Advanced Corporate Law
Matheson
Spring 2011
I CAPITAL STRUCTURE: ISSUANCE AND ATTRIBUTES OF SECURTIES
A. OVERVIEW: STATUTES/CONCEPTS TO ALWAYS CONSIDER
Ø corps must file articles of incorporation
Ø peeking order (higher controls lower):
Constitution
Statutes
Articles of incorporation
Bylaws
Board resolutions
1. Purposes (§302A.101)
A corp may be incorporated for ANY business purpose, unless otherwise required MN law. Default: unless different in articles, corp has general business purposes.
· Business purpose is any purpose intended to benefit shareholders.
2. Articles (§302A.111)
Required Provisions (subd. 1) The articles SHALL contain: (a) name of corp; (b) address of registered office & name of registered agent; (c) authorized share: aggregate # of shares corp has authority to issue; (d) name/address of each incorporator.
Statutory provisions that may be modified only in ARTICLES (subd. 2)
(e) simple majority vote for board of directors for Bd action
(o) simple majority vote for SH action, except plurality vote (215, 1) or absolute majority (437, 1)
(note) if there is a discrepancy between SH & Bd on bylaws = SH prevail
Statutory Provisions modified either in articles or bylaws (subd. 3)
3. Efficient Capital Market Hypothesis: (Chicago Boys) Concept that market price of publicly-traded security will reflect all of the information that is available to the market (and will be accurate).
4. Tests for directors’ conduct:
normal business decisions à business judgment rule (deference given to board’s decision)
duty of care: process of informed decision making
proper info in front of you for making the decision (getting right info)
asking the right questions of those presenting information to you that isn’t w/in your knowledge active in process of decision making)
**if board exercises its fiduciary duty of care, then the business judgment rule applies
conflict of interest transactions à intrinsic fairness test (scrutinize conflict of interest transactions & require a showing of fairness)
duty of loyalty
conflict of interest b/w board member & corp
1 or more directors dealing directly w/ corp
mgmt group is determining to take corp private
board member has some asset that is of value to the corp & the corp wants to buy that asset
Presumptively suspect transaction & will be upheld if shown that transaction is fair & reasonable via an intrinsic fairness test (§255 subd 1a)
adoption of defensive measures à intermediate scrutiny test
Unocal – because of potential for conflict of interest (used both to protect SHs & entrench current mgmt), the intermediate scrutiny test was adopted (p. 105 Supp.)
(1) corp had reasonable grounds to believe that the hostile bid constituted a threat to corp policy
usually this means the price was too low
(2) the defensive measures adopted where proportionate (reasonable) in relation to the threat the board reasonably perceived
dead hand & slow hand provisions are disproportional to a hostile bid because preclusive (Carmody (p. 94 Supp.) & Quickturn v. Mentor Graphics (p.96 Supp.))
B. Authorization and Issuance of Shares:
Ø Default provision for Issuance of shares (§ 401: Authorized Shares)
v Board may authorize (sub. 1): Board has exclusive power to issue (only when authorized by the board) subject to restrictions in articles
1. securities and rights to purchase securities
v Terms of shares: All shares of corp:
1. (a) shall be of one class & one series unless articles establish or authorize board (blank check authority) to establish more than 1 class or series.
2. (b) shall be common shares entitled to vote & shall have equal rights and preferences unless articles provide otherwise.
3. (c) par value 1 cent default unless articles specify otherwise
v Procedure for fixing terms (sub. 3): if articles allow (subject to restriction in the articles), resolution approved by board (simple majority). May change default terms of shares (designation of class, fixing the rights & preferences of class)
v Specific terms (sub. 4): redemption, cumulative, distribution preference, convertible, voting rights (full, part, or no)
Ø Subscription for Shares (§403)
Share subscription agreement: agreement by a potential SH to invest under certain conditions (ex. that the person wouldn’t be paying any more than anyone else for their shares (par value)) (irrevocable offers to invest in a nonexistent entity); future investor subjects him/herself to a call
relatively rare today
Use this to amass capital for new corp
Signed writing (subd. 1): subscription must be in writing & signed to be enforceable (statute of frauds); applicable even before the corp is formed
Irrevocable period (subd. 2): subscription is irrevocable for a reasonable amount of time (statutory default of 6 months)
Payment; installments (subd. 3): Subscription will be paid at the time(s) determined by the Bd i
ctor or SH present & entitled to vote, who failed to vote against the issuance
Ø person to whom the shares were issued
Ø successor or transferee of interests described in (b)(1) & (2)
3. (c)
Ø Pledgee or holder of shares in violation of (a) isn’t liable if surrenders shares to corp.
Ø Pledgee or holder of shares in violation of (a) is only liable in that capacity
Ø equitable contribution from all other person liable under (b)
Ø statute of limitations for action under (b) is 2 years for date of share issuance
Ø Murphy v. Country House I (MN)
v Corp issue 250 shares in exchange of the certain franchises and trade names held by Johnson. P (Murphy) was diluted from ¼ to 1/9.
v Claims: Plaintiff has made two complaints:
1. the president transfers his shares to his son. There is no statutory restriction on it, stock can be transferred freely presumably, but can be restricted by articles, buy-sell agreement. Once the shares are there, just like property of the person himself–so this is not a proper claim.
2. Inadequacy of consideration:
Ø Barred by SOL
3. Fraudulent misrepresentation of the legal significance of the transaction.
Ø Not identify J is the source and is hearsay
Ø Argue of deliberate effort to conceal
v Court says: J must have knowledge of the misunderstanding
4. Fiduciary relationship
Ø Must be established by “substantial evidence”
Ø Disparity of business experience and invited confidence could be a legally sufficient basis for find a fiduciary relationship.
Ø MBKS v. Reddy (DL)
v Stock issued below par value: voidable rather than void
1. Two equitable consideration
Ø Protection of third parties such as creditors
v If void, creditor could not sue for the difference render DL 162 meaningless
Ø Protection of stockholder
v Can pay additional up to par value and legally own the stock.
2. Voidable stock has voting rights
v If no consideration, then void:
v Here: no consideration, not third parties
