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Business Associations/Corporations
University of San Diego School of Law
Wonnell, Christopher T.

Corporations Outline

Professor Wonnell
Spring 2008

I. Economics of the Firm & General Background. 9
A. Trade off between optimal risk allocation and control of agency costs. 9
B. Optimal allocation of non-controllable risks. 9
C. Agency costs. 9
II. Financial Accounting and Valuation. 10
A. Balance Sheet10
B. Income Statement10
C. Statement of Cash Flows. 11
D. Valuation. 11
III. Choice of Organizational Form.. 12
A. General Partnership (Revised Uniform Partnership Act)12
B. S Corporation (Subsection of the Corporate Tax Code)12
C. Limited Partnership (Revised Uniform Limited Partnership Act)12
D. Limited Liability Company (Uniform Limited Liability Company Act)13
E. Limited Liability Partnership. 13
F. Corporations. 13
IV. Financial Structure of the Corporation. 14
A. Equity versus Debt14
B. Authorization and issuance of Equity Securities. 15
i) RMBCA § 6.01 – Authorized Shares. 15
ii) RMBCA §2.02(a) – Articles of Incorporation. 15
iii) RMBCA §6.30 – Shareholders Preemptive Rights. 15
C. Regulation of “Legal Capital”. 15
RMBCA §6.21 – Issuance of Shares. 16
RMBCA §6.40 – Distributions to Shareholders. 16
V. Regulation of Securities Issuance. 17
A. Federal Statutes Governing. 17
Securities Act of 1933. 17
Securities Exchange Act of 1934. 17
B. Registration of Public Offerings of Securities. 17
§5 of the 1933 Act17
C. Exemption from Registration. 18
§4(2) of the 1933 Act18
Regulation D – 1933 SEC Rules. 18
D. Civil Liabilities for Violation of the 1933 Act20
§11 of the 1933 Act – False Statements in a Registration Statement20
§12 of the 1933 Act – Unregistered Public Offering. 20
VI. Limited Corporate Shareholder Liability (Piercing the Corporate Veil”. 21
A. Policy Considerations. 21
B. Piercing the Corporate Veil21
RMBCA §6.22 – Liability of Shareholders. 21
C. Parent-Subsidiary Piercing. 21
D. Tort versus Contract Piercing. 22
Enterprise Liability (Walkovsky v. Carlton)22
VII. Management and Control of the Corporation. 23
A. Agency Issues: Authority of Officers. 23
RMBCA §8.01(b) – Officers are under the authority of the Board of Directors.23
RMBCA §8.41 – Functions of Officers. 23
B. Authority of Directors. 23
RMBCA §8.22 – Notice. 23
RMBCA §8.23 – Waiver of Notice. 24
RMBCA §8.24 – Quorum and Voting (Actions by the Board)24
RMBCA §8.10(a)(3) – Quorum when filling Board Vacancies. 24
RMBCA §8.21 – Action Without a Meeting. 24
RMBCA §8.25 – Committees. 24
VIII. Closely Held Corporations. 25
A. Economics of a Closely Held Corporation. 25
B. Cumulative Voting. 25
RMBCA §7.28(b) – Cummulative Voting. 25
C. Class Voting. 25
D. Shareholder Agreements. 25
RMBCA §7.31 – Voting Agreements. 25
Ringling Brothes Case – Specific Performance of Voting Agreement26
RMBCA §7.30 – Voting Trusts. 26
RMBCA §7.22 – Proxies. 26
E. Shareholder restrictions on the Discretion of the Board of Directors. 26
New York Case Law.. 26
RMBCA §7.32(d) – Shareholder Agreements. 27
F. Super-Majority Voting. 27
RMBCA §7.27 – Greater Quorum or Voting Requirements for Shareholders. 27
G. Restrictions on the Transfer of Shares (Buy-Sell Agreements)27
RMBCA §6.27 – Restriction on Transfer of Shares and Other Securities. 27
H. Oppression of Minority Shareholders. 28
RMBCA §14.30(2) – Grounds for Judicial Dissolution. 29
RMBCA §14.34 – Election to Purchase in Lieu of Dissolution. 29
IX. Shareholder Rights. 30
A. General Shareholder Voting Rights. 30
RMBCA §.805 – Terms of Directors Generally. 30
RMBCA §8.10 – Vacancy of the Board. 30
RMBCA §7.22 – Proxies. 30
RMBCA §7.04 – Action without a Meeting. 30
B. Shareholding Voting Rights in Merger30
RMBCA §11.04- Action on a Plan of Merger or Share Exchange. 30
RMBCA §6.21(f) – Issuance of Shares (Dilution)31
RBMCA §13.02 – Appraisal Rights. 31
Statutory Merger31
Triangular Merger31
Statutory Share Exchange. 31
Asset Exchange. 32
RMBCA §12.01 – Disposition of Assets Not Requiring Shareholder Approval32
RMBCA §12.02 – Shareholder Approval of Certain Dispositions. 32
Tender Offer/Hostile Takeover32
“Defacto Merger” Doctrine. 32
Doctrine of Independent Legal Significance. 32
C. Shareholder Rights to Initiate Action. 33
Delaware §211(d) – Special Meeting. 33
Delaware §228 – Shareholders Action via Written Consent33
RMBCA §7.25 – Quorum.. 33
RMBCA §7.02 – Special Meeting. 33
RMBCA 7.05 – Notice of a Meeting. 33
RMBCA 7.07 – Record Date. 33
RMBCA §10.20 – Amending the Bylaws. 33
RMBCA §8.08(a) & (d) – Removal of Directors by Shareholders. 33
RMBCA §8.10 – Vacancy on Board. 33
Blasius v. Atlas. 34
RMBCA §16.02 – Inspections of Records by Shareholders. 34
X. Solicitation of Proxies. 35
A. Philosophy and Policy. 35
Theories of the Firm.. 35
B. Proxy Fraud. 35
§12 Securities. 35
§14 of the 1934 Securities Exchange Act36
SEC Rule 14a-1 – Definitions. 36
SEC Rule 14a-2 – Allow Certain Types of Communications (Constitutio

. 52
Constructive insider52
Rule 10b5-1. 52
Rule 10b5-2. 53
ix. Remedies for Insider Trading. 53
§20A of the Securities Exchange Act of 1934. 53
§21A of the Securities Exchange Act of 1934. 53
§32(a) of the Securities Exchange Act of 1934. 53
C. Disgorgement Liability: 1934 Act §16. 53
D. Comparative Regulation of Insider Trading. 54
XV. Changes in Corporate Control (Tender Offers)55
A. Economic Reasoning and Policy Considerations. 55
i) Arguments in favor of takeovers. 55
ii) Arguments against takeovers. 55
iii) Efficient Market Hypothesis and Takeovers. 55
iv) Empirical Evidence. 56
B. Federal Regulation of Tender Offers. 56
i) §13(d) of the Securities Exchange Act of 1934. 56
ii) §13(e) of the Securities Exchange Act of 1934. 57
iii) §14(d) of the Securities Exchange Act of 1934. 57
iv) §14(e) of Securities Exchange Act of 1934. 57
C. State Regulation of Tender Offers. 58
D. Delaware Takeover Case Law (Judicial Review)58
Cheff v. Mathes (199 A.2d 548)58
Unocal v. Mesa Petroleum Co.59
Moran v. Household International Inc.59
Revlon Inc. v. MacAndrews & Forbes Holdings. 60
Paramount v. Time. 60
Paramount v. QVC.. 61
Blasius Industries v. Atlas Corp.61
Unitrin v. American General Corp.61
Chesapeake Crop. V. Shore. 62
Omnicare v. NCS Healthcare. 62
E. European Takeover Regulation. 62
i) British City Code. 62
ii) European Takeover Directive. 63
XVI. Duties of Controlling Shareholders. 64
A. What is a Controlling Shareholder64
B. Parent- Subsidiary Dealings. 64
Sinclairv. Levien. 64
C. Cash-Out Transaction. 64
Old Rule – Business Purpose Test65
Modern Rule – “Entire Fairness Test”. 65
Weinberg v. UOP.. 65
XVII. Shareholder Derivative Suits. 66
A. Delaware Approach to the “Demand Requirement”. 66
B. The RMBCA and ALI Approach to the “Demand Requirement”. 66
C. Court Approval of the Settlement67
D. Attorneys Fees. 67
Lodestar method. 67
Percentage of recovery method or Salvage value. 67