Capital Structure
Saturday, April 26, 2008
10:40 AM
Shares and Distributions
Issuing Shares
MBCA – 302A.111
Articles of Incorporation
Total Number of Shares Board has Authority to issue (sub. 1(c))
No Par Value required
DGCL 102
Certificate of Incorporation
Only one class of stock allowed
Total number of authorized shares ((a)(4))
Par value required
Restrictions on Issuing Shares:
Qualitative – what kinds of consideration can the shares be issued for?
MN 405(1) – Can be issued for any consideration
Tangible or intangible property “To be received” must be in writing (405, sub 1(a))
Future services can be used as consideration (Id.)
Board determination of appropriateness of consideration is presumed proper if made in good faith and by following reasonable accounting practices (Subd. 2)
DE 152 – Cash, or any tangible or intangible property
Absent fraud, the board decision is final
Written agreements are not required
Quantitative – How much can the shares be issued for
MN 405(2)- No par value, must be issued for fair value
MN 553(1)(b) – Treasury stock becomes authorized but un-issued shares
MN 425 – Shareholders are only liable to pay the full consideration for which the shares are issued
DE 153 – must be issued for par value or greater
No par value stock
Some states tax based on par value and will assume a par value if none is stated
Treasury stock does not have to issue for par value, but must be issued for fair value
DE 162(a) – same as MN 425
Other
Preemptive rights
MN – default rule (413, sub. 1)
Only applies when issued for money (sub. 4(a))
Preemptive rights are only applicable within the same class, or stock convertible into the same class (413)
DE – must opt-into (102(b)(3))
Although no preemptive rights is the default, can always contract around the default (Benihana)
Fractional Shares
MN 423/DE 155 – Allows for the issuance of fractional shares
Fractional shares need not be treated equally to whole shares (Applebaum v. Avaya)
Reverse stock split/cash-out of fractional shares
No dissenters appraisal rights in MN or DE
MN 423(2) – bright line test for determining validity:
Can’t pay cash for fractional shares if that action would result in a cancellation of more than 20% of the outstanding shares of a class or series
DE – Using fractional shares to eliminate minority holders is an open question (See p. 815 – 16 DCA)
Shares and Distributions Cont.
Board of Directors
MN 201 & DE 141
The business and affairs of the corporation shall be managed by or under the board of directors
302A.401
Subd. 1 – The board must authorize the issuance of securities
Subd. 2 – All shares are presumptively of one class or series
MN 251
Subd. 1 – Directors must act in good faith
Subd. 2/DE 141(3)(e) – directors may rely on the expertise of others
Subd. 3 – Presumption that a present director who does not dissent approves of a transaction
DE law does not view abstention as assent
Subd. 4/DE 102(b)(7) – allows elimination of liability for breach of fiduciary duties, EXCEPT breaches of fiduciary duties of loyalty
Subd. 5 – Allows a director to consider other con
orate powers. That they may be mistaken, that other courses of action might have differing consequences, or that their action might benefit some shareholders more than others present no basis for the superimposition of judicial judgment, so long as it appears that the directors have been acting in good faith. (MN – 251)
1. Brane – Cannot act in bad faith/must act with care
b. Limiting Director Liability
i. DE – 102(b)(7) / MN – 251(4)
1. Cannot limit liability for duty of loyalty or failure to act in good faith
c. Duty of Good Faith
i. MN 251(1)
1. Recognizes the “Triad” of fiduciary duties
ii. DE it is not it’s own fiduciary duty
1. It is a subpart of the duty of loyalty
iii. To avoid an after the fact determination of fairness, you can insulate the challenge through full disclosure of the conflict and the material facts, and independent approval
d. Fiduciary duties (See other outline, section e)
