Term
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Definition
| S/H sues corp on their own behalf and if they win they will be paid damages - compel payment of declared dividends;enforce right ot inspect corp records; protect preemptive rights; compel dissolution |
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Term
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Definition
| S/H sues a TP on behalf of the corp, the corp enjoins as a D, if P wins damages go to corp - recover damages from mgmt for breach of duty;recover improper dividend;enjoin wrongful issuance of shares;reocver damages from TP;recover damages from mgmt |
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Term
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Definition
| non corporation; developed through agreement;partnership agreement doc is the governing document; mgmt is s/h/decision maker;partners and general managers manage and operate;collective vote; profit sharing is equal;unlimited liability;one time taxation via individual;transfers of financial interest allowed unless restricted;mgmt interest not transferable unless permitted; partners interest in the partnership may be assigned but it may be restricted. Assignee does not have full rights of a partner; Each general partner has a direct and equal voice in mgmt unless otherwise agreed via delegation of auth; one vote per partner, unless otherwise agreed- fundamental:unanimous, ordinary:majority, unless othrewise agreed via delegation of authority; to do business in another state, normally must qualify to do business and obtain certificate of authority |
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Term
| Limited Liability Company |
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Definition
| not corp;create by filing Article of Org;separate legal entity;Articles of Org are governing doc;business owns property;s/h, decisionmakers own and mng;member's distributional interest is ownership policy;member managed and manager-managed; collective vote;can transfer financial interests unless restricted; mgmt cannot transfer interests unless permitted; equal profit sharing;limited liability - no personal;one time taxation via individual; members distributional interests are freely transferable, but transfer may be restricted; member-owners can fully participate in mgmt or they can decide to have a manager-managed LLC; one vote per partner unless otherwise agreed, fundamental: unanimous, ordinary:majority, unless otherwise agreed via delegation auth; single taxation: members are taxed personally on LLC net profits, LCC is not taxed |
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Term
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Definition
| not corp; created at will by owner;no governing document;not a separate entity-owner is the business;owner decides powers;owner takes all profits;unlimited liability; owners decision how long it lasts but if owner dies, business liquidates;owner's decide transfer of ownership; mgmt is completley owners decision |
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Term
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Definition
| not a corp; file certificate of L/P Partnersihp to create; treated same as a general partnership;general powers are not specified in statute;general partners and limited partners share profits based on proportionate share of contributions, unless otherwise agreed; unlimited liability of all general partners - limited partners are liable only to the extent of capital conributions;terminated by partners agreement, operation of law, or by judicial decree; partners may agree thta an ownersihp (mgmt) position may be transferred. Absence of agreemnt partner's unanimous approval is required; general partners and limited partners are subject to same rules as in general partnerships; general partners have direct and equal voice unless otherwise agreed - Limited partners do not actively participate in mgmt; General partners make decisions - one vote per partner unless otherwise agreed, limited partners dont get a vote unless otherwise provided; taxed similar to general partnership - single taxation where each partner pays pro rata share of income taxes on net profits, partnership is not taxed |
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Term
| Limited Liability Partnership |
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Definition
| not corp; file statement of qualification to create;partnership agreement is governing document;origianlly not a separate legal entity in many states but entity in RUPA; powers not specified in statute;partner's liability limited to some extent, depending on whether statute is "full shield" v "partial shield"; terminated by partners agreement, operation of law or by judicial decree; partners may agree that an ownership mgmt position may be transferred. In absence of agreement partner's must have unanimous approval;partners interest in the partnership may be assigned but it may be restricted. Assignee does not have full rights of a partner; each genreal p artner has a direct and equal voice in mgmt unless otherwise agreed via delegation of auth; one vote per partner unless otherwise agreed, fundamental:unanimous, ordinary:majority unless otherwise agreed |
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Term
| What factors will a corp consider when deciding what state to incorporate in? |
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Definition
| taxes, mgmt and operation, nature/extent of duty of care and duty of loyalty, financing requirements/restrictions (ie dividends, issuance of shares, bonds), s/h rights (ie access to records, voting (cumulative?) preemptive rights?, s/h powers (ie approving funadmental changes, election/removal of directors), special laws for closely held corps |
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Term
| Why is DE favored by corporations? |
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Definition
| highly experienced and qualified judges and lawyers, substantial body of corporate law (certainty, consistency, treatises, articles), pro-corporation culture, modern corproate laws and constitutional protections, greater flexibility for mgmt to run business |
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Term
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Definition
| strict compliance with incorporation statutes. Corp attributes, insulation frmo de Jure collateral and direct suits |
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Term
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Definition
| Substantial Compliance with incorporation statute, good faith exercise of corporate powers. Corporate attributes, insulation from collateral suits |
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Term
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Definition
| holding out, reasonable and good faith erliance, equitable considerations. Unlimited personal liability for onwers |
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Term
| Contents in Business Organization Agreements |
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Definition
| description, purpose term of business;capital contributions - money or property; returns to owners - salary, sharing of profits, distributions; accounting - responsibility, methods, types of records and access to; mgmt - equal voice or delegation, approval of actions; restrictions/limitations on actions; settling of disputes - majority, unanimous; death, disability, removal, bankruptcy or withdrawal of owner; insurance - life, liability, property; admission of new owners - majority or unanimous approval; termination of business - situations triggering, procedure, distribution; valuation of business, ownership interest - method of calculation |
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Term
| Main Objectives in Acquiring an Existing Business |
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Definition
| Financially solid enterprise; consistently profitable enterprise; existence of other favorable factors; pay a fair price |
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Term
| Sources of Info used in determining whether to acquire an existing business? |
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Definition
| financial statements;accounting/financial specialists;on-site physical inspections; other company materials/documents;discussions/meetings with company officials; general work/competitive environment |
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Term
| Types of business valuation methods |
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Definition
| liquidation - salvage;book value - equity: assets-liabilities;fair market value;appraised value - independent opinion; mutual agreement - periodic v time of event; capitalized earnings - past/future earnings; |
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Term
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Definition
| ownership interest; last in line for residual interests; issuance limited to amt authorized in AOI; issuance compared to subscriptions; different classes of shares of stock permitted; owners receive income via dividends (not gauranteed) and financial gain on sale; compared to stock options which have right to purchase |
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Term
| Common Stock Interest Protections |
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Definition
| voting rights; right to cumulative voting; right to inspect corp records; preemptive rights; mgmt fiduciary obligations (care/loyalty); any other speical protections in AOI or bylaws |
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Term
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Definition
| in the event of a new issuance of shares, this entitles a s/h to purchsae requisite # of shares so as to maintain his proportionate interest in the corp; imp in any closely held corp in order to protect interest; statutory treatment is either mandatory, opt-in (majority rule) or opt out; |
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Term
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Definition
| regulates terms and conditions on which corporations are permitted to sell stock and pay dividends; traditionally concentrates on s/h (owners) equity section of the balance sheet; state law designed to protect creditors interests who have priority over s/h; today MBCA and other states have rejected and/or changed and allow other ways to protect creidtors such as K restrictions, federal bankruptcy laws, state creditors-protection laws (ie fraudulent conveyances) |
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Term
| Equation for Owner's Equity |
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Definition
| Assets - Liabilities = Owners Equity |
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Term
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Definition
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Term
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Definition
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Term
| Protections to Creditors from s/h undermining their preferred status |
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Definition
| limitatinos on issuance of shares; limitations on declaration of dividends; impoesd personal liability if violated |
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Term
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Definition
| Equity Insolvency and Balance Sheet |
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Term
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Definition
| test for insolvency; assess whether corp can pay debts; assesses whether it can pay dividends and still pay off its debts; no dividends can be paid if the corp would not be able to pay its debts as they become due in the usual course of business |
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Term
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Definition
| insolvency test; uses the assets-liabilities = owners equity formula; the corps total assets would be less than the sum of its total liabilities plus the amount that would be needed if the corp were to be dissolved at the time of dividend distribution |
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Term
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Definition
| a type of dividend where additional shares of stock are distributed to s/h; produces no meaningful change in the financial status of the corp or its s/h;reason for paying this type of dividend is to produce the appearance that s/h that s/h are receiving something when the corp is not in a position to pay a dividend in cash; no limitations |
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Term
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Definition
| when a corporation repurchases its shares from s/h the shares are called Treasury stock; remains issued but is not outstanding; allows corp to resell shares w/o new consideration since consideration for the initial buying/selling was already established; preemptive rights ordinarily do not apply to treasury stock; corp cannot reacquire shares unless it passes the insolvency tests; |
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Term
| What can corp do with cash surplus? |
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Definition
| retain it in savings account; place in highly liquid securities; pay more income/bonuses to employees;pay dividends to s/h; reinvest cash inc orp by purchasing assets; pay off debts; invest cash in securities of other corp; loan money to another corp/person; acquire another corp |
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Term
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Definition
| used to determine whether a particular financial instrument constitutes a security; 3 parts - the investment of money; in a common enterprise; with an expectation of profits to be derived solely from the efforts of the promoter or a third party - formula must be applied in light of the economic realities of the transaction |
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Term
| Private Offering Exemption |
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Definition
| §4(2) of SEC 1933, rule 506; excludes those private offerings in which the potential investor can fend for themselves/protect their own interests; courts consider number of offerers, offerers relationship to eachother and the issuer, number of units offered, size and manner of the offering; intended to provide more specific guidance to issuers;requirements to rely on exemption are no dollar limation cannot publicly advertise, cannot solicit more than 35 non-accredited investors, unlimited accredited investors allowed, |
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Term
| How to determine where a subsidiary is just an alter ego? |
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Definition
| common directors, officers, employees; common business departments/offices; consolidated financial statements/tax returns; parent provides financing or services to subsidiary; parent caused incorporation of subsidiary; parent controls budgets and major expenditures; subsidiary inadequately capitalized; subsidiary's only business is with parent; parent uses subsidiary's property/assets; parent/subsidiary's daily operations combined; subsidiary observes corp formalities; |
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Term
| What are ways other then PCV that s/h can be liable for corp debts? |
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Definition
| direct liability by statute (unlimited personal liability); fraudulent conveyance statutes (transfer set aside); equitable subordination (s/hs creditor status lowered); apparent relation/estoppel (parents/subsidiary situation) - parent holding out that same operation, TP/creditor reasonable reliance; nondisclosure of corp status-undisclosed principal - closely held crop, marjor s/h/corp officer fails to inform creditor |
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Term
| What is the test to determine the corps potential contract liability? |
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Definition
| Scope of authority - actual or apparent authority |
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Term
| what are the two types of actual authority |
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Definition
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Term
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Definition
| the powers and limitations are mandated in the bylaws and resolutions |
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Term
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Definition
| determined based on past conduct, position in the corp (CEO is generally thought to have authority to bind corp); custom - whether corp has allowed person to make similar types of decisions in the past; documents or other indicia of authority; emergency; whatever is usual, incidental, reasonably necessary to carry out agent's responsibility or authority |
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Term
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Definition
| based on the TPs reasonable belief that the person was able to contract on behalf of corp; determined by past dealings (if person has made similar decisions in past and corp has ratified them), position in comp (someone of auth in corp can be assumed to contract on behalf of corp), manifestation, custom; what a reasonable person would objectively believe to be agent's authority and TPs subjective belief |
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Term
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Definition
| authority that is incidental to business, a general manager would be assumed to have authority to contract for corp |
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Term
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Definition
| Corps specific affirmation that it agrees to K |
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Term
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Definition
| determined based on past conduct - if corp has agreed to similar decisions in the past; failure to object - if corp knows about it and doesnt oppose |
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Term
| What should a lawyer consider before BOD meetings? |
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Definition
| was proper notice given; what is the anticipated attendance; was the agenda set; were meeting materials compiled and do they include - last meeting minutes, discussion/supporting documents, draft resolutions prepared, presentation materials included, other reports/information required; |
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Term
| What should a lawyer consider during a BOD meeting? |
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Definition
| ensure that sufficient # for quorum and valid vote; closely follow discussion; be ready for changes to draft resolutions or draft new document or proposal; be prepared to explain legal questions or to make a presentation in summary form; ensure that proper points are made during discussion |
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Term
| What should a lawyer consider after the meeting? |
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Definition
| review the draft minutes of meeting; follow-up on any items or materials requested; document any other matters that need to be taken care of (ie any waivers of meeting notice) |
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Term
| What are all the voting possibilities for BOD? |
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Definition
| committee; majority of all directors (absolute); majority of directors attending meeting (simple:norm); super-majority of all directors (3/4 or 2/3); super-majority of all directors attending meeting; unanimous approval of all directors; unanimous approval of all directors attending meeting |
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Term
| What role do lawyers play regarding s/h? |
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Definition
| help govern s/h powers, rights and compliance matters |
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Term
| What is the majority rule for how many s/h are required for approval? |
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Definition
| all outstanding voting shares (ie absolute majority) |
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Term
| What is the MBCA rule for how many s/h are req for approval? |
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Definition
| majority of all voting shares at the meeting (ie simple majority) |
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Term
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Definition
| each s/h can cast total number of votes (one vote per share) for any given director-candidate, for each open director position |
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Term
|
Definition
| each director-candidate must receive an affirmative vote of the majority of votes cast |
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Term
|
Definition
| director-candidates with the most votes win - can win with just one affirmative vote in an uncontested election |
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Term
| What could s/h have power to do in certain situations? |
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Definition
| initiate corp action; call special meeting; direct interferences w mgmt decision; express opinion or views; make suggestions; amend the AOI or bylaws; remove directors (with or without cause); increase the # of directors; |
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Term
| What are BODs responses to possible s/h actions? |
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Definition
| ignore or delay s/h efforts; agree w efforts and take action at the board level; address the issues on the merits via the s/h process meeting (argue efforts are not in the best interests of the corp); exercise powers conferred by law and/or corp documents (proper exercise of powers vs improper use (undercut efforts)); argue that board actions are protected by BJR |
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Term
| What constitutes a proper s/h purpose for inspecting corp records? |
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Definition
| reasonably related to persons interest as a s/h; financial condition of the company; issuance and value of shares and dividends; mismanagement, misappropriation, wrongdoing; litigation by or against company or its officers; information regarding upcoming s/h meeting (s/h lists) |
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Term
| What constitutes an improper purpose for inspecting corp records? |
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Definition
| business/trade secrets; confidential information; undermine corp; benefit competitor of comp; trash corp in the public; idle curiosity; no business or economic purpose (ie political purpose) |
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Term
| what forms of corporate combinations are there? |
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Definition
| mergers and consolidations |
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Term
| Why would corps merger or consolidate? |
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Definition
| general advantages of size; acquisition of know-how;guaranteed source of supply/market;diversification (reduce risk);reduce competition;tax advantages;financial reporting |
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Term
| What times of corp mergers and consolidations are there? |
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Definition
| vertical; horizontal;conglomerate;market extension |
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Term
| What methods of corp combinations are there? |
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Definition
| formal statutory (short form);triangular;exchange of shares;exchange of stock (or money) for shares;exchange of stock (or money) for assets;direct purchase of shares (tender offers) |
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Term
| What are major issues involved with corp combinations? |
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Definition
| business justifications; what form to use;process to be followed (inside & outside corps); effect of assets and liabilities; consideration to be used (money, shares, property); fairness of combination to s/h (price); whether s/h approval required; whether appraisal (dissenters) right required; how to complete combination (full integration?) |
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Term
| When does acquiring corp assume debts of acquired corp? |
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Definition
| the purchaser expressly or impliedly agrees to assume the sellers liabilities; transaction amts to a consolidation or merger of the two corps (de facto); the purchaser is a mere continuation of the seller; sale is for the fraudulent purpose of avoiding the sellers liabilities; some courts recognize a fifth exception called "product line" which imposes strict tort liability upon the purchaser for defects in products manufactured and distributed by the seller crop when the purchaser corp continues the same product line |
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Term
| What defenses to corps have if they are confronted w a hostile takeover? |
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Definition
| crown jewel; golden parachute; greenmail; lobster trap; pac-man; poison pill; scorched earth; shark repellent; white knight; |
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Term
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Definition
| corp's defense against hostile takeover; a corp sells its most valuable asset (crown jewel) thereby making a takeover less attractive for aggressors |
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Term
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Definition
| corps defense to hostile takeover; when an aggressor acquires a target corp, it usually fires the target corps managers or asks them to retire. Anticipating takeover, the target corp mgmt often establishes lavish termination and retirement benefits. Then, when the aggressor forces them to "jump from the corp plane," their "parachutes" are lined with gold |
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Term
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Definition
| corp's defense to hostile takeover; aggressors using this defense are like blackmailers in the sense that they slowly accumulate shares of the target crp. if the target crp wishes to remain in control of the crp, the aggressors charge it exorbitant prices for the shares |
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Term
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Definition
| corp's defense to hostile takeover; target corp forbids holders of convertible securities - corp bonds or stocks that can be converted into common shares - from exchanging their securities into common shares if the conversion results in the owner holding more than 10% of the voting shares stock. This defense prevents aggressors from targeting s/h w large blocs of voting stock. It is similar to a lobster trap which traps large lobsters bet lets little ones escape |
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Term
|
Definition
| corps defense to hostile takeovers; in the video game, Pac-Man swallows other characters, in business, a target corp may defend against takeover by trying to "swallow" an aggressor in a takeover bid of its own |
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Term
|
Definition
| corps defense to hostile takeovers; a target crp issues shares that can be redeemed for cash if a takeover occurs. This defense makes a takeover unattractive or impossible for aggressors |
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Term
|
Definition
| corps defense to hostile takeovers; target corps make their businesses as barren, useless, and unattractive as a piece of scorched earth by selling off assets or taking out large loans |
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Term
|
Definition
| corps defense to hostile takeovers; target corps often see aggressors as sharks seeking to destroy them. They attempt to repel sharks by amending their AOI to render takeovers more difficult |
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Term
|
Definition
| corps defense to hostile takeovers; just as a white knight rescues those distress, so, too, can a TP rescue a target corp from a takeover. A target crp solicits the "white knight" to make a more favorable offer to target s/h |
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Term
| What are basic characteristics of closely held corps? |
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Definition
| small # of s/h; shares not actively traded (specific restrictions exist); bc shares not actively traded, no ready market price per share; s/h are active in mgmt and control of corp (frequently their main source of income); less observance of normal corp formalities |
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Term
| what are special control problems in closely held corps? |
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Definition
| election of directors (straight v cumulative, class voting); s/h voting arrangements (s/hs voting agreement, s/h trust, s/h irrevocable proxies); restrictions on BOD (s/h agreements regarding mgmt of corp, high voting or quorum requirements); restrictions on transfers of shares (types, requirements to enact); dissension, deadlock and oppression (situations presented, approaches to balance competing interests) |
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Term
| Straight Voting in Closely Held Copr |
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Definition
| each s/h can cast total number of votes (one vote per share) for any given director-candidate, for each open director position - the directors with the most votes win |
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Term
| Cumulative Voting in Closely held corp |
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Definition
| each s/h can cumulate all of his votes (total # of shares X total # of open board positions) and allocate those shares to certain board candidates; this enables a minority s/h to have at least some board representation, provided the s/h holds a required minimum of outstanding shares; statutory treatment - mandatory,opt in, opt out; methods used to dilute - staggering elections, reduce size of board |
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Term
| What are s/h voting arrangements in closely held corp? |
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Definition
| they allow groups of s/h to concentrate voting power rather than act individually - give s/h more power as against other s/h |
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Term
| Problems with s/h voting in closely held corps |
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Definition
| courts are traditionally suspicious about separation of voting power and economic (ownership) interest (voting trust and proxy); advanced decision making forecloses any substantive, meaningful debate; vast majority of jurisdictions allow voting arrangements provided in compliance with state statute (ie proper disclosure) |
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Term
| What are possible restrictions on BOD in closely-held corps? |
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Definition
| appointment and removal of senior officers; compensation of senior offices; establishment and administration of pension plans; major financing decisions (dividends, issuance of stock); higher voting requirements for certain issues; major operational mgmt decisions (relocation); major transaction (sale/purchase of real estate); s/h approval required for certain transactions |
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Term
| What events trigger a transfer of shares in a closely held corp? |
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Definition
| death; disability; decision to leave; retirement;dismissal; transfer within family |
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Term
| Key issues regarding transfer of shares in closely held corp? |
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Definition
| events triggering restrictions; nature/type of restrictions;what requirements need to be met; how is price determined; how should price bye funded? |
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Term
| What are types of transfer of share restrictions in a closely held corp? |
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Definition
| right of first refusal; first option to purchase; consent/approval; buy-sell requirement;flat prohibitions |
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Term
|
Definition
| type of transfer of share restriction in closely held corp; obligates the s/h to first offer the corp or other persons (separately, consecutively, or simultaneously) an opportunity to acquire the restricted shares |
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Term
|
Definition
| Type of restriction on transfer of shares in closely held corp; obligates the corp or other persons (separately, consecutively, or simultaneously) to acquire the restricted shares |
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Term
| Consent/Approval Agreement |
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Definition
| type of restriction on transfer of shares in closely held corp; requires the corp, the holders of any class of its shares, or another person to approve the transfer of the restricted shares, if the requirement is not manifestly unreasonable |
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Term
|
Definition
| restriction to transfer of shares in closely held corp; prohibits transfer of the restricted shares to designated persons or classes of persons, if the prohibition is not manifestly unreasonable |
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Term
| Situations for business valuation methods |
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Definition
| purchasing a business; investing in a business; deciding ownership interests (incoming/departing) |
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Term
| Business valuation methods |
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Definition
| liquidation (salvage); book value (equity; assets- liabilities); fair market value; appraised value (independent opinion, FMV of business or share price); mutual agreement (price per share set by s/h); capitalized earnings (past and future earnings) |
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Term
|
Definition
| corp and main players at a standstill regarding major decision/issue, probably causing serious harm to corp |
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Term
| What are potential deadlock situations? |
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Definition
| even s/h split on election of directors, amendments of AOI or by-laws; even director split on appointment of officer, declaration of dividends, any other major decisions; high quorum or voting requirements (unanimous approval, super majority approval) |
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Term
| What are solutions to deadlocks? |
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Definition
| courts reluctant to resolve corp internal disputes if players are "playing by the rules" as per internal affairs doctrine (state statute, AOI, by-laws) - but courts may consider petition for judicial dissolution under state statute if deadlock causing irreparable injury to corp |
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Term
| What are statutory grounds for judicial dissolution? |
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Definition
| directors deadlocked w/ threat of irreparable injury to corp; directors (or controlling persons) have acted illegally, oppressively or fraudulently; s/h deadlocked reg election of directors; corp assets are being misapplied or wasted |
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Term
| What are inherent weaknesses of s/h in publicly held corps? |
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Definition
| widely dispersed; relatively small investment; relatively small impact; short-term obj/profits; corp issues too complicated; strong tendency to rely on masses; mgmt controls machinery |
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Term
| Types of institutional investors |
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Definition
| pension plans;mutual funds; financial institutions;insurance companies;foundations and endowments; hedge funds; other major corps and investment groups |
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Term
| What needs to be included in a proxy statement for publicly held corp? |
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Definition
| date, place and purpose of s/h meeting; s/h eligible to vote; listing/qualifications of nominee directors; explanation of other matters for s/h approval; recent market price of stock and dividends; senior officers compensation and related programs (stock options, retirement plans); major s/h-dir-officers stock holdings; copy of proxy to be exercised; annual report and recent business activities; financial statements and other related info; s/h proposals and BOD response; |
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Term
| What is required regarding s/h proposals? |
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Definition
| must be drafted as a recommendation or requirement that the corp or BO take action; s/h must own at least $2000 in market value or 1% of shares eligible to vote, for at least 1 year to make a proposal; s/h can submit only one proposal at a time; s/h supporting statement cannot exceed 500 words; |
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Term
| What are types of s/h proposals? |
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Definition
| environmental impact of business; race and/or sex discrimination; human rights; foreign policy; religious discrimination; abortion; stem cell research; election of BOD; increase s/h powers (require s/h approval); altering corp structure; seek more diversity- representation on BOD; seek more outside/ind directors; place limits on executive compensation |
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Term
| What are exclusions for S/H proposals from BOD meetings? |
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Definition
| not a proper subject matter for s/h action (#1 important); would cause a violation of law; is contrary to SEC proxy rules (false or misleading info); relates to personal claim or grievance against corp; is deminimus in nature (not relevant or significant) (#2 important); corp lacks power/authority to implement; relates to corp ordinary business operations(#3 important); relates to BOD election; directly conflicts wiht corps own proposal; corp has already substantially implemented it; substantially duplicates another s/h proposal; resubmission of same proposal within 5 years; relates to specific amount of dividend |
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Term
| How do you determine whether a director is indepedent? |
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Definition
| present or former employee; relative of employee; close friend/associate of corps senior mgmt;financial interest/connection with corp; specific business relation to corp; employe or affiliated with another corp that has relation with sujbect corp; well-established position/view, pro-corp; receiving any compensation/other benefits from corp; |
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Term
| Audit Committee Requirements |
|
Definition
| comprised solely of three or more independent directors who are financially literate (not subj to proxy rules); members must meet SEC stadnards on independence; at least one member must meet SEC financial expert standard |
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Term
| Nominating and Compensation Committee Standards |
|
Definition
| composed solely of three or more independent directors (w limited exception for one outside, non independent dir);company must cerify adoption of charter on nomination process |
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Term
| What are the key board of directors committees |
|
Definition
| executive committee; audit committee; compensation committee; nomination committee |
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Term
|
Definition
| imposes more federal requirements on traditionally state governed matters - ie officers and directors conduct; cuts across different areas - designed to correct noted deficiencies (ie auditing, reporting, controls, lawyers); it is not a complete solution to many existing problems in corp world |
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Term
| What are the major provisions for SOX in title I? |
|
Definition
| established board to oversee audit of public companies, estbalish audit report stds (quality control), investigate public accounting firms & enforce compliance with applicable laws, rules, standards; a non profit corp (not a gov agency) consisting of 5 full-time independent members; unlawful for any public accounting firm not registered w teh board to prepare or issue any audit report or an issuer; SEC is responsible for general oversight of the board |
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Term
| What are the major provisions for SOX in title II? |
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Definition
| registered public accounting firms that perform any audit for an issuer are prohibited from, (unless exempted from performing any non-audit services) bookkeeping, financial info systems design and implementation, appraisal or valuation service, internal auditing outsourcing services, mgmt or human resource functions, investment bnaking services, legal services; all auditing services and non-audit services must be pre-approved by the issuers audit committee; no registered public accounting firms can provide audit services to an issuer if its lead or reviewing audit partner has performed audit services in each of hte last 5 years or if a ceo, controller, cfo or equivalent person was employed by the accounting firm within one year;registered public accounting firms that perform any audit service shall timely report certain matters to the audit committee |
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Term
| What are the major provisions for SOX in title III:Audit Committees? |
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Definition
| requires issuers compliance with audit committee standads as established by SEC; issuers audit committees are direclty responsible for the appointment, compensation and oversight of the work of any registered public accounting firm employed by the issuer; each member of the audit committee shall be a member of the issuers BOD and otherwise independent of the issuer; audit committees are required to establish procedures for hte receipt, rentention and treatment of complaints regarding the issuers accounting, internal accounting controls or auditing thereof |
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Term
| What are the major provisions for SOX in Title III: Corp Responsibility |
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Definition
| requires issuers' CEO and CFO or equivalent officer to ceritfy in each quarterly and annual financial report filed with sec that the signing officer has reviewed the report, based on officers knowledge the report does not contain any untrue statement of material fact and is not misleading; prohibits any officer or dir of an issuer to improperly influence, coerce, manipulate or mislead, any accountant engaged in the performance of an audit of the financial statements; requires attorneys in accordance with SEC rules setting forth minimum standard of professional conduct to report evidence of a material violation of securities law or breach of fiduciary duty to the subject issuer's general counsle of CFO |
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Term
| What are the major provision in SOX title IV:Enhanced Financial Disclosure? |
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Definition
| requires sEC to issue rules requiring disclosure of all material off balance sheet transactions and relationships that may have an affect on issuers financial condition, the presentation of pro forma financial information that is misleading, and in which can be reconciled with GAAP; requires SEC to prescribe rules mandating the inclusion of an internal control report and assessment thereof within required annual reports |
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Term
| What are the main provisions in SOX Title IV:Corp Responsibility? |
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Definition
| requires issuers' CEO and CFO or equivalent officer to ceritfy in each quarterly and annual financial report filed with sec that the signing officer has reviewed the report, based on officers knowledge the report does not contain any untrue statement of material fact and is not misleading; prohibits any officer or dir of an issuer to improperly influence, coerce, manipulate or mislead, any accountant engaged in the performance of an audit of the financial statements; requires attorneys in accordance with SEC rules setting forth minimum standard of professional conduct to report evidence of a material violation of securities law or breach of fiduciary duty to the subject issuer's general counsle of CFO |
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Term
| What is a directors duty of care? |
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Definition
| as a fiduciary, must exercise reasonable care in carrying out responsibilities; devote necessary time; attend meetings and be prepared; be attentive, participate in discussions;keep informed, maintain own records/materials; reasonably rely on others (reports, briefings); make inquiry, ask questions if necessary; ask for supporting documentation, if needed; exercise good judgment in voting/not voting |
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Term
| MBCA rules on Directors Duty of Care |
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Definition
| level of performance expected of every director in carrying out his duties and responsibilities on the board; mainly aspirational guidelines re what director should do in a given situation;does not deal direclty with the liability of a director - failure to adhere to a standard does not automatically result in liability |
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Term
| DE rules re Directors Duty of Care |
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Definition
| contains no specific provision on the required standard of care for directors, or when directors will be liable; places maximum discretion and judgment in judges |
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Term
| In what situations does the BJR apply? |
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Definition
| to recover for corp losses (deriviate suits); to recover for s/h losses (direct suit); to recover fo rother parites losses (ie creditors/employees); to reverse BODs specific decision; to require BOD to make specific decision or take action (specific performance); to prevent BOD from making a decision or take action (injunction);to impose personal liability - monetary damages-on the individual directors for their action/inaction; to remove directors from the BOD |
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Term
| What are justification for BJR? |
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Definition
| s/h in making investements place trust in mgmt and fully understand the risk of poor decision making; inapprorpiate for a court to make an after the fact judgment far removed from actual situation and decision; court are ill equipped, lacking in expertise/experience, to properly assess/evaluate complex business decisions; courts constant interference with mgmt decisions may have an adverse effect on future decision making and it may result in overly cautious approach by mgmt; s/h challenging mgmt decisions present an in house dispute, courts are not willing to resolve all such disputes, courts will accept mgmt judgment unless a significant problem is at issue (ie gross negligence, conflicts of interest) |
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Term
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Definition
| s/h in making their investments expect mgmt to carry out fiduciary responsibilities to act with due care and in the best interests of the corp; bjr unduly protects BOD from liability for their negligent conduct, all fiduciaries owe a duty to exercise reasonable care to their principals; no legitimate reason for an exception for well qualified, highly compensated mgmt, when substantial amts of other persons money is at risk; courts, in exercising their judicial oversight role, always review parties conduct (action/inaction) after the fact, nothing new in analyzing dir conduct; great judicial oversight is best way to ensure accountability for being entrusted with substantial amts of investments; bjr represents a judicial cop-out from analyzing complex business transactions, if necessary greater reliance should be placed w managerial /financial/accounting experts |
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Term
| Limitations on directors liabilty |
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Definition
| statutory exculpations - affect TPs ability to sue, corp charter adoption - may eliminate or reduce potential liability, not self-executing requires corp action, requires s/h approval, most state statutes place limits on ability, allows s/h to decide proper level of conduct; statutory std of conduct - s/h approval not required; indemnification - provided in corp documents or private agreement, corps promise to reimburse director for either litigation expenses or personal liability, may apply to all proceedings: litigation/investigation; insurance - corps pay premium for coverage, policies protect against contingencies |
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Term
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Definition
| one who is not a party to the subject transaction, does not have a direct or indirect interest therein, and is not subject to the dominion or control of an interested director - a person who can cast an objective independent and other fair vote on subject transaction |
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Term
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Definition
| party to the transaction; has a business, financial or family relation to a party in the transaction; any of the above individuals have a material pecuniary interst in the transaction; is subject to a dominating controlling influence by a party to the transaction, or one who has a pecuniary interest; the persons judgment could be reasonably expected to be affected |
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Term
| What should s/h prove before challenging a BOD decision? |
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Definition
| BOD not informed; BOD grossly negligent; BOD acted in fraudulent and/or illegal way; BOD did not act in good faith; transaction not fair to corp; transaction constitutes corp waste; full disclosure of director's conflict was not made; BOD action is invalid because no quorum existed (no majority of disinterested Dir present); BOD action invalid bc no majority approval (maj interested and/or lacked independence) |
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Term
| What are possible effects of valid s/h approval? |
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Definition
| full effect:complete defense; shift substantive standard: fairness to waste; shifts burden of proof to s/h to show unfairness; no effect: burden of proof on BOD to show fairness to corp; BJR applies |
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Term
| Possible ways to attach s/h approval of interested dir transactions? |
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Definition
| s/h acted in fraudulent and/or illegal way; s/hs action is invalid because no quorum existed (no majority of disinterested s/h present); action is invalid bc no majority approval vote (majority interested and/or lacked independence); full disclosure of conflict was not made; transaction was not fair to corp; transaction constitutes corp waste; |
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Term
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Definition
| corp intereset of expectancy; similar line of business; overall fairness |
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Term
| What factors are relevant in determining whether a corp opportuniy was usurped? |
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Definition
| how it was discovered (business or personal capacity);use of corp assets, facilities, time; corp financial ability to acquire; mann/extent of disclosure to corp; has corp reacted to opportunity (approved, rejected, pending); degree of harm or benefit to corp; has director acted in good or bad faith; nature of dir relation to corp |
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Term
| What are potential remedies for usurping corp opportunity? |
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Definition
| no need to show corp harm; assume contorl of corp opportunity; place sontructive trust on profits; award damages if appropriate (loss of key personnel) |
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Term
| Forms of executive compensation |
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Definition
| salary; bonuses; pension plans - consultant in retirement; stock options |
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Term
| Perks of executive compensation |
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Definition
| corp facilities/property; country club membership; health/sports club; sports tickets and suites; vacation homes; home security/chaffeur; business trip; general prestige-leader; political activities/events; life insurance/health benefits; low/no interest loans (SOX prohibits); maid service/babysitting expenses; investment advice; invitations to speecial events/parties/receptions; spouse/children benefits (tuitiion money) |
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Term
| SEC Rules for Executive Compensation |
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Definition
| requires disclosure in corps proxy statements of designated compensation info of ceo, fgo and top three of highest paid officers; requires narrative to s/h of how exec pay is set and earned (compensation discussion and analysis) |
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Term
| SOX Rules for Executive Compensation |
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Definition
| prohibits personal loans to directors and senior officers; requires CEO and CFO and certain other officers to reimburse corp for any incentive pay based on misstated financial statements |
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Term
| Dodd-Frank Act rules for executive compensation |
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Definition
| requires non-binding s/h advisory vote on exec comp programs administered via proxy statement disclosures; requires non-binding s/h advisory vote on golden parachutes mandatory disclosures in proxy statements related to requests for s/h approval of a merger or other corp transaction; requires stock exchange to adopt stds requiring corp to have independent exec comp committees - requires committees to assesss the independence of compensation consultants and other advisers to the committee; directs SEC to adopt rules requiring corps to disclose the relationship btw exec comp actual paid and the corps financial performance |
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Term
| What standards of review do courts apply to executive compensation? |
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Definition
| BJR; fairness standard; waste standard; intermediate of proportionality review |
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Term
| What are elements of fraud for insider trading? |
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Definition
| deception: false or misleading statements of material fact; scienter: intention to deceive, manipulate, defraud; reliance: investors reasonable reliance; causation - reliance caused teh investors loss |
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Term
| What is covered in the term insider trading? |
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Definition
| material inside info: important decision; corp insiders, permanent + temporary; tippees who receive information from insiders knowing confidential nature ofinfo and disclosure is breach of fiduciary duty; if covered person must either disclose or abstain from trading |
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Term
| Common Law rules for insider trading |
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Definition
| insiders silence regarding important inside information is actionable only if under a duty to disclose; duty to disclose may arise in face to face transaction but not in impersonal markets transactions (stock exchanges) |
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Term
| Federal Law rules on insider trading |
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Definition
| persons possessing material inside info if trades without disclosure actional only if duty to disclose; duty arises becuase existence of a relationship with corp giving access to information and inherent unfairness of taking advantage of special access |
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Term
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Definition
| a court may not place restrictions on how much money a corporation gives to charity |
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Term
| Radaszewski v Telecom Corp |
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Definition
| Corp gave subsidiary millions in liability insurance and the court said insurance can meet financial responsibility policies |
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Term
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Definition
| met factors showing that there was a "shell corp" involved - there were no corp formalities and undercapitalization - bc this was a "shell corp"/alter ego doctrine applied, the veil can be pierced |
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Term
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Definition
| a parent corp can be held liable for the acts of another if the subsidiary corp is organized or operated as a mere tool or business conduit for parent |
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Term
| Single Business Enterprise Doctrine |
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Definition
| a corp can be held liable for acts of another if they are not operated as separate entities, but integrate their resources to achieve a common business purpose |
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Term
| Summit Properties v New Technologies |
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Definition
| Apparent authority can come into play when the principal "fails to disapprove of the agents act or course of action so as to lead the public to believe that his agent possesses authority to act in the name of the principal |
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Term
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Definition
| s/h have right btw annual meetings to elect directors to fill vacancies. s/h also have right to remove directors for cause. directors have the right to to defend themselves by being allowed access to corp proxy process. Dir who are attacked have right to use corp funds when they defend themselves |
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Term
| Blasius Industries Inc v Atlas Corp |
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Definition
| a BOds act is inconsistent with its fiduciary duties if it goes against what a majority of the s/h want. BJR does not apply when the actions (even if done in good faith by disinterested directors) are done for the primary purpose of thwarting a s/h vote |
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Term
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Definition
| The source of documents and the manner in which the corporation obtains them have little or no bearing on a stockholder’s inspection rights. If activities that occurred before the purchase date are reasonably related to the stockholder’s interest as a stockholder, then the stockholder should be given access to records necessary to an understanding of those activities. |
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Term
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Definition
| If corporation is selling less than "all or substantially all" of its assets, it does not need to get s/h approval. The corporation only needs to get a s/h vote when it sells all or substantially all of its assets. |
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Term
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Definition
| deals with question of what to do with someones shares when they die; here, court ordered corporation to buy out P's stock - usually you can only order someone to sell stock, not buy it but here the court felt this was the only rational approach |
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Term
| TSC Industries v Northway |
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Definition
| omissions are only material if it can be shown that there is substantial likelihood for a s/h to consider the fact important when deciding how to vote. Here, court said that explanations of how terms of proposal were calculated does not amount to a material fact; |
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Term
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Definition
| CBRL announced policy against employing gay persons. NYCer filed a s/h resolution against the policy and it was to be included in CBRL's proxy statement. CBRL excluded resolution saying it was "ordinary business" - SEC issued a "no action" letter to CBRL saying that all employment related s/h proposals raise "ordinary business" issues within meaning of SEC regulations and therefore such proposals may be excluded. SEC later reversed this saying it will consider employment related s/h proposals on a case by case basis. NYCer submitted same resolution which CBRL included in proxy statement. CBRL mgmt opposed resolution but 58% of s/h approved it. Mgmt reacted by adopting anti-discriminatory policies relating to persons sexual orientation. FIRST TIME SOCIAL POLICY S/H RESOLUTION HAS RECEIVED A MAJORITY VOTE WHEN MGMT OPPOSED RESOLUTION. From now on - whether something constitutes ordinary business will be determined by whether the policy will raise significant social policy issues |
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Term
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Definition
| DE Supreme Court found that the BOD acted with gross negligence because it failed to thoroughly inform the directors and s/h of the details of the merger. Saying the "s/h approved the merger" does not excuse dir from acting out their duty to fully disclose actions of material value. Dir would be protected if they relied on information from corp officers but here there was no such information given. Directors duty to disclose an informed business judgment is a duty of care NOT loyalty. |
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Term
| Remillard Brick v Remillard Dandini Corp |
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Definition
| issue with duty of loyalty. Director cannot, at the expense of the corporation, make an unfair profit from his position. When a transaction greatly benefits one corporation at the expense of another, it should be set aside (especially if it personally benefits the majority s/h). Duty of loyalty says the directors cannot use his position to benefit himself at the expense of the corp. |
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Term
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Definition
| P accused D of self dealing and breaching duty of loyalty because he was negotiating a deal from both sides. DE Rule: if directors knew about conflict and majority of disinterested directors still voted affirmatively then it is protected by BJR |
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Term
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Definition
| an exchange of corp assets for consideration so small as to lie beyond the range at which a reasonable person might be willing to trade; if you dont use corp assets properly then it constitutes waste and if it constitutes waste it violates BJR |
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Term
| Reasonableness Test for Charitable DOnations |
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Definition
| nature of recipient organization; substantive merits: specific performance of donation; relative size + nature of donated assets; financial condition of corp; "cost" to s/h; procedural process: approval mechanism -BJR; overall goodwill/benefits to corp; hidden agenda or benefit to corp individual(s) |
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Term
| Good Points for Charitable Giving |
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Definition
| long run benefit; show that good citizen; build up good will; fulfill needed $ void; tax deduction; enhance customer relations; gain respectability |
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Term
| Bad Points for Charitable Giving |
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Definition
| No immediate benefit; buy silence; quid pro quo, tie-ins; owners (s/hs) no role; no disclosure; use corp $ for personal interests; advance personal ambitions, prestige |
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Term
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Definition
| must get an auditors opinion in a publicly held corp. based on document/evidence/% of transactions. they arent looking for fraud |
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Term
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Definition
| spread cost over useful life in which it will produce profits. allow mgmt to decide with broad discretion |
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Term
| Indirect Cash Flow Statement methods |
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Definition
| start with income statement and make adjacent- 95% is done with adjacent |
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Term
| Direct Method for Cash Flow Statement |
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Definition
| look directly @ expense and cash flow |
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Term
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Definition
| if you renege on bond, creditor can gain peaceful possession of property. does not require litigation which is a significant benefit. Preferred bc of no litigation |
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Term
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Definition
| loaned or bought loans from corp and if corp reneges on bond the loanee can sue |
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Term
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Definition
| not good because corp might redeem bonds at a bad time financially |
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Term
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Definition
| can convert to preferred or common stock |
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Term
| Qualitative Issuance of Shares |
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Definition
| corp can only accept adequate consideration for assets |
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Term
| Quantitative Issuance of Shares |
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Definition
| cannot issue shares for less than par value |
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Term
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Definition
| for every one share you have you get 1 free stock. no $ leaving corp so not regulation required |
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Term
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Definition
| to increase overall profitability, performance or simple investment; improve efficiency, add special capability, related product |
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Term
| Formal Statutory Merger Method |
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Definition
| follow statutory requirements: BOD plan approval, s/h of both merging corps approval, submit plan to state, state approve, effect combination, satisfy any appraisal rights |
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Term
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Definition
| create subsidiary in acquiring corp. Subsidary merges with acquired corp and subsidiary is survivor. BOD approval required, s/h approval of both corps required. Parent corp is not liable for debts of acquired corp. Parent corp s/h dont need to approve transaction |
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Term
| Why is triangular merger so popular? |
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Definition
| parent corp is not liable for debts of acquired corp and parent corp s/h dont have to approve transaction |
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Term
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Definition
| A acquired B's shares. B s/h need to approve. B is now subsidiary of A. B retains liabilities |
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Term
| Exchange of Stock for Assets (Successor Business Doctrine) |
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Definition
| A trades stock for B's assets. B's s/h must approve. B no longer exists. B is now s/h of A |
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Term
| Outright Purchase Assets for Cash |
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Definition
| A buys B's assets. B can use $ to pay debts or s/h dividends. B no longer exists. B's s/h must approve. |
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Term
| Directors DOL WEAK Judicial Approaches |
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Definition
| read common law into statute, look @ whole fairness - Remilliard case |
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Term
| Directors DOL SEMI STRONG Approach |
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Definition
| Shifts burden of proof from D to P but retains a fairness test ie courts will consider both procedure and substance of transaction. If disinterested s/h approve the transaction, a waste test will usually apply instead of fairness |
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Term
| Directors DOL STRONG Judicial Approach |
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Definition
| precludes or severely limits judicial inquiry if there has been statutory compliance including ind directors approval |
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Term
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Definition
| If a corporation is unable to prove it is de facto then defense could still inquire as to whether the participants were acting on behalf of or as a corp. Persons who have dealt with a business as though it were a corporation may not later protest when attempting to hold s/h individually liable on grounds that the corp had been defectively formed. |
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Term
| Subscription Common Stock |
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Definition
| agreement to purchase # of shares at a set price at a later date. Usually a down payment is required and typically payments are on an installment basis |
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Term
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Definition
| gives buyer the right but not the obligation to buy or sell a stock at a set price within a certain of time or by a certain date |
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Term
| Private Offering Exemption |
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Definition
| SEA of 1933 exempts from registration and prospectus delivery requirements transactions by an issuer not involving a public offering. An offering is private if none of the offerees needed the sort of protection a registration statement would afford. This would be true if all offerees were shown to be able to fend for themselves and if they also were shown to have access to the kind of information which registration would disclose. Each purchaser must be sophisticated and knowledgeable enough to evaluate the merits of the offering. |
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Term
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Definition
| subordination of the claims of s/h including a parent corp in favor of those outside creditors |
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Term
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Definition
| Type of merger where A and B combine to create a new company, C |
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Term
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Definition
| Part of duty of loyalty. Includes conduct motivated by subjective bad intent and by an actual intent to harm the corp. Intentional dereliction of duty and a conscious disregard for one's responsibilities would also constitute a lack of good faith because it shows more culpability than the gross negligence of duty of care |
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Term
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Definition
| Corp had to pay damages bc employees violated the law. Derivative suit brought against BOD for breaching their duty of care by failure to monitor the employees. Court found no breach of duty of care - no evidence of bad faith in monitoring or a knowing violation of the law. Court found dir have a responsibility to assure that an adequate system exists for receiving corp information and reporting, including compliance with relevant statutes and regulations. Even if there is no reason to suspect a lack of compliance, some monitoring system must be in place in order to satisfy the obligation that directors need to be informed for both legal compliance and decision making. |
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Term
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Definition
| MBCA approach to DOL. takes strong form by limiting judicial scrutiny of fairness if there is either disinterested board or s/h approval. K involving a conflicting interest will not be voidable if approved by disinterested s/h or dir or if the int dir proves fairness |
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Term
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Definition
| Dealt with issues of Good Faith and BJR. Dir received enormous severance package from Disney after serving just over a year. The severance package was given by the dir's friend and Disney's CEO. First, the case was dismissed based on a 12b6. Then s/h activated their right to inspect corp records. Second, complaint was filed and not dismissed. The CEO and fired director could not get along and it was a problem for corp. Ps said that the compensation in severance package was too big and breached duty of care, good faith and waste. This was a case of malfeasance - failure to act. Court said process failed to meet best practice standards where the documentation should have indicated that the compensation committee board understood the potential compensation under different scenarios including the magnitude of the severance package for termination w/o cause. Court found sufficient evidence to say that they acted in an informed manner and thus no violation of duty of care. Court said that actin gin bad faith needed to be more than acting w/o information adn inadequate deliberation which was essentially a due care analysis. Court said good faith was distinguishable from duty of care and would require more proof. Set standard for good faith defintions. |
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Term
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Definition
| P claim the dir should have known about the liability and that they had a duty to implement compliance with the law, especially since the corp had agreed to a consent order 20 years earlier to not violate the antitrust laws. Court found no duty of care liability and in broad language indicated that unless they had reasons to suspect the existence of a violation, directors have no obligation to install a system of monitoring or reporting. Dir can rely on the honesty and integrity of the employees. This has been changed though - modern rule is that dir should implement procedures and programs to assist in their monitoring role. |
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