of any action, suit, or
proceeding referred to in sub§ A or B, or in defense of any claim, issue, or matter therein, person shall be indemnified against expenses, including attys’ fees, actually & reasonably incurred by person in connection therew/.
Any indemnification under provisions of sub§ A or B, unless ordered by ct, shall be made by corp only as authorized in specific
case upon determination that indemnification of present or former dir or officer is proper in circumstances b/c person has met applicable standard of conduct of sub § A or B. This determination shall be made, w/ respect to person who is dir or officer at time
of determination:
1. By majority vote of dirs who are not parties to action, suit, or proceeding, even though less than quorum;
2. By committee of dirs designated by majority vote of dirs, even though less than quorum;
3. If there is no such dirs, or if such dirs so direct, by independent legal counsel in written opinion; or
4. By s/hs;.
Expenses incurred by officer or dir in defending civil or criminal action, suit, or proceeding may be paid by corp in advance of final
disposition of action, suit, or proceeding upon receipt of undertaking by or on behalf of dir or officer to repay amount if it shall ultimately be determined that person is not entitled to be indemnified by corp. Expenses incurred by former dirs or officers or other
employees & agents may be paid upon terms & conditions, if any, as corp deems appropriate.
Indemnification & advancement of expenses provided by or granted pursuant to other subsections shall not be deemed exclusive of
any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement,
vote of s/hs or disinterested dirs, or otherwise, both as to action in person’s official capacity & as to action in another capacity while
holding office.
Corp shall have power to purchase & maintain insurance on behalf of any person who is or was dir, officer, employee, or agent of
corp, or is or was serving at request of corp as dir, officer, employee, or agent of another corp, partnership, joint venture, trust or
other enterprise against any liability asserted against the person & incurred by person in any such capacity, or arising out of person’s
status as such, whether or not corp would have power to indemnify person against liability under provisions of this section.
For purposes of this §, reference to “corp” shall include, in addition to resulting corp, any constituent corp, including any constituent of constituent, absorbed in consolidation or merger which, if its separate existence had continued, would have had power & authority to indemnify its dirs, officers, & employees, or agents, so that any person who is or was dir, officer, employee, or agent of
constituent corp, or is or was serving at request of constituent corp as dir, officer, employee, or agent of another corp, partnership,
joint venture, trust, or other enterprise, shall stand in same position under provisions of this § w/ respect to resulting or surviving
corp as person would have w/ respect to constituent corp if its separate existence had continued.
Indemnification & advancement of expenses provided by or granted pursuant to this §, unless otherwise provided when authorized
or ratified, shall continue as to person who has ceased to be dir, officer, employee, or agent & shall inure to benefit of heirs, executors, & administrators of person.
Dis ct is vested w/ exclusive jurisdiction to hear & determine all actions for advancement of expenses or indemnification brought
under this § or under any bylaws, agreement, vote of s/hs or disinterested dirs, or otherwise. Ct may summarily determine corp’s
obligation to advance expenses including atty’s fees.
Black v. Harrison Home Co. (Calif., 1909) – Pres of corp has no power, merely b/c he is pres, to bind corp
by K. Management of affairs of corp is ordinarily in hands of its BOD, & pres has only powers that have been
expressly given him in corp bylaws or by dirs & such other power as may arise from his having assumed &
exercised power in past w/ apparent consent & acquiescence of corp. Corp is bound so far as third persons are
concerned by acts of its agent which are w/in apparent scope of his authority, & that authority of officer to
make certain Ks on behalf of corp may arise to third persons from his having assumed & exercised that authority in past w/ acquiescence of corp, & that corp may ratify & render binding K entered into by one of its
officers in excess of his authority.
a. This case would be decided differently today b/c of pres’s inherent authority. It is included in case book
for general concepts included therein.
40
VI.
5.
Lee v. Jenkins Bros. (2nd Cir., 1959) – Apparent authority is essentially a question of fact. Depends not only
on nature of K but also on officer negotiating it, corp’s usual manner of conducting business, size of corp &
number of s/hs, circumstances giving rise to K, reasonableness of K, amounts involved, & who contracting
third party is.
a. Rule – General rule is that pres only has authority to bind his company by acts arising in usual & regular
course of business but not for Ks of an “extraordinary” nature.
b. Rationale – No evidence that pres had actual, express authority to enter into pension plan promise. Instead, ct is evaluating his “apparent authority” to do so. Public policy of apparent authority – no business
would be conducted if everyone had to agree on every decision. Whether termed “apparent authority” or
an “estoppel” to deny authority, many cts have noted injustice caused by practice of permitting corps to
act commonly through executive & then allowing them to disclaim agreement as beyond authority of officer, when K no long suited its convenience.
6.
In Matter of Drive-In Dev. Corp. (7th Cir., 1966) – Officers of Drive-In entered into loan secured by parent
corp w/o having authority to do so. Presented false document of authority.
a. Rule – Statements made by officer or agent in course of transaction in which corp is engaged & which are
w/in scope of authority are binding upon corp.
b. Holding – Corp is estopped to deny representation made by secretary of his authority to enter into loan, in
absence of actual or constructive knowledge on part of bank that representation was untrue.
c. Rationale – Realities of modern corp business practices do not contemplate that those who deal w/ officers or agents acting for corp should be required to go behind representations of those who have authority
to speak for corp & who verify authority of those who presume to act for corp.
7.
Modern Day Analysis on Authority Issues
a. Actual Authority
(1) express
(2) implied – inherent
b.
Apparent Authority – estoppel – if corp puts someone in position which appears to have certain authority w/o express actual authority, corp is estopped to deny authority once exercised.
c.
Ratification – After fact approval of someone’s actions despite lack of actual authority to take action.
Chapter 10: Duty of Care & Business Judgment Rule
A. Duty of Care
1. Litwin v. Allen (NY, 1940) – “minimum rationality” test – Must have some basis for taking action.
a. Facts – Derivative suit brought by minority s/hs of Trust Co., seeking to impose liability on dirs for losses
incurred on transaction of purchase of Trust Co. by J.P. Morgan w/ option for Trust Co. to repurchase for
same price in six months. Stock market crashed & company was worth a lot less at end of six-month option. No evidence of improper influence or domination of dirs or officers of Trust Co by J.P. Morgan.
b. Rule – Dir is not liable for loss or damage other than that proximately caused by his own acts or omissions in br/ of his duty.
c. Held – Liability in this transaction b/c entire arrangement so improvident, so risky, so unusual & unnecessary as to be contrary to fundamental conceptions of prudent banking practice. Dirs did not seek advice
of counsel although transaction was so unusual. May have acted w/ honesty but not w/ requisite diligence
of care & prudence. Dirs who approved transaction are liable for it in derivative s/hs’ action. Further,
dirs are only liable for loss attributable to improper repurchase option itself.
d. Rationale – Rules to be applied in determining liability of dirs – generally, dirs are considered trustees so
that they stand in fiduciary relationship w/ company. Dir owes loyalty & allegiance to company – loyalty
undivided & allegiance influenced by no consideration other than welfare of company. Dir must act honestly & in good faith & exercise some degree of skill & prudence & diligence. Dirs are liable for negligence in performance of their duties. Dir is required to conduct business of corp w/ same degree of fidelity & care as ordinarily prudent man would exercise in management of his own affairs of like magnitude & importance. Dir of bank held to stricter standard of accountability than dir of ordinary business
corp.
2.
Bates v. Dresser (note case, 1920) – Bank pres held liable for amount stolen by young bookkeeper at bank b/c
he had access to books & had received hints that should have put him on notice of theft. Other dirs not held
liable b/c they reasonably relied on bank examinations & pres.
41
3.
Shlensky v. Wrigley (App Ct Ill, 1968) – Where dir’s act or omission involves no fraud, illegality, or conflict
of interest but is question of policy or business judgment, dir who acts in good faith is not personally liable for
mere errors in judgment or want of prudence short of clear & gross negligence.
a. Rule – Majority shares must be permitted to control business of corp in their discretion, when not in violation of its charter or some public law, or corruptly & fraudulently subversive of rights & interests of
corp or of s/hs.
b. Rationale – Cts of equity will not undertake to control policy or business methods of corp, although it
may be seen that wiser policy might be adopted & business more successful if other methods were pursued. Not negligence that dirs of this corp failed to follow trends of other teams in holding night games.
4.
Francis v. United Jersey Bank – Dir liable for corp’s insolvency b/c dir never made slightest effort to discharge any responsibilities as dir – only went to office once & never received financial statements. “Dirs are
under continuing obligation to keep informed about activities of corp,” that “while dirs not required to audit
corp books, should maintain familiarity w/ financial status by regular review of financial statements.”
B. “Business Judgment” Rule – Dir’s conduct is not measured so that dir is found to not have exercised due care in
situations where dir is found to have made decision inconsistent w/ that of “ordinarily prudent person … in like
position … under similar circumstances.” Instead, rule requires finding of bad faith or some other corrupt motive.
1. Reasoning – minimum influence by cts in internal corp affairs.
2.
In corp law, standard of due care is met if two tests are satisfied:
a. due care must be used in “ascertaining relevant facts & law before making the decision,” &
b. decision must be made after reasonable deliberation.
3.
Key is reasonableness of decision-making process not of results.
C. Derivative Suits – if management (or third party) has abridged duty owed to corp & corp fails to enforce its c/a,
s/h may bring suit on behalf of corp.
1. Prerequisite to suit – since derivative suit seeks to enforce corp c/a, P must first show exhaustion of remedies
w/in corp structure. Essential element of P’s c/a & must be specifically pleaded & proven.
a. Demand on dirs – since only BOD is authorized to bring suit on behalf of corp, sh/h, before filing derivative suit, must make sincere effort to induce dir to remedy wrong complained of.
(1) Demand excused when s/h shows it would be futile.
(2) Dirs reject demand – If derivative suit alleges wrongdoing by majority dirs, bd’s decision not to sue
will not prevent derivative suit.
(3) Business Judgment – where suit does not involve dir wrongdoing, bd’s good faith refusal bars action. Suit, though, not barred if s/h shows reasonable doubt that bd exercised reasonable business
judgment in declining to pursue c/a.
(4) Zapata Corp. v. Maldonado (Del., 1981)
(a) Rule – (1) BOD can decided to cause derivative suit to be dismissed as detrimental to company,
after demand made & refused & such decision will be respected by cts unless it was wrongful.
Exceptions to general rule: s/h may sue in equity w/o prior demand where apparent that such
demand would be futile. (2) Corp statutes allow disinterested dirs to act for bd where majority
of bd would taint decision.
(b) Holding – After objective & thorough investigation of derivative suit, independent committee
may cause corp to file pretrial motion to dismiss based on corp’s best interests. Moving party,
then, must meet normal burden of no issue of material fact & that moving party is entitled to dismiss as matter of law. Ct should apply two-step test to motion: (1) inquire into independence &
good faith of committee & the bases supporting its conclusion. Committee has burden of proving
this. (2) Ct should determine, applying its own business judgment, whether motion should be
granted.
(c) Rationale – Derivative suits enforce corp rights & any recovery obtained goes to corp. Problem
– If, on one hand, corps can consistently wrest bona fide derivative actions away from wellmeaning derivative Ps through committees, derivative suit will lose much of its effectiveness as
intra-corp means of policing BOD. If, on other hand, corps are unable to rid themselves of meritless or harmful litigation, derivative action, created to benefit corp, will hurt corp.
(d) Class Notes:
i. Typically, stock options used to recruit new management
ii. In money option – option price below current market price
iii. Out of money option – option above market price
42
iv. Different tax incentives/consequences b/w in & out of money options
v. Tender offer – public offer to s/hs to buy shares. When corp buys its own shares, these are
called treasury shares.
vi. OK Rule § 1027 – (c) – bd’s ability to create committee to make decisions for bd.
vii. Business judgment is not in OK statutes b/c it is a judicial construction
(5) Aronson v. Lewis (Del., 1984) – S/h suit arose in complaint of compensation agreement w/ former
dir & for retirement consultation position. Complaint alleged that compensation agreement had no
valid business purpose & were waste of corp assets.
(a) Rule – Under business judgment rule, dir liability is predicated upon concepts of gross neg.
(b) Holding – Demand can only be excused where reasonable doubt that dirs’ action was entitled to
protections of business judgment rule & showing demand would be futile. In determining demand futility, lower ct must decide whether, under facts alleged, reasonable doubt is created
that: (1) dirs are disinterested & independent; & (2) challenged transaction was otherwise product of valid exercise of business judgment. Review is entirely factual in nature.
(c) To prove dir lack of independence, must be coupled w/ allegation of control such facts as would
demonstrate through personal or other relationships dir are beholden to controlling person.
(d) Rationale – Purpose of demand requirement is to ensure that s/hs exhaust all corp remedies before filing derivative action & limits strike (frivolous) suits. Derivative action developed in equity to enable s/hs to sue in corp’s name where those in control of company refused to assert
claim belonging to it. Nature of action is two-fold: (1) equivalent of suit by s/hs to compel corp
to sue; (2) suit by corp, asserted by s/hs on its behalf, against those liable to it.
Is demand on BOD futile? (Not required)
Assume BOD or special
committee decides to
dismiss
Should ct respect
decision to dismiss?

Apply Zapata Test


Apply Aronson Test


 YES





YES
Was BOD/committee independent &
acted in good faith & were there reasonable bases for decision?
YES
Apply balancing test – does ct believe,
exercising own business judgment, that
decision to dismiss is correct?

Is there reasonable doubt that BOD is disinterested/independent?
NO
Is there reasonable doubt that transaction was product of
exercise of valid business judgment?
NO
NO 





NO 
Demand not Excused.
Don’t
Dismiss
YES



Proceed.

Dismiss.
Apply Business
Judgment Rule
(6) Cuker v. Mikalauskas (Penn., 1997)
43


BOD/Committee
makes decision

No Proceed.

Business
Judgment
Rule
(a) Rule – Business judgment rule should insulate officers & dirs from judicial intervention in absence of fraud or self-dealing, if challenged decisions were w/in scope of dirs’ authority, if they
exercised reasonable diligence & if they honestly & rationally believed their decisions were in
company’s best interests.
(b) Held – Business judgment rule permits BOD to terminate derivative lawsuits brought by minority s/hs.
(c) Procedure for judicial review of BOD’s decision to terminate derivative lawsuit: Validity of decision to terminate – if made in compliance w/ appropriate standards (business judgment rule), ct
should dismiss action. Preliminary examinations should be limited & precise so as to minimize
judicial involvement when application of business judgment rule is warranted.
(d) Rationale - More deference to BOD. Business judgment rule should insulate officers & dirs
from judicial intervention in absence of fraud or self-dealing, if challenged decisions were w/in
scope of dir’s authority, if they exercised reasonable diligence, & if they honestly & rationally
believed their decisions were in best interests of company.
(e) This Cuker rule is different than Zapata – Know the two rules!!!!
(7) Split of jurisdictions – (1) majority of disinterested dirs; (2) disinterested majority
(a) § 1030 – Interested dirs; quorum
A.
B.
No K or transaction b/w corp & one or more of its dirs of officers, or b/w corp & any other corp, partnership, association,
or other organization in which one or more of its dirs or officers are dirs or officers, or have financial interest, shall be
void or voidable solely for this reason, or solely b/c dir or officer is present at or participates in meeting of bd or committee thereof which authorizes K or transaction, or solely b/c his or their votes are counted for such purpose, if:
1. Material facts as to his relationship or interest & as to K or transaction are disclosed or are known to BOD or committee, & bd or committee in good faith authorizes K or transaction by affirmative votes of majority of disinterested dirs, even though disinterested dirs be less than quorum;
2. Material facts as to his relationship or interest & as to K or transaction are disclosed or are known to s/hs entitled to
vote thereon, & K or transaction is specifically approved in good faith by vote of s/hs; or
3. K or transaction is fair as to corp as of time it is authorized, approved or ratified, by BOD, committee thereof, or
s/hs.
Common or interested dirs may be counted in determining presence of quorum at meeting of BOD or of committee
which authorizes K or transaction.
(8) ALI Principles (relating to derivative action) – demand should be excused only on showing that “irreparable injury” to corp would result.
VII.
Chapter 11: Duty of Loyalty & Conflict of Interest
A. Duty of Loyalty – As further consequence of fiduciary relationship w/ corp, officers & dirs are held to duty of
loyalty in all dealings w/ corp. Two principal duties dirs owe to corps – (1) duty of care; (2) duty of loyalty.
B. Self-Dealing
1. Business Dealings w/ Corps – conflict of interest issues arise whenever corp Ks directly w/ officer or dir, or
w/ company in which officer or dir is financially interested. I.e., if corp Ks to purchase property in which dir
has financial interest, or to sell corp assets to entity in which dir has financial interest, does dir’s adverse interest disqualify her from voting on K? Does it render K voidable by corp, even where adverse interest was
disclosed?
2.
Marciano v. Nakash (Del., 1987) – 50% s/h tried to claim loans made by other 50% s/h to corp were voidable
as matter of law b/c lacked majority approval. Ct held loans valid & enforceable regardless of their origin in
self-dealing.
a. Rule – Fiduciary relationship b/w dirs & corp imposes fundamental limitations on extent to which dir
may benefit from dealing w/ corp. Per se rule of voidability of transactions applies in cases of transactions b/w corps having common dirs & officers, absent s/h ratification. Transactions also voidable per se
when dir self-interest is shown in voting to approve transaction. Intrinsic fairness test – determination
of fairness of transaction vis-à-vis nonparticipating s/hs & whether transaction received approval of noninterested majority of dir or s/hs.
b. Holding – Despite state statute regarding self-interested transactions, common law rule can apply to validate transactions determined to be intrinsically fair. Two tiered analysis – statute & intrinsic fairness
test. D has burden of proving intrinsic fairness.
c. Rationale – Continued viability of intrinsic fairness test is mandated not only by situations where s/h
deadlock prevents ratification but also where s/h control by interested dirs precludes independent review.
d.
OK has same statute as was in question in Marciano – OK §1030 – Interested Dirs; Quorum. B/c OK
has no judicial decision on this statute, Del ruling of Marciano would most likely prevail in OK.
44
3.
OK §1029 – Loans to employees & officers; guaranty of obligations of employees & officers.
Any corp may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of corp or of its subsidiary,
including any officer or employee who is dir of corp or its subsidiary whenever, in judgment of dirs, such loan, guaranty or assistance
may reasonably be expected to benefit corp. Loan, guaranty or other assistance may be w/ or w/o interest, & may be unsecured, or secured in such manner as BOD shall approve, including, w/o limitation, pledge of shares of stock of corp. Nothing contained in this §
shall be construed to deny, limit or restrict powers of guaranty or warranty of any corp at common law or under any statute.
4.
Heller v. Boylan (NY, 1941) – s/h’s derivative action (brought by minority of s/hs) to seek recovery for corp
from dirs for alleged improper payments to certain corp officers. According to bonus clause in corp bylaws,
pres & vps were to receive % of annual profits in addition to their normal salaries. As result of this, aggregate
bonus for all officers over ten year period was over $11-million. Ps claim these large bonuses bore no relation
to value of services, that bonuses were actually gifts so that majority s/hs committed waste in giving away
corp property against protest of minority s/hs.
a. Holding – B/c there is no reliable standard under which to find excessive bonuses to be waste or spoliation, there is no valid ground for disapproving what majority of s/hs approved.
b. Rationale – Cts are concerned that corps be honestly & fairly operated by dirs, w/ observance of formal
requirements of law; but reasonable compensation for officers is primarily decision for s/hs, not cts.
5.
Four observations about high level of executive salaries:
a. Roughly comparable w/ compensation of highest paid professional athletes but considerable lower than
gov officials w/ comparable responsibilities.
b. Amount of compensation paid to executive is not related to size of business or its long-term profitability.
c. Increase in CEO salaries is beginning to have effect on corp bottom line & on s/h wealth.
d. Few studies examine actual worth of CEOs to determine whether actually overpaid.
6.
Increasing CEO compensation by improving s/h wealth – granting CEOs options to purchase shares at
fixed price below current market price. These options create incentive for CEO to increase market price of
company’s shares & benefit s/hs.
7.
Regulatory actions that target executive compensation:
a. S/h proposals – SEC requires proxy statements to include – (a) capping total compensation to no more
than 20 times the pay of average employee; (b) eliminating retirement plan for dirs; (c) prohibiting management bonuses until dividends reach certain level; (d) adopting policy that future stock option prices
cannot be adjusted downward; (e) cutting management salaries & stock options until company becomes
profitable.
8.
b.
Disclosure of executive compensation – SEC requires disclosure of executive salaries.
c.
Revenue Reconciliation Act of 1993 – § 162(m) amended Internal Revenue Code, disallowing corp deductions for executive compensation after 1994 to extent that executive compensation exceeds $1 million
a year. Applies only to publicly held companies & only to CEO & four highest paid executives. Exception – performance-driven compensation.
Fiduciary Obligation of Controlling S/h – Although controlling majority s/h may validly K w/ corp, he cannot exploit corp at expense of minority. Majority s/h owes duty of “utmost good faith & loyalty” to minority s/hs. Thus, if K is unfair – as where price terms not those that would be set in arm’s length bargain – controlling s/h has br/ his fiduciary obligation to minority.
a. Sinclair Oil Corp. v. Levien (Del., 1971) – duty parent corp owes subsidiary
(1) Test of intrinsic fairness involves both a high degree of fairness & a shift in burden of proof. Under
standard of intrinsic fairness, burden is on corp to prove, subject to careful judicial scrutiny, that its
transactions were objectively fair. When situation involves parent & a subsidiary, w/ parent controlling transaction & fixing terms, test of intrinsic fairness, with its shifting burdens, applies.
(2) Business Judgment Rule – (no shift of burden of proof) ct does not interfere w/ judgment of BOD
unless showing of gross & palpable overreaching. BOD enjoys presumption of sound business
judgment & its decisions are not disturbed if they can be attributed to any rational business purpose.
(3) Held – B/c dividend payments did not result in parent corp receiving anything to exclusion of & detriment to minority s/hs, dividend payments did not constitute self-dealing. B/c there is no evidence
of self-dealing, appropriate test is business judgment rule & not test of intrinsic fairness.
(4) Rationale – Parent-subsidiary situation does not itself invoke test of intrinsic fairness. Only in situations of self-dealing – where parent controls both sides of a transaction – will test arise. Self-dealing
occurs when parent causes subsidiary to act in a way that parent receives something form subsidiary
to exclusion of & detriment to the minority s/hs of the subsidiary.
45
b.
Weinberger v. UOP, Inc. (Del., 1983) - When dirs of corp are on both sides of transaction, they are required to demonstrate utmost good faith & most scrupulous inherent fairness of bargain.
(1) Individuals who act in dual capacity as dirs of both parent & subsidiary corps owe same duty of good
management to both corps, & in absence of independent negotiating structure or dir’s total abstention
from any participation in matter, this duty is to be exercised in light of what is best for both companies.
(2) Concept of fairness has two basic aspects:
(a) fair dealing (questions of when transaction was timed, how initiated, structured, negotiated, disclosed to dirs, how approvals were obtained) requires duty of candor – one possessing superior
knowledge may not mislead any s/h by use of corp info to which latter is not privy.
(b) fair price (relates to economic & financial considerations, including all relevant factors – assets,
market value, earnings, future prospects & any other elements that affect value of company’s
stock).
i.
old test – “Delaware block” or weighted average method – elements of value, i.e., assets,
market price, earnings, etc. are assigned a particular weight and the resulting amounts added
to determine value per share. Ct finds that “Delaware” block or weighted average method is
outdated to extent that it excludes other generally accepted techniques used in financial
community & in cts b/c fair price obviously requires consideration of all relevant factors involving company value.
(3) Held – Parent corp’s conduct in not sharing findings of feasibility study w/ subsidiary & its minority
s/hs “hardly meets fiduciary standards applicable to such transaction.” Br/ of fiduciary duty b/c there
were common parent/subsidiary dirs participating in bd’s decision-making process w/o full disclosure of conflicts they faced. Also relevant to determination of br/ of fiduciary duty are time constraints under which parent put subsidiary in the deal & in structuring transaction itself.
(4) Rationale – Transaction was situation in which “complete candor” was required by Ds to disclose
all info in their possession “germane” to transaction. Germane means info that reasonable s/h would
consider important in deciding whether to sell or retain stock. In other words, Signal designated dirs
on UOP’s bd still owed UOP & its s/hs an uncompromising duty of loyalty.
(5) proxy statement – Info required by SEC to be given s/hs as prerequisite to solicitation of proxies for
a security subject to requirements of Securities Exchange Act. Purpose of proxy statement is to provide s/hs w/ appropriate info to permit an intelligent decision on whether to permit their shares to be
voted as solicited for particular matter at forthcoming s/hs meeting.
(6) From this Case know – BOD has duty of good faith, which is measured by the inherent fairness test
– two prongs – (1) fair dealing requires duty of candor; (2) fair price. Valuing fair price does not require rigid formula. Instead, look at all relevant factors of financial community.
(7) Also, appraisal right statute (OK § 1091) does not provide exclusive mechanism for remedy where
s/hs dissatisfied w/ merger. Another c/a available where can show br/ of fiduciary duty by dirs.
Remedies essentially same but differ in the requirements.
c.
S/h Appraisal Rights
(1) Usually, s/hs who dissent from certain fundamental corp changes are entitled to have corp purchase
their shares at “fair value” (determined either by Del block method or modern finance method) or
“fair market value.”
(2) Procedure – Procedural requirements for exercising appraisal rights vary. Typically, before vote taken, s/h must give written notice of intent to demand payment of shares & must not vote for proposed
action. If action approved, corp must deliver notice to dissenters w/in 10 days of approval vote after
which s/h must demand payment. Corp must then pay each dissenter who followed proper procedure
& must include certain info w/ payment.
(3) §1091 – Appraisal rights.
A.
Any s/h of corp of this state who holds shares of stock on date of making demand pursuant to provisions of sub§ D w/
respect to shares, who continuously holds shares through effective date of merger or consolidation, who has otherwise
complied w/ provisions of sub§ D & who has neither voted in favor of merger or consolidation nor consented thereto in
writing pursuant to provisions of § 1073 shall be entitled to appraisal by dis ct of fair value of shares of stock under circumstances described in sub§§ B & C. AS used in this §, word “s/h” means holder of record of stock in stock corp & also member of record of nonstock corp; words “stock” & “share” mean & include what is ordinarily meant by those
words & also membership or membership interest of member of nonstock corp; & “depository receipt” means instrument
issued by depository representing interest in one or more shares, or fractions thereof, solely of stock of corp, which stock
is deposited w/ depository.
46
B.
C.
D.
E.
1. Except as otherwise provided for in this sub§, appraisal rights shall be available for shares of any class or series of
stock of constituent corp in merger or consolidation, or of acquired corp in share acquisition, to be effected pursuant to
provisions of § 1081, other than merger effected pursuant to sub§ G of § 1081 …
2. a. No appraisal rights under this § shall be available for shares of any class or series of stock which stock, or depository receipts in respect thereof, at record date fixed to determine s/hs entitled to receive notice of & to vote at
meeting of s/hs to act upon agreement of merger or consolidation, were either:
(1) listed on nat’l securities exchange or designated as nat’l market system security on interdealer quotation system by Nat’l Assoc of Securities Dealers, Inc., or
(2) held of record by more than 2000 holders.
No appraisal rights shall be available for any shares of stock of constituent corp surviving merger if merger did not
require for its approval vote of s/hs of surviving corp as provided in sub§ G of § 1081.
b. In addition, no appraisal rights shall be available for any shares of stock, or depository receipts in respect
thereof, of constituent corp surviving merger if merger did not require for its approval vote of s/hs of surviving corp as provided for in sub§ F of § 1081.
3. Notw/standing provisions of ¶ 2, appraisal rights provided for in this § shall be available for shares of any class or
series of stock of constituent corp if holders thereof are required by terms of agreement of merger or consolidation
pursuant to provisions of §§ 1081, 1082, 1086, 1087, 1090.1,or 1090.2 to accept for stock anything except:
a.
shares of stock of corp surviving or resulting from merger or consolidation or depository receipts thereof, or
b. shares of stock of any other corp, or depository receipts in respect thereof, which shares of stock or depository
receipts at effective date of merger or consolidation will be either listed on nat’l securities exchange or designated as nat’l market system security on interdealer quotation system by Natl Assoc Securities Dealers or held
of record by more than 2000 holders.
c.
Cash in lieu of fractional shares or fractional depository receipts described in sub¶s a & b, or
d. Any combination of shares of stock, depository receipts, & cash in lieu of fractional shares
4. In event all stock of subsidiary OK corp party to merger effected pursuant to provisions of § 1083 is not owned by
parent corp immediately prior to merger, appraisal rights shall be available for shares of subsidiary OK corp.
Any corp may provide in its cert of incorp that appraisal rights under this § shall be available for shares of any class or
series of its stock as result of amendment to its cert of incorp, any merger or consolidation in which corp is constituent
corp or sale of all or substantially all assets of corp. If cert of incorp contains such provisions, procedures of this § shall
apply as nearly as is practicable.
Appraisal rights shall be perfected as follows:
1. If proposed merger or consolidation for which appraisal rights are provided under this § is to be submitted for approval at meeting of s/hs, corp, not less than 20 days prior to meeting, shall notify each of its s/hs entitled to appraisal rights that appraisal rights are available for any or all shares of constituent corps, & shall include in notice
copy of this §. Each s/h electing to demand appraisal of shares of s/h shall deliver to corp, before taking of vote on
merger or consolidation, written demand for appraisal of shares of s/h. Demand will be sufficient if reasonably informs corp of identity of s/h & that s/h intends thereby to demand appraisal of shares of s/h. Proxy or vote against
merger of consolidation shall not constitute such demand. S/h electing to take such action must do so by separate
written demand as herein provided. W/in 10 days after effective date of merger or consolidation, surviving or resulting corp shall notify each s/h of each constituent corp who has complied w/ provisions of this sub§ & has not
voted in favor of or consented to merger or consolidation as of date that merger or consolidation has become effective; or
2. If merger or consolidation is approved pursuant to provisions of §§ 1073 or 1083, each constituent corp, either before effective date of merger or consolidation or w/in 10 days thereafter, shall notify each holders of any class or
series of stock of such constituent corp who are entitled to appraisal rights of approval of merger or consolidation
& that appraisal rights are available for any or all of shares of class or series of stock of constituent corp, & shall
include in such notice copy of this §; provided, if notice is given on or after effective date of merger or consolidation, notice shall be given by surviving or resulting corp to all holders of any class or series of stock of constituent
corp that are entitled to appraisal rights. Notice may, &, if given on or after effective date of merger or consolidation, shall, also notify s/hs of effective date of merger or consolidation. Any s/h entitled to appraisal rights may,
w/in 20 days after date of mailing of notice, demand in writing from surviving or resulting corp appraisal of holder’s shares. Demand will be sufficient if it reasonably informs corp of identity of s/h & that s/h intends to demand
appraisal of holder’s shares. If notice does not notify s/hs of effective date of merger or consolidation either:
a.
each constituent corp shall send second notice before effective date of merger or consolidation notifying each
holder of any class or series of stock of constituent corp that are entitled to appraisal rights of effective date
of merger or consolidation, or
b. surviving or resulting corp shall send second notice to all holders on or w/in 10 days after effective date of
merger or consolidation; provided, however, that if second notice is sent more than 20 days following mailing
of first notice, second notice need only be sent to each s/h who is entitled to appraisal rights & who has demanded appraisal of holder’s shares in accordance w/ this sub§. Affidavit of sec or assistant sec or of transfer
agent of corp that is required to give either notice that notice has been given shall, in absence of fraud, be p/f
evidence of facts stated therein. For purposes of determining s/hs entitled to receive either notice, each constituent corp may fix, in advance, record date that shall be not more than 10 days prior to date notice is given;
provided, if notice given on or after effective date of merger or consolidation, record date shall be effective
date. If no record date is fixed & notice is given prior to effective date, record date shall be close of business
on day next preceding day on which notice given.
W/in 120 days after effective date of merger or consolidation, surviving or resulting corp or any s/h who has complied
w/ provisions of sub§§ A & D & who is otherwise entitled to appraisal rights, may file petition in dis ct demanding determination of value of stock of all s/hs; provided, however, at any time w/in 60 days after effective date of merger or
consolidation, any s/h shall have right to w/draw demand of s/h for appraisal & to accept terms offered upon merger or
consolidation. W/in 120 days after effective date of merger or consolidation, any s/h who has complied w/ requirements
of sub§§ A & D, upon written request, shall be entitled to receive from corp surviving merger or resulting from consolidation a statement setting forth aggregate number of shares not voted in favor of merger or consolidation & w/ respect to
which demands for appraisal have been received & aggregate number of holders of shares. Written statement shall be
47
F.
G.
H.
I.
J.
K.
L.
mailed to s/h w/in 10 days after s/h’s written request for statement is received by surviving or resulting corp or w/in 10
days after expiration of period for delivery of demands for appraisal pursuant to provisions of sub§ D, whichever is later.
Upon filing of any such petition by s/h, service of copy thereof shall be made upon surviving or resulting corp, which,
w/in 20 days after service, shall file, in office of ct clerk of dis ct in which petition was filed, duly verified list containing
names & addresses of all s/hs who have demanded payment for their shares & w/ whom agreements regarding value of
their shares have not been reached by surviving or resulting corp. If petition shall be filed by surviving or resulting
corp, petition shall be accompanied by such duly verified list. Ct clerk, if so ordered by ct, shall give notice of time &
place fixed for hearing on petition by registered or certified mail to surviving or resulting corp & to s/hs shown on list at
addresses therein stated. Notice shall also be given by one or more publications at least 1 week before day of hearing,
in newspaper of general circulation published in OKD or other publication as ct deems advisable. Forms of notices by
mail & by publication shall be approved by ct, & costs thereof shall be borne by surviving or resulting corp.
At hearing on petition, ct shall determine s/hs who have complied w/ provisions & who have become entitled to appraisal
rights. Ct may required s/hs who have demanded appraisal of their shares & who have demanded appraisal of shares &
who hold stock represented by cert to submit cert of stock to ct clerk for notation thereon of pendency of appraisal proceedings; & if any s/h fails to comply w/ this direction, ct may dismiss proceeding as to that s/h.
After determining s/hs entitled to appraisal, ct shall appraise shares, determining fair value exclusive of any element of
value arising from accomplishment or expectation of merger or consolidation, together w/ fair rate of interest, if any, to
be paid upon amount determined to be fair value. In determining fair value, ct shall take into account all relevant factors.
In determining fair rate of interest, ct may consider all relevant factors, including rate of interest which surviving or resulting corp would have to pay to borrow money during pendency of proceeding. Upon application by surviving or resulting corp or by any s/h entitled to participate in appraisal proceeding, ct may, in its discretion, permit discovery or
other pretrial proceedings & may proceed to trial upon appraisal prior to final determination of s/h entitled to appraisal.
Any s/h whose name appears on list filed by surviving or resulting corp pursuant to provisions of sub§ F of this § & who
has submitted certs of stock of s/h to ct clerk, if required, may participate fully in all proceedings until it is finally determined that s/h is not entitled to appraisal rights.
Ct shall direct payment of fair value of shares, together w/ interest, if any, by surviving or resulting corp to s/hs entitled
thereto. Interest may be simple or compound, as ct may direct. Payment shall be made to each s/h, in case of holders of
uncertificated stock immediately, & in case of holders of shares represented by certs upon surrender to corp of certs representing stock. Ct’s decree may be enforced as other decrees in dis ct may be enforced, whether surviving or resulting
corp be corp of this state or of any other state.
Costs of proceeding may be determined by ct & taxed uon parties as ct deems equitable in circumstances. Upon application of s/h, ct may order all or portion of expenses incurred by s/h in connection w/ appraisal proceeding, including, w/o
limitation, reasonably atty’s fees & fees & expenses of experts, to be charged pro rata against value of all shares entitled
to appraisal.
From & after effective date of merger or consolidation, no s/h who has demanded appraisal rights as provided for in
sub§ D shall be entitled to vote stock for any purpose or to receive payment of dividends or other distributions on stock,
except dividends or other distributions payable to s/hs of record at date which is prior to effective date of merger or
consolidation; provided, however, that if no petition for appraisal shall be filed w/in time provided for in sub § E, or if
s/h shall deliver to surviving or resulting corp a written w/drawal of s/h’s demand for appraisal & acceptance of merger
or consolidation, either w/in 60 days after effective date of merger or consolidation as provided for in sub§ E or thereafter w/ written approval of corp, then right of s/h to appraisal shall cease; provided further, no appraisal proceeding in dis
ct shall be dismissed as to any s/h w/o approval of ct, & approval may be conditioned upon terms as ct deems just.
Shares of surviving or resulting corp into which shares of any objecting s/hs would have been converted had they assented to merger or consolidation shall have status of authorized & unissued shares of surviving or resulting corp.
d.
CEDE v. Technicolor (Sup Ct) – culpable conduct of dirs warrants br/ fiduciary duty action outside relevant appraisal right statute.
e.
General rule, though, is to go through appraisal rights statute first.
f.
“Cash-out” merger of parent corp owning more than 50% of stock of subsidiary corp may compel minority s/hs of subsidiary to accept cash for shares in amount determined by parent, subject to appraisal
rights provided in Chapter 13 of MBCA.
g.
Appraisal remedy is not acceptable for all cash out mergers b/c of following problems:
(1) S/hs must litigate w/ corp as to fair value issue; corp has more resources & knowledge of skeletons
than s/h;
(2) S/h receives nothing until litigation establishing fair value, including appeals, is exhausted, which
could be a long time not worth the loss of using proceeds for that time;
(3) S/h must bear litigation expenses;
(4) Method of valuation used in most cts, “Delaware block” approach, may not yield realistic valuation;
(5) Interest payment on award is discretionary.
h.
Singer v. Magnavox (note case) – overruled by Weinberger, applied double test to “cash out” mergers –
transaction must meet test of “entire fitness” & there must be a “business purpose” other than eliminating minority s/hs.
i.
Oklahoma Statutes on Merger:
(1) §1081 – Merger or consolidation of domestic corps – merger of two or more OK corps. Basically
same as § 1082. Merger – one existing entity survives. Consolidation – entities organize new entity
48
& none of original entities survive. Each BOD approves – executed & acknowledged – submitted to
s/hs of each corp.
A.
B.
C.
D.
E.
F.
Any two or more corps existing under laws of this state may merge into single corp, which may be any one of constituent
corps or may consolidate into new corp formed by consolidation, pursuant to agreement of merger or consolidation, as case
may be, complying & approved in accordance w/ provisions of this §.
BOD of each corp which desires to merge or consolidate shall adopt resolution approving agreement of merger or consolidation. Agreement shall state:
1. Terms & conditions of merger or consolidation;
2. Mode of carrying same into effect;
3. In case of merger, amendments or changes in cert of incorp of surviving corp as are desired to be effected by merger, or
if no amendments or changes desired, statement that cert of incorp of surviving corp shall be its cert of incorp.
4. In case of consolidation, that cert of incorp of resulting corp shall be set forth in attachment to agreement;
5. Manner of converting shares of each constituent corps into shares or other securities of corp surviving or resulting from
merger or consolidation, &, if any shares of any constitute corp are not to be converted solely into shares or other securities of surviving or resulting corp, cash, property, rights, or securities of any other corp which holders of shares are to receive in exchange for or upon conversion of shares & surrender of any certs evidencing them, which cash, property,
rights, or securities of any other corp may be in addition to or in lieu of shares or other securities of surviving or resulting
corp; &
6. Other details or provisions as are deemed desirable, including w/o limiting generality of foregoing, provision for payment of cash in lieu of issuance or recognition of fractional shares, interests or rights, or for any other arrangement w/ respect thereto, consistent w/ provisions of § 1036. Agreement so adopted shall be executed & acknowledged in accordance w/ provisions of §1007. Any terms of agreement of merger or consolidation may be made dependent upon facts ascertainable outside of agreement; provided, that manner in which these facts shall operate upon terms of agreement is
clearly & expressly set forth in agreement of merger or consolidation. Term “facts” as used in this ¶, includes, but is not
limited to, occurrence of any event, including determination or action by any person or body, including corp.
Agreement required by provisions of sub§ B shall be submitted to s/hs of each constituent corp at annual or special meeting
thereof for purpose of acting on agreement. Due notice of time, place & purpose of meeting shall be mailed to each s/h
whether voting or nonvoting, of corp at address which appears on records of corp, at least 20 days prior to date of meeting.
Notice shall contain copy of agreement or rief summary thereof, as dirs shall deem advisable; provided, however, notice shall
be effective only w/ respect to mergers or consolidations for which notice of s/h meeting to vote thereon has been mailed after
Nov 1, 1988. At meeting agreement shall be considered & vote taken for adoption or rejection. If majority of outstanding
stock of corp entitled to vote thereon shall be voted for adoption of agreement, that fact shall be certified on agreement th sec
or assistant sec of corp. If agreement shal be so adopted & certified by each constituent corp, it shall then be filed & shall become effective in accordance w/ provisions of § 1007. In lieu of filing agreement of merger or consolidation required by
this §, surviving or resulting corp may file cert of merger or consolidation executed in accordance w/ provisions of
§1007 & which states:
1. Name & state of incorp of each constituent corps;
2. That agreement of merger or consolidation has been approved, adopted, certified, executed, & acknowledged by each
constituent corps in accordance w/ these provisions;
3. Name of surviving or resulting corp;
4. In case of merger, amendments or changes in cert of incorp of surviving corp as are desired to be effected by merger, or,
if no amendments or changes are desired, statement that cert of incorp of surviving corp shall be its cert of incorp.
5. In case of consolidation, that cert of incorp of resulting corp shall be as set forth in attachment to cert;
6. That executed agreement of consolidation or merger is on file at principal place of business of surviving corp; stating address thereof; &
7. That copy of agreement of consolidation or merger will be furnished by surviving corp, on request & w/o cost, to any s/h
of any constituent corp. Term “s/h” shall be deemed to include “member.”
Any agreement of merger or consolidation contain provision that at any time prior to time that agreement, or cert filed w/ Sec
of State in lieu thereof, becomes effective, agreement may be terminated by BOD of any constituent corp notw/standing approval of agreement by s/hs of all or any constituent corps; provided, if agreement of merger or consolidation is terminated after filing of agreement, or cert filed w/ Sec of State in lieu thereof, but before agreement or cert has become effective, cert of
termination of merger or consolidation shall be filed. Any agreement of merger or consolidation may contain provision that
BOD of constituent corps may amend agreement at any time prior to time that agreement, or cert filed w/ Sec of State in lieu
thereof, becomes effective in accordance w/ §1007; provided, that amendment made subsequent to adoption of agreement by
s/hs of any constituent corps shall not:
1. Alter or change amount or kind of shares, securities, cash, property, or rights to be received in exchange for or on conversion of all or any shares of any class or series thereof of constituent corps.
2. Alter or change any term of cert of incorp of surviving corp to be effected by merger or consolidation; or
3. Alter or change any terms & conditions of agreement if alteration or change would adversely affect holders of any class
or series thereof of constituent corp.
If agreement of merger or consolidation is amended after filing of agreement, or cert in lieu thereof, w/ Sec of State, but before
agreement or cert has become effective, cert of amendment of merger or consolidation shall be filed.
In case of merger, cert of incorp of surviving corp shall automatically be amended to extent, if any, that changes in cert of incorp are set forth in cert of merger.
Notw/standing requirements of sub§ C, unless required by cert of incorp, no vote of s/hs of constituent corp surviving merger
shall be necessary to authorize merger if:
1. Agreement of merger does not amend in any respect cert of incorp of constituent corp;
2. Each share of stock of constituent corp outstanding immediately prior to effective date of merger is to be an identical
outstanding or treasury share of surviving corp after effective date of merger; &
3. Either no shares or common stock of surviving corp & no shares, securities, or obligations convertible into such stock are
to be issued or delivered under plan of merger, or authorized unissued shares or treasury shares of common stock of surviving corp to be issued or delivered under plan of merger pus those initially issuable upon conversion of any other
shares, securities, or obligations to be issued or delivered under plan do not exceed 20% of shares of common stock of
constituent corp outstanding immediately prior to effective date of merger. No vote of s/hs of constituent corp shall be
49
G.
a.
necessary to authorize merger or consolidation if no shares of stock of corp shall have been issued prior to adoption by
BOD of resolution approving agreement of merger or consolidation. If agreement of merger is adopted by constituent
corp surviving merger, by action of its BOD & w/o any vote of its s/hs pursuant to provisions of this sub§, sec or assistant sec of that corp shall certify on agreement that agreement has been adopted pursuant to provisions of this sub§, &:
a.
if it has been adopted pursuant to ¶ 1 of this sub§, that conditions specified have been satisfied; or
b. if it has been adopted pursuant to ¶ 2 of this sub§, that no shares of stock of corp were issued prior to adoption by
BODF of resolution approving agreement of merger or consolidation.
Agreement so adopted & certified shall then be filed & shall become effective. Filing shall constitute representation by
person who executes cert that facts stated in cert remain true immediately prior to filing.
1. Notw/standing requirements of sub§ C, unless expressly required by cert of incorp, no vote of s/hs of constituent corp shall
be necessary to authorize merger w/ or into single direct or indirect wholly owned subsidiary of constituent corp if:
a.
constituent corp & direct or indirect wholly owned subsidiary of constituent corp are only constituent corps to merger;
b. each share or fraction of share of capital stock of constituent corp outstanding immediately prior to effective time
of merger is converted in merger into share or equal fraction of share of capital stock of holding company having
same designations, rights, powers, & preferences, & qualifications, limitations, & restrictions thereof, as share of
stock of constituent corp being converted in merger;
c.
holding company & each constituent corp to merger are corps of this state;
d. cert of incorp & bylaws of holding company immediately following effective time of merger contain provisions
identical to cert of incorp & bylaws of constituent corp immediately prior to effective time of merger, other than
provisions, if any, regarding incorporator or incorporators, corp name, registered office & agent, initial BOD, & initial subscribers of shares & provisions contained in any amendment to cert of incorp as were necessary to effect
change, exchange, reclassification, or cancellation of stock, if change, exchange, reclassification, or cancellation
have become effective,
e.
as result of merger, constituent corp or its successor corp becomes or remains direct or indirect wholly owned subsidiary of holding company,
f.
dirs of constituent corp become or remain dirs of holding company upon effective time of merger;
g. cert of incorp of surviving corp immediately following effective time of merger is identical to cert of incorp of constituent corp immediately prior to effective time of merger, other than provisions, if any, regarding incorporator or
incorporators, corp name, registered office & agent, initial BOD, & initial subscribers of shares & provisions contained in any amendment to cert of incorp as were necessary to effect a change, exchange, reclassification, or cancellation has become effective; provided, however, that:
(1) cert of incorp of surviving corp shall be amended in merger to contain provision requiring that any act or
transaction by or involving surviving corp that requires for its adoption under this title or its cert of incorp the
approval of s/h of surviving corp shall, by specific reference to this sub§, require, in addition, approval of s/hs
of holding company or any successor by merger, by same vote as is required by this title or by cert of incorp
of surviving corp, &
(2) cert of incorp of surviving copr may be amended in merger to reduce number of classes & shares of capital
stock that surviving corp is authorized to issue, &
h. s/hs of constituent corp do not recognize gain or loss for fed income tax purposes as determined by BOD of constituent corp.
j.
As used in this sub§, term “holding company” means corp which, from its incorp until consummation of merger governed by this sub§, was at all times a direct or indirect wholly owned subsidiary of constituent corp & whose capital
stock is issued in merger.
k. From & after effective time of merger adopted by constituent corp by action of BOD & w/o any vote of s/hs pursuant to
this sub§:
a.
to extent restriction of § 1090.3 applied to constituent corp & its s/hs at effective time of merger, restrictions shall
apply to holding company & its s/h immediately after effective time of merger as though it were constituent corp &
all s/h of stock of holding company acquired in merger shall be deemed to have been acquired at time that s/h of
stock of constituent corp converted in merger was acquired; provided, that any s/h who immediately prior to effective time of merger was not interested s/h w/in meaning of § 1090.3 shall not solely by reason of merger become
interested s/h of holding company, &
b. if corp name of holding company immediately following effective time of merger is same as corp name of constituent corp immediately prior to effective time of merger, shares of capital stock of holding company into which
shares of capital stock of constituent corp are converted shall be represented by stock certs that previously represented shares of capital stock of constituent corp. If any agreement of merger is adopted by constituent corp by action of BOD & w/o vote of s/hs pursuant to this sub§, sec or assistant sec of constituent corp shall certify on
agreement that agreement has been adopted pursuant to this sub§ & that conditions specified in this sub¶ have been
satisfied. Agreement so adopted & certified shall then be filed & become effective. Filing shall constitute representation by person who executes agreement that facts stated in cert remain true immediately prior to filing.
§1082 – merger of OK corp w/ foreign corp. Basically same as § 1081 but must also look at merger laws
of state in which foreign corp is located.
A.
B.
Any one or more corps of this state may merge or consolidate w/ one or more other corps of any other state or states of US or
of DC, if laws of other state or states or DC permit corp of juris to merger or consolidate w/ orp of another juris. Constituent
corp may merge into single corp, which may be any one of constituent corps, or may consolidate into new corp formed by
consolidation, which may be corp of state of incorp of any one of constituent corps, pursuant to agreement of merger or consolidation, as case may be, complying & approved in accordance w/ provisions of this §. In addition, any one or more corps
organized under laws of any juris other than one of US may merge or consolidate w/ one or more corps existing under laws of
this state if surviving or resulting corp will be corp of this state, & if laws under which other corp or corps are formed permit
corp of that juris to merge or consolidate w/ corp of another juris.
All constituent corps shall enter into agreement of merger or consolidation. Agreement shall state:
1. Terms & conditions of merger or consolidation;
2. Mode of carrying same into effect;
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3.
C.
D.
E.
b.
Manner of converting shares of each constituent corp into shares or other securities of corp surviving or resulting from
merger or consolidation &, if any shares of any constituent corps are not being converted solely into shares or other securities of surviving or resulting corp, cash, property, rights, or securities of any other corp which holder of shares are to
receive in exchange for, or upon conversion of, shares & surrender of any certs evidencing them, which cash, property,
rights or securities of any other corp may be in addition to or in lieu of shares or other securities of surviving or resulting
corp;
4. Other details or provisions as are deemed desirable, including w/o limiting generality of foregoing, provision for payment of cash in lieu of issuance or recognition of fractional shares of surviving or resulting corp or of any other corp the
securities of which are to be received in merger or consolidation, or for some other arrangement w/ respect thereto consistent w/ provisions of § 1036.
5. Other provisions or facts as shall be required to be set forth in cert of incorp by laws of state which are stated in agreement to be laws that shall govern surviving or resulting corp & that can be stated in case of merger or consolidation.
Any terms of agreement of merger or consolidation may be made dependent upon facts ascertainable outside of agreement; provided, that manner in which facts shall operate upon terms of agreement is clearly & expressly set forth in
agreement of merger or consolidation. Term “facts” as used in this ¶ includes, but is not limited to, occurrence of any
event, including determination or act5ion by any person or body, including corp.
Agreement shall be adopted, approved, executed, & acknowledged by each of constituent corps in accordance w/ laws under
which it is formed, &, in case of OK corp, in same manner as provided for in § 1081. Agreement shall be filed & shall become effective for all purposes of laws of this state when & as provided for in § 1081 w/ respect to merger or consolidation of
corps of this state. In lieu of filing agreement of merger or consolidation, surviving or resulting corp may file cet of merger or
consolidation executed in accordance w/ provisions of § 1007, which states:
1. Name & state of incorp of each constituent corps;
2. That agreement of merger or consolidation has been approved, adopted, executed, & acknowledged by each constituent
corp in accordance w/ provisions of this sub§;
3. Name of surviving or resulting corp;
4. In case of merger, amendments or changes in cert of incorp of surviving corp which are effected by merger, or, if no
amendments or changes are desired, statement that cert of incorp of surviving corp shall be cert of incorp.
5. In case of consolidation, that cert of incorp of resulting corp shall be as is set forth in attachment to cert;
6. That executed agreement of consolidation or merger is on file at principal place of business of surviving corp, & address
thereof;
7. That copy of agreement of consolidation or merger will be furnished by surviving corp, on request & w/o cost, to any s/h
of any constituent corp;
8. If corp surviving or resulting from merger or consolidation is to be corp of this state, authorized capital stock of each
constituent corp which is not corp of this state; &
9. Agreement, if any, required by provisions of sub§ D. For purposes of § 1085, term “s/h” shall be deemed to include
“member.”
If corp surviving or resulting from merger or consolidation is to be governed by laws of DC or any state other than this state,
shall agree that it may be served w/ process in this state in any proceeding for enforcement of any obligation of any constituent
corp of this sate, as well as for enforcement of any obligation of surviving or resulting corp arising from merger or consolidation, including any suit or other proceeding to enforce right of any s/hs as determined in appraisal proceedings pursuant to
provisions of § 1091, & shall irrevocably appoint Sec of State as its agent to accept service of process in any suit or other proceedings & shall specify address to which copy of process shall be mailed by Sec of State. In event of service uon Sec of State
in accordance w/ provisions of this sub§, Sec of State shall immediately notify surviving or resulting corp thereof by letter,
certified mail, return receipt requested, directed to surviving or resulting corp at address specified unless surviving or resulting
corp shall have designated in writing to Sec of State a different address for this purpose, in which case it shall be mailed to last
address so designated. Notice shall include copy of process & any other papers served on Sec of State. It shall be duty of P in
event of such service to serve process & any other papers in duplicate, to notify Sec of State that service is being effected pursuant to provisions of this sub§, & to pay Sec of State fee provided for in ¶ 7 of § 1142, which fee shall be taxed as part of
costs in proceeding. Sec of State shall maintain alphabetical record of any such service setting forth name of P & D, title,
docket number, & nature of proceeding in which process has been served upon Sec of State, fact that service has been effected, return date thereof, & date service was made. Sec of State shall not be required to retain such info longer than 5 years
from receipt of service of process.
Provisions of sub§ D of § 1081 shall apply to any merger or consolidation pursuant to provisions of this §. Provisions of sub§
E of § 1081 shall apply to merger pursuant to provisions of this § in which surviving corp is corp of this state. Provisions of
sub§ F of § 1081 shall apply to any merger pursuant to provisions of this §.
§1083 – Merger of parent corp & subsidiary or subsidiaries – short form merger b/w parent & subsidiary – requirement that parent must own 90% of subsidiary. Downstream or upstream merger. Don’t
have to prepare as many documents. Only parent corp approves – sub BOD do not need to approve.
A.
In any case in which at least 90% of outstanding shares of each class of stock or corp or corps, other than corp which has in its
cert of incorp provision required by division § 1081(G)(1)(g)(1), is owned by another corp & one of corps is corp of this state
& other or others are corps of this state or any state or o DC & laws of other state or states or DC permit corp of that juris to
merger w/ corp of another juris, corp having such stock ownership may either merge other corp or corps into itself & assume
all of its or their obligations, or merge itself, or itself & one or more other corps, into one of other corps by executing, acknowledging, & filing cert of ownership & merger setting forth copy of resolution of BOD to merge & date of adoption; provided, however, that in case parent corp shall not own all outstanding stock of all subsidiary corps which are parties to merger,
resolution of BOD of parent corp shall state terms & conditions of merger, including securities, cash, property, or rights to be
issued, paid, delivered, or granted by surviving corp upon surrender of each share of subsidiary corp or corps not owned by
parent corp. Any terms of resolution of BOD to so merge may be made dependent upon facts ascertainable outside of such
resolution, provided that manner in which such facts shall operate upon terms of resolution is clearly & expressly set forth in
resolution. Term “facts”, includes, but is not limited to, occurrence of any event, including determination or action by any
person or body, including corp. If parent corp is not surviving corp, resolution shall include provision for pro rate issuance of
stock of surviving corp to holders of stock of surviving corp to holders of stock of parent corp on surrender of any certs therefor, & cert of ownership & merger shall state that proposed merger has been approved by majority of outstanding stock of par-
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B.
C.
D.
E.
c.
ent corp entitled to vote thereon at meeting thereof duly called & held after 20 days’ notice of purpose of meeting is mailed to
each s/h at s/h’s address a appears on records of corp if parent corp is corp of this state or state that proposed merger has been
adopted, approved, certified, executed, & acknowledged by parent corp in accordance w/ laws under which it is organized if
parent corp is not corp of this state. If surviving corp exists under laws of DC or any state other than OK, provisions of sub§
D of § 1082 shall also apply to merger pursuant to provisions of this §.
Subject to provisions of § 1006(A)(1), if surviving corp is OK corp, it may change its corp name by inclusion of provision to
that effect in resolution of merger adopted by dirs of parent corp & set forth in cert of ownership & merger, & upon effective
date of merger, name of corp shall be changed.
Provisions of sub§ D of § 1081 shall apply to merger pursuant to this §, & provisions of § 1081(E) shall apply to merger pursuant to provisions of this § in which surviving corp is subsidiary corp & is corp of this state. For purposes of this sub§, references to “agreement of merger” shall mean resolution of merger adopted by BOD of parent corp. Any merger which effects
any changes other than those authorized by provisions of this § or made applicable by this sub§ shall be accomplished in accordance w/ §§ 1081 or 1082. § 1091 shall not apply to an merger effected pursuant to this §, except as provided for in sub§
D.
In event all stock of subsidiary OK corp party to merger effected pursuant to provisions of this § is not owned by parent corp
immediately prior to merger, s/hs of subsidiary OK corp party to merger shall have appraisal rights as set forth in § 1091.
Merger may be effected pursuant to provisions of this § although one or more of corp parties to merger is corp organized under laws of juris other than one of US; provided, that laws of that juris permit corp of that juris to merge w/ corp of another juris.
§1088 – If merger, all property of disappearing corp becomes assets & liabilities of surviving corp. Don’t
have to do new certs of title or new deeds, etc.
When any merger or consolidation shall have become effective pursuant to provisions of OGCA, for all purposes of laws of this
state separate existence of al constituent corps, or of all such constituent corps except one into which other or others of such constituent corps have been merged, as case may be, shall cease & constituent corps shall become new corp, or be merged into one of
such corps, as case may be, possessing all rights, privileges powers & franchises as well of public as of private nature, & being subject to all restrictions, disabilities & duties of each of such corps so merged or consolidated; & all & singular, rights, privileges,
powers & franchises of each said corps, & all property, real, personal & mixed, & all debts due to any of said constituent corps on
whatever account, as well for stock subscriptions as all other things in action or belonging to each such corp shall be vested in corp
surviving or resulting from such merger or consolidation; & all property, rights, privileges, powers & franchises, & all & every other interest shall be thereafter as effectually property of surviving or resulting corp as they were of several & respective constituent
corps, & title to any real estate vested by deed or otherwise, under laws of this state, in any such constituent corps, shall not revert or
be in any way impaired by reason of provisions of OGCA; but all rights of creditors & all liens upon any property of any said constituent corps shall be preserved unimpaired, & all debts, liabilities & duties of respective constituent corps, from that time forward,
shall attach to said surviving or resulting corp, & may be enforced against it to same extent as if said debts, liabilities & duties had
been incurred or Ked by it.
d.
§1091 (above) – appraisal rights – can object to merger. (D) perfecting appraisal rights. (H) all relevant
factors for determining valuation – don’t use Block method.
e.
§1144 – Required filings following merger or consolidation or change of corp name. File in county in
which merging corps have property.
A.
l.
a.
b.
Certified copy of following documents, as applicable, shall be filed w/ county clerk of each county in which surviving or resulting corp to merger or consolidation, or corp whose name was changed, has recorded interest in real property:
1. cert of agreement of merger or consolidation filed w/ Sec of State;
2. cert of ownership & merger filed w/ Sec of State;
3. amendment to cert of incorp effecting change of name.
Wright case - In OK, cannot take into consideration majority interest. If trying to merge out, can’t consider majority/minority holdings to discount offer. What does this mean?
Can have ct hearing to value fair price of stock.
Can’t get atty fees – but can allocate costs among parties. After collect appraisal rights, cannot vote.
m. Merger can be used for curative means – Merge old corp (w/ improper organization or improper stock
issuance) into newly & properly organized corp. Cures the defects of the old corp.
B. Corp Opportunity Doctrine
1. Northeast Harbor Golf Club, Inc. v. Harris (Maine, 1995) – Pres of golf club acquired various tracts of land
adjoining golf course. Eventually, pres developed plans to turn land into housing subdivisions. BOD did not
approve & asked her to resign. This lawsuit was initiated against pres for br/ of her fiduciary duty to act in
best interests of corp.
a. Rule – Corp opportunity doctrine recognizes that corp fiduciary should not serve both corp & personal interests at same time. ALI test – central feature is requirement of full disclosure prior to taking advantage
of corp opportunity. Corp must formally reject opportunity. “Corp opportunity” includes opportunities “closely related to business in which corp is engaged” & encompasses any opportunities that accrue
to fiduciary as result of position w/in corp. Burden of proof depends on who rejected it – whoever rejected has burden.
b. Holding – Ct adopted ALI test b/c disclosure-oriented approach provides clear procedure whereby corp
officer may insulate herself through prompt & complete disclosure from possibility of legal challenge.
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c.
d.
Rationale – Corp fiduciaries must discharge duties in good faith w/ view toward furthering corp’s interests. They must disclose & not w/hold relevant info concerning potential conflict of interest w/ corp &
must refrain from using their position, influence or knowledge of corp’s affairs to gain personal advantage.
Corp opportunity doctrine
(1) “line of business” test – If corp officer is presented w/ business opportunity which corp is financially able to undertake, is in line of corp’s business & is of practical advantage to it, is one in which
corp has interest, & by embracing opportunity, self-interest of corp dir will be brought into conflict
w/ that of corp, law will not permit him to seize opportunity.
(a) Weaknesses w/ line of business test: (1) determining whether activity is in corp’s line of business is difficult; (2) requirement of financial ability of corp to undertake opportunity.
(2) Fairness test – rests on unfairness of corp fiduciary in taking advantage of opportunity for personal
profit when interest of corp justly calls for protection.
(a) Weakness of fairness test is that it provides little or no practical guidance to corp officer or dir
seeking to measure their obligations.
(3) Two-step analysis – (a) determine whether opportunity was w/in corp’s line of business; (b) scrutinize equitable considerations surrounding officer’s acquisition.
(a) Weakness of two-step analysis is that it just combines problems of other two tests.
2.
ALI test as adopted in Northeast Harbor Golf is not followed in OK & is not statutory. For exam, be aware of
all four doctrines. Not clear which OK follows
3.
Corp opportunity doctrine does not necessarily require formal rejection by corp. I.e., dir can show that corp
knew about opportunity yet failed to act upon it. Or waiver occurs if corp “ratifies” dir’s actions. If corp fails
to act immediately after learning of dir’s use of an opportunity, inaction may constitute implicit ratification.
C. Don’t know where this statute fits:
1. §1124 – Actions against officers, dirs or s/hs to enforce liability of corp; unsatisfied judgment against
corp.
A.
B.
When officers, dirs or s/hs of any corp shall be liable by provisions of OGCA to pay debts of corp, or any part thereof, any person to
whom they are liable may have action, at law or in equity, against any one or more of them, & petition shall state claim against corp
& ground on which P expects to charge Ds personally.
No suit shall be brought against any officer, dir or s/h for any debt of corp of which he is officer, dir or s/h, until judgment is obtained therefor against corp & execution thereon returned unsatisfied.
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